Was Spotify too optimistic about U.S. launch?

Warner Music Group CEO makes comments that indicate Spotify and other ad-supported music services may have a tough time obtaining content from at least one label.

Spotify CEO Daniel Ek last week offered crowds at a tech conference in Los Angeles a glowing report about launching an ad-supported music service in the U.S.

Ek, who founded the site that has wowed Europe and ignited huge anticipation in the U.S., told the audience the launch was "looking pretty good." He told Billboard later that Spotify's preparations were "in the final stages." Well, Daniel Ek meet Edgar Bronfman Jr.

Bronfman, CEO of Warner Music Group , one of the four largest record companies, doesn't appear to be bullish on the idea of giving music away to consumers for free. "Free streaming services are clearly not net positive for the industry and as far as Warner Music is concerned will not be licensed," the CEO said during a phone interview with analysts and reporters.

Bronfman didn't mention Spotify by name but his comments are certainly not a ringing endorsement of the company's ad-supported business model. Warner already licenses music to Spotify in Europe, where the company offers music on an ad-supported basis and then tries to convert users into paying subscribers. Music industry sources say that Warner has no plans to stop backing Spotify in Europe.

In the U.S., the problem for Spotify is that managers have told the big labels they want to go with a purely ad-supported service--at least initially. But plenty of companies have already tried to make a go at ad-supported music in this country and failed. Social-media site Imeem was acquired for pennies on the dollar. SpiralFrog and Ruckus offered ad-supported downloads--laden with digital rights management--and both shut down.

Warner is well-acquainted with these companies. The label licensed music to Ruckus and Imeem and was among Imeem's investors, a deal that Warner lost money on. This is undoubtedly driving skepticism at Warner, which reported a first-quarter net loss of $17 million on Tuesday, about this kind of model.

So why doesn't Spotify just do the same thing in the U.S. that it does in Europe? Spotify also offers an ad-supported service in Europe but then tries to convince users to become paying subscribers. These attempts, however, have met with disappointing results.

Of Spotify's 7 million users, about 250,000 pay between $14 and $16 a month, The Los Angeles Times reported. That comes to about 3.5 percent. Conversion rates like that aren't going to impress many at the music labels.

The reality is that regardless of Bronfman's comments, if Ek walks into negotiations waving enough money around or if he convinces the Warner CEO he's found a new and winning twist to ad-supported music, he'll strike a deal.

But Ek should expect a tough sell.

 

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