Spotify Hits 20 Million Monthly Users and Could be on Track for 8 Million Paid Users 1 Year From Now

When Facebook flicked the switch on stage two of its Socially Optimized Web Strategy at f8 it was clear that the social network had just found an effective means of embedding itself further into all of our digital lives, by making itself the universal content dashboard.  What wasn’t so clear at that time was quite how significant an impact it would have on music services, Spotify in particular.

Today Spotify hit 20 million monthly users on its Facebook app, having added 500,000 new users in less than two weeks,  from the 3rd to the 15th of May (see figure 1).

Spotify has added 1.5 million users since the end of April, representing a growth rate of 8%.  That compares to 0.5 million new users and 4% growth for the entire month of May in 2011.  Facebook integration, coupled with launching in the US has turbo charged Spotify’s growth trajectory.

And yet, as impressive as Spotify’s total user growth is, it is only par when compared with other streaming music services.  Looking at the growth in total users by month since launch date of service (see figure 2) Spotify is close to the average for streaming music services.

In fact it is only above Pandora and lags imeem  and Last.FM, both of whom were once the future too.  In favour of Spotify, services like Pandora first launched in the US – a much larger addressable audience – and have unlimited free tiers.  Against Spotify, the market is now much more mature in terms of technology and consume readiness. Measuring against current user levels, 20 million users is also a long way south of Pandora’s 100 million users.  3 million paying subscribers is also far off Apple’s 80 million iTunes customers, though the comparison isn’t necessarily apples-to-apples (pun fully intended).

All of this is not to say that Spotify’s growth rate should be questioned but instead to put it into appropriate historical context, namely that Spotify is performing at the rate that streaming music services should perform in their first 40 months.  Not more, not less.

What is different about Spotify, is the need to amass new free users to drive premium subscriptions (see figure 3).

Although Spotify officially quotes 10 million registered users (the same number it first reported in December 2010) it is more instructive to look at paid conversion as a share of the 20 million monthly users reported by Facebook.  (Bear in mind that Spotify first quoted 10 million users back in December 2010, long before the US launch or Facebook integration).

Even with the 20 million users measure, 17% stands out as a highly successful conversion ratio for Spotify, an affirmation of the Freemium model.  Not only that, the conversion rate has grown strongly month upon month.  Spotify has been getting progressively better at converting free users to paid.  The conversion from active users to paid is even more impressive: 27%.

However it is also clear that the acceleration in new user acquisition enabled by Facebook integration is beginning to dent the conversion rate (see figure 4).

This is though just a natural byproduct of rapidly expanding the funnel: these new free users need to have time to get hooked on the service and then get migrated over to paid. The rate of new users is so much higher than previously that it will take time for Spotify’s overall metrics to balance out.  But that should indeed happen.  And if it does , then it augurs well for positive premium growth down the line.

If Spotify converts between 17% and 27% of each of the new daily 45,454 users, it will add between  0.7 and  1.1 million new paid users a quarter, or between 4.8 and 4.5 million a year.  Assuming a 27% conversion rate of these new active users, Spotify could have just over 8 million paying subscribers by May 2013 and 36 million total users.  The lower case, and probably more realistic, 17% conversion rate scenario would result in 6.3 million paying subscribers.

Although the rates and ratios will fluctuate over the coming 12 months, these numbers give us a useful directional sense of the long term impact of Facebook on Spotify’s current growth metrics.  There remains a big question over the scale of the actual addressable market, i.e. is there a demand ceiling that Spotify will hit somewhere south of the 5 million paying subscribers mark?  But ceiling or no ceiling, and low or high conversion scenario, there is one inescapable conclusion, namely that Facebook integration is transforming Spotify’s business, fast.

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These charts and the above analysis feature in a brand new Music Industry Blog free report: ‘ When 2+2=Free: Making Streaming Music Add Up’.  The report is free of charge to Music Industry Blog subscribers.  To receive your copy simply subscribe to email updates of this blog using the box to the upper left of this page.

