Spotify Makes Music Social in an iTunes World

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Your music choices have never been better. 

Spotify is less than five years old, and today 20 million people use the digital service to share their music with friends and vice versa. Only 25% pay for it, preferring instead to listen to ads, which leads some to ask if the Swedish start-up (now based in London) can compete with iTunes.

The iTunes store is credited with killing (rather reducing) the need for people to “steal” music off the web (ala Napster) and encouraging people to actually pay for music. But what I think the iTunes store really did, was make quality music tracks available to everyone for a reasonable cost ($.99 or $1.29). It also gave you a music file that was higher quality than normal MP3s. As of February 2013, more than 25 billion songs have been sold through the iTunes store.

Music subscription services

While iTunes was building its popularity, other music models were being floated on the Web. These were primarily music subscription services like Rhapsody that charged you between $10 and $15 per month for an all-you-can-eat buffet of music which you can download onto your devices or burn to a CD. BUT, the catch with these sub services is that once you unsubscribe ALL the music you’ve downloaded goes away.

Needless to say, the subscription model has had middling success (Rhapsody claims to have 700,000 paying users as of January 2011). You can also buy tracks for 89-cents which you can keep, but that means that you’re essentially paying twice for your music, once for your subscription and then again if you want to own a track. To me, it’s fairly obvious that the biggest flaw in music subscription services is that instead of paying once and owning your music, you keep on paying. At $120-$180 per year that doesn’t make much sense. Especially when you stop paying and you have zero tracks.

Spotify, the new kid on the block

Before Spotify launched in the U.S., it got a lot of buzz. But the buzz was focused around its subscription model and not about its social and sharing features. At $4.99 or $9.99 per month, Spotify looks a lot like Rhapsody, but it’s not. Like Pandora, you can create playlists or stations that can mix tunes from Spotify’s library with your own iTunes collection. But more importantly, because of its tight integration with Facebook, you can quickly post what you’re listening to and you friends can join and listen to your selections. It’s a 2013 version of creating a mix for somebody and giving them access to it without having to physically burn a CD (so 2007).

Spotify is probably iTunes’s first real competitor in terms of music listening and resources because of its ability to allow you to listen to any of its 20 million tracks and create a playlist. It still trails iTunes vast library of 28 million tracks, but it dwarfs Pandora’s paltry 1 million song inventory.

While Spotify’s revenue is driven primarily by subscriptions, it does allow listeners to take advantage of all of its features for free via an ad model. Like Pandora, these ads are both radio-like broadcasts, but also banners and pop-ups that populate its app. This free side was formerly limited to 10 hours of listening per month before you got cut off or (constantly) pushed to subscribe. Since its entry into the U.S. market, Spotify has allowed unlimited free listening.  (I suspect Spotify needs the users to prop up the ad rates, which makes sense. It also points to the fact that they’re experiencing a relatively low conversion rate to a paid model and still see growth on the ad-side of the business.)

Like iTunes, you listen to Spotify via an app. This app is available for free streaming, and it’s a lot like iTunes.

And like Rhapsody, you can listen to all the music you want, you can purchase tracks you want to keep, but once you stop subscribing, all the songs you haven’t bought go away.

Music sharing

But what’s given Spotify traction, and a real chance to unseat iTunes, is its social and sharing aspects. This has resonated with many listeners who have been migrating over to Spotify (according to Statistica, Spotify had more than 3 million users as of April 2012, with 600,000 paid).

The other unique thing about Spotify is that it merges your iTunes library with its library so that your stations or mixes can combine songs from various sources. You can’t do that with iTunes, and you certainly can’t do this with Pandora.

Subscription plans

Spotify has two levels of subscription: Unlimited which is $4.99 per month, and Premium which is $9.99. If you have the free version, you’re limited to 10 hours per month and can only download 3,300 songs to your device. The Unlimited sub gives you access to all 28 million songs with no time limits, no advertising and a higher (better) bit rate file. It eliminates the ads, and lets you share music. What you don’t get is the ability to make your music portable or available off-line. That’s only available with the Premium level.

But paying $60 or $120 a year for a service that can be (somewhat) replicated by iTunes or Pandora, or by a mix of the two, is still suspect. Especially if iTunes is free and you only pay for what you want and Pandora is free unless you don’t want ads, and that version is about half of what Spotify wants at the base sub level.

Spotify’s future

My son, who is a freshman at the University of Missouri, and his friends who are attending colleges scattered across the country, have quickly jumped on the Spotify bandwagon and share music across Facebook. He is a vocal advocate of Spotify and his purchase of individual tracks and albums off of iTunes has dropped dramatically. His rationale: why buy music when you can listen to virtually any track of any artist you want for free. He doesn’t subscribe and he doesn’t feel the need to “own” his music anymore.

This points up both the threat to iTunes as well as to the Spotify model. If users love the ability to listen to music for free, then what incentive do these listeners have to subscribe? My son and his friends don’t mind the ads. All they care about is getting the tracks and creating custom playlists and then sharing these compilations on Facebook or Twitter. For iTunes, the threat is clearer: People are able to get, listen and share music without having to buy it.

The catch to this, however, is that Spotify isn’t as ubiquitous as Pandora on the mobile side. While you can get Spotify on an iPhone, iPad you can’t (yet) access auto multimedia screens. Certainly once Spotify does offer these types of mobility, it will only be accessible via subscription and that’s where the rubber will meet the road with the service. Will consumers pay in order to have unlimited access that will go away once you stop paying?

So far, my son and his friends aren’t concerned about this. We’ll see what happens in a few months.

It’s still an iTunes world

My high school daughter, on the other hand, continues to be the archetypal iTunes consumer. She and her sophomore friends still (apparently) want to own their music and buy new tracks as they’re released (the new Justin Timberlake/Jay-Z release “Suit & Tie” is a great example). And that’s primarily because they want to listen to it over and over again.

So the digital music landscape is vast and filled with great features and options. It’s still evolving and I’m certain that the next step will be much higher quality files that will start to deliver audiophile level sound (MP3 are notoriously bad because of the need to be compact).

I also think that all the pundits who have been screaming for iTunes to become a subscription service are completely missing the boat. The sales stats, market share and ubiquity of iTunes shows that the model is highly successful and extremely profitable. The sub market is the definition of a low margin, high turn-over, niche segment. And even though Spotify is the flavor of the month, the jury is far from coming in on whether or not Spotify can make its service profitable.

Between iTunes, Pandora and Spotify there are three viable services for music that give consumers differentiating choices. Right now, I’m using all three, but only paying for two of the services (iTunes Match and Pandora). Will I be tempted to move more to Spotify and pay a monthly sub? More importantly, will my kids and their friends see the value in Spotify enough to pay for the premium services?

Stay tuned.

VIDEO: Spotify has more recently launched tools for music discovery based artists you “follow.”

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Terry Nakagawa (46 Posts)

Terry Nakagawa is a Chicago-based technology marketing veteran with more than 20 years of industry background. He has been involved in launching products that have been at the forefront of innovation from broadband and wireless to unified communications.