This month’s OpenMusicMedia event in London enjoyed perhaps its biggest buzz since these digital music pow-wows began last year. The reason for this was the planned appearance of guest speaker Martin Lorentzon, one of the Swedish co-founders of digital music service ‘du jour’ Spotify [www.spotify.com]. The night’s theme was ”Access vs. Ownership” and offered the chance for many in the capital’s digital music space to discuss the relative merits of ‘buying versus renting’ as the basis upon which to form a successful business model.
For the few of you to have not yet sampled the delights of Spotify, it’s an online music streaming service that has one clear distinction over rivals such as Last FM and Rhapsody, and it is this: users can play the track they want to hear, when they want to hear it.
In other words, what it offers digital music subscribers is the type of control and flexibility over one’s listening that to-date only track purchase/ownership has been able to offer. This, and this fact alone, has been enough to see the service go from zero to 1M registered users incredibly fast. True, Spotify does have a ‘premium service’ which for a few Euros/Dollars a month that gives users faster access to new releases and various other content, but there’s no question that the simplicity and flexibility of the service is what has driven it’s remarkable rise.
But does Spotify, and its business model, justify all the glowing reviews and headlines it has received in recent months? Does it even have a medium-term future? The Music Void’s Chris McLellan digs a little deeper behind all the glowing reviews and headlines and glowing reviews to find some pretty serious cracks appearing
Some Background
Spotify hit most people’s radar (in the UK at least) in the Autumn of 2008 and to its credit, it has since created a level of hype amongst the world’s digital media that we haven’t really witnessed since the launch of Amazon Music in the US some 18 months ago. According to Spotify, it is now registering something like 10K users a day, and appears to be signing licensing deals with the labels of a very respectable pace. I would guess it now has something in the order of 3M+ tracks. Not a lot compared to Amazon Music, MySpace Music (powered by Amazon) or iTunes, but not bad at all for a start-up.
Founded in October, 2006 by Martin Lorentzon, previously co-founder of TradeDoubler along with chief executive Daniel Ek, Spotify has opened for business in the UK, Germany, France, Italy, Spain, Finland, Norway and Sweden. Spotify might be classified as a ‘3nd generation’ online music service. Taking inspiration from the global success of 1st generation game-changers such as Napster and Kazza, and side-stepping the music ownership models of current heavy-weights iTunes and Amazon, Spotify has fast become the poster-child for the music subscription model.
And this was a canny move. whereas illegal downloading continues un-abated, flying in the face of the ownership model (only about 7% of all tracks downloaded are paid for) and where the immovable object of the free internet lobby is being stared-down by the unstoppable force of content owners, rights owners and copyright law. What a fine mess.
But while music subscription pioneers like Rhapsody, Last FM and Pandora were only ever able to offer their listeners a music recommendation service (at least in their free versions), Spotify was able to capitalize on the shifting sands of record label licensing approaches and do a deal that put the control over streaming/playback firmly back into the hands of the public. Their primary source of revenue, however, is not so remarkable in that it is based in advertising. Every few minutes its users hear a 30 short voice-over ad between tracks, and on the player there’s a banner or two. That’s it.
So, everything is peachy keen. Spotify will keep adding tracks, advertisers will come flooding in, and we’ll all be happy bunnies. Right?
Wrong.
I Might Be Thick, But I Don’t Get It
At the OpenMusic event, Lorentzon reminded us that music will have many business models – downloads, ringtones, ticketing, social networking, artist promotion, merchandise etc. He mentioned that the URL might very well be the new MP3 (it isn’t) and that, access is really the lynchpin to the whole shootin’ match.
To emphasize this last point, Lorentzon mentioned a Spotify feature that he was most proud of which is the fact that it is 3-4 times faster than most streaming services and that this improves discovery and increases user engagement. Here’s your stat: 85% of Spotify tracks are delivered within the first 200ms.