Five Music Predictions for 2010 (and Five Reasons Why 2009 was a Flop)

[Please note that this post first appeared on the Forrester Consumer Product Strategy blog.  Over the coming month or so I will be migrating all of my activity there.  I will soon be posting new information here for you to amend your feeds and subscriptions. Thanks]

Lots happened in 2009 but it wasn’t a vintage year for digital music (in fact it was the year it well and truly lost the digital buzz to eReaders). All in all I’d give 2009 a 6 out of 10, with the launch of Spotify accounting for at least couple of those points and the following as the 5 key disappointments:

  1. Comes With Music under-whelmed (as did Play Now plus)
  2. ISP services didn’t get off the ground (including unlimited MP3’s nearly but not quite moment)
  3. Apple’s new killer music format was….oh iTunes albums
  4. imeem gave a master class in how not to make money out of social music
  5. The big boys (MySpace, Apple) snapped up the innovative competition (Lala, iLike, imeem)

So will be 2010 be any different?  Though I don’t think it will be the year digital music will really come of age (that’s at least a couple more years away) I do expect it on balance to be a stronger one than its predecessor.  Leaving aside the few specific developments I’m not able to talk about here are a few of my predictions:

  1. Apple launches a major refresh to the music experience.  (I’ll caveat this first prediction with the disclaimer that Apple make a habit of proving wrong those of us foolish enough to try to second guess them.)  With that said, there are many things Apple could do with music in 2010.  Whatever they do, they have to do something significant if they are to stay on top of their game. They’ve spent much of 2009 collecting user data via the Genius app and they’ve acquired some top notch streaming and programming expertise via the Lala acquisition. And of course they’re busy developing with content partners for the forthcoming touch screen note book.  Here’s hoping that this will all add up to something like an integrated on-device, connected, interactive and immersive music experience where the cost is bundled into the price of the device (perhaps with the touch screen note book as the flagship device for the offering).  Apple wouldn’t be in the game of hiding the cost of music to the consumer (a la Comes With Music) but they may use content subscription bundling as a way to maintain premium price points and differentiation for their devices.
  2. MySpace deepens its focus on music. Though MySpace will spend most of 2010 simply ingesting iLike and imeem, the acquisitions form part of a longer term strategy to breathe much needed new life into MySpace’s music role.  The new management talent is tasked with pulling MySpace from the brink of becoming a garbled also ran and dragging it by the collar into the 2nd decade of the century.  Though they’re unlikely to admit it, the mainstream social networking race against Facebook is as good as over. By contrast they remain the #1 destination for artist communities online, yet without a major reinvention they’ll start to feel the competitive pressure bite there also.
  3. Spotify scales back its US launch. Spotify appears to be paying the price for the major labels having second thoughts about ad supported on-demand content.  Those pesky US licenses have been proving tough to tie down and I’d expect to see Spotify’s US launch to be more strongly focused on the premium tier than it is in Europe.  If so, it could actually prove to be something of a blessing for the Swedish upstart, allowing it to consolidate the monetization of its core user base rather than building a US ad business from scratch whilst millions of free US subscribers add cost to the bottom line. Whatever the case, Spotify’s European revenue fundamentals should improve in Europe in 2010.
  4. ISP music services don’t pack a killer punch. I’m a firm believer that ISPs will become established as a core element of the digital music value chain and the best way of fighting piracy head on.  In 2010 we’ll see more services launched both in the US and in Europe, especially the UK.  But I don’t see anything yet to suggest they’ll be adequately provisioned to flourish. It’ll take another year or two of revenue pain decline for the labels to adjust their license requirements sufficiently. What do I think will work?  5 pounds / euros / dollars a month for household access to near unlimited (i.e. fair use) MP3.
  5. Semi-pro sites and services prosper. I’m not sure I’d go as far as to say 2010 will be their year, but it will certainly see continued growth for the likes of SellaBand, MyMajorCompany and Tune Core. These sites that create a route to audiences for artists either not good enough or not yet good enough for record deals, play to the strength of the Internet as a social channel for artists and fans. Which of course is all the more reason for MySpace to be watching its back.

To conclude, 2010 will be another year in which digital music continues to find its feet, but significant progress will be made.

