The music service still doesn't have licensing deals with the top four major labels. Some record execs doubt Spotify can wrap up negotiations in the next 12 weeks.
Greg SandovalFormer 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.
Spotify, the European music service that drops the jaws of all who try it, is at risk of blowing another self-imposed deadline for launching in the United States.
While CEO Daniel Ek has promised that Spotify will finally launch before the end of 2010, the company has yet to sign a single licensing agreement with any of the top four record companies, multiple music industry sources told CNET. Sure, Spotify can claim many admirers at the top labels and some progress in the negotiations, but time is running out.
Music licensing deals are complex and typically can't be slapped together at the last minute. After more than a year of talking to the labels, the chances that Spotify can sign all four major record companies in the final 12 weeks are slim, according to the music industry sources. Jim Butcher, a Spotify spokesman said the company would stand on the comments made in July when Billboard reported that negotiations between Spotify and the labels had suffered a serious setback: "We are in fact in a good place with our label negotiations. We're confident in our U.S. launch later this year."
What must be noted is that Spotify has made "confident" statements in the past, as launch deadlines have come and gone. In February, Billboard asked Ek when the service would finally arrive and the CEO responded: "We're in the final stages of setting up. Yesterday we signed a data center contract, which is huge for us...So, we're gearing up for a U.S. launch. I can't say if it's in one month's time or two month's time, but it's looking pretty good."
What Spotify risks by missing its own deadline is credibility. By failing to make good on its promises to enter the U.S. market, the company is killing the anticipation and fan excitement. More importantly, the opportunity for ad-supported music services appears to be fading.
Spotify, founded by Ek who is from Sweden, is now the standard bearer for so-called free music services. Four years ago, a start-up music service called SpiralFrog generated a lot of hype by offering to give songs away to the public and support itself through sales of advertisements. Other services, such as Imeem, Project Playlist, and Ruckus followed with their own versions of ad-supported music.
These companies played up their ability to entice peer-to-peer users away from illegal file-sharing sites and boasted they would generate huge revenue for themselves and the labels. It never happened. Imeem was sold for pennies on the dollar. SpiralFrog and Ruckus collapsed and shut down. Project Playlist has filed for Chapter 11 bankruptcy protection.
Spotify remains the last great hope of the so-called freemium model, but it too has struggled to prove it can produce significant profits. And that's one of the reasons the company has yet to ink any deals.
Here's a list of some of the issues standing in the way of the agreements, according to the music industry sources who spoke to CNET:
• Money: The two sides can't agree on some basic financial questions.
• Conversion rates: This is the percentage of Spotify's users that opt to move from the company's free offering to the paid-subscription plan. Butcher said that Spotify has seen gains in conversion rates and now has more than 500,000 paying customers. TechCrunch pointed out yesterday that the company is expected to soon announce that it has surpassed 10 million users. That sounds like an impressive benchmark until you do the math. The percentage of paying customers to the total number of users is somewhere around 5 percent. Music industry sources say Spotify's actual conversion rate is closer to 7 percent. That's still too low for the labels. They want conversions to be somewhere in the 15 percent to 20 percent range.
• Google Music: The top four labels have long sought someone to challenge iTunes. Apple sits atop digital music sales unfettered by any significant competition. But Google is working on plans to do just that, according to multiple music executives. They say that Google has spoken to the record companies about downloads, streaming music, and integrating Google Music into Android as well as the company's juggernaut search engine. When compared to Google's ambitious proposals, importing Spotify, with its modest revenue, isn't as big a priority to some at the labels.
All of that doesn't mean the record companies don't want Spotify. The start-up has earned respect at some of the top labels with its ability to produce an almost unparalleled user experience. This year, executives at the two largest labels, Universal Music Group and Sony Music Entertainment, have publicly voiced support for the service. They like Spotify. They just aren't convinced that the company can make money.
One of the most skeptical is Warner Music Group CEO Edgar Bronfman Jr., who said in February "Free streaming services are clearly not net positive for the industry, and as far as Warner Music is concerned will not be licensed. So the 'get all your music you want for free and then maybe with a few bells and whistles we can move you to a premium price' strategy is not the kind of approach to business that we will be supporting in the future."
That said, neither Bronfman nor anyone else in the industry is going to turn down a fat check from Spotify. The service could probably go out tomorrow if it was willing to pay big enough advances on royalties. These advances, however, are very controversial among digital music services.
Former officers at SpiralFrog said that the company was never able to get out from under the millions they paid in up-front to the labels and music publishers. So far, Spotify has appeared unwilling to go this route.
What remains to be seen is whether Spotify can grab that American audience without mortgaging its future.