Media: All about ... Spotify

Can the music site make money without alienating fans, Ian Darby asks.

Online brands are capable of provoking great surges of passion from their advocates. Just witness the latest user response to the news that the music streaming site Spotify had reached the landmark of one million UK registered users.

On the Spotify blog, the comment from Gordon64 was typical: "The Beatles wrote about 'Lucy in the sky with diamonds'. This is much better, a great big jukebox in the sky with music! Good luck with the project."

However, now it is gaining critical mass, Spotify is facing questions about the viability of its business model. Though it's not a social network like Facebook or its music rival Last.fm, Spotify has become the latest online sensation. But will it be able to convert favourable user comments and sizeable audience into revenues and profit?

Spotify has been billed as a music industry-backed alternative to illegal download sites and has also been labelled an "iTunes killer" because users can register for free and then stream music for free. The only difference is that the streamed music cannot be downloaded to keep on your own portable device or PC. It's like radio but radio that users can programme themselves without the editorial content.

This isn't a new wheeze (the similar service Yahoo! Music launched in Europe in 2005), but the beauty of Spotify, users say, lies in its simplicity and the broad array of music available via the service. Before launch, Spotify signed deals with the four music majors (Universal Music Group, Sony BMG, EMI Music, and Warner Music Group) plus leading independent labels.

And in a world of illegal downloads, it's clear to see what's in it for the music companies - not only a way to trial and promote their artists but also for consumers to listen to music before they buy. Dave Chase, the head of music partnerships at Mindshare, says: "It's so easy to use and you can access so much music - I'm trying out music on Spotify before buying it."

Critics point out that there are some glaring omissions in the music offered on Spotify. The only Oasis song available, for instance, is She's Electric (via the Jeremy Clarkson-endorsed Top Gear compilation) and significant bands including The Beatles, Led Zeppelin and AC/DC have opted out of giving permission to stream their music.

But, on the whole, the service gets the thumbs-up from music fans. Now it's down to Spotify's management to wow the ad world with its offer. And this must be achieved within a context of a customer base that is all too easy to alienate. Back to Gordon64, who concluded his otherwise enthusiastic post with the warning: "But don't spoil it with an avalanche of ads in the future."

1. Spotify launched officially on 7 October 2008 in the UK, Germany, France, Italy, Spain, Finland, Norway and Sweden. However, its founders had worked on the concept since 2006. They are the serial entrepreneurs Daniel Ek, Spotify's chief executive, and Martin Lorentzon. Ek was the founder of the online companies Advertigo and Evertigo; Lorentzon one of the co-founders of the online ad company Tradedoubler. Its name is a combination of "spot" and "identify", and it is based at a HQ in the UK with a research and development office in Stockholm. Its stated aim is to "aggregate content from rights holders, distribute it to consumers through our technical platform and monetise both through a free, ad-funded service and a subscription service".

2. Spotify's basic music streaming service (providing access to thousands of tracks) is free to use and funded by advertising. Audio ads run every 20 minutes and are supplemented by banner and skyscraper formats. Spotify also has a premium service (which doesn't carry advertising), available for 99p a day or £9.95 a month. Though Spotify has one million UK users, its UK managing director, Paul Brown, a former Sony BMG executive, refuses to disclose how many have subscribed to the premium offer - though he claims this is a "decent proportion".

3. Spotify says it is developing other potential revenue streams. These include mobile applications (for which it intends to charge) and rare content such as archive radio material.

4. Advertisers on Spotify include the National Blood Service, COI/Act on CO2 and a joint safe sex campaign from MTV and The Body Shop. In March, Spotify announced a number of pan-European deals with advertisers including Nike, Ray-Ban and H&M. The beer brand Carling signed a content deal.

WHAT IT MEANS FOR ...

SPOTIFY

- Hitting the one million UK subscriber mark demonstrates that Spotify is gaining the critical mass that will interest advertisers. However, observers note that reach in the online world does not always translate into revenue.

- The UK managing director, Paul Brown, says that Spotify is "on the path to profitability" but industry sources suggest that it pays out "tens of thousands" each month in securing publishing and streaming rights.

- This means hard work and investment in new revenue streams to supplement its current ad model and a continued proactive approach from its sales team, led by the sales director, Jon Mitchell

ADVERTISERS

- While Spotify is the latest online buzz brand, it still has some way to go in attracting mass support from advertisers, but is fighting its corner. Mindshare's head of music partnerships, Dave Chase, says: "From an advertiser point of view, it's still early days - it's on the radar of our clients and we are having plenty of internal agency conversations about it. When you're talking about the likes of MySpace, Spotify is now right up there in those conversations."

- Some believe that Spotify will need to develop more engaging ways of luring in advertisers beyond traditional audio and banner advertising. Ways of creating greater engagement with brands might include content deals and licensing of third-party applications that can feature on the site.

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