Will Spotify crack open the all-you-can-eat music subscription model?


Spotify is one of the hottest online music properties of the moment, currently pushing into the US from its home territory of Europe, where it has over 2 million users in the UK and over 4 million users in the continent. Its founder Daniel Ek recently said that it is doubling revenues every month.

The basic model is providing music streaming from a library of more than 5 million songs, through European deals with all the major music labels plus many independents. Ad-supported free subscriptions are available, or full packages for EUR/GBP9.99 or equivalent per month which include ad-free access and the ability to download over 3,000 tracks to your music player to listen to wherever you are.

Early this decade the all-you-can-eat music subscription model was getting some attention. In my 2002 book Living Networks I wrote:

These twin powerful trends of greater access to content, and increased awareness of quality content, can result in greater revenue for these industries, but new business models are required. For example, US music consumers currently spend on average $60 a year on CDs—equivalent to perhaps four albums. If each of those consumers were given the option to pay $10 per month, and in return get all the music they wanted, it is safe to predict that most would take it up, feel they are getting great value, and the industry would double in size.

The model makes immense sense for all parties if we can get it to work. Rhapsody was one of the first players in this space, Napster has been promoting a subscription unlimited on-demand streaming music since 2004, combined with 5 permanent MP3 downloads per month, and others such as Virgin have attempted to do it.

Several key factors are at play here:

* Scope of music licensing. Spotify within Europe has one of the broadest range of licensing deals achieved yet. However no player in the US market has a truly comprehensive licensing scope, and Spotify will also find it tough to achieve this.

* Downloads and portability. Despite bandwidth becoming well-nigh pervasive, people will still want to have music on their music player, allowing them to listen anywhere, anytime. Online streaming by itself does not replace a music collection, while the Spotify model can.

* DRM. Record labels will only allow essentially unlimited downloads if those files are protected. The tethered downloads of Spotify appear to do the job admirably, meaning they are easy to use anywhere, but expire if the subscription lapses (though can be reinstated once the subscription resumes).

* Freemium model. This is what might make the difference – Spotify has a vast range of ad-supported subscribers, although recently just 2% of this number were premium subscribers. Napster has declined (likely due to licensing restrictions) to offer a free version. The Guardian notes Spotify’s freemium approach leaves Napster gasping.

[UPDATE: Neil Ackland of Sound Alliance pointed me to a recent blog post he wrote – Spotify ‘back of napkin’ revenue forecast – which goes through the dynamics of what will make this succeed or fail.]

The excerpt above is taken from Chapter 8 of Living Networks on Next Generation Content Distribution – Creating Value When Digital Products Flow Freely. Reading the chapter now, it seems to be almost all completely relevant today, bar the case studies used. The chapter is below.

Living Networks – Chapter 8