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PLAY LIStEN LOvE SHARE SPOtIFY: tHE FutuRE OF INtERNEt RADIO? CHANGE INSPIRE CREAtE OBSESS ENJOY

Spotify is an online music service, which allows users to listen to streamed music on demand from a library of over 4 million songs— either as an advertising-supported free service, or as a paid-for service with “premium” features and no advertising. Reporting around 1 million listeners per week in the UK, Spotify have built up a considerable audience — compared to RAJAR figures indicating that only around 1.6 million people per week listen to commercial radio stations over the internet. Based in Sweden, the Spotify service is currently also available to users in the UK, Norway, Finland, France and Spain, and is expected to launch in the US before the end of the year. They have recently announced that they have a total of 6 million users across these countries, and are adding another 30-50 thousand users each day. In this edition of EMERGING SPACES: PuLSE, we take a closer look at Spotify, ask what the opportunities might be for brands and advertisers, and whether on-demand services signify a new beginning for the music industry.

Source: Nielsen Online, October 2009

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EMERGING SPACES: PuLSE


HOw DOES SPOtIFY wORK?

SPOtIFY MOBILE

Once users have signed up and created an account at Spotify.com, they are then prompted to download the desktop Spotify application which manages the downloading and streaming of music. The interface will be immediately familiar to users of iTunes, with navigation elements on the left and lists of tracks, albums and artists appearing in the main window. Users can then build playlists of the songs they want to listen to.

In September 2009, Spotify applications for the iPhone and Android handsets were released, allowing access to the service over a WiFi or 3G mobile internet connection. (Similar applications are expected to follow for the Blackberry and Symbian mobile platforms)

Users have the choice between the free or “premium” service; either adsupported, or a subscription-based and ad-free service at £9.99 per month, which includes pre-release access to selected tracks, higher-quality audio, and also allows use of the Spotify Mobile service. A single “day pass” for 99p can also be purchased, which allows ad-free playback of songs — but not the full range of premium features. After a surge in registrations following the Spotify Mobile launch in September, access to the free service is currently invitation-only (although users can still sign up for the premium service without an invitation.)

Mobile network 3 have announced the release of an Android phone, coming with a voucher for a 24 month Spotify Premium subscription as a part of the mobile contract, and it’s understood that Spotify intend to promote similar “bundling” of it’s premium services with other suitable devices such as mobile phone, broadband or cable providers. Spotify’s founder told Screen Digest’s Future of Online Media Distribution seminar earlier this month that “The key for us is getting music in to people’s existing billing habits”, and also that the iPhone application had been “an enormous success”, growing premium subs “by a big number.” The mobile service also allows users to download playlists (up to 3,333 tracks) to their mobile device, which can then be listened to offline — ideal for environments such as journeys where 3G coverage may be patchy or non-existent (such as on the London Underground.) The mobile download service has also been extended to allow premium subscribers to save music to the Desktop application to be listened offline — although they cannot be transferred to other devices (such as iPods), and need to be connected to the internet every 30 days to confirm that the subscription is still valid.

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EMERGING SPACES: PuLSE


tHE PIRACY PROBLEM

tHE ADvERtISING ENvIRONMENt

The music industry’s problems with piracy have been well-documented and discussed— most recently with a number of artists making public statements about the damage to the industry, making it difficult for record labels to be able to invest in new artists.

The advertising format on Spotify is a combination of radio-style audio advertising and online display (either static or rich media) within the player. But whether Spotify provides a truly valuable environment for brands has yet to be proven, and there are a number of questions that it raises about the value to advertisers that it provides.

So does Spotify have the answer? The ability to quickly find and listen to music legally and for free makes it a service that can truly compete with illegal alternatives — providing much the same service as file sharing for free, but faster and more reliably. In addition, it allows music to be shared; links to individual tracks, albums or artists can easily be dragged to other applications (such as email or instant messenger) and sent as Spotify links. Collaborative playlists can also be set up, allowing friends to edit or add tracks on your own playlists. By sharing these links through websites such as Facebook or Twitter, this can integrate the music listening experience into “social” online activities — although not as truly integrated as some other music streaming services, such as the Last.fm online radio station. However, while Spotify (and similar legal services) can provide an appealing alternative to piracy, we do not believe that it is a complete solution to the problem. Recent studies from Entertainment Media Research and British Music Rights/UK Music have indicated that copying music from CDs is probably at least as large a source of unauthorised music content as illegal downloads over the internet — at least for the time being.

