Spotlight On Spotify

Posted by | March 31, 2009 | 11,636 views

This month’s OpenMusicMedia event in London enjoyed perhaps its biggest pre-event buzz since these digital music pow-wows began last year. The reason for this was the planned appearance of guest speaker Daniel Ek, one of the Swedish co-founders of digital music service ‘du jour’ Spotify. Thanks to David Emery via Flickr for image.

Open Music Media Event

The night’s theme was “Access vs. Ownership” and offered the chance for the capital’s digital music scene to discuss the relative merits of ‘buying versus renting’ as the basis upon which to form a successful business model in digital music.

But does Spotify justify all the glowing reviews and headlines it has received in recent months? Does it even have a medium-term future? The Music Void’s Chris McLellan digs a little deeper to discover that indeed there are already some tiny cracks appearing in the foundations.

Arise, Sir Spotify

For the few of you out there who have not yet sampled the delights of Spotify, it’s an online music streaming service that has one clear distinction over rivals such as Last FM and Rhapsody, and it is this: users can play the track they want to hear, when they want to hear it.

In other words, what it offers digital music subscribers is the type of control and flexibility over consumption patterns that to-date only track purchase/ownership has been able to offer. This, and this fact alone, has been enough to see the service go from zero to 1M registered users at astounding speed (10K new users per day now). True, Spotify does have a ‘premium service’ which for a subscription fee (£10/month in the UK) offers users an ad-free service and more immediate access to new releases and various other content, but there’s no question that the simplicity and flexibility of the service is what has driven its remarkable rise.

Some Background

Spotify hit most people’s radar (in the UK at least) in the Autumn of 2008 and has since created a level of hype amongst the world’s digital media that we haven’t really witnessed since the launch of Amazon Music in the US some 18 months ago. According to Spotify, the site is now registering something like 10K users a day and appears to be signing licensing deals with the labels at a very respectable pace. I would estimate that it now has something in the order of 3 million+ tracks. Not a lot compared to Amazon Music, MySpace Music (powered by Amazon) or iTunes, but not bad at all for a start-up.

Founded in October, 2006 by Martin Lorentzon (previously a co-founder of TradeDoubler) along with chief executive Daniel Ek, Spotify has opened for business in the UK, Germany, France, Italy, Spain, Finland, Norway and Sweden. Taking inspiration from the global success of 1st generation game-changers such as Napster and Kazaa, and side-stepping the music sales models of ‘2nd generation’ heavy-weights such as iTunes and Amazon, Spotify has fast become the poster-child for what one might call the ‘3rd generation’ of digital music business models, namely, online music subscription services.

Whereas illegal music downloads continue unabated, flying in the face of the supposed success of the 2nd generation sales model (only about 7% of all tracks downloaded are actually paid for), the newer subscription models offer a clear and legal alternative for consumers. And while the immovable object of privacy law/the free internet lobby continues to lock horns with the unstoppable force of copyright law/content owners over the issue of free downloads, Spotify and other music streamers simply avoid such legal quagmires because their revenues are reliant primarily upon advertising and subscription, rather than downloads.

But while other music subscription pioneers like Rhapsody, Last FM and Pandora were only able to offer their listeners a music recommendation service (at least in their free versions), Spotify has been able to capitalise on the shifting sands of record label licensing deals and put the control over streaming/playback firmly back into the hands of its listeners. Their primary source of revenue, however, is not nearly so innovative in that it is based on good old-fashioned advertising. Every 10 minutes or so, Spotify listeners are played a 30 second audio ad (and half of the time these are from Spotify itself, aka “Roberta”). On the web player itself, there’s a banner or two. That’s about it.

So, everything is peachy keen. Spotify will keep adding tracks, advertisers will come flooding in, and fans will finally have a legal, digital music service that meets their desire for playback control. Right?