MySpace Music UK: First Take

[Please note that this post first appeared on the Forrester Consumer Product Strategy blog.  Over the coming month or so I will be migrating all of my activity there.  I will soon be posting new information here for you to amend your feeds and subscriptions. Thanks]

MySpace today launched its UK music offering, over a year after its US launch.  However tempting it is to position this as a Spotify challenger (and the BBC and many others do) it simply isn’t.  It isn’t, both out of intent (more on that later) and also out of poor execution (more on that later too).

Music matters to MySpace more than ever before. Why?  Because it is has lost the race with Facebook for social networking supremacy, in fact Facebook is about to lap MySpace.  But MySpace remains undisputed leader as the global social music destination (a position consolidated by the recent acquisitions of iLike and imeem).  If you are a band, you’ll have an artist page because that’s where the online music audience coalesces for engaging with bands. Sure there are better, more innovative alternatives, but MySpace has the momentum and the scale.  And if you’re an artist looking to reach audiences that is exactly what you want.  Bebo and Facebook have both tried to challenge MySpace’s position here but have not had meaningful success (a recent report indicated that 77% of Facebook fan pages have less than 1,000 fans).

So whilst the mainstream social networking momentum may be shifting elsewhere, MySpace remains at the heart of the social music experience.  In many ways MySpace is in a similar position too YouTube, which is getting left behind in the online video revolution as the momentum moves beyond skateboarding dogs to full length shows on the likes of Hulu and iPlayer.  But it remains the number one destination for music video.  So MySpace and YouTube both find themselves repositioning around music, perhaps more out of necessity than out of choice.

All of this leads to why MySpace Music is not a Spotify challenger:

  • Strategically: MySpace is building its music experience firmly around social and community.  It knows that is its differentiation point and the essence of the artist-fan relationship which MySpace delivers.  So the music experience is wedded to that. Spotify is a straightforward music experience.  No community (at least within the application itself) and no artist-fan dialogue. So the music content is deeply integrated into the social experience (hence the focus on playlists for example).
  • Execution: But it is also not a direct challenger to Spotify because it isn’t executed well.  That deep integration brings great challenges also.  If you are looking for a Spotify-like experience on MySpace, you won’t find it.  But the odds are you won’t easily find the music you want either.  For example, MySpace poster girl Lily Allen is one of the featured artists on the home page (despite her just announced career break), but finding her music isn’t easy.  As you can see from the screenshot at the bottom of this post, you have to go all the way to the bottom of the page to find a genuine song.  And the top result, which is out of shot here, is for the ‘This is not the real Lily Allen’ profile page.  Those results below are all songs by unknown and small time artists.  Yes that is part of the essence of MySpace’s music community, but they shouldn’t be pushing the genuine Lilly Alen track to the bottom.  Also note all those ads by competitor music services!

All that said, MySpace Music is an important part of the digital music landscape and I expect to see much more fromo them over the coming 12 months as the leverage the iLike and imeem assets to the full.  But they also need to innovate hard.  There is a huge amount of activity in this space and MySpace can’t simply wait for each of the competitors to fail and then buy them up on the cheap.  The fact MySpace music is a Joint Venture sets them in good stead, with reportedly significantly below market-rate license fees (as this artist’s account also seems to suggest).  But MySpace doesn’t have a JV by accident, its financial security makes MySpace an important partner for the music industry. It can plan ahead with MySpace in a way that you cannot with an unproven start up, however well funded it may be right now. Here’s hoping MySpace use that power to the full and don’t rest on their laurels.

Spotify’s Marathon

The news that Spotify’s mobile app is now available for the Android platform, coupled with an anticipated Autumn US launch, are both part of the music service’s inexorable rise and media interest.  Spotify undoubtedly has momentum and potential in abundance.  But, even without considering the issue of cash burn, it is also important to keep a sense of scale. Spotify has done a great job of acquiring a sizeable audience after a short period of time, but needs many users more before it can be considered on a par with some more established services that get a lot less attention (these days at any rate).

In the chart below I have mapped the number of users of Spotify and a number of other key free music services, each from launch.  What is clear is that Spotify has made a solid start is growing at a stronger rate than Pandora was at the same stage.  If Spotify ever reaches Pandora’s scale and business model viability, it will rightly be considered a success.

But it is also clear that other services like Last.FM and imeem grew more quickly.  And just to put the absolute scale of Spotify into perspective, the Pandora iPhone app alone is mapping almost exactly in line with Spotify’s entire user base. (No coincidence of course that Spotify see the iPhone app as a crucially important ticket to further success).

