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.

Music as Free: When Discovery Becomes Consumption

Regular readers will know that I’ve dedicated quite a lot of time to the debate over the threat that free music poses to the music business, but that I’m also a strong believer in embracing free as a legitimate business in the right way. It’s a difficult equation to balance and I’m not going to pretend I have answers to every question that the strategy raises: the next five years will see the music business learning those answers for itself.

But there is a simple inescapable fact: if consumers are not offered compelling free alternatives to file sharing, the long term future of the music business is in serious doubt.

A broad range of tactics have been used to address the problems posed by music sharing on peer-to-peer networks, including legal action, technical measures and dialogue with ISPs. These are all important tactics, but the basic behaviour also needs harnessing. If the tap could ever be turned off on peer-to-peer file sharing another technology would evolve to meet the demand. A whole digital generation of youth has grown up expecting music to be free, unlimited in choice of catalogue and essentially disposable.

Those attitudes cannot be turned off. In fact, it could be argued that file sharing is becoming a technological manifestation of new behaviour patterns.

These behaviours need short term and long term attention.

The long term focus is to develop new perceptions of the value of music. Values that will be very different than those of the nineties, perhaps even very different from now, for the right mix of value hasn’t yet been hit upon. The digital youth need to learn a new sense of why music has a value to them that is strong enough for them to opt for legal options over illegal ones.

The short term focus is on providing enough compelling alternatives now, so that as the illegal sector becomes less and less appealing (due to legal action etc.) that there are genuinely interesting legal alternatives that they can jump to. I’ve discussed some of the possible types of services here. One interesting post script to that post is the success of Spotify with a purely streaming solution which is positive news for ISPs looking to push streaming services.  They may thoughhave to accept they’ll need to subsidize rather than charge for such services and even lean on ad revenue. But if you layer in a mobile streaming story into the mix too, then for a telco with fixed and mobile businesses you’ve got a compelling proposition that also drives mobile data usage.

Beyond those services though, a crucial additional layer exists: the social music services. 32 million Europeans are already social music fans and Forrester predicts that the number will grow to 78 million in 2014 (see the press release here with more stats). That is key addressable market. But whereas the social music sites (e.g. YouTube, MySpace, Last.FM, imeem, Pandora etc.) had historically been seen by many in the music business as a good discovery tool, it is becoming increasingly clear that they are also an end in themselves.

The discovery capabilities of social music sites cannot be ignored: they are very positive drivers of music spending and many sites have robust affiliate relationships with digital and physical music retailers. But the discovery is not, and should not be considered to be their Raison d’être. The technology as technological manifestation of new consumer behaviour applies many more times more strongly to social music than file sharing. Social music services, in their various distinct ways, use the Internet to create something new, an immersive experience that did not exist before the Internet.

MySpace music’s success of 40 million streams in the first seven days after launch in the US (17-18 streams per person) show just how much consumption can be tapped, but many services don’t have access to the sort of deal that MySpace has achieved via it’s unique negotiating position to make such large stream counts a viable business model.

The digital future of the music business is a complex and multifaceted one, but social music services will be a crucial component of it. Key to that success though, will be a shift in assumptions and revenue models.

Spotify: Why It’s Been So Successful and What it Needs to do Next

I first spoke to the guys at Spotify a good few months ago and I have to confess to thinking at the time that they were just another digital music start-up. In fact, it was worse than that, I thought they were potentially another doomed digital music start-up if they didn’t revise their strategy.

On the face of it Spotify doesn’t actually have that much to offer. The discovery, programming and community features are next to non-existent in comparison to the feature rich functionality that the current next-wave of digital music services such as imeem, Pandora, Last.FM and Comes With Music are offering. Added to that the core of the business model seemed to be a 9.99 monthly subscription for non-portable streaming music rentals (with an ad supported layer that appeared to be a customer acquisition tool). In short, it was the increasingly defunct premium subscription model that Napster, Yahoo and Rhapsody have all failed to push out of a niche. To give a sense of the degree of failure, the share of European Internet users that paid for music subscriptions in 2008 was approximately 0.1 percent.

