Spotify wasting time begging for price breaks

Stardust is sprinkled all over music service Spotify.

Steve Jobs built the most successful music service by dealing from a position of strength.

(Credit: CNET)

In recent months, users, reviewers, and even Facebook founder Mark Zuckerberg have heaped praise on the European service, which has yet to launch in the United States. But while Spotify may be a nifty service, it may also be a textbook example of how popularity doesn't mean profits.

CEO Daniel Ek appeared to acknowledge that his company has a long way to go before hitting profitability in a candid note he posted to the site on Thursday. Writing on the anniversary of the site's launch, Ek signaled that the service may be struggling to generate revenues by becoming the latest CEO to complain about music-licensing fees.

Ek began his post by saying he envisions a future where Spotify helps the music industry pocket $50 billion annually and lures people away from illegal file-sharing sites by the truckload. But before this happens, Ek said, the labels must help him help them.

"The new business model in music," Ek argued, "is a mix between ad-supported music, downloads, subscriptions, merchandising, and ticketing where, the user comes first...It can't happen if the industry continues to enforce the per-play fees it has tried so hard to hold on to. The new model is about figuring out how to increase the revenue per user between the different models--not squeeze as much as possible out of every single transaction."

Blaming the labels for an underperforming business model isn't new. Everybody from SpiralFrog to Imeem has claimed that overinflated licensing fees are the cause of their struggles. No doubt, the world would be a better place for consumers, if the labels gave their music away for free. The reality is that they aren't going to do that.

Label chiefs have a number in their heads that they think their songs are worth, and it's higher than Ek's valuation. All the moves of late by the record industry indicate that while they will try to help these sites, to a point, the labels appear determined to hold the line on their overall pricing strategy.

Here are some of things I've learned about the big record companies over the past year:

The labels don't think the failure of ad-supported Web sites will spell their doom. Not by a long shot. Many label honchos were skeptical of the ad-supported model from the start. The performances of these companies haven't raised the confidence level much. Ruckus and SpiralFrog are closed, Imeem barely survived a financial crisis, and no one in the sector has reported profits. In other interviews, Ek has acknowledged that less than 10 percent of the site's users actually fork over any money.

None of the services have shown that their sites appeal very much to advertisers (people listening to music don't look at ads). There's also evidence that instead of promoting song sales, ad-supported sites cannibalize them.

To hear Michael Robertson tell it, the founder of MP3.com says the top labels don't care if Spotify or the other services fail because there are always more "dummies" willing to pay big bucks to partner with the labels. One goes down, another will leap to take its place.

Here's the direction where music industry chiefs appear headed:

First, they are trying to get back control of distribution, and that means plugging the holes.

The industry knows that file sharing isn't going away, but the record companies appear to believe that they can discourage mainstream music fans from pirating music. To do that, the Recording Industry Association of America continues to lobby bandwidth providers to establish a graduated response program, which may include cutting off service to the worst offenders. The RIAA, the trade group representing the four largest music labels, hasn't been very successful so far. Not a single Internet service provider has publicly acknowledged working with the music industry on graduated response.

The next step for the labels is to focus on what works. My music industry sources say the labels, with their shrinking revenues, are backing away from risky digital models. Selling downloads is the only proven way to make money off the Web. The problem for the labels is that downloads are synonymous with iTunes, and that means they are forced to share too much control with Apple. The labels would like to see a world where lots of outlets sell songs online and the industry isn't overly dependent on a single store.

The business model that the labels really want to see succeed is subscriptions. Enticing people to pay a monthly fee to hear all-you-can-eat music wouldn't offer the same fat margins that CDs once did, but it has the potential to deliver consistent revenue and volume. So far, the public has by and large rejected paying monthly fees because they know that as soon as they stop paying, they lose their music.

As for Spotify, Ek wrote that "overnight success takes a long time," and he supported his statement by noting that iTunes "missed its revenue targets in its first year by 30 percent."

What Ek failed to mention was that in its first year--at a time when far fewer people were buying music online--iTunes sold 70 million songs and managed to turn a small profit. Apple forced the music industry to yield to its wishes by creating a wildly popular and self-sustaining business, not by pleading for mercy.

"It would obviously be wrong for me to compare Apple's success with iTunes to Spotify."

On this, Ek is right.

[freedoms_stain]

"Apple forced the music industry to yield to its wishes by creating a wildly popular and self-sustaining business, not by pleading for mercy. "

You've completely ignored the influence of the ipod.

The iTunes store would have fallen flat on its face if Apple hadn't been able to stuff it down the throats of everyone with an ipod.

Spotify are treading completely different waters, they weren't a huge multi-national to begin with, and they don't have a vehicle like the ipod to instantaneously build a user base of millions. To compare the two would be unfair at least, and in reality, rather irrelevant.