But I personally do not think that’s what people really care about. What they care about is control. Control over playing what they want to hear, when they want to hear it. But wouldn’t this mean that Rhapsody and Last FM are just a few negotiations away from offering the same option, but with larger potential libraries and richer peripheral services?
In other words, other than track playback flexibility, what does Spotify have (or have planned) that is unique?
Music Library?
It has maybe 3-4m. Lot’s for subscription, but much fewer than Rhapsody or Last FM and definitely less than the stores like iTunes or Amazon at 6m+ tracks on offer.
Music Store?
Spotify do not offer this yet, but even if they do, how will they manage to do what nobody (not even the mighty Amazon) has managed to do, namely break open the iTunes/iPod/iPhone fortress?
Recommendation/Discovery?
Pandora has the Music Genome Project. Last.FM the Scrobbler engine. Does Spotify really have a better mouse-trap planned than these amazing tools?
Social Music?
MySpace or Last.FM have been building music communities for years. And who’s that on the horizon, oh yeah, only Facebook (probably in partnership with either Rhapsody, LaLa, iLike or Amazon).
Exclusive Content?
Name me a single unsigned band not on MySpace. And once the current bun fights with Collection Societies end, I think we’ll find that YouTube has a pretty good share of the music video market online, along with pretty much all of the user-generated content on offer (mash-ups etc).
Artist Relationships?
With every band in the free world on MySpace (or even Sonic Bids for that matter) how many “exclusive” deals with online music services will Artists and their Management be expected to make? Get in line, Spotify.
Mobile Music?
Will Apple allow Spotify entry into the iPhone/iTunes ecosystem? Will they hell. Although at the OpenMusicDigital even Lorentzon claimed all that Apple really care about is “hardware sales”, I am far less sure of this. Maybe they should try Blackberry. Anyway, Spotify are apparently going hell-bent for leather on their own mobile web interface, so maybe they can innovate here, but the modest/luke-warm success of Nokia’s “Comes With Music” proposition to-date might indicate that the market might not be there just yet.
Live Music/Ticketing?
Do a deal with Song Kick [http://www.songkick.com/]. Do it and be done with it. Unless you are going to dig deep, buy some venues and take on Live Nation, or dig a little less deep and go head-to-head with mobile phone companies like O2 or all those beer brands who like plaster their logo all over gigs. Not advisable at this stage (no pun intended).
Where’s The Innovative Business Model?
Ok. Spotify is saying anything is possible and they will try everything under the Sun to monetize their content and artist relationship. But who isn’t? In the meantime, they are an ad-funded model in a digital marketplace swamped with media outlets piling it high and selling it cheap.
So how long before Spotify needs to cram so many ads between tracks in order to survive that it starts turning people away in the same numbers that are currently being attracted? Does it really matter how cross-platform/rich-media/demographically-targeted your planned advertising platform might become. It isn’t going to change the effects of slash and burn pricing wars among the world’s media outlets (starting with TV, newspapers and radio, I’m guessing).
According to one rumor I have heard, Spotify also plan to create in-country ad sales teams. To paraphrase one observer, this is tantamount to “commercial madness” and will very quickly lead to unsustainable resource drains that will be exacerbated by media glut alluded to above.
And then there are other overheads. Spotify have over 60 employees in Sweden, many of whom are expensive C++ developers. That’s a heck of a lot of people for a start-up, and coupled with the recent news of a recruitment drive to hire even more developers [http://crave.cnet.co.uk/software/0,39029471,49301528,00.htm] for Spotify Mobile, I just have to wonder just how fast they are burning their cash? How much cash is there?
Already a few cracks are appearing. Spotify recently announced that it has had to reduce its available track library due to record label wrangling, and no amount of Facebook groups are going to change the commercial realities. Last FM also just announced that it will begin charging for access to its music recommendations in many international territories. Pandora was shut down 2 years ago in many non-US markets for more or less the same reason
The reason behind these changes is both simple and sad: the labels and other music content owners consistently (and inexplicably) under-value the worth of their own content. These dinosaurs are slowly but surely realizing that people are more passionate about music than almost anything else that you can name that’s non-tangible. It’s amazing. It completes people’s sense of self. It’s essential. So as the labels slowly awaken to this fact, they enter endless rounds of re-negotiations in order to chip away at the silly, under-valued deals they have struck in the past few years.
