Apple, Lala, The Music Biz, and Why Spotify Might Not Work in the US Market

Two developments are heating things up again on the music front. First came leaks of negotiations between Apple and the major labels over the company’s plans for music streaming in the wake of its December 2009 acquisition of Lala. Rumors are that Apple is pitching the idea of extending unlimited, cloud-based streaming privileges to music tracks purchased on iTunes. The notion is that if you downloaded a song on iTunes, you’ll no longer need to be at your computer or synchronize your iPod to listen to it. Once you release that song into the cloud, you can access it from any connected device.

There are a million potential wrinkles here. For instance:

• Possible legal gray areas as to who “owns” the track;
• Whether the terms of the original download can be extended to streaming without permission from the content owner;
• Whether the streaming quality will be the same as the playback quality of a track stored on an iPod, iPhone, or a computer hard drive;
• Whether people will be interested in storing their collections in the cloud, especially if they already have a workflow with which they’re comfortable;
• How much storage Apple will provide for free, and what happens to those users whose collections are larger than the system’s capacity;
• What happens when you’re in the subway or on an airplane.

But the biggest question, at least in my mind, is what Apple intends to do for new music. Will it automatically allow any purchased track to be streamed for free? Will it offer a subscription plan for streaming of music that’s not currently in a user’s collection? More questions than answers, for sure.

For now, it’s all in the realm of speculation, but things will come into focus as these early negotiations turn into licensing deals.

While the Apple rumors were circulating through the blogosphere, European streaming service Spotify made headlines thanks to published comments from Rob Wells, senior VP of digital at Universal Music International. Mr. Wells told the Telegraph UK he considered Spotify “a very sustainable business model,” and he revealed interesting details of the contractual relationship between the fledgling service and the labels.

In four the the six territories in which it does business–Sweden, Norway, Finland and France–Spotify “pays the labels from a mixture of the money it generates from advertising revenues and subscriptions,” in Mr. Wells’ words. Interestingly, the sharing of ad revenue is exactly the premise behind MySpace Music, the joint venture among the four major-label groups and the social network for ad-based streaming in the US. Only in the US, we haven’t heard too many people characterize MySpace Music as “very sustainable.”

In the other two countries, UK and Spain, Spotify pays the labels based on the number of users who are on a paid subscription. No one is saying what percentage of UK or Spain users are paying, but the article suggests it’s a very small figure, in the single-digit percentages.

Mr. Wells estimates that Spotify needs to convert between 10% and 12% of its customers to the paid model, which in the UK costs about £9.99 per month, or about $16.10 at current exchange rates (The price in Europe, as a reader points out, is a slightly different €9.99 per month). This premium version allows users to stream music sans ads.

Spotify was Universal Music International’s fourth largest digital revenue contributor last year. That division of Universal Music covers the entire world except for North America, so it’s a pretty big deal that a startup that operates in only six countries (not including Japan and Germany, two of the biggest music territories in the world) fed so much revenue into the company’s pipeline.

The Telegraph article further noted that, in Sweden, Spotify was the biggest digital revenue source for that country’s Universal Music division, surpassing iTunes. It’s no wonder Apple is taking notice.

The information in the Telegraph story is great food for thought. But again, it raises more questions than it answers.

The biggest question is: What is Spotify’s potential in the US? It hasn’t launched here yet, but rumors are rampant that a US rollout is imminent. Assuming this happens, a whole new set of questions arises. For instance:

• Will labels license their music under Spotify’s terms, which seem more tailored to the European market than to the notoriously thorny US market?
• Will labels support Spotify if they perceive it to threaten the MySpace Music JV?
• Will labels gripe about how Spotify’s mobile streaming might cannibalize digital downloads–one of the few bright spots in an otherwise bleak revenue mix?
• Will Spotify survive in a fiercely competitive market that includes Apple (now armed with a similar offering), Pandora, MySpace Music, and a host of well-established downloading and subscription services (Amazon, Napster, Rhapsody, eMusic, etc.)

The notion of labels partnering with a streaming service for ad revenue is reminiscent of what TV studios have done for years: generate revenue through lucrative partnerships with distributors. In television, businesses like DirectTV and Comcast pay huge fees for the right to broadcast content from TV studios. Could a similar model work in the recorded music industry? Stranger things have happened.

Stay tuned ….