Monthly users of key free music services mapped by months from launch

So what can we conclude from these numbers?

  • Extrapolating Spotify’s early user growth suggests that if it is sustained it could reach the 20-30 million user range within 2 years
  • A US launch will significantly accelerate audience growth (all of the other services mapped here have US reach.  imeem and Pandora have reached their scale in the US alone)
  • Spotify will need to accelerate its revenue model maturation if it is going to be able to sustain this projected level of growth.

The last point is key. All of the other services in the chart have had to deal with the challenge of audience cost sustainability:

  • imeem has had well publicized financial difficulties with WMG writing off millions of debt
  • Last.FM recently closed its free service to countries it couldn’t operate in profitably
  • Pandora closed its non-US operations when it couldn’t strike deals with rights owners that would enable it to operate profitably in international markets.  Pandora has long focused on building financially sustainable audiences, a strategy echoed by We7 in the UK.

Spotify has run a fast first lap, but it is a very, very long race.

The Three Things Spotify Needs to Do

Spotify is certainly the darling of the moment.  In the close to a decade that I’ve been covering the digital music space for Jupiter, and now Forrester, I have seen oh so many services come and go.  I’ve seen far fewer grab the limelight and hold it in the way Spotify is currently doing so.  In fact the only other digital music service that has ever sustained the same pulling power as Spotify is Apple’s iTunes.  And of course there is a lot of talk about whether Spotify is an ‘iTunes Killer’.  (For the record I don’t think the comparison is a valid one, rather that Spotify is a complementary addition to an increasingly complex digital music marketplace.  But I’ll park that discussion for another day.)

The Financial Times today ran a story about Spotify being close to securing substantial extra funding, and I for one hope they secure it: the music industry needs Spotify to get a decent shot at being a success.  It’s no secret that ad-supported music services have numerous challenges, not least a softening ad market.  It’s equally no secret that Spotify needs to make its premium business a success.  But building the ad business and the premium revenues will both take time.  Until those are fixed every new user for Spotify is cost to the bottom line.  So it would be a real shame for Spotify to have to put the brakes on its audience acquisition given that they have that most sought after of dynamics: momentum.

At the same time however, I think it is important to put Spotify’s nascent European adventure into perspective.  Spotify itself is not about to become ‘the future of the music industry’ but it does stand a decent chance of being one of the first truly mass market online services.

As you can see from the chart below, Spotify’s user base growth is impressive.  (It is important to clarify that the current European user number is the 4 million as shown in the chart, not the 6 million reported elsewhere.  Spotify clarified to me that those 6 million numbers are not correct and are ‘unsubstantiated’).

spotify users

But just what does 4 million really represent?  Well across the 6 European markets Spotify is available in (Sweden, Norway, Finland, the UK, France and Spain) it represents 3 percent of all Internet Users and in the UK it represents 5 percent.  Those may not sound particularly high but are impressive given that the service only launched 9 months ago and only formally came out of invite stage this year.  By way of comparison it took Pandora a year to reach 1.7 million users, representing 1 percent of US Internet users.

So it is clear that Spotify has momentum.  But it is too early to say that it is a success.  Pandora now has 30 million users and its iPhone app users alone out number total Spotify users by more than a million.  Also, there are plenty of streaming music services with many more users, such as imeem (25 million in March),  Last.FM (20 million in March) and iLike (30 million in March).  Spotify has some distance to go before it reaches the levels of those services, none of which are being talked about as the future of the music industry…at least not anymore.

And there lies the rub.  Each of those services had their time in the spotlight.  For a while each was seen as the shape of the future.  They still have plenty to offer, but the attention has shifted elsewhere, due in no small part to the fact that their user growth reached a plateau in the 15-20 million range.

To build upon its great start and be a long-term success Spotify needs to do three things:

  1. Break through the 15-20 million user bar like Pandora did
  2. Convert roughly 5 percent of its user base to premium offerings
  3. Build a sustainable ad business that helps shoulder the cost of its free users

Launching in the US and having its iPhone app approved by Apple would both be great ways of moving towards achieving those three aims.

