Spotify's freemium approach leaves Napster gasping

[hamba]

Spotify's freemium approach leaves Napster gasping

Only when you put the numbers in perspective does the remarkable nature of Spotify's offering becomes clear. If you're a premium user – paying £10 a month – you can store more than 3,000 tracks offline, to listen to as and when you want (and they're portable if you have an iPhone, iPod Touch or Android phone).

Buying that many from the iTunes Store would cost £2,370. You'd have to subscribe to Spotify for 20 years before it became a lossmaking deal. Sure, if you stop paying the £10 for one month, those 3,000-plus tracks won't be there. But start paying again the next month and you're back where you were. Try doing that with your CD collection.

Yet people have a visceral reaction to the idea of "renting" music: see the comments on my Spotify article last week. People tend not to like the idea; we seem to think that if we spend any money on music, it should be there all the time – despite the experience of going to gigs (does the band keep playing as long as you want?) or listening to commercial radio (where you "pay" with your attention to the ads; that doesn't make your chosen music keep coming).

But there are signs that Spotify's nudgings (the stick of adverts and the carrot of better audio quality, storage and zero ads) is getting people interested. Although Spotify admitted a while back that only 2% of its users were premium payers, I think the number will be significantly higher very soon.

At which point you can hear the people who work for Napster spluttering and spitting tacks. Napster, they'll tell you, was offering back in 2004 exactly what Spotify is doing now. They're relaunching their offering this week: for £5 a month you can get unlimited streaming and five MP3s a month to keep. For £9.95 a month you get unlimited streaming, tethered downloads and 12 MP3s a month to keep.

I sensed frustration when I spoke to Thorsten Schliesche, Napster's European vice-president of sales and marketing, earlier this week. "We used to offer tethered downloads," he said. "Customers told us they loved unlimited access to music. But they didn't like DRM" – the technology that stops you transferring all those files onto CD. "And the big argument was that if they stopped paying, all those songs were gone." Yes, I replied, but – 20 years! "What we're doing here" – moving away from DRM-based downloads — "is in response to our users and the market," insisted Schliesche.

The monumental irony is that Spotify, of course, uses DRM (but not Microsoft's; cleverly, it's sneaked its own past Apple onto the iPhone and iPod Touch), and no ownership. And yet it's hugely popular, with more than 5m users. How many does Napster have? "Since our purchase by Best Buy, we can't give numbers," said Schliesche, unhappily.

You'll have spotted the key difference between Napster's offering and Spotify's: the latter uses "freemium". You can use the ad-supported version forever (or as long as it lasts). Did Napster consider a free version, to lure users? "We don't think the ad-funded model is viable," said Schliesche. Perhaps — but if Spotify doesn't last 20 years, think of all the money you'll have saved.



Charles Arthur
Wednesday 7 October 2009 20.45 BST
guardian.co.uk © Guardian News and Media Limited 2009

 

[hamba]

How much does Spotify cost to run? We analyse the numbers

From public statements made by the company, you can get some idea of how close it is to profitability. Its biggest cost? Apparently, music licensing


Napster offers cut-price service



Will Napster's new approach pay off?

 

[Captin]

I've been using the free version of Spotify for ages, any tunes I want to keep I just record them as they are playing.

 

[Firemouth]

I've been using the free version of Spotify for ages, any tunes I want to keep I just record them as they are playing.

lol, yeah. but should we not look to how to pay the artists for this? costs have tumbled (you can get a full recording studio, in three computes). lets remove PRS (it only costs money to run, adding cost to the user). make it a simple transaction. bands post songs, they get a fixed amount, per track, for streamed content (remembering this is advertising their wares). and a fixed price per down load.
the real problem is, the Record companies. they are defunct. lol "bereft of life". their time has come and gone, now they scream for money they have, no longer, any right to.

 

[hamba]

Spotify says it needs more time to make money

• Help us work out how much it costs to run Spotify

One of the men behind internet radio service Spotify says the company needs more time to develop its business - once again casting the spotlight on the difficulties of making money from online music.

In a post on the company's blog, co-founder Daniel Ek said that Spotify "has a long way to go" and was still trying to avoid joining dozens of other startups in what he called the "digital music graveyard".

"The notion of overnight success is very misleading and actually rather harmful to any hope for long term and sustainable growth in this industry," he said. "Yet this is unfortunately something the music industry as a whole is particularly good at, expecting business models to be proven within months of inception."

Spotify - which is based in Stockholm and London - offers users free music on demand if they also listen to adverts, or gives them the chance to gain more advanced, advertising-free services by subscribing for £10 a month. It quickly became a darling of the dotcom industry after launching a year ago - with more than 5m users signing up to use it - and has continued expanding aggressively.

Despite the buzz, however, the company's finances remain unclear: the cost of streaming is likely to stretch into the millions of pounds, a problem that has hurt many similar services before.

Spotify has raised more than €71m from investors, and has attempted to mitigate its expenses through a number of factors, including a reliance on peer-to-peer technology and other ways of saving bandwidth. More importantly, however, the company may have also defrayed some costs owed to record labels by giving them a stake in the company - though all parties have remained evasive over the details of any deal.

Despite these attempts at saving costs, though, Ek indicated that Spotify was still some distance from reaching its goal of profitability - and pointed out that even Apple's dominance of the digital music market began with a struggle.

"The truth is that even the most successful digital business to date, iTunes, missed its revenue targets in its first year by 30%, and label executives were far from convinced that this was the future," he wrote.

"It would obviously be wrong for me to compare Apple's success with iTunes to Spotify... yet whatever the business, big success takes years to build and there are very few counter examples."

However, he added that his intention was to solve the complex problem of making money from music streaming - not to simply sell out to the highest bidder.

"We are in this for the long haul," he said. "We aren't interested in just trying to hype the company and then 'flipping it'."

Streaming music services have found it notoriously difficult to generate profit, thanks largely to the costs of licensing. Last.fm, the London-based company that sold for $280m to US media conglomerate CBS in 2007, recently said it was closing down advertising-supported services in some areas because it could not cover costs.

American online radio service Pandora, meanwhile, has been locked in a battle over royalty payments that has had a number of side-effects - including forcing it to shut off its offering for British users.

Last.fm co-founder Martin Stiksel, who has now left the company, told the Guardian earlier this year that complex music royalty systems were hampering innovation online.

"Where we're standing, it's not only more complicated, but also more expensive," he said in February. "It's an absolute nightmare in the grand scheme of things. We are further away from a simple licensing model – the sort of thing FM radio has – than ever before."



Bobbie Johnson, San Francisco
Friday 9 October 2009 02.58 BST
guardian.co.uk © Guardian News and Media Limited 2009