Don't expect Spotify in U.S. this holiday season

The popular European music service is without a single label deal more than a year after first promising to launch here. All music fans can expect from the company this holiday season is spin.

Greg Sandoval Former Staff writer
Greg Sandoval covers media and digital entertainment for CNET News. Based in New York, Sandoval is a former reporter for The Washington Post and the Los Angeles Times. E-mail Greg, or follow him on Twitter at @sandoCNET.
Greg Sandoval
4 min read

commentary Daniel Ek says he can't commit to a launch date for Spotify USA.

Spotify CEO Daniel Ek Ian Phillips-McLaren

Too late. Ek, Spotify's founder and CEO, did commit. Maybe he forgot that he and his underlings have repeatedly said the launch of a U.S. version of Spotify, a popular European music service that offers free streaming songs in addition to a subscription offering, would open in the United States before the end of the year.

What Ek knows and isn't saying is that Spotify will miss that deadline, just as it has missed other launch dates.

As of last week, Spotify had yet to sign a single licensing deal with a major label, after spending more than a year negotiating, multiple music sources told CNET. The way things are shaping up, all U.S. music fans can expect from Ek this Christmas is spin.

On the surface, a missed launch deadline doesn't sound like much. We've seen only a few hundred thousand of those. But dig into the company's predicament a little, and something more troubling starts to appear.

Spotify is a hugely popular business, with lots of potential that it may never fulfill. The company simply hasn't demonstrated a means to pay for the music it gives away to users--or said another way, the company's business model appears to be broken. If it's not broken, it is certainly unconvincing.

The major music companies are not going to allow Spotify to jump to the United States without knowing how they are going to get compensated, and Spotify appears unable to tell them--at least to the labels' satisfaction. For that reason, the labels want Spotify to pay a premium because of the risks the company's service poses to other revenue streams, insiders say. The most important of those financial tributaries flows from Apple's iTunes.

There's no doubt that Spotify's service is clever and easy to use--and that it would attract a U.S. audience. There is, however, plenty of doubt about whether enough people will pay to use it. There is also a fear in the music industry that by offering users free music streams, Spotify could cut into sales at iTunes and elsewhere.

Spotify says not to worry because the company also sells subscriptions, and at a conference held by All Things Digital today, Ek said the company now has 750,000 people paying the equivalent of $13 a month to access it.

The problem there is that Spotify has 10 million total users. That means the rate at which the company is converting users of the free service to the paid service is 7.5 percent. Some music executives have said they want to see twice that amount.

The labels also don't need Spotify in the U.S. Google is working on a music service, and there's no doubt which company the labels believe stands a better chance of mounting a serious challenge to Apple's dominance. The top recording companies have long hoped to see the rise of another strong digital-music outlet so the industry's dependence on Apple might be reduced.

Then throw in Spotify's report that it lost $26 million in 2009 and that it spoke to Google about a possible sale, according to a report in TechCrunch. Was Ek just testing the waters, or does he lack confidence in the company's ability to generate money? That kind of news is likely to give some in the music industry pause.

Spotify is starting to remind me of SpiralFrog and Qtrax. Those companies were led by managers who also made lots of big promises but failed to deliver.

Both services said they would help answer the music industry's piracy problem. Qtrax, which billed itself as a legal peer-to-peer service, once threw a huge party in France to celebrate a U.S. launch, but it didn't own the rights to any music. Later, the company made at least two other promises to enter the U.S., and we've yet to see it.

Some pundits suggested that SpiralFrog was an iTunes killer. The company managed only to license music from two of the four major labels and was also undermined by a plethora of management problems. It closed down last year.

Neither of those companies managed to build the kind of following that Spotify has in Europe. But we've seen popular services with loads of customers fail before. Imeem had 17 million users. Lala was popular, as was Project Playlist. Not one of them ever turned a profit.

It's a sad fact of life, but having lots of users doesn't always add up to profits.