Could the success of music-streaming services such as Spotify point to a viable long-term business model for the music industry?
Techies have two great online loves at the moment: one is Twitter, the microblogging service that allows you to send messages of 140 characters or less to a network of friends; the other is Spotify, the online music-streaming service that gives access to four million songs, for free, in exchange for listening to an advert every 20 minutes or so.
This week, the Swedish entrepreneurs behind Spotify announced that they would be opening up the technology that underpins the service, in effect allowing anyone to start building Spotify in to other devices. It means, for instance, that in the next few months, you won’t just be restricted to listening to your personalised playlists through your computer; instead, you’ll be able to tune in on your mobile phone, through your television or games console, or perhaps even on your home stereo. Spotify has confirmed it is in talks with the likes of Microsoft Xbox, Sony PlayStation and Sonos for just this purpose.
For all Spotify’s current popularity and acres of news coverage, the company faces two major obstacles: making money, and sustaining its initial momentum. Spotify does allow people ad-free access to the service for 99p a day or £9.99 per month, but so far, it appears most users are content with hearing the occasional jingle while listening to free music.
Opening up its technology to third-party developers to build their own applications is a high-risk strategy for Spotify, says one expert, but a move that could pay off in the longer term as they seek to go ‘mainstream’.
“The holy grail of digital music isn’t who can successfully compete with Apple anymore,” says Mark Mulligan, an analyst with Forrester Research. “It’s not even who can create an ‘iPod Killer’. [It’s about who can] engage the real mass market online opportunity: the free music fans who won’t buy downloads, however cheap they get.
“Spotify know that in order to do that, they’ve got to get away from the PC. That’s why tying up with home electronics manufacturers is key.
“To really start dominating, to free itself from the PC, Spotify needs to open itself up as a platform.”
At the same time as Spotify is trying to find its feet, other more established music retailers are squaring up for the latest battle in an ongoing war to establish market dominance.
Apple’s iTunes music store has introduced “variable pricing”, so that rather than paying a flat rate of 79p, iTunes users will now pay either 59p, 79p or 99p per track. Meanwhile, Amazon’s MP3 store has slashed the price of some of its singles to 29p, massively undercutting Apple.
Record labels had long railed against Apple’s “one price fits all” strategy, arguing that songs should be priced differently to reflect their perceived worth among customers.
Meanwhile, other labels are beginning to view singles as “loss leaders” in the hope of making back some of that money back through “bundles” – charging consumers more to buy, say, a single as well as a ringtone, artist wallpaper for their mobile phone, and some exclusive video content.
But these battles, says Mulligan, are relatively minor tussles. Instead, the bigger picture is the fight between free and paid-for content. In a digital era where web users are unused to paying for content and services, music labels may soon find that services such as Spotify are the only way forward.
“The price battles between Amazon and Apple are not irrelevant, but they’re certainly not the most important part of the debate,” he says. “It’s not going to turn paid-for MP3s into a format replacement for the CD.”
Daniel Ek, co-founder of Spotify, agrees. “Music is already available for free – 95 per cent of all music downloads are currently illegal, it is pointless to resist that,” he said in a recent interview. “Instead, you have to make paying more attractive by offering fans more exclusive content, like interviews, live concerts.”
“Freemium” – the idea of giving something away for free and then clawing back some money through added premium content – is a well-established business principle. In Spotify’s case, it could work by persuading users to pay to listen to music wherever they are and wherever they want. If Spotify becomes available on mobile phones, it won’t be long before paying subscribers get access to a sophisticated “caching” system that allows them to pre-stream and “stack” songs for continual listening, even when they’re in signal black spots, like the Tube.
“You only need to have a very small share of your audience paying on a regular basis in order to account for a majority of your revenue,” observes Mulligan.
The difficulty, he says, is balancing cost against earnings. “[Services like Spotify] pay a fee every time someone listens to a piece of music – they basically pay for their audience growing and becoming more engaged,” says Mulligan. He warns that companies have to make sure their advertising revenue is growing more quickly than their costs.
“But that’s a dynamic that lots of very established players aren’t managing to achieve at the moment,” he cautions.
After years of stubborn resistance, though, it appears the music industry is slowly coming to grips with a new way of doing business. While no-one would deny the rights of artists and labels to be properly rewarded for their work, it’s refreshing to see ostensibly free services, such as Spotify, Last.fm and Imeem, get the seal of approval from most within the industry.
“I think this is a case of evolution, not revolution,” says Adam Webb, a spokesman for UK Music, which promotes the interests of artists and songwriters. “Radio, for instance, has felt like ‘free’ for decades, but only because broadcasters are paying licence fees to organisations such as PPL and the Performing Rights Society for Music. And, of course, radio has happily coexisted alongside – and driven – a market for vinyl, cassettes, CDs and downloads, as well as live performance, merchandise and so on.
“The same rules apply online. Fans want to access music in a whole variety of ways. As long as those who write, perform and invest in the music get paid, there is no reason why emerging ‘feels like free’ streaming services, such as Spotify or We7, cannot coexist around a number of other offerings, be they downloads, subscription services, CDs or deluxe box sets.”
With an entire generation of web users used to downloading the latest songs for free from illegal peer-to-peer sites, the decision to offer a free, legal alternative is to be applauded.
Consumers, too, appear to be willing to pay for “free” products when they are offered extra value and an incentive to do so – rock band Nine Inch Nails, a pioneer of the new music industry business model, gave away nine songs from a recent album for free. But they also offered fans the chance to buy the complete 36-track album for $5, or treat themselves to a limited edition signed box set, complete with copious sleeve notes and extravagant artwork, for $300. Sales of the box set were astonishing, with all 2,500 signed, limited edition packages sold within the first two days, raking in more than $1 million for the group.
Free, it seems, could actually be the best way to turn a profit. “Content owners across numerous media have recognised that paid strategies need complete revision,” says Mulligan. “That’s not to say that they don’t work, just that the scale of ambition has been too great.”