And yet despite all of that, Spotify is proving to be a roaring success, rapidly become the darling of the digerati (it certainly seems to have replaced Blip.FM as the service of choice for European Twitterers). Why? There are three key factors behind Spotify’s success:

  1. The actual lack of sophisticated functionality has actually proven to be an asset: the simplicity of the proposition has made it equally popular among tweens as it has pensioners.
  2. Spotify used smart viral marketing tactics, launching in an invite-only mode, but giving each user a large number of invites. This created apparent (though not actual) scarcity which drove demand, making those invites hot-tickets and giving whoever had them kudos. It was essentially a pyramid selling scheme, but it worked, and some.
  3. The single most important factor though is the fact the ad-supported tier offers completely free access to very comprehensive catalogue.

In short, Spotify gives you most of the music you could want for free without hassles or complications. My Forrester colleague James McQuivey has developed a methodology called the Convenience Quotient that measures products and services based upon the benefits to consumers and the barriers to adoption. Spotify would get a strong CQ score because it makes it easy to get strong benefits.

So what next for Spotify?

Spotify, by accident or intent, now has the potential to become a mass market free music offering. They need to build up their audience sufficiently to attract big advertisers to generate enough revenue to enable them to ditch any business plan reliance on the premium tiers. Founder and CEO Daniel Ek is talking up strong new features for premium subscribers, some sort of mobile play and even downloads. I hope they don’t spend too much time focusing on the premium offering. They’ll struggle to get anything as near as compelling user experience as Rhapsody which even with market leading UI failed to break out of niche.  I’d also steer clear of ad supported downloads. That would require messy DRM implementation which will muddy the service’s current simplicity.

Mobile though could be a hugely important move. Pandora’s iPhone app has demonstrated how well implemented mobile can turn a PC-centric service into a truly portable one. If you have a compelling portable streaming element, the need for downloads becomes much less important.

So interesting times ahead for Spotify. They succeeded so far by smart adherence to the KISS principle: Keep It Simple Stupid.   If they stick those ideals they stand every chance of stepping up to the next level.


2008: The Year of Free

This time last year I predicted that 2008 would be ‘The Year of Free’. (Targeted legal free that is, not the ‘let’s give it all away and hope for the best’ flavour of free I’ve been posting about here recently.) Though all music can’t ‘just be free’, free services are a crucial element of blended digital music strategies. As the year draws to a close we can see just how fundamentally the digital music market changed in 2008. (See the list of developments at the bottom of this post).

2008 was the year in which the music industry accepted the fact that the only way to fight free is with free. That the only way to engage young digital consumers that have grown up with file sharing is to offer them something genuinely comparable in experience and price (i.e. free). Back in 2005 I wrote in a Jupiter report that if the industry didn’t start offering these young consumers free music they would become a demographic time bomb for future music revenues. Now finally we’re seeing these strategies starting to happen.

Today’s announcement from TeliaSonera illustrates just how far digital music strategies have come since I wrote that report, but also how there is still much distance to go. TeliaSonera’s Telia Musik service will offer unlimited free music to all of its mobile and PC broadband customers across 6 markets for 3 months. Telia can expect robust take-up and to bring many new consumers into the digital music fold. But as soon as they start trying to charge for the service they can expect the vast majority of these new customer to go.

To paraphrase, Free is not just for Christmas, Free is for life. You can’t just use it as a loss leading customer acquisition tool. That both falls short of its potential but is also damaging. Free services are invaluable when targeted at specific target groups who are unlikely to spend anything. Target it at all consumers and it weakens overall perceptions of the value of music as a paid commodity.

Free should be a crucial element of multi-tiered digital music strategies, based upon sophisticated segmentation of the consumer marketplace, working on the underlying assumption that one size does not fit all. But equally sophisticated consumer life-cycle management is equally important to ensure valuable customers are migrated to premium offerings.

Here’s my Top Ten of the ‘the Year of Free’ (i.e. services that launched or had a key event in 2008 ) Let me know who you think I’ve missed but should have included.

2008: The Year of Free Top 10

  1. Comes With Music (UK launch)
  2. TDC Play (Danish launch)
  3. MySpace Music (US launch)
  4. Pandora (2 million iPhone downloads)
  5. Last.FM (downloads launch)
  6. Spotify (ad supported tier)
  7. We7 (Repositioning & relaunch)
  8. Telia Musik (Nordic & Baltics launch)
  9. Blip.FM (surge in adoption mid 08 )
  10. Qtrax (US label deals signed)

Music Mistakes, Myths and Misconceptions. Part 2: Ad Supported


Continuing my bid to provide more fuel for the ‘music should be free’ fire this is the second in my short series of ‘Music Myths, Misconceptions and Mistakes’ posts, tackling one big ‘free’ issue at a time.  Today’s topic is Ad Supported (yesterday’s post on File Sharing can be found here). 


