Commentary: Spotify - hot today, not tomorrow

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(MoneyWatch) COMMENTARY Pundits and reporters were wondering whether popular European music streaming service Spotify could unseat Pandora (P) in the U.S. Strong revenue growth reported later in 2011 only seemed to underscore the threat, even though Spotify was still running in the red.

Fast forward six months and things look different. Although 3 million U.S. consumers signed up for the service, only about 20 percent - about 600,000 - actually pay for the service in this country, according to a New York Post report. That's an enormous uptake in the world of so-called freemium services, where usually moderate single-digit percentages are considered successful. But if a business model is based on greater expectations and you have to get cooperation from rights holders like the music labels, success may be a much trickier prospect.

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The problem facing Spotify, and others in the online music industry, is the need to get along with large corporations that own rights to the bulk of music people most often listen to. That gets event trickier when you want to give music away to entice people to the paid service.

Last summer, Pandora CEO Joe Kennedy said Spotify operated in a "fundamentally different marketplace," though that seems a bit of a stretch. Both companies have advertising and subscription models.

It's not as though Pandora is on easy street. Music licensing costs keep rising, which resulted in a $16 million loss for the fiscal year that ended in January.

But that was still significantly less of a loss than the $41.5 million that Spotify lost in 2010, as it reported last fall. As Pandora has shown, growing a music service costs a lot of money, and labels don't seem to be looking to encourage new business models. And unless either the number of listeners or the percentage of those willing to pay increases rapidly, the chance that Spotify could continue to disappoint financially would also seem to grow.

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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.

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