Spotify crashes into Apple on way to U.S.

As Spotify attempts to launch in the U.S., some execs from Apple and the top music labels worry that a free-music offer could eat into download sales.

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

These are some swinging Swedes, the guys at Spotify.

Founded in Stockholm in 2006, Spotify is is an online streaming music service that has already conquered Europe with the help of a revolutionary desktop service and now desperately wants to make the jump to the United States.

And it's probably safe to say many American music fans want that to happen too. Yet, despite immense anticipation for the service here, the company has already failed to meet two promised launch dates. The new self-imposed deadline is for the end of the year. Spotify managers say that by then they'll finally have licensing deals in place with the four largest record labels: Universal Music Group, Sony Music Entertainment, Warner Music Group, and EMI Music.

But multiple music industry sources say that Spotify, which is now in discussions with all four big record companies, is facing an assortment of obstacles--some of its own making, and some from external forces. They stressed that there is nothing certain about the company's chances of opening a U.S. shop by Dec. 31.

Music industry sources interviewed by CNET say this is what Spotify is up against:

Some of the labels are unconvinced of Spotify's business model and its ability to get people to pay for music; Apple executives have expressed concern to the labels that a free music service here could undercut already lackluster download sales; at least one label chief, Edgar Bronfman Jr., chairman and CEO of Warner Music Group, has lost confidence in ad-supported models.

To mitigate some of these risks the labels will require big upfront royalty fees.

Representatives for Spotify, Apple, and the major labels declined to comment for this story.

Some label and Apple execs fear that Spotify's free music service could cut into download sales. James Martin/CNET

Time appears to be running out for Spotify. Missing another launch date would certainly do nothing for the company's reputation, but more importantly, the era of the ad-supported music service appears to be at an end. Streaming service Imeem sold for pennies on the dollar. SpiralFrog crashed spectacularly. MySpace Music failed to generate any momentum and is a massive disappointment to the record companies. Spotify also has to contend with Google, which is working on its own music service and appears to be threatening to snatch away whatever excitement is still left in this sector.

Here is Spotify's predicament at the moment:

The company has yet to sign a single major label deal, and while talks are ongoing, no announcements are imminent, multiple sources close to the talks have told CNET.

In meetings in Los Angeles recently, Apple executives told their music industry counterparts that they had serious doubts about whether Spotify's business model could ever generate significant revenues or profits, according to two sources with knowledge of the discussions.

But Apple executives worried about the effects of a free music service might have on the rest of the market. They noted that it's tough to sell something that someone else is giving away, the sources said. One industry insider said it is only logical that if Spotify were allowed to launch a free-music service here, at a time when Nielsen recently reported that the growth of digital sales has flattened out, it could eat into the businesses of proven revenue-producers like Apple and Amazon.

Apple is working on a digital cloud service that, according to the sources, would allow users to store their iTunes music libraries on the company's servers and then enable them to stream songs from the cloud to Web-connected devices. According to music insiders, Apple is considering whether to attach these features to a streaming music subscription service.

Some at the labels are worried that allowing Spotify to encroach on Apple's turf may dampen Steve Jobs' desire to launch a subscription service.

When it comes to ad-supported models, Spotify might suffer from the sector's dismal history. Plenty of managers at the labels have lost faith in free as a business model. The idea that someone can give away songs from the major labels and then sell enough advertising online to support the service has yet to be proven. That such an offering can entice listeners to pay for other services has also been a bust.

"Free streaming services are clearly not net positive for the industry," Bronfman said earlier this year. "As far as Warner Music is concerned [these companies] will not be licensed."

All of that said, though, U.S.-based music fans could still get their hands on a Spotify account if the company is willing to pony up enough cash. The way the labels see it, they risk cannibalizing sales at Apple and Amazon by licensing Spotify. They have licensed other companies that give away music, and most of them have gone belly up without making a cent in profit.

One reason the labels may not be signing deals with Spotify is that Google is expected to launch a music store soon. Elinor Mills/CNET

The labels will want something to limit their risk. So far, Spotify's leaders have balked at paying big upfront fees. Since it is unlikely that Spotify will be able to boost the number of paid subscribers much between now and Dec. 31, if we do see a Spotify service, it will be because the company agreed to pay up.

Meanwhile, any Spotify launch could be overshadowed by Google, which is readying to make a foray into the sector. Music industry sources say Google appears to be running slightly behind its proposed schedule for launching before the end of the year and they now expect the launch to happen sometime in the first quarter of 2011.

Google, with plenty of revenue behind it and unparalleled marketing muscle, could take advantage of the wave of popularity for its Android cell phones and use it to ride into the music libraries of millions of handset owners.

And after all of Spotify's efforts to launch in the United States, the company could discover when it gets here that there's only enough room in the flagging digital music sector for Apple and Google.