Sweden has a new music export, and it's attracting an audience way broader than an ABBA greatest hits album. Twenty-month-old Spotify allows listeners to tune in to their favorite music over the Internet. It has 7.7 million registered users across Europe, according to digital media tracker ComScore. That's roughly 10 times the audience of Rhapsody, which has been around for nine years and is the leading music subscription service in the U.S.
For more than a year, Spotify's co-founder, Daniel Ek, has been trying to bring the service to the U.S. What's stopping him are the industry's four major record labels, Universal, Sony (SNE), Warner, and EMI. They have licensed their music to Spotify for use in the U.K., Spain, France, Finland, Sweden, Norway, and the Netherlands, where most listeners tune in to the service free. In the U.S., the labels want the service to make them money and help compensate for a 65 percent drop in CD sales over the last decade.
Aside from the free part, the labels like Spotify for the same reason listeners do. Tunes from its 8 million-song catalog load quickly, and listeners can compile playlists of their favorite tracks and gain access to them from any computer. "Spotify is the first digital offering that has come along that people find sexy without having the Apple (AAPL) name on it," says Ted Cohen, a former top digital executive at EMI Music, whose Tag Strategic advises companies on digital strategy.
The four big labels want Spotify, now based in London, to junk its free model and find a guaranteed revenue stream it could share with them, say music executives with knowledge of the discussions. Rhapsody and U.S. rivals eMusic and MOG charge monthly fees. "Free streaming music services are clearly not net positive for the industry," said Edgar Bronfman Jr., chief executive officer of Warner Music Group (WMG), during an earnings call in February. Warner was an early investor in Spotify.
The service already offers two premium plans in Europe: For the equivalent of around $6 a month, listeners get unlimited playtime with no ads; $12 buys better sound quality and the ability to play music from a cell phone. So far only 320,000 users have signed up for subscriptions, a sign that Europeans exhibit the same resistance to paying for music that Americans do. For the record labels, clearing that hurdle is crucial as CD sales continue to plummet and Apple's iTunes keeps its grip on digital music pricing. "Nothing in digital has been able to counter the decline in traditional revenue sources," said Ek, 27, at an industry conference in March. Record companies, he said, are "concerned about how to ensure that people don't stop buying CDs."
The major music companies have been pressing Spotify to ally with wireless service providers so they can get a cut of the monthly charges. Spotify has tried that, signing a deal with Swedish telephone operator Telia. Plus, it has created apps for the Apple iPhone and handsets powered by Google's (GOOG) Android software.
Google also has been "kicking the tires" at Spotify, according to music executives with knowledge of the search engine's interest, but no acquisition is in the works. Apple bought Lala, another music streaming service, last year, only to shut it down at the end of May. The talk in the industry is that Steve Jobs wants to incorporate Lala's technology into a subscription version of iTunes, which would allow listeners to gain access to their music libraries from any device.
Whether Spotify becomes an iTunes competitor will depend on the fickle tastes of consumers. One part of the equation will be whether the music labels let it do business in the U.S.
The bottom line: The music majors are pressing a hot European startup to dump its free service as a condition for licensing their tunes for use in the U.S.