Music streaming application and iTunes competitor Spotify has been extremely popular in the UK and apparently profitable too, but when the service launches in the US, the response may be less enthusiastic.
All the major music labels and independent labels have equity in Spotify, but the company has largely left the industry to speculate on the financial agreements it has in place. Reportedly, however, if Spotify continues to keep growing at the same pace, it will quickly become a significant new revenue stream for the music industry.
According to the Universal Music Group International, it only needs a 10 to 12% conversion rate of free to paid users in an area to pay its record labels. Universal Music said that the online, ad-supported service only pays it a royalty per users in two of its territories, the UK and Spain. Everywhere else Spotify pays the labels a combination of money it generates from advertising revenues and subscriptions. Spotify has already taken over iTunes in terms of revenue contribution in Sweden, Universal Music said.
But what that also means is that less than 4% Spotify’s users pay for the service, according to a StrategyEye report issued last week. Spotify itself is paying for music by the stream, driving up its costs. The company supports its royalty payments through an ad-supported free version alongside premium offers in which users pay to remove the ads. But in its large markets, UK and Spain, they simply aren’t paying.
Spotify has promised it would be profitable by the end of last year and that it would be in the US by early this year. It still hasn’t launched yet, although got a big boon when Apple approved its premium version for inclusion in its App Store. As Tech Crunch aptly pointed out today, it can’t expect US consumers to go crazy over a service they have to pay for online – and US consumers typically aren’t big fans of advertising either. Even so, Spotify is feeling the pressure from labels in the US to launch as a subscription-only service. Tech Crunch reports that Google is so eager to get Spotify on Android that it will subsidize the per-user fees. Apparently its talks have been stalled but, considering the challenging environment for iTunes-dominated music in the US, it might be its best option.
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