Spotify – I Don’t Get It?

So here’s a funny thing. The press has been awash with Spotify for much of this year. It’s a great piece of kit for sure although I haven’t found myself using it as much as I thought I would because of its lack of portability. I guess they will fix that in due course.

But what I don’t get has nothing to do with Spotify as a technology and everything to do with Spotify as a business. Currently it has 2 revenue streams; ad-funded free full -length streaming or the ad-free subscription service at £9.99.  On that basis I can’t see Spotify lasting the year.

Let’s take ad-funded for a start, what service has yet to turn a buck in this area? Spiral Frog – dead, Imeem in trouble, QTrax lacking in traction and in litigation with a number of its investors, We7 – who? Despite the rethoric of some well-established industry commentators, there is no significant money to be found in ad-funded models – repeat – ad-funded = no cash! Now throw into the mix the fact that Spotify would have paid out over 10 million euros in advances so far and is currently paying out 7 figures in streaming royalties, how in the fuck is it going to make any money out of ad-funded streaming. The reason there is no profit in ad-funded music models is that what labels see as a fair-deal for themselves based on a top-down view of music sales in general doesn’t equate back to the revenues that Spotify are going to earn from its sale of advertising.

So subscription will save them … Will it fuck! This is a double wammy, first up subscription has by & large still got no traction with the consumer. I know you sonos, rhapsody, napster users will tell me that the service is the greatest thing on earth and without doubt at some future point, the entire planet are going to agree with you. However, right here, right now, these services don’t mean shit in the digital music market when talking about revenue (I’m not counting eMusic in this as its more of a bulk purchase MP3 offering and it excludes all the major labels effectively circum-navigating the crippling advances these entities require whilst simultaneously employing editorial filters to drive its customers deep into the indie repertoire it holds – all power to them).

So not only have the current mainstream market rejected subscriptions but also the Spotify proposition of unlimited streaming (great) but with no portability (bad) but £10 per month (very bad) is not going to bring in the bacon.

LibSpotify is yet another red herring; if you read the press (Telegraph Example) then you can expect a host of crowdsourced apps arriving on your mobile device, games console etc. any minute now. Spotify take a slice of the app sales, the service goes portable, take- up extends hugely (mainly amongst the mobile kids who hate paying for anything but wouldn’t mind paying for an app that keeps on giving free music on-demand, even with a bit of advertising in it – worth a week’s pocket money? I think so). But a quick look into the T&Cs of the API platform show that this is not the case as a) your work cannot be commercial and b) it can’t be applied to a mobile device (why can’t the telegraph do this type of research …)

Approved Device” means desktops, laptops and netbook PCs and such other devices that we permit as notified to you from time to time. Approved Device does not include any mobile wireless handset or any other internet-enabled device that is designed to be handheld.

3.3 You may not charge Users for use of the Application or otherwise derive any income from Users’ use of the Application, such as through e-commerce initiated via the Application or the sale of any advertising, sponsorships or promotions on the Application itself.

So Spotify must have the portability issue covered in their R&D / Development plan. This juicy prospect of a portable spotify system is the piece they need to deliver … Watch this space I guess, but until then anyone commercially minded would assume that Spotify does not currently have a great business model.

So what’s the play here?

1. They have a secret plan probably around portability that is going to turn their massive audience into real cash (something that facebook, myspace & youtube have a real problem with).

2. They were all about customer acquisition; make the kit, pay the advances, get a seven figure audience quickly and then sell. Ooops, then the recession hits and they can’t find the dream buyer and the cliff edge is looming in the not to distant future.

3. They are a hippie collective with super-large pockets that are solely about paradigm shift – I have a conspiracy theory on this but as I don’t believe for a second that this is even a potential scenario, I’ll leave it there for now …

My hunch is no.2 given that all the planning would have been done throughout 2005 / 2006 and this service is heading for the skids. When they re-negotiate their licensing deals, the true extent of their lack of business will come shining through and Spotify may well have to ‘walk into the light’.

If you have a better idea, I’m all ears.



~ by donjenkins on April 15, 2009.

3 Responses to “Spotify – I Don’t Get It?”

  1. Hi Don
    Good post and a good analysis, ad funded is not about the bullshit factor it has to be about showing that the model can eventually generate cash and become sustainable and scalable. You interestingly said We7 – who? But in the last 100 days we have quietly added 500k UK users to our service and are getting Ad traction.

    By just getting on with it and delivering an outstanding web based music service which just works, we are able to understand and uncover the metrics and dynamics of what is a complicated supply chain. For example we are aware that We7’s ad impression to song ratio is capable of about 4:1 whereas Spotify’s is 1:4. which one is more likely to have a chance of working.

    There is still lots to do but I am confident that Ad funded models will become a cornerstone of the recorded music industry in the future.

    CEO We7

  2. A big thank you to Steve for the comment.

    But 2 things just won’t go away … The total worth of the online advertising industry is approx £3.2bn in the UK (source Brand Republic). Just how much of that is the recording industry ever going to claw in? 5%? 10%? Ad funded modelling is the cornerstone of ‘digital pennies’ replacing.

    The other point is potential all about fans & bands – do we really want an ad-funded future? If the money is all going to come from brands then what happens to artists who do not want the association or whose work falls outside of the branding guidelines? What are we handing down to the next generation of artists? Potentially something so much worse than a silly a&r man who isn’t feeling it yet!

  3. […] I’ve commented on Spotify’s viability before – I still don’t get it … […]

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