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April 26 (Bloomberg) -- Spotify Ltd., the London-based online music provider, is developing a U.S. Internet radio service that would directly challenge Pandora Media Inc., said two people with knowledge of the situation.
Spotify’s current service functions like a music collection, allowing users to create playlists from specific albums and tracks. The new format would be similar to Pandora’s, which operates like radio and is cheaper to operate because royalty rates are lower and set by Congress.
The new service would start by year-end and be supported by advertising, said the people, who weren’t authorized to talk publicly. The company has begun notifying some content partners of its plans, they said.
“We have no announcements to share at this time,” Graham James, a spokesman for Spotify in New York, said in an interview. He declined to comment further.
An online radio offering would advance Spotify’s strategy of attracting users with free, ad-supported services who can be converted later into paying subscribers. About one-third of Spotify users have signed up for paid plans offering unlimited, commercial-free music on computers and mobile devices.
Still, its audience is smaller. Closely held Spotify, founded in 2006, had 10 million registered users worldwide, and 3 million paying subscribers, it said in November. Pandora, started in 2005, has 150 million registered users, with 49 million logging in within the last 30 days, according to the company. The Oakland, California-based company doesn’t operate outside the U.S.
In addition to drawing more potential listeners, a Pandora-like radio service would give Spotify users access to artists who are now withholding their music.
Spotify has content deals with Sony Corp.’s Sony Music, Vivendi SA’s Universal Music, EMI Group and Warner Music Group. Under those agreements, artists, record companies and publishers receive a cut of ad sales and subscriber fees.
Spotify lacks the rights to play some artists, such as The Beatles. Others, including The Black Keys and Adele, have withheld new releases citing threats to music sales over services such as Apple Inc.’s iTunes.
While Pandora users can’t choose specific songs, they have access to any artist whose music has been published, because the service operates under federal rules. Royalties paid by Pandora and other online radio companies are set by the Copyright Royalty Board, a division of the Library of Congress.
Pandora users create radio stations that play songs by a specific artist and related performers, with display and audio ads mixed in. The company, whose investors include former News Corp. Chief Operating Officer Peter Chernin, was little changed at $8.57 at the close in New York. The stock has fallen 14 percent this year.
Spotify raised $100 million last year from venture capital investors including DST Global, Accel Partners and Kleiner Perkins Caufield & Byers, achieving a valuation of about $1 billion.
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