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SXSW: Spotify, and the delay to reach the U.S. market

March 20, 2010 |  3:54 pm

I arrived in Austin, Texas, on Tuesday, and spent much of my first two days talking to labels and publishing reps on Spotify, the hit European music subscription service that is seen as having the opportunity to shake up the digital landscape in the U.S. Yet Spotify was expected to arrive in the U.S. in early 2010, and we're approaching spring without a launch date. The story below was co-reported with our tech experts Alex Pham and Mark Milian, and it appeared in Friday's Business section. 
 - Todd Martens


The last time a young entrepreneur executed his promise to revolutionize music with computer software, the industry sued him for billions of dollars.

A decade after Shawn Fanning unleashed Napster, 26-year-old Daniel Ek is generating tidal waves across Europe with Spotify, a company that offers upward of 10 million songs, streamed free over the Internet. The difference this time is that Spotify is a legal service, sanctioned by the music industry -- to a degree.

Ek, Spotify's chief executive, had hoped to launch his service in the U.S. early this year. But he acknowledged that talks with record labels, along with thousands of music publishers and royalty collectors, had bogged down over details. Ek cited the complexity of dealing with numerous rights holders for the delay.

Some music executives have questioned whether Spotify's free, ad-supported service will help the beleaguered industry regain its economic footing. They worry that it could further erode the market for paid music.

Ek declined to detail the sticking points but said in an interview at the South by Southwest music festival in Austin, Texas, this week that Spotify was taking the time to safeguard its contracts with the license holders by anticipating a variety of business models, such as student discounts or special offers bundled with a mobile phone service.

"This is a very, very complex industry," Ek said. "It's an industry that's been in decline for 10 years. They just want to make the right bet."

Spotify has more than 7 million users in six European countries: Britain, France, Spain, Sweden, Finland and Norway. The vast majority use the free, ad-supported version. About 320,000, or less than 5%, pay a monthly fee of 10 euros (about $13.62) to subscribe to Spotify's premium service, which streams higher-quality audio files and lets users download and play songs on their smart phones. Spotify also sells most tracks as paid downloads, similar to what Apple Inc. does on iTunes.

An executive at a major record label, who spoke on condition of anonymity because negotiations were ongoing, said the advertising revenue generated by the free service was inadequate and that labels and publishers would prefer to see 15% of Spotify's listeners subscribe to the premium service.

Warner Music Group Chief Executive Edgar Bronfman Jr., during a recent earnings call with analysts, nixed the concept without referring to Spotify by name.

"Free streaming services are clearly not a net positive for the industry," Bronfman said. "So this sort of get all the music you want for free and then maybe we can . . . move you to a premium price strategy is not the kind of approach to business that we will be supporting in the future."

Spotify itself has curtailed the number of non-paying subscribers in Europe, allowing only its premium customers to give out a limited number of "invitations" to the free service.

Although music companies gave Spotify the latitude to offer a free streaming service in Europe, they're less likely to do the same for the U.S., the world's biggest music market. 

"It's the major leagues," said Eric Garland, chief executive of BigChampagne, a Los Angeles research firm, who raised the possibility that Spotify might have to drastically alter its free service for the U.S. "The labels let stuff happen in other markets that they would never let happen here."

Read the full story here. 

Photo: Daniel Ek. Credit: Alex Pham