Reuters - Streaming music service Spotify basks in praise

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Streaming music service Spotify basks in praise

Sunday, Jun 21, 2009 3:26AM UTC

By Antony Bruno

DENVER (Billboard) - At first glance, Spotify isn't much different from other on-demand streaming music services. It includes roughly the same library of songs, pays the same per-stream licensing fees for music and contends with the same poor ad-sales environment.

Usage is respectable but not overwhelming, with about 3 million users in the United Kingdom, Finland, Sweden, Norway, Spain and France. The "vast majority" of them skip Spotify's monthly ad-free subscription option and use the service for free, according to co-founder/CEO Daniel Ek.

Yet while the media routinely skewers similar services like MySpace Music, Last.fm and even Rhapsody and Napster for their shaky business models and usability concerns, Spotify has been heaped with praise.

So far, U.S. music fans can only read about the much-hyped service, as it isn't yet available domestically. But as the company prepares to launch the service stateside before the end of the year, let's examine why Spotify has been anointed the iTunes of streaming music.

Compared with its competitors in the subscription and ad-funded spaces, Spotify is a simple, even basic, application, consisting of a search bar, media player, playlist builder and music management tools.

"What instinctively looks like it should be a failing is actually its core strength," Forrester music analyst Mark Mulligan says. "It doesn't have the discovery, search and community functionality that we've come to expect from the streaming services. But that's why it just works. The reason iTunes was so successful comparative to other download stores was because it's so easy to use. Spotify works on that same level."

Moreover, the service's simplicity hides a slick technology that uses a mix of cached streaming and peer-to-peer distribution that results in real-time playback speeds free of the buffering delays of other music services. And rather than billing itself as a music service -- and thereby burden itself with expectations of the usual discovery, recommendation and community bells and whistles that come with such a distinction -- the company positions itself as a music management system. It's a subtle distinction, but one that seems to have made a difference with consumers.

"People don't manage their music with the online services that are out there today," Ek says. "They manage it with iTunes. What's different about Spotify is that users manage their music with Spotify instead. They don't perceive what they're doing as streaming music online. They perceive it as they have all the world's music on their hard drive and can play it whenever they want. That's the kind of fundamental difference we offer."

Also critical to Spotify's success so far has been its ability to recruit as allies key influencers in the press and blogosphere. Following its beta launch last year in Europe, the company sent invitations to analysts, journalists and bloggers. Each recipient was allowed to invite seven other people to the service, with the same privilege extended to each of those people and so on. The result was a frenzy of online news coverage and rave reviews.

But replicating that success in the United States will be a tall order. For starters, there are entrenched competitors stateside in the ad-funded and pay-per-month camps with better name recognition among music fans and advertisers. And even if Spotify attracts a critical mass of users, its streaming music costs could skyrocket in this country faster than its ability to pay for them.

"The costs are going to be an order of magnitude higher than they have at the moment, and their cash burn rate is going to accelerate," Mulligan says. "So the question is: Can they afford to be successful in the U.S.?"

Ek says the company has enough cash and venture capital investments to last 18 months. But it will have to dramatically ramp up the number of paid monthly users to ensure its long-term viability.

The company is placing its bet on mobile platforms as the key to that upsell, having already developed a downloadable Android application and preparing the launch of an iPhone app as well. Ek says that only paying users will have access to the mobile apps. It's also seeking to monetize paid downloads through a partnership with the European digital retailer We7 and is dabbling in ticket and merch sales.

Challenges aside, Spotify's short but notable record of success has sparked optimism that it might have the right mix of elegant technology and savvy marketing that made another digital music service thrive in a market full of entrenched competitors.

"If Spotify can convert a large share of consumers -- in the tens of millions -- to streaming," Mulligan says, "this might be a killer app in the way iTunes was a killer app."

(Editing by Dean Gooodman at Reuters)