Spotify Gambles on U.S. Introduction with Limited Free Accounts

Last Updated Jul 14, 2011 3:58 PM EDT

Swedish streaming music service Spotify finally arrived in the U.S. after previous plans to enter the market. And reviewers are generally giving it thumbs up. It should bode well for doing well in a crowded market.

However, Spotify is doing something different here than in Europe by heavily limiting the number of free accounts. The move seems to be a dual attempt to create a sense of exclusivity and then ride that to getting a greater percentage of customers to pay, rather than rely on the generosity of advertisers. It's a big gamble, and one that is unlikely to pan out.

Spotify built its business on ad-supported music. Two years ago, 90 percent of its customers used the ad-supported service. In March 2011, co-founder Daniel Ek verified that the percentage had grown, but not by much:
"The vast majority of subscribers (upgrade) after having first used the free service and the ratio of paying subscribers to active free users (is) now 15 percent," Spotify co-founder Daniel Ek said in an email to AFP.
Spotify at that point had 1 million paying users ... but most came from the ad-supported version.

That makes as much sense as handing out food samples in a grocery store. People want to know what they're getting before they pay. But the U.S. game plan seems different, at least at the start.

Users have to get an invitation for a free account. If, for some reason, you signed up when the site opened and Spotify deems you unworthy, you can try through Klout, a social network influence measuring site. If you've got the connections juice, you, too, can be chosen. (If Klout hasn't run out of its allotted invitations for the day.)

It seems that Spotify wants to leverage social influence to create a sense of exclusivity and then try to get most people to pay money rather than hope for access to the ad-supported service. Even though the company has received about $259 million in funding, that won't last forever. Somebody has to increase the revenue.

Spotify wants to try to readjust that 15 percent paid share of customers upwards. However, without giving lots of people the access to the free version, it's really unlikely that the service can blow past Pandora (P), Rhapsody, Rdio, and others.

Expect the invitations for a free version to start becoming more available, either as soon as Spotify thinks that it created the exclusivity halo or when it realizes that it's not getting the number of paying customers it expected.

Related: Image: Spotify
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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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