What’s Truly Unique Here?
At the OpenMusicMedia event, Daniel Ek reminded us that digital music will have many business models – downloads, ringtones, ticketing, social networking, artist promotions, merchandising etc. He mentioned that the URL might very well become the new MP3 and that access is the lynchpin to the whole digital content industry (on this last point, I agree whole-heartedly).

Ek also quoted a Spotify performance metric that he was extremely proud of – namely that his service is 3-4 times faster than most streaming services and that 85% of Spotify tracks are delivered within the first 200ms. Very impressive, but personally I don’t think your average Spotify listener really cares about streaming rates very much. What they care about is control. Control over playing what they want to hear and when they want to hear it.

But if this is true, wouldn’t it mean that Rhapsody and Last FM are just a few major label negotiations away from delivering the same option to their listeners, but with even larger potential libraries and richer peripheral services to offer? In other words, other than playback flexibility, what does Spotify have (or have planned) that is unique?

Perhaps it would be a useful exercise to look across the digital music value-chain and see if we can find out…

Playback? Here, as stated, Spotify stands out. It’s fast, simple and flexible and in this respect, fairly unique. They should be applauded for the deals they negotiated that make so much of this possible and for creating something that “just works”.

Music Library? It has maybe 3-4m tracks. OK for your average subscription service, but far fewer than Rhapsody or Last FM and definitely less than music stores like iTunes or Amazon (at 6 million+ tracks).

Music Store? Spotify do not do track sales yet, but even if/when they do, how will they manage to do what nobody (not even the mighty Amazon) has managed to do, namely lay siege to ‘Fortess iTunes/iPod/iPhone’?

Recommendation/Discovery? Pandora has the Music Genome Project. Last FM the Scrobbler engine. Does Spotify really have a better mouse-trap planned than these amazing tools? Do consumers need or want any more web-based discovery?

Social Music? MySpace and Last.FM have been building music communities for years. And who’s that on the horizon? Oh yeah, only Facebook (probably in partnership with either Rhapsody, LaLa, iLike or Amazon)! Is it simply too late for new social networks based around music?

Exclusive Content? Name me a single un-signed band that isn’t on MySpace. And once the current bun fight between Collection Societies and YouTube ends, I think we’ll find that Google has a pretty good share of the digital music video market already, along with pretty much all of the user-generated content on offer (mash-ups etc).

Artist Relationships? With every band in the free world already on MySpace (or even Sonic Bids for that matter) how many “exclusive” deals with online music services will Artists and their Management be expected to make? Get in line now Spotify – it’s a massive queue.

Mobile Music? Will Apple allow Spotify into the iPhone/iTunes ecosystem? Seems unlikely. Although at the OpenMusicDigital even Spotify’s Ek claimed all that Apple really care about is “hardware sales”. I’m less sure of this. Anyway, Spotify are working like crazy on their own mobile web interface, so maybe they can innovate on this fast-emerging platform. Or rather, should the modest success of Nokia’s “Comes With Music” proposition be a warning that the right market conditions (e.g. unlimited mobile data price plans) may not be there just yet for mobile music?

Live Music/eTicketing? Unless Spotify are going to dig deep, buy some venues and take on Live Nation, I’m not sure what can be done here. Same goes for ticketing - particularly if the Ticketmaster/Live Nation deal goes through. Even the sponsorship route is tough these days. Does the company really have the cash to go up against the likes of O2, Carling and Budweiser (etc)?

Where’s The Innovative Business Model?

OK, Spotify is saying anything is possible and they will try everything under the sun to monetise their content and artist relationships. But who isn’t? In the meantime, they are an ad-funded model in a digital marketplace swamped with media outlets ‘piling it high and selling it cheap’.

So how long before Spotify needs to cram so many ads between tracks in order to survive that it starts turning people away in the same numbers that it is currently attracting? If things reach that stage it really won’t matter how cross-platform/rich-media/demographically-targeted your (planned) advertising platform is, it isn’t going to change the negative effects of slash and burn media pricing wars (starting with TV, newspapers and radio, I’m guessing).