Ad Supported: 10 Mistakes, Myths and Misconceptions


  1. Myth: All music will be free and supported by advertising in the future. There simply isn’t enough online ad revenue to go round.  In 2007 the entire European online ad market was exactly the same size as the entire European music market (€ 7.7 billion)
  2. Mistake: Charging the 1st generation of ad supported download services too much for their licenses  Qtrax and Spiral Frog clearly have their flaws but they were further impeded by excessively high rights fees. Ad supported rates need to sit somewhere between radio and premium download rate levels, skewed strongly to the former.
  3. Misconception: Spiral Frog and Qtrax flopped, Ad Supported is dead. A) first movers rarely win, early followers typically do, so wait for the next breed B) where downloads have stumbled streaming has flourished cf MySpace in the US, Last.FM, imeem
  4. Misconception: Ad supported downloads will cannibalize premium downloads pt1.  Users of ad supported download services tolerate restriction on use, sound quality, catalogue etc. in return for no fee.  Most of those willing to pay do so because they want the quality etc.  Otherwise they’d file share. 
  5. Misconception: Ad supported downloads will cannibalize premium downloads pt2. Apple owns 80% of the premium download market.  Ad supported download services aren’t compatible with iPods.  
  6. Misconception: Ad supported streaming weakens the premium download market. Last.FM, imeem etc are entirely complementary to premium downloads, indeed one could argue they have a symbiotic relationship with premium downloads
  7. Mistake: Trying to charge for streaming music. Ad supported streaming does though, destroy the market for premium streaming services such as Napster and Rhapsody.  These services need a fundamental rethink e.g. 100% DRM-free for an upfront annual fee.
  8. Mistake: Excessive restrictions on number of plays per artist per hour etc. DMCA restrictions on ad supported streaming confuse online with traditional radio are ignorant of the fact that online is an on-demand medium.  Ultimately the playground should level so that there is one broad category of on demand streaming alongside pure simulcast radio
  9. Myth: Consumers won’t buy music anymore if they listen to ad supported streaming. The social music services actually drive music discovery and purchase.  Last.FM has strong affiliate relationships with iTunes etc
  10. Myth: Apple will launch an ad supported streaming service integrated into iTunes and iPhone and iPod touch, using Genius to drive Audio Scrobbler-type functionality. This is one myth I hope comes true J

Why MySpace Should Think Long and Hard Before Challenging the iPod

When questioned at a conference recently, MySpace Chief Executive Chris DeWolfe suggested the social network would consider launching an MP3 player some time in the future, thus going head on against Apple.  It might sound like a logical next-step but it’s not.


The reason MySpace has become so important to the music value chain (both for digital and broader discovery/marketing) is because it has a distinct place.  MySpace, like imeem, Last.FM, Pandora etc. works well because it is an explicitly online, consumption and discovery based experience.  The launch of the new streaming content pushes it even further in that direction.  MySpace doesn’t suffer from the endemic DRM constraints and controversies that mire download services.  And because it is free it doesn’t have to develop a value positioning either.  In its free, online guise, MySpace sits as an entirely complementary asset alongside the iTunes / iPod combination.  


Sure Apple might be (ever so slowly) starting to steal some of social music’s clothes (cf Genius) but its focus remains devices and downloads.  As soon as MySpace starts trying to fight Apple on Apple’s home turf, they’ll find themselves having to reinvent and reinforce their value proposition from the foundations up.  Consumers tolerate the various quibbles and glitches that are an accepted companion to MySpace as a free, online destination.  But those standards aren’t good enough for a paid offering. 


When MySpace finally launches its own download store it will need to refine its music DNA, a need which will become more fundamental if an associated device strategy is pursued.   But I fear MySpace will shy away from the requisite comprehensive rethink even for the download store and simply launch it and hope/expect it to succeed.  If they do so, and launch a device in a similar fashion, then MySpace will sow the seeds for long-term decline.


For now MySpace would be well advised to read up on how well Napster’s branded MP3 player strategy went….remember that?  Exactly.