Business models, free music and pay-for options: the Spotify site

Since the IP Finance weblog is much given to reviews of new IP commercialisation business models, or in some cases to improved and refreshed versions of existing ones, the blog is indebted to a law student, Andrew Logie who writes in to extol the potential of Spotify (www.spotify.com). Says Andrew:

"I think it really shows the future of music delivery and marks an acknowledgment by the music industry that 'free' music is not necessarily something to suppress, in fact quite the opposite.

Aside from a slick interface, the great thing about the service is that its 'free' to listen to high quality (160kbs) full albums. If you choose the free service, you will occasionally be served an advert, and by that I mean about one thirty second add in an hour of listening. I suspect that the frequency of adverts may rise as the service grows in popularity, but for now it's a fantastic trade-off bound to attract the masses.

If you want a completely ad-free service you can either take a day pass for 99p, or pay a monthly subscription of £9.99. I suspect the £9.99 is a little overpriced when you consider that the music can't be format-shifted (ie put on your iPod), a service that Napster offer for £14.99 a month, but it's certainly not beyond most budgets.

The most important thing about the service however is the sheer number of tracks available. Lots of services allow free streaming music, but very few give such free access to such a massive database of full albums. Spotify, who are based in Sweden, have managed to team up with major labels such as EMI, Sony BMG, Universal and fast growing independent 'distributors' such as CDBaby.

The success of Spotify, I believe, will accord with The Long Tail principle advanced by Chris Anderson which says that as the cost of inventory falls, the efficient inventory falls. In other words, as the cost of storage and bandwith falls, it becomes reasonably viable to have huge store collections, bigger than the world has ever seen.

Access is important. It is no longer acceptable simply to store the major albums as might a bricks and mortar store. As Lessig points out in his recent book Remix, 25% of Amazon's sales come from the the 'tail' - titles which are not available in a bricks and mortar store. A library could never be big enough and never afford to store all the world's books, just as HMV can never afford the retail space to sell all the world's music, and so on. But in the digital world people demand all the music in the world, and will come to expect is as standard.

Not only do people want all the music in the world, but they want it for free. So how does the market solve this problem? How do artists get paid?

A 2007 decision by the Copyright Tribunal (here), which concerned the Music Alliance and download services such as iTunes, set out certain minimum royalties that such services must pay. This includes 8 per cent of gross revenues from online music service providers for on-demand services including downloads and subscription streaming services, 6.5 per cent of revenues for interactive webcasting services and 5.75 per cent for non-interactive webcasting.

The framework for free stuff, at least free music, is beginning to take shape. Services such as Spotify can exist because labels are now willing to accept free streaming of their music in return for a share of advertising revenue, pay per click, or other such models.

I tend to see this as a negotiated peace deal between the music industry and the Internet. The invention and rise of file sharing advanced like an army against the traditional model of content delivery. Feeling under threat, the music and film industries declared war, and sought to crush the revolution. After a heavy exchange of blows from either side, a peace deal has been reached, the boundaries re-drawn, both sides accepting compromises. In other words, free music is here to stay, but in return we will listen to the occasional advert or pay a subscription. Free stuff is no longer necessarily a threat to the creative industries, but the revenue model has most definitely changed".

Thanks, Andrew, for this insight.