According to one rumour I have heard, Spotify also plan to create in-country Ad Sales Teams. To paraphrase one industry insider; this is tantamount to commercial madness and will very quickly lead to an unsustainable resource drain that will only be exacerbated by the current media glut.

And then there are its other overheads. Spotify have over 60 employees in Sweden, many of whom are expensive C++ developers. That’s a heck of a lot of people for a start-up, and coupled with the recent news of a recruitment drive to hire even more developers for Spotify Mobile, I just have to wonder just how fast they are burning their cash.

To make matters worse, the freshly-minted label deals that Spotify has struck are already showing signs of potential unravelling. Spotify recently announced that it had to remove some tracks from its library due to record label wrangling. This is not a good sign, and no amount of Facebook groups are ever going to change the commercial realities of that situation.

In related (and equally disturbing) news, fellow music subscription service Last FM just announced that it will begin charging for access to its music in many international territories.  And let’s not forget that Pandora was shut down 2 years ago in many non-US markets and for more or less the same reasons.

So what is the underlying cause of these recent threats to digital subscription models?

The fact is that the driving force behind these and other changes to the deals initially set between the major labels and the music streamers is both simple and sad: The labels and other music content owners consistently (and inexplicably) under-value their own content. These companies barely realise that people are more passionate about music than almost anything else that you can name that’s non-tangible. It completes people’s sense of identity. It’s essential.

So, as the labels slowly awaken to this fact, they enter (and re-enter) endless rounds of negotiations in order to chip away at the silly, ‘shot-ourselves-in-the-foot-yet-again’ deals they have struck over the past few years. The current battle between the UK Collection Society PRS and Youtube over music video royalties is merely a different battle in the same war. This means that the current re-negotiations are probably only the beginning of such problems for music subscription models such as Spotify and Last FM, not the end.

It’s Not All Doom & Gloom!
An encouraging statement to hear at the OpenMusicMedia event was that Spotify, according to Ek, is keen to explore how they can work with ISPs to manage and promote access to digital music. After all, ISPs (and increasingly their Mobile and WiFi counterparts) ultimately control a huge portion of everyone’s access to digital content – and certainly all the websites/mobile services.

However, ISPs are also at the centre of the above-mentioned controversy that puts the forces of personal privacy and ‘the free internet’ up against copyright law and the many other commercial ‘powers that be’ (royalty collectors etc). Given this brewing storm, approaching the ISPs pro-actively seems to me to be a highly-intelligent move on the part of Spotify in order to help influence the debate and to pre-empt many of their competitors.

Anyway, not that anyone asked me, but here are my strategic ‘top-tips’ for Spotify which might help them to consolidate a place in the future of digital music:

*Centralise Ad Sales Stop burning money like it was, well, last year. Ads are your only revenue right now, but a  media sales presence in every country? Expensive and in this ad market, crazy methinks, even if there are piles and piles of TradeDoubler money laying around.

*Build Other Revenue Streams Obvious, I know. But if you can do this in ways as innovative as your licensing deal, that would be ideal, rather than just offering “me too” services.

*Release (or Re-Purpose) Developers You have too many. Get more product and business development people in to monetise your proposition. Reduce your cash burn-rate – it shouldn’t matter how much TradeDoubler money is or isn’t avaialble to dip into.

*Talk To ISPs Ultimately, ISPs control digital access and most industry observers now agree that they will be the key to the future of digital music. However, this will be grinding, country-by-country work with all the nightmare legal entanglements that entails. But clearly you have a great legal and contract team already in place, so why not start now and give yourself a real market lead in this critical battleground for digital music.

*Talk To ‘Mobile ISPs’ They control access to the digital airwaves. They are wireless ISPs. Some of them are wired ISPs too. Looks like Apple and Orange (that combination actually makes me slightly ill to say aloud) might be heading down this path with their recent announcement of a mobile broadband deal – do NOT miss out here.