Spotify has made a great start but it hasn’t even finished the first lap yet.  Here’s hoping that they’ll have made more substantial progress before the backlash begins.  Because one thing my years of market watching have taught me is that the higher a service is built up, the farther it has to fall when it is pushed off the top by many of the very same people that put them there.

Why Would Anyone Buy the Pirate Bay?

A small Swedish company Global Gaming Factory today announced the acquisition of the Pirate Bay.  The acquisition poses far more questions than it does answers.

The acquisition was for $7.7 million, which the founders described as “great bit underneath its value”.  Which is kind of interesting considering that they argued strongly in court that the Pirate Bay was not a cash cow.  Of course the fee neatly covers the fines $3.6 million handed out in the trial with over $4 million on top.  And it comes hot on the heels of the ‘bias’ claim against the judge being thrown out and the bid for a retrial being refused.  It isn’t clear whether GGF have acquired the liabilities of the Pirate Bay.  (When Roxio bought the assets of Napster it pointedly left the liabilities with Bertelsmann who then went on to face settlement fees with major record labels.)

GGF claim that they intend to launch “new business models that allow compensation to the content providers and copyright owners.”  This appears to involve some sort of supra-distribution model and GGF are at pains to stress they intend to compensate copyright owners.  Of course it is one thing to argue this and another to do it.  Normally in such situations there is a massive gulf between content owners’ valuation of their own content and that of software companies seeking to build business around it.  Also why buy a site that is diametrically opposed to copyright if you want to build a service which upholds copyright?

The history of file sharing networks and sites ‘going legit’ isn’t exactly a vibrant one:

  • Napster sold its brand and mailing list to Roxio.  As a file sharing network it peaked at over 20 million users, as a subscription service it has less than 5% of that.  And really the new business has nothing to do with the old one, nor its user base.
  • Grokster closed down in 2005 following legal action, stating that it would be back ‘soon’ with a legal alternative.  We’re still waiting.
  • iMesh re-launched, again after legal action, as a licensed service, with modest success.
  • Kazaa owners Sharman Networks settled with the music industry $100 million including provisions for launching a legal music service, which we still haven’t seen any sight of.

The trend is clear, and in many ways it is important that the message is clear that you do not get to the content licensing table by building an audience with unlicensed content.  (Though to be fair imeem did push the boundaries).

So why have GGF bought Pirate Bay?  All that Pirate Bay is is a list of locations of files.  It’s not a network, it doesn’t have content per se.  But it does have an audience. If they at some stage want to launch a licensed music service they have a number of problems:

  • I can’t see them getting licenses from the majors for a file sharing service (Play Louder have been admirably fighting this battle with little success for years)
  • If they do get licenses for some other form of music service they’re unlikely to be able to monetize that successfully with advertising given the current malaise that ad supported content finds itself in.  Not to mention the fact that Pirate Bay users are not the most attractive audience for many advertisers.
  • If they intend to charge they’ll have a minimal conversion ratio: Pirate Bay users are there for finding free content, plain and simple.

So what other revenue models are left?  There are a number of possibilities:

  • GGF’s CEO is doing this as a philanthropic act because he believes in the cause.  Though he asserts that he sees this as a viable business proposition.
  • Pirate Bay has other (cash?) assets that were not revealed in the court case.  The experience of Sharman Networks shows us that owners of file sharing properties tend to have incredibly opaque and convoluted business structure to obscure accountability and ownership.  I have no evidence that this is the case with Pirate Bay, instead I’m simply making the case that this has happened before elsewhere.
  • The last, and probably the most likely, option is that GGF will launch an adware business, building a client that tracks users’ behaviour and serves up ads based on context and behaviour, typically superimposed on publishers’ inventory.  This pretty much the Kazaa model.  The fact GGF have additionally bought a peer-to-peer technology company Peerilism points to this also, as does their current internet café ad business model.  The big issue here is around whether the application will run on other networks or a proprietary one.  If it is the former they simply won’t be able to meet content owners’ requirements and if it is the latter, do they really intend to block out all non-licensed content.

Returning to where I started, this acquisition leaves a lot more questions than it does answers.  The only thing that is clear is that the Pirate Bay owners, despite claiming to be modern day Robin Hoods have now become multi-millionaires, making them more like the rich Sheriff of Nottingham than the swashbuckling archer.