[sandonet]

I didn't ignore it, I just figured everybody knows the enormous part the iPod played.

As for comparing Spotify to iTunes, Ek did that, not me. My point is that Ek should develop a business model that doesn't require him to go to the labels with his hands out. And that is relevant.

[baconstang]

I was using the ITMS for a year before I got my first iPod. It's an easy to use, well stocked store that's only gotten better over time. While some people complain about spending a dollar for a song, some people will complain regardless of the price, even if it was a dime. Those folks should get subscription services or listen to the radio.

[myles taylor]

Excuse me. Please don't talk about what you don't know.

I have purchased (checks) exactly 11 songs on the iTunes store and I've had an iPod for 5 years. Mostly my music is purchased from Amazon and other online stores and originally I ripped my CD collection. So Apple didn't force it's store down anyone's throat. The iPod had massive influence, yes, but people who had iPods weren't forced to use the iTunes store, only iTunes itself.

Secondly, Apple didn't force the iPod down anyone's throat either. Apple introduced a product and integrated it with software to make it a streamlined experience. At the time that was innovative and very good. It made it easier for customers and adding the store only added a more convenient and legal way to get music on demand. Are you suggesting that Apple break away from this model that has not only proven to be successful from a business perspective, but that millions of consumers use and have no problems with?

[dotwhynot]

I disagree. The number label chiefs have in their heads is a dream that is killing their business' future. The music (plastic disc) industry have enjoyed a couple of decades of insane profit margins. It is over. They are not the only ones that have to adapt, drastically, to new economic realities. But they have so far been far more "successful" than other industries in convincing courts and politicians of their god given right to charge more for their product than consumers are willing to pay. The war on their users is going to go down in history as a text book example of a collective industry suicide pact.

- Paying Spotify user

[Mergatroid Mania]

"Blaming the labels for an underperforming business model isn't new. Everybody from SpiralFrog to Imeem has claimed that overinflated licensing fees are the cause of their struggles. No doubt, the world would be a better place for consumers, if the labels gave their music away for free. The reality is that they aren't going to do that."

Perhaps the reason why so many companies complain about the prices the music labels charge is because they charge too much?
Sure, the world would be a better place if the music was free, it would also be a better place if the blood sucking record labels would stop trying to get filthy rich off of the artists' work. They just don't seem to realize that the days of the artist getting 25% (if they're lucky) and the label getting the other 75% are over.
People are not against their artists making a good living, but paying all that extra so a few people in a record company can get rich is not something most people would be happy about. Hell, the record company doesn't even add any value. The recording studio should be making most of the money that does not go into the artist's pocket, all the record company does is get the CDs pressed and distribute the CDs from there. These days they can do most of the distribution digitally and don't even need to make as many hard copies.
On top of all that, I can completely side with the consumers that are not interested in subscriptions. Many of us don't down-load that many songs and would get poor value for our money.
Add to that the fact that everyone and his dog want you to subscribe to their service/product. Subscriptions for music, games, movies, news, cell phones, car leases and everything else. Just how much money do these companies think the average person is made of? Of course, there comes a limit where a person just says "no more, take your subscriptions and stuff them".

What the ad supported companies should do is have free ad supported downloads, but charge a fee per download after an arbitrary limit has been reached so the people overusing the service will pay their share, and the casual downloaders would get good value. The free downloads (perhaps a limit every month) would get people to the site. That's half the battle right there. Then they could offer a subscription, or a fee per download depending on what the consumer wants. Don't try to force a plan on them that they don't want.

Of course, having relevant ads that people would be interested in clicking on wouldn't hurt either. An example of what not to do it some of the ads on sites like Facebook, where they tell you you have a message waiting and expect you to click on their ad. There are many similar ads and they just turn people off, plus the product being offered is usually borderline not a product at all, or is just something like selling shirts. Perhaps if these were ads related to music, downloading, playback devices (in other words ads for actual real products worth buying) people might click on them once in a while.

[MadLyb]

"The new model is about figuring out how to increase the revenue per user between the different models--not squeeze as much as possible out of every single transaction."

I think this is a very key point. The music industry has *always* measured revenue at the singular event and it will be very hard for them to unravel the byzantine fee structure they have built up over decades, but they need to do this to improve the overall revenue stream.

[CreativeMalcolm]

The thing is Apple is the new record label, the labels used to handle distribution, now Apple handles that. As more artists learn that really they just need a good management company and not a label so long as they sign up to distribute on iTunes, the label becomes needless. The reason the labels want more stores online is because it's not that hard to get your music on iTunes, Amazon, and.. OK well that's all you really need now. The problem is not everyone only wants music from the big four, for me when I've tried to use other stores they never have the smaller artists that I like. I just got the new We Shot the Moon album on iTunes, they even had a preorder, I don't even know if they're signed to a label. Fact is Apple would run a much better music industry than the music industry ever would.

