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Spotify (finally) cracks the US market

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Music streaming service Spotify already operates in seven European countries and has around ten million users, of which 1.6 million pay for the service (up from one million at the start of the year). 

Spotify has wanted to launch in the US since 2009, but has struggled to reach an agreement with intransigent record labels owing to its ad-funded freemium model, which in effect gives away free music to low-end users.  

Faced with reduced revenues from digital downloads and peer-to-peer systems, music labels have been reluctant to hand over their catalogues to digital upstarts like Spotify. As a result, record companies have dug in their heels, demanding punishing “minimum guarantees”, upfront payments that must be paid regardless of usage. 

Even after this has been discharged, they want high licensing fees. The coup de grace, however, is the insistence on most favoured nation (MSN) clauses, which stipulate that the licensing contract with the most favourable terms applies to all the labels. In this way, the last music label at the deal table still holds all the cards.

To assuage the fears of the labels, Spotify agreed to restrict the amount of content available to non-paying users earlier this year. In the US, the company will offer an invite-only free service, as well as a $4.99-per-month package with no ads and a deluxe experience costing $9.99 which also syncs with mobile. 

Spotify faces competition from rival streaming services in the US such as Rhapsody, Rdio and MOG. Although the company has the upper hand owing to its attractive interface, scale and range of features, tech giants such as Google, Amazon and Apple have released cloud music services, which could prove problematic for the Swedish company. Equally, analysts have commented that Spotify’s US launch threatens the stranglehold of Apple’s iTunes on digital music. 

In February, Spotify announced that it had raised a $100m (€73.3m) funding round supported by DST, Northzone Ventures and Creandum.

Read more from sister title Real Deals.

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