*Talk To Blackberry Yeah, they have deals with loads of other music stores and apps, but I really don’t think Apple are gonna listen to reason on opening up the iPhone platform (beyond letting Spotify place an app for which they’ll take their 25% pound of flesh). If you like, you can watch the TMV interview with RIM’s CEO Jim Balsillie here. Give me a call, we’ll give you his number ;).

*Do a deal with Song Kick. Work with them them for recommending gigs, sell a few tickets. Start from there and build your live strategy. After all, many people claim it’s the future of music.

*Build On Loyalty You have a brand people seem to have taken to heart. There’s a great deal of value there. Stand for something. Communicate these values. Grow the user experience. Do everything to retain the million people who currently love you.

The Spotify guys are clearly super-intelligent. Marin Lorentzon, the other co-founder, started Affiliate Marketing giant TradeDoubler for goodness’ sake (by contrast, I still have a day job and ride a bicycle to gigs and events around London).

However, the music industry is a lot like professional football teams in that it has a history of churning through high profile owners who have entered it from the outside – often with stars in their eyes. Rightly or wrongly (wrongly) the music business still has its own inimitable way of getting things done. It’s quirky. It makes no sense at times. It’s all highly irrational. Just be wary of these pitfalls and try to keep leading from the front.

Anyway, there’s my 2 cents. Take it or leave it. No hard feelings either way, promise. And apologies in advance for recommending things you’re already doing.

Side Note: What The Hell Are Last.FM And MySpace Doing?!!
Take all those areas for innovation in the music value-chain I listed above where basically it was a “No” for Spotify and they are almost all a “Yes” for Last.FM and MySpace/MySpace Music.

And you know what, with the recent news that Apple, the “hardware only” company, is now inching into the subscription space, all these 3rd generation subscription brands had better pull their thumbs out, and fast, before this ’2nd generation music store’ bites them right on their commercial behinds.

To paraphrase TMV contributor and industry guru Ted Cohen, who was writing about EMI’s digital strategy; “Get on with it!”.

Personal Note: I Love Spotify!
I am listening to Black Rebel Motorcycle Club’s “As Sure As The Sun” and the new Royksopp album “Junior” on Spotify as I write this. Spotify works. It’s lovely. I wish them all the success in the world. They are humble, charming guys with an excellent Contracts/Legal team. They’re Swedish. I like Sweden. Camping out, swimming and buying groceries at the Willy’s in Söderköping back in the summer of 2007 is one of my fondest memories.

But whether I’ll still be listening to Spotify in 12 months, or simply dragging my sorry behind back to all those abandoned ‘friends’ on Last.FM remains (very much) to be seen.

Here’s hoping.

Other readers also read:

Through The Storm of Streaming Services, Spotify Remains Buoyant

MySpace Music Is No Spotify Challenger

SPOTIFY AND THE USA. WHY NOT?

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Posted by on Mar 31 2009. Filed under Business Models, Gadget & Services. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

6 Comments for “Spotlight On Spotify”

  1. A lot of thanks for this excellent share!

  2. [...] rest is here: Spotlight on Spotify A Few Facts About NapoleonA Guide to Better Web-Working From Your iPhoneCreativity: Mental [...]

  3. Hey Chris,

    good analysis. What do you think of popmorphic?

    C

  4. Thanks Daniel. I would be only too happy (as would our readers) to have you address any points that require clarification. I’ll get in touch.

    And thanks again for your visit to London. I know how busy you are, but it was thoroughly enjoyed by all who attended.

  5. Hi Chris,

    Interesting comments on Spotify. Some stuff I definitely agree with, but I think you have a few key assumptions wrong about our business. I’m happy to speak more about why I think our approach is a bit different from others. E-mail me and we’ll set something up.

    Best,

    Daniel

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