Why Napster’s New Pricing Strategy is More than Just Price Cuts

Napster has overhauled its pricing strategy in the US, selling pre-stored value cards in retail stores. It’s being widely reported as ‘Napster slashing prices’ but it’s more than just that.  The key things of note here are:

  • It shifts the consumer focus onto downloads: each card has a pre-stored value for MP3 downloads as the headline.  Unlimited streaming is the sub head.
  • It targets iPod owners: MP3 downloads and easy synching make iPod owners a core target
  • It lowers barrier to entry to subscriptions: by using a Pay As You Go solution Napster makes subscriptions more attainable to more consumers, even if they are sneaking them in through the back door
  • It tacitly acknowledges the dire state of premium subscriptions: the focus on MP3s moves the focus away from the subscription business, but the latter is still Napster’s core business.  To really thrive in the imeem and Spotify age they need to be unlimited MP3

This is an innovative move by Napster, and should widen their market appeal, but I can’t help but feel that it is almost embarrassed of its core value proposition (on demand streaming).  Positioning the streaming component as a freebie with MP3 tracks will weaken perceived value.  They’ll need to be careful with their positioning, or risk further weakening their ability to sell their core product, unless of course they can fire the silver bullet of unlimited MP3s.

Comes With Music Finally Gets Its Route To Market

Orange today announced they will be ‘exclusively’ providing Comes With Music on the Nokia 5800 in the UK.  Finally Nokia’s Come With Music gets the route to market it needs.

I’ve long been a strong advocate of CWM and that belief remains intact despite reportedly poor sales to date.  Nokia always needed strong channel partner participation to make the service a success. Without the route-to-market, marketing support and – most crucially – subsidy support that the operators provide CWM is left looking like an overpriced, under featured oddity.  But with the support of an operator it comes into its own.

Orange packages start at just 25 pounds a month.  For this consumers not only get a decent number of voice minutes and texts, but they also get the handset for free and unlimited music that they get to own for ever.  That is a compelling proposition and offers genuine value for money. Unsubsidized, the cost in Italy for the same handset and music service, but without a voice and text tariff is just short of 500 Euros.  The comparison is stark and is central to why CWM has under-whelmed thus far.

CWM is an exciting product because, when packaged correctly, looks and feels like free to the consumer.  In this context DRM restrictions and a phone that falls short of iPhone sexiness are entirely tolerable.  But with a premium price point they become non-starters.

CWM, along with the likes of Spotify, We7, Last.FM and imeem, is one of the key weapons that the music industry has in its armoury to fight free with free itself.  CWM may not be free, but packaged like this it ‘feels like free’ and that’s enough to have real potential of pulling young music fans away from illegal downloading on a scale that hasn’t yet been achieved.

Spotify and Spiral Frog: Spot(ify) the Difference

Spotify reached another milestone at the weekend, clocking up a million users in the UK. As I’ve mentioned in previous posts Spotify’s success lies in doing what it does simply and well, not by doing anything particularly revolutionary (advanced caching technology arguably aside). But it is imperative that Spotify doesn’t go the way of Spiral Frog. Remember Spiral Frog built up a million strong user base also. Granted, Spotify’s consumer proposition is superior, but whilst both user experiences are products of their respective times, their business models are less distinct. In short they both depend upon advertising income to be larger than license fee and technology costs. As Spiral Frog proved, having a million users is no guarantee of achieving that equation.

Spotify is probably in a much stronger position now than Spiral Frog ever was, but to paraphrase the Conservative leader David Cameron’s comment to then Prime Minister Tony Blair “it was the future once too”. Spiral Frog may look like a fundamentally flawed business model now, but the bottom line is that if it had struck a better cost to revenue ratio it would have fared much better. With a more vibrant balance sheet it’s reasonable to assume that the DRM-download model would have ultimately been shunned for streaming as user bandwidth augmented. When it comes down to brass tacks, Spiral Frog and Spotify aren’t as different as you might think.

