The last time a young entrepreneur executed his promise to revolutionize music with computer software, the industry sued him for billions of dollars.
A decade after Shawn Fanning unleashed Napster, 26-year-old Daniel Ek is generating tidal waves across Europe with Spotify, a company that offers upward of 10 million songs, streamed free over the Internet. The difference this time is that Spotify is a legal service, sanctioned by the music industry -- to a degree.
Ek, Spotify’s chief executive, had hoped to launch his service in the U.S. early this year. But he acknowledged that talks with record labels, along with thousands of music publishers and royalty collectors, had bogged down over details. Ek cited the complexity of dealing with numerous rights holders for the delay.
Some music executives have questioned whether Spotify’s free, ad-supported service will help the beleaguered industry regain its economic footing. They worry that it could further erode the market for paid music.
Ek declined to detail the sticking points but said in an interview at the South by Southwest music festival in Austin, Texas, this week that Spotify was taking the time to safeguard its contracts with the license holders by anticipating a variety of business models, such as student discounts or special offers bundled with a mobile phone service.
“This is a very, very complex industry,” Ek said. “It’s an industry that’s been in decline for 10 years. They just want to make the right bet.”
Spotify has more than 7 million users in six European countries: Britain, France, Spain, Sweden, Finland and Norway. The vast majority use the free, ad-supported version. About 320,000, or less than 5%, pay a monthly fee of 10 euros (about $13.62) to subscribe to Spotify’s premium service, which streams higher-quality audio files and lets users download and play songs on their smart phones. Spotify also sells most tracks as paid downloads, similar to what Apple Inc. does on iTunes.
An executive at a major record label, who spoke on condition of anonymity because negotiations were ongoing, said the advertising revenue generated by the free service was inadequate and that labels and publishers would prefer to see 15% of Spotify’s listeners subscribe to the premium service.
Warner Music Group Chief Executive Edgar Bronfman Jr., during a recent earnings call with analysts, nixed the concept without referring to Spotify by name.
“Free streaming services are clearly not a net positive for the industry,” Bronfman said. “So this sort of get all the music you want for free and then maybe we can . . . move you to a premium price strategy is not the kind of approach to business that we will be supporting in the future.”
Spotify itself has curtailed the number of non-paying subscribers in Europe, allowing only its premium customers to give out a limited number of “invitations” to the free service.
Although music companies gave Spotify the latitude to offer a free streaming service in Europe, they’re less likely to do the same for the U.S., the world’s biggest music market.
“It’s the major leagues,” said Eric Garland, chief executive of BigChampagne, a Los Angeles research firm, who raised the possibility that Spotify might have to drastically alter its free service for the U.S. “The labels let stuff happen in other markets that they would never let happen here.”
Not everyone in the music industry is leery of Spotify.
“These guys are good, smart and focused,” said Richard Conlon, senior vice president of planning, communications and new media at Broadcast Music Inc., which collects license fees from businesses that use music and distributes royalties. “We need them. We need a focal point to help the U.S. understand music in the cloud. They could become the poster child, the breakthrough service that makes consumers get it.”
A number of companies have made runs at selling music streaming services, where consumers pay to listen to large music catalogs but don’t actually own copies of the songs as they would if they purchased tracks on iTunes or Amazon.com.
Rhapsody, a music streaming service from RealNetworks Inc., pioneered the all-you-can-listen model in 2001.
Among the latest players offering similar services is Thumbplay Inc., which launched a $10-a-month service for smart phones this year, and MOG Inc., which began a desktop service in December and will release a service for cellphones later this year.
By and large, however, Americans have turned a deaf ear to those pitches, preferring to listen to free Internet radio stations such as Pandora, buy song downloads or get free music, either from their friends or from peer-to-peer sites such as Pirate Bay.
Ek invoked the Napster specter during his keynote at the South by Southwest festival, saying that the original program used by millions of people to distribute pirated music was “fantastic” because it let users access other people’s computers and browse their music collections as a way to discover new albums.
“We want to get closer to that experience, but 10 years later,” Ek said.
The Swedish entrepreneur remains optimistic that Spotify will soon hit the U.S., where some die-hard fans already plug into the service by circumventing its geography locks.
“We’ve always said we wanted to launch in early 2010. We still hope that will be the case,” Ek said. “That said, I don’t think it matters for us if it’s two or three months later. The U.S. is the world’s biggest market. And to use an American phrase, we really want to hit it out of the park.”