Cuts to Spotify’s free listening are sweeteners to the US music industry, where the streaming service wants to launch next



Powered by Guardian.co.ukThis article titled “Spotify’s limits on free use will please the big record labels” was written by Charles Arthur, for guardian.co.uk on Thursday 14th April 2011 17.02 UTC

It’s obvious, innit? Spotify’s announcement that it is going to limit free use on its music streaming service (although not for users who pay) must mean one of three things:

• it’s on a membership drive, trying to push more people to hand over their cash instead of freeloading

• it’s trying to cut its bandwidth costs – with a million users that would be hefty, even with all sorts of compression and local storage tricks

• it’s trying to cut its payments to the record labels – for each track it plays, it has to pay out a tiny amount of money

So it must be one or all of those things in some combination, right?

Here’s Spotify’s response: “To be clear, this is in no way a conversion drive. Neither is it to reduce bandwidth costs or to reduce payments to rights holders.”

So what’s left? Though it won’t say so, Spotify’s move is actually being done to prepare for its entry into the US market.

This may provoke some headscratching for those unused to the strange ways of the music industry, where when the talk is not of how wonderfully Adele’s new and old albums are selling, then it’s about which territories the music is licensed in. Because music is treated just like books, which are also licensed for sale in different territories – despite the fact that music long since ceased relying on physical incarnations. (Books aren’t exactly troubled by them that much now, but the physical incarnation still has advantages.)

To put it bluntly: Spotify is cutting the amount of free music people can listen to in order to please the American labels with which it is agonisingly negotiating to try to get permission to launch in the US. The fact is that the labels there – and for that matter in Europe – don’t like Spotify allowing people to listen to so much music for free (even though Spotify pays them the stipulated amount per track, whether the customer is listening for free or on a paid subscription).

Yet the US labels don’t have much to crow about. It’s hardly as if their approach has led to the land of milk and honey for subscription services. First, they were completely screwed up by Microsoft’s Janus software (remember that?), which barely worked. Apple completed an end-run (as it’s known there) around all their attempts and triumphed in the straight download business. Napster, now owned by Best Buy, struggles on with an unknown number of subscribers worldwide, while the biggest US subscription service is actually Rhapsody, run by Real Networks, which has 700,000 – after having been around for a decade. (Lest you object and say “Pandora!” – that’s not a subscription service: it’s actually an internet radio service. You can’t choose the songs that come up on Pandora. Ditto for CBS-owned Last.fm.)

Spotify, let’s remember, has been around for about two and a half years and has a million paying subscribers. It’s made subscription music actually work.

That, however, doesn’t cut any mustard with the record labels, which combine the obstinacy of the average mule with the herding instincts of cats. All they want to see is, ideally, everyone on any service that hasn’t crawled under the wire and classified itself as “radio” (at which point they evade the labels’ grasp) to be a paying customer. Because it used to be that way – you either listened to music on the radio or you bought the 45rpm vinyl single or the 33rpm vinyl album – and so it should remain that way.

That overlooks the reality, which is that the internet’s openness means that if you can’t get your music for a low cost in one place, then you’ll find someone ignoring the rules and offering it for free somewhere else.

It also ignores the reality about the effect Spotify has on digital revenues for the music business. It’s the second single largest source of digital music revenue for labels in Europe, according to IFPI’s latest report. And last week, Billboard magazine reported that countries where Spotify is licensed saw an average digital revenue growth rate of 43% in 2010. By contrast, neighbouring countries – including Germany, Austria, Belgium, Denmark, Italy, Portugal and Switzerland – saw only 9.3% digital growth last year. That’s based on IFPI data too.

So what’s eating the labels? Simply, they don’t like having to face up to the digital reality. They do have control of the music licences, which means they can hold the biggest companies to ransom – and that includes Apple, Google and Amazon, which all want to introduce streaming services, and would do so in a heartbeat if they could only get the labels to sign.

The ransom they’re expecting to be paid and the amount that they’re actually going to get paid are a long way apart. The hostage isn’t worth the ransom; Apple can do fine from its download service via iTunes, which helps sell a few more iPods, but what it’s really waiting to do is use itunes.com as a pure streaming service. Amazon’s launch of its sort-of cloud music service (where you have to upload the music that you might have bought as a CD a few days ago from Amazon, but over a much slower upload connection) is a nice idea, but impossible for the average person to cope with. Google is waiting, too, but can’t get all the labels to sign up.

At some point, sanity may intrude; record labels are getting used to having less money coming in. Subscription services could mean even less money in the short term, yet lots in the longer terms as all of Google, Amazon and Apple – and Spotify – tempt everyone to play music they choose all the time, all over the place.

In the meantime, for disaffected Spotify users, there’s also we7, whose chief executive, Steve Purdham, says happily: “People who want an alternative can come to us.” Ad-supported, with subscriptions, it’s like Spotify – but British.

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