The first important question is whether the Spotify listening environment can be one that appeals to advertisers. Radio is a well-established environment, understood by listeners and advertisers alike, where interruptions for news bulletins, DJ chat and advertising breaks are an accepted and understood part of the format. However, the Spotify “music on demand” listening environment is much closer to listening to CDs or MP3s through a service like iTunes, where listeners are not accustomed to these interruptions. The argument is that unlike radio advertising (or most “offline” forms of advertising), Spotify’s advertising can have zero wastage — advertisers can exclusively reach an audience of the age, gender or region of their choosing. So although advertising may feel like more of an interruption than via the radio, it can be made to be more relevant — and therefore more compelling to listeners. As the platform develops, we expect to see further technical refinements to this approach. For example, the principles of Behavioural Targeting could be used to identify listeners of a particular genre of music who are more likely to respond to advertising from a particular market category. There are other models that we believe offer some interesting opportunities for the Spotify service. For example, looking at how some media brands are using Spotify playlists as a branding tool (led by Fiat’s experiments with sponsored playlists, or Drowned in Sound’s weekly “Spotifriday” playlists) we think that this could be an opportunity to provide sponsored playlists for brands to provide an ad-free listening experience to non-paying listeners. Perhaps by enabling these to be embedded within a web widget, these could provide a way for brands to put this directly onto their own websites or microsites, or to allow users to share them across their own blogs or social networks.

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tHE FutuRE OF MuSIC? The fact that revenues from paying subscribers will exceed those from adsupported listeners will mean that there will always be a strong motivation for Spotify to be pushing users towards a paid subscription. Therefore a core audience of engaged music fans with disposable income would be the most likely to be driven to the ad-free premium model — so the most valuable target for many advertisers will also be difficult to reach through the Spotify service. This means that Spotify will need to achieve a delicate balance between the different requirements of listeners, advertisers, the music industry — and of course, their own revenue growth. On one hand, they will want as many users as possible to be paying for a subscription to the service — but if subscribers can access their choice of the Spotify library from a range of devices, then this could drive spending away from music purchases. It’s still early days, and it remains to be seen how well this will fit alongside the traditional model of the record industry. Some artists (including Bob Dylan) have already pulled their back catalogues from the service, saying that the revenues that they are earning are not enough to make it a worthwhile venture, and this is an area that we will be watching with interest to see how it develops. On the other hand, for the free ad-supported platform to work from a consumer perspective, Spotify will need to ensure that the advertising environment is kept as “clean” as possible — which means keeping the numbers down, and the quality and relevance up. So although we hope to see Spotify maintaining a focus on the value of the ad-supported space they are building, it seems like the easy win lies in using increasingly frequent and interruptive advertising to both increase the share of revenues from “free” listeners and to push users towards the premium service. So it is difficult to see this environment working well over the longer term for brand advertisers who are looking to create an interesting, entertaining or engaging experience for their target audience.

There are a number of other music services using different business models, but directly competing with Spotify for users. For example, Napster provides unlimited legal music streaming for the considerably lower cost of a £5 per month subscription — with the added bonus of a limited number of downloads which can be permanently saved as MP3s and copied to other devices such as iPods. However, they lack the ad-supported free alternative. Last.fm provides a streaming music service and offers a choice of a free adsupported service or £3 a month subscription service — however, users cannot pick and choose tracks in the same way as Spotify, so it is closer to a “personalised radio station” than a truly on-demand music service. Like Spotify, it is also available as a mobile application for iPhone and Android mobile devices, and is also expected to launch on the Xbox 360 soon. Both Sky and Virgin Media are currently preparing to launch their own online music services, providing a similar combination of unlimited streaming/limited download packages — presumably, these services will eventually form a standard part of their Broadband packages. While this might not decrease the “actual” cost paid by the consumer, it may make it feel like less of a hit — particularly for younger people who may be accessing such services on a family subscription package rather than paying out of their own pockets. Although Spotify has formed similar partnerships in Sweden, no news of similar partnerships with UK ISPs have yet been announced. Meanwhile, a number of partnerships in the US are leading to music being more easily discoverable via search engines such as Google, via services like MySpace Music, Pandora and Rhapsody (not currently available in the UK), where tracks can be listened to for free from the search results page. In the longer term, we believe that the future of the music industry will not look too different from the old model; a blend of “free” listening (ie. Radio) and “bought” music which can be listened to on-demand. But the issue of how this is going to be shaped and exactly who is going to be paying for it is currently being determined. But it’s Spotify’s free, ad-supported model that marks it as unique from an increasingly crowded collection of legal music services, and we believe — even if it is only through the power of “free” driving trial usage and word of mouth recommendations — that it is a media channel that will quickly become an important part of a media planners’ repertoire.

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EMERGING SPACES: PuLSE

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