This means that the recent re-negotiations are the beginning of such problems for music subscription models, not the end. The currently battle [http://www.nme.com/news/various-artists/43425] between the UK PRS Collection Society and YouTube over music video royalties is merely a different front in the same exact war.
It’s Not All Doom & Gloom
An encouraging sign for me was to hear that Spotify, according to Lorentzon, are keen to explore how they can combine with ISPs to manage the access to digital content. After all, ISPs (and increasingly mobile data operators) ultimately control everyone’s access.
They are also at the center of the sh**-storm between the immovable object of privacy and the free internet versus and copyright. This, to me at least, would seem a highly intelligent move to pre-empt the more established digital music players. Anyway, not that anyone asked me, but here are my strategic ‘top-tips’ for Spotify which just might help them to consolidate a place in the future of digital music:
Centralize Ad Sales
Stop burning money like it was, well, last year. Ads are your only revenue right now, but presence in every country? Expensive and in this ad market, crazy methinks even if there are piles and pile of Trade Doubler deal money laying around.
Build Other Revenue Streams
Obviously. But if you can do this in ways as innovative as your licensing deal, that would be ideal.
Release A Few Developers
You have too many. Get more product and business development people in to monetize your proposition. Reduce your cash burn-rate – it shouldn’t matter how much Trade Doubler money is or isn’t available to dip into.
Talk To ISPs
Ultimately, they control access and most industry observers agree that that will be the key to the future of digital music. However, this will be grinding, country-by-country work with all the nightmare legal entanglements that entails.
Talk To Mobile Operators
Try to get tie-ups anywhere you can. They control access to the airwave. They are wireless ISPs. Some of them are ISPs too. Start with them and kill a few birds with one stone.
Talk To Blackberry
Yeah, they have deals with loads of others, but I really don’t think Apple are gonna listen.
Build Loyalty
You have a brand people seem to have taken to their heart’s. There’s a great deal of value there. Stand for something.
Marin Lorentzon is a super-smart individual. He started Affiliate Marketing giant Trade Doubler for goodness’ sake. By contrast, still have a day job and ride a bicycle to gigs and events around London. However, the music industry is a lot like professional football in that for some reason it has a history of chewing up and spitting out many highly-success business people who enter it from the outside. I don’t know why that is exactly, but it happens. Just don’t want to see it happen again.
Anyway, there it is, my 2 cents. Take it or leave it. No hard feelings either way. Apologies in advance for the for the things you may already be doing!
Side Note: What The Hell Are Last.FM And MySpace Doing?!
Take all those areas in the music value-chain I listed above where basically it was a “No” about Spotify and they are almost all a “Yes” for Last.FM and MySpace.
And you know what, with the recent news that Apple, the “hardware only” company, is now inching into the subscription space, all these subscription brands had better pull their freaking thumbs out, and fast.
To paraphrase TMV contributor and industry guru Ted Cohen (who was writing about EMI’s digital strategy [http://www.themusicvoid.com/?p=334]; “Get on with it!”.
Personal Note: I Like Spotify
I am listening to some old Black Rebel Motorcycle Club “As Sure As The Sun” and the new Royksopp album “Junior” on Spotify as I write this.
Spotify works. It’s lovely. I wish them all the success in the world. They are humble, charming guys with a very good Contracts/Legal team. They’re Swedish. I like Sweden. Camping out, swimming and buying groceries at the Willy’s in Söderköping over the course of a few weeks in the Summer of 2007 is one of my life’s most charming memories.
But whether I will be still listening to Spotify in 10 months, or simply dragging my sorry behind back to my recently-abandoned ‘pals’ on Last.FM remains (very much) to be seen.
Good luck.