Which all underscores how crucial it is that Spotify both successfully develops a premium (probably mobile) business and builds its ad business in a softening online ad market. Both are easier said than done. Consumers have proven for years that they’re just not willing to pay for content in meaningful numbers. Also the likes of imeem, Last.FM and Pandora have all set the standard for mobile streaming music apps to be free, not paid. With the softening ad market Spotify will not only need to think carefully about how aggressively it grows its user base but may also need to reassess some of its business relationships. Many content providers are finding themselves unable to afford their audiences growing because ad revenue is not growing as quickly as the increased license fee costs are every time their audiences listen to more music or watch more video. Which basically means many online content providers are finding themselves in the paradoxical situation of not being able to afford to have their audiences to grow. (I just wrote a report on this topic which Forrester clients can find here).

All this said, Spotify are in a better position than many to be able to navigate these troubled waters than many. They’re the right service in the right place at the right time. They’re a high profile success story that the labels will not want to fail. But it’s equally important that the rest of the market succeeds also. Just in the same way it’s as equally important that imeem’s streaming business model is as sustainable as MySpace Music’s. An uneven playing field will simply tilt the balance in favour of the bigger players. The one-size-fits-all shiny disc days are gone. The future should be all about choice, but that may yet require a little ‘behind the scenes give and take’.

Spotify, Scratching Beneath the Surface of the Numbers

The Financial Times today report that Spotify has 250,000 UK Internet Users have downloaded the streaming music application, and 800,000 worldwide. Not bad for an application which has only recently just stopped being invite-only. I’ve posted before on why Spotify has been so successful, now we have some numbers to measure that success by. First of all let’s assume that 98.5%+ of those 800,000 are free, ad supported customers, so I’ll treat the reported numbers as being largely synonymous with free. I invite Spotify to challenge that assumption, but I think it’s a relatively safe bet.

  • 250,000 is more than 4 times higher than the premium subscribers Napster has managed to accumulate in the in the UK after years of trying. That’s significant because the free Spotify service effectively offers just what Napster’s 9.99 tier does but with much weaker editorial and programming. This is proof positive of why being free has been at the core of Spotify’s success to date. All the ease of use, deep catalogue, smart streaming technology and clever use of pyramid-selling peer promotion would have come to naught if it had just been for the 9.99 tier. And this is why Spotify have to realistically build their business for being an ad supported business not a premium subscription business.
  • 250,000 may be bigger than Napster, but Napster was never anything more than a niche player in the UK. As a share of the total UK paid digital buyer market Spofity is less than 5%, as a share of the total UK digital music audience, less than 2%. So 250,000 is a great first step, but it’s not at ‘taking over the world’ proportions yet.
  • 250,000 means that the UK accounts for nearly a third of the total 800,000, with each of the other 5 markets accounting for an average of 110,000. As much as the Brits do really like Spotify, I’d expect France and Spain to be really strong markets too, especially Spain. Both are big free-music markets. In fact as a label exec I’d be a little concerned that Spotify was doing so well in the UK (the strongest European premium digital music market) and hoping it doesn’t cannibalize iTunes sales.
  • Let’s generously assume that only 95% of the 800,000 are free: compared to those users being 9.99 paid subscribers, that’s a shortfall of just under 100 million euros annual subscription revenue that needs to be made up in advertising. I admit the comparison is a bit disingenuous given the explicit tactic of deploying a free tier to promote the service. But Spotify must be careful not to expect to convert the majority of those to paid subscriptions. They’ve cast their net among free music fans and they’ve reeled in a nice catch of freeloaders who love their music but predominately won’t pay to stream it. Charging for must-have added functionality, such as mobile, might be an avenue, but Last.FM, Pandora, imeem etc have all set the standard of mobile support being free. So charging for mobile would arguably be as damaging to their growth potential as if they’d only launched with a premium offering.
  • Finally the numbers must be caveated with the fact they only refer to downloads, not active usage.

So a solid start for Spotify, but the real test is building a vibrant business around free music and kicking it towards the mainstream. If anyone can do that right now, it’s Spotify. But they need to strike whilst the iron is hot before they start getting bogged down with the every day tedium the rest of the digital music market has e.g. directly competitive services, disgruntled customers, differentiating from file sharing, competing with Apple etc.

UPDATE: Spotify have just announced that they passed the 1 million users mark.