[ofmyony]

Consumers have an advantage over music labels and the labels don't like it. I get whatever songs I want for cheap why would I pay for a service. Back in the 1980s I had to still buy a whole album, now I can spend less than a buck for the one song I want, its great. Plus I get to stream internet music for free, are you kidding me I love the services I get now. Don't change a thing, let the music industry suffer

[Taxi74]

Im pretty sure Daniel Ek is speaking of the music industry in general when he says that it a bad idea.to charge an unreasonable fee for every streamed song. No one really knows what deals Spotify has with labels, but I don´t think he has to worry for himself or his company.

"Blaming the labels for an under-performing business model isn't new."

Well, Spotify isn´t under-performing and they are not blaming anyone for anything. They could be profitable right now but they have instead chosen to expand their reach. Imeem and Spiralfrog mentioned stream rates specifically to be reason for their failure. No one knows what rates Spotify has to pay but they are most likely not the same as Spiralfrog and Imeem.

"no doubt, the world would be a better place for consumers, if the labels gave their music away for free. The reality is that they aren't going to do that"

No serious music service suggest that they should do that, especially not Spotify. Besides, the internet already is a fantastic place for music consumers. The music is free for everyone. Reliability, immediacy and quality of service on the other hand, costs money. Spotify has only existed for a year and already half a million customers are paying. So people do pay for good service ( as with Itunes).

"The labels don't think the failure of ad-supported Web sites will spell their doom"
First of all Spotify isn´t a website, its a desktop application. And why would labels think that digital music services would spell their doom? The labels own 18 percent of Spotify, it would seem stupid to want it to fail.

"None of the services have shown that their sites appeal very much to advertisers (people listening to music don't look at ads)
That depends completely on the service of course. Spotify has a clickthrough rate of 1-5% which is far better than most online newspapers. They also have audio ads.

"To hear Michael Robertson tell it, the founder of MP3.com says the top labels don't care if Spotify or the other services fail because there are always more "dummies" willing to pay big bucks to partner with the labels"
Agree somewhat, but still, the companies owns part of Spotify (stake probably worth around 60 million dollars), I don´t think they can afford to be completely ignorant.

"The problem for the labels is that downloads are synonymous with iTunes, and that means they are forced to share too much control with Apple"

The goal of Spotify is for the consumers to be able to buy every single track in their library. At this time I would guess about 30-40% (will increase over time) of their catalogue is available for purchase (by right clicking) through 7digital. Millions of users with the option to buy songs on a whim, should be good news for everyone.

"So far, the public has by and large rejected paying monthly fees because they know that as soon as they stop paying, they lose their music"

Not true with Spotify. All free users can build as many and as large playlists as they want, that they can keep for as long as they want. This is important as it makes it possible for longtime users to jump in and out of premium subscription and still keep their music collection.

By the way, I don´t work for Spotify, but I have been following them since long before they launched. Im fully confident they will succeed in what they are trying to do. No need to worry.

[bburl]

The music business is going to be smaller and less profitable than in the past. That is a fact. They no longer have the stranglehold on the creation and distribution of music, nor do they wield the same influence in the media, as media has become fractured and non-monolithic. These too are facts. What the industry should do is limit the shrinkage as much as they can. Selling 'time spent listening' is a great way to do that, and the industry should be doing that themselves instead of relying on 3rd party companies. If a Spotify-type service was run by the majors, they could affect the types of artists that get exposure and the service wouldn't have to pay a separate set of shareholders as it would if it was run by a 3rd party. Likewise, the majors should band together and have their own music download store. Why split profits with apple and amazon? Is creating a download store really all that hard? Again, they would have the added benefit of being able to promote who they wanted.

The music industry refuses to take advantage of the opportunities presented, and so the amount of shrinkage will be greater than it has to be. The industry is run by mediocre minds without vision who seek to rely on regulatory capitalism.

[MrMe003]

okey, how stupid is it to even talk about spotify for NOW, how long it has been on the businness? couple of years?

i just say wait for a year or a about 6 months, then we can say is Spotify the thing or not.

i love spotify but even that desktop app isnt yet version 1.0 EVEN, so what you can expect for now. more developmenting, nothing more for now.. they just release their first version of mobile versions to the software, after they get their symbian version out from the lab, then we see that was Apple and others big deal names fear, that's way they keep saying that Spotify can't win anything..

it is very sad that some people really belive that BS.

[MrMe003]

that comment thing really need a edit button! :)