March 2, 2010 10:36 pm

Spotify defends business model

Spotify’s co-founder, Daniel Ek, has hit back at criticism from record label bosses, insisting that the digital music service would soon be a significant contributor to music industry revenues.

Last month, Edgar Bronfman Jr, chairman of Warner Music, one of the four major labels, said that free advertising-supported music streaming services, such as Spotify and We7, were “not net positive for the industry”, even though they also offered “premium” subscription products, and said the label would not licence its music to them in future.

Speaking at the FT’s Digital Media and Broadcasting conference in London, Mr Ek admitted Spotify’s business was at an early stage of commercialisation but added: “We are very promising. We are already one of the biggest accounts for many of the labels. At the growth rates we are having now, we are probably going to be one of the top four accounts globally for many of the record labels.”

Spotify has more than 7m users around Europe, 250,000 of whom pay for the service. Of those, “pretty much all” are subscribers to its £9.99/€9.99 ad-free service, which also allows smartphone owners to access its internet-based library of songs.

Mr Ek said that he wants to create a service that delivers “music like water” – making it a utility which people are accustomed to paying for regularly.

That attitude unnerves some in the music industry, who fear that subscribers to “all-you-can-eat” music services such as Spotify will stop consumers from buying CDs or MP3 downloads, and lower the industry’s overall revenues.

But Mr Ek pointed to Sweden, where he said 15 per cent of the population uses its service but download sales have still increased.

Bringing Spotify’s music service to more devices, and adding revenues from ticket sales or merchandise, will help to prove its commercial viability, said Mr Ek, who would not say whether the company was profitable.

“What a lot of people in the music industry talk about is cannibalisation – getting the most profitable customers to become free users,” Mr Ek said. “That obviously doesn’t work. But we are convinced and seeing a lot of research that actually we are doing the opposite: we are taking pirates and moving them into a legal service.”

Spotify sees adding sharing music and other “social” features as critical to attracting new customers, and Mr Ek said it would be developing new features in this area. Although it will not be creating a social network to compete directly with Facebook or Twitter, which are its biggest sources of traffic, Mr Ek said Spotify could eventually exceed them in popularity.

“Music is probably the most social object there is,” he said. “If we can enable sharing of music on the internet, that application is going to be huge. That could be bigger than uploading your photos on the internet. Hundreds of millions of people want to share music with their friends . . . It would be as big if not bigger than what Facebook or Twitter is. Our ambition is to be one of those players that drives that.”

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