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Spotify: The Sutton Coldfield challenge

Fifty Quid Bloke replaced by small cluster of Spotifans?

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Exclusive New Spotify figures obtained by El Reg shed some new light on the progress of the music phenomenon.

Back in June, we revealed the subscriber and revenue numbers for the startup, which showed that Spotify had exceeded half a million UK users, but was gaining just 14p of advertising revenue per user - not enough to keep the lights on, let alone replace the music business' mythical Fifty Quid Bloke.

How's it been doing since? Well, it's a mixed bag.

On the plus side, the conversion rate from free to premium has improved over the sorry, early figures. On the back of new native clients for the iPhone, iPod Touch and Android - which are only available for a monthly Spotify subscriber - the number of Premium users has grown to over 116,000, almost doubling month-on-month. (Offline access on Mac and PC was added too late to make an impact on these numbers). Spotify documents suggest almost 56,000 of the additions are mobile subscribers. Back in May, Spotify had just 34,000 subscribers worldwide.

Spotify-watchers may notice something not quite right. Press reports describe a "close to" 10 per cent conversion rate from free to premium. But as you can see, that doesn't really add up. Since Spotify claims to have reached 2.74m signups in the UK in July, then the conversion rate is around a third of press reports. That's hardly Spotify's fault: co-founder Daniel Ek was asked if Spotify had a 10 per cent conversion rate and he said no - Her Majesty's Press Corps then simply assumed it was 9 per cent.

On the downside, advertising revenue, while growing, has lost its 100 per cent month-on-month growth rate. It was up 32 per cent in September.

Reading the Spotirunes

Spotify's Unique Selling Point, differentiating it from near-identical rivals such as Rhapsody, is that access to its music catalogue is free. But free listeners cost Spotify dearly: so dearly in fact, that they threaten to capsize the best laid business plans. Because of the supply costs of transmitting that music, Spotify has to manage demand, as well as find revenue. We've seen Spotify blockade the number of new free users, restricting signups in the UK, although you can still get onto the service if recommended by an existing user who has comps.

Other options have not yet been deployed - such as capping the number of streams a free listener can hear per month. But that's all demand (and hence cost) management. What about incoming revenue?

One revenue stream so far untapped is subsidy from operators. Spotify has a deal with Hutchison Whampoa, with Spotify providing the music service for 3 subscribers who sign up for the £35 monthly tariff. 3 says it will roll out more services with Spotify included. But these deals also require access to Spotify to remain a scarce resource. If it remains free to all, there's simply no benefit for someone agreeing to take a Vodafone or TalkTalk-branded Spotify (for example) than drinking from the fire hose itself.

Ominously for musicians and music businesses, demographic research confirms that Spotify has captured the mythical "Fifty Quid Bloke" demographic. Over a third of its users are 30-60, the age group most likely to splurge on CD box sets. But instead of indulging in some retail therapy, they're listening for free - with only a small proportion, currently not much larger than the population of Sutton Coldfield - stumping up a tenner.

Music business opinion about the prospects of Spotify's success ranges across the spectrum. Some senior figures we've talked to are confident Spotify will pay off, and hail the success in weaning people from P2P. Of course, some of these people have equity investments in it. Someone who doesn't is PRS For Music, but they don't want to look to closely either. A PRS economics bulletin issued this week observes, somewhat whimsically, that if 40 per cent of the UK population opted into Spotify Premium, then record company revenue would more than double to £2.8bn a year.

Well, yes. And if pigs had wings they could carry air freight. I'm designing the little harnesses now.

MP3.com founder Michael Robertson, a veteran of skirmishes with the major labels, has a practical suggestion:

"My advice to Spotify is to hire a banker and start shopping the company to a BDC (big dumb company)." ®

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