The Problem With Spotify

Is everything all right at Spotify? News that the music streaming service has reverted to being invite-only – just days after the much-heralded launch of its iPhone app – is deeply puzzling. It’s a bit like Arctic Monkeys releasing ‘Humbug’ – then a week later saying, Wait, hang on, it’s not finished, can we do that again?

The Swedish start-up’s clumsy volte-face could be interpreted as a sign of unexpected success: they’ve had so many subscriptions since launching the app, they simply can’t keep up with demand. It’s a technical hitch: please bear with us while we repair the fault.

But there is another possibility: Spotify may have a temporary cashflow problem. As New Media Age point out, Spotify pays record labels per stream – it’s not much, about half a penny per track – but any sudden spike in users would cause a corresponding hike in the site’s costs.

And that’s a problem, because Spotify can’t possibly be making any real money yet. How many people do you know have signed up for the £9.99 subscription? According to tech blog The Register – as reported by The Guardian – Spotify’s advertising revenue to date is less than £100,000.

Of course, the media loves Spotify, which gives it momentum. Everyone with a Twitter account has decided that Spotify is the Future Of Music. And it might be – if its user base explodes. But that’s a big if. There’s no firm evidence that people will ever be willing to pay to stream music in significant numbers.

Which, in turn, exposes a fundamental flaw in the business model: the more people pay for a subscription (thus avoiding the ads) the less attractive the service becomes to potential advertisers. And the more ads it runs, the less music lovers will want to use the service.

Indeed, I’m convinced the ‘free’ aspect of Spotify is unsustainable. Across the media, people’s faith in the ad-funded free content model is faltering. Rupert Murdoch is planning to charge for online news. Following his lead, Google are developing a system of micropayments. Advertising will never cover Spotify’s costs: its only hope of success is in attracting subscribers in huge numbers.

You might say: who cares if it’s profitable? To its most devoted fans, Spotify represents the achievement of the elusive “celestial jukebox”: the limitless-music paradise that David Bowie predicted in 2002, when he said: “Music itself is going to become like running water or electricity.”

But while it might look like utopia for music fans, if Spotify is to have a future, it needs to be a viable business. For now, funding is still pouring in – the company employs 30 people, and has offices in London and Sweden. It was recently valued at over £200 million.

This is, however, an entirely theoretical, phantom value. There’s every possibility Spotify could go the way of Spiralfrog, or Pandora, or any number of music services which once looked promising, before fading away when the investment dried up.

But I hope I’m wrong. Like all music lovers, I want Spotify to succeed.