Music Label Execs Say Spotify's Freemium Model Is Thwarting U.S. Launch

Music streaming service Spotify promised and promised and promised it would launch stateside in 2010. The Swedish startup, which is available only in certain parts of Europe, made our list of Most Innovative Companies in part because it was one of the most promising competitors to iTunes in the U.S. (and, actually, because it was already causing a disruption pre-launch). It's now 2011. Where the hell is Spotify?

With rumors of halted negotiations bubbling, it's unclear whether Spotify will ever launch this side of the pond. More major record label complaints surfaced Wednesday, and it's become clear Spotify's freemium-to-premium business model is the company's Achilles' heel. The cloud-based service offers an expansive library of free music, and labels are concerned that consumers will resist upgrading to its subscription service, which features unlimited streams, mobile access, and ad-free listening, even at the low monthly cost of £4.99 to £9.99.

"We love the subscription service proposition--the freemium business model doesn't really work, and has to be course corrected," one senior label executive tells Fast Company. "[Spotify] is basically investing customer value at the top of the funnel in hopes that someone will wind up paying for something."

Given that potential loss of customer value, the issue is whether Spotify's subscription service can grow enough to offer a viable return to content providers--the labels and artists. One oft-cited report from Sweden claimed Lady Gaga had only earned $167 for 1 million streams of her hit "Poker Face" on Spotify.

"Look at the number of subscribers--you have some 700,000 subscribers, but you have more than 10 million users. That's not good math," explains the exec. "Say they have a 10% conversion rate. If you pour 1 million users into the top of the funnel, you'll get 100,000 subscribers paying you $10 a month. You're earning $12 million a year from those consumers, and then you have 900,000 consumers that are not paying anything. Those 1 million consumers are worth an average of $50 to $60 at retail. So you've invested about $50 million in consumer value to generate $12 million."

This diminished revenue is exactly why the majors have hesitated to jump aboard the Spotify gravy train, and supports criticism of the service that leaked to The Telegraph this week.

“The U.S. divisions of the major record labels, [Universal Music, EMI Music, Warner Music and Sony Music] do not feel comfortable with the freemium model and have demanded extremely high cash advances, which has caused Spotify to stop and think about whether it can afford the move to the U.S. and indeed whether it is worth it," says one senior music executive. "The labels in the U.S. are worried about too many people becoming heavy users of the free component Spotify will offer, which is why they want high minimum guarantees. Spotify is now looking for additional funding to facilitate the labels’ demands."

Meanwhile, sad to say, users are likely looking for additional streaming services to satisfy their listening demands.

Add New Comment

0 Comments