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Pandora spurs music sales; Spotify not so much

Web radio services such as Pandora lead to a 41 percent increase in paid downloads, NPD says. On-demand music services, by contrast, lead to a 13 percent decrease.

Update 2-26-10, 6:17 a.m. To include quotes from Spotify and to clarify that NPD's numbers were for U.S. only.

NEW YORK--Free on-demand music sites haven't fared very well when it comes to driving song sales.

Russ Crupnick, an analyst with market researcher NPD Group, told a crowd of music and tech executives here Wednesday that free streaming-music sites, which enable people to listen to any song at any time free of charge, lead to a 13 percent decrease in paid downloads.

Speaking at the Digital Music Forum East conference, Crupnick sized up the situation this way: "We're eating our young. For some people, more listening just means more listening and tends to lead to less purchasing."

By contrast, online radio services lead to a 41 percent increase in paid downloads, Crupnick said.

Pandora, the best-known Web radio service, doesn't enable people to choose songs but plays ad-supported music randomly.

NPD's figures, which covered the U.S. only, are just the latest bad news for the ad-supported music sector. Very quickly, the concept of free music is losing credibility as a business model with the record companies.

This is what they see: a long list of failed attempts. Last year, SpiralFrog and Ruckus closed their doors, while Imeem avoided such a fate by selling itself for peanuts to MySpace.

Only Pandora has shown a profit, and that's just for one quarter.

By all appearances, what this means is that the ability to log on to a site and listen to any song without paying a cent appears to be in jeopardy.This also means Spotify, the on-demand service that has taken Europe by storm, and is planning a U.S. launch sometime in the spring, may struggle to get some of the labels on board--at least if it's pitching an on-demand, ad-supported service.

Edgar Bronfman, Warner Music Group chairman, very publicly voiced his skepticism about the ad-supported model earlier this month when he said: "Free streaming services are clearly not net positive for the industry."

Thomas Hesse, Sony Music Entertainment's digital chief, said at the Digital Music Forum that he was pleased with Spotify's efforts to convert customers from the company's free service to a subscription offering. He said Spotify is getting double-digit conversions in some areas. As for a U.S. launch happening this year, Hesse said, "I'd bet $10 for Spotify launching in the US...they have a lot going for them."

"We've (got) a long way to go, that's for sure," said Jim Butcher, a Spotify spokesman on Friday. "Having only been around for just over a year we're not going to be providing overnight answers to a longer-term decline--but we're confident we have both the model and the service to make Spotify a success and combat the fundamental problem here--that of music piracy and how we as an industry convince music fans to enjoy music in a legal environment."

Whether Spotify launches next year or next week, such services one day soon will need to figure out how to make money, said Kevin Bacon, owner of Artists Without A Label.

Bacon, whose company has worked with Radiohead's Thom Yorke, Moby, and the Arctic Monkeys, said during a panel discussion that he loved Spotify's platform as did many of the acts he represents. But he lamented that, for all the company's neat technology and huge following, it passed very little compensation back to the artists.

"As far as revenue, it's not really meaningful at all," Bacon said. "It's frustrating. The artists see Spotify and get excited. But when they see the revenue from it, it's insignificant."