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03.17.10

The iTunes Killer Heads to the U.S.

Seven million people use Spotify to play songs for free, completely legally—but most of them are overseas. Nicholas Ciarelli reports on how its 26-year-old CEO aims to conquer America.

When will the world's most sought-after online music service finally come to the U.S.?

Or to put the question more directly: When will the curmudgeonly American music labels let it happen?

Judging from a show of hands at the South By Southwest Interactive conference in Austin on Tuesday, the most plugged-in tech connoisseurs have not waited for answers before trying out the service, called Spotify. One Spotify addict openly admitted to a thronged auditorium that since the service isn't yet offered in the U.S., he had been exploiting a technical workaround to illegally play its music outside of the six European countries where it's available today.

Spotify is so desirable because it's a desktop application as sleek and polished as Apple's iTunes, but with a virtually limitless catalog of songs that—unlike iTunes—can be played on demand for free, alongside a few advertisements. The songs stream instantly over the Internet as seamlessly as they play in iTunes, with no waiting for tracks to load. It just works, and it's not difficult to see why nearly 7 million people (including nearly a fifth of Sweden's population) now use the service.

"Here you have to strike deals with almost 5,000 different publishers, or probably more, and then the collecting societies and then the labels," Spotify’s CEO said.

The biggest news from Tuesday’s keynote at SXSW by Spotify's 26-year-old chief executive, Daniel Ek: The startup has convinced 320,000 of those users to pay for Spotify's premium service, which turns off the ads and lets you stream music to mobile devices. That service costs about $15 per month.

But over the past year, as Ek has jetted around Europe, Asia, and the Americas, the all-important question trailing him has been how, in his words, to "get all of our ducks in a row" for an expansion into the U.S., by far the world's biggest music market. The U.S. launch has been delayed to sometime this year, and Ek declined to offer a more specific timeline. He also did not say whether the U.S. software will differ in significant ways from the European version, beyond conceding: "There could be slight changes."

According to reports, Google and Spotify have considered a partnership in which consumers would be able to use Spotify's premium service for no charge on an Android smartphone, while Google would foot the users' bill. Spotify has a similar arrangement with Telia, a Swedish mobile carrier that bundles the music service with its phones and pays for the first three to six months. For Google's Android software, such a partnership would be a deft maneuver against Apple's iPhone, the defending champion of smartphones.

Deal or no deal, though, the most consequential roadblock to the U.S. launch has been anemic support from some of the major U.S. record labels, which speculate that not enough users will upgrade from Spotify's free, ad-supported service to the premium version. Witness the statements by Warner Music chief executive Edgar Bronfman Jr. during a conference call with analysts last month. "Free streaming services are clearly not net positive for the industry, and as far as Warner Music's concerned will not be licensed," he said. "This sort of 'get all the music you want for free and then maybe we can with a few bells and whistles move you to a premium price' strategy is not the kind of approach to business that we will be supporting in the future."

Thomas Hesse, Sony Music's president of global digital business, told The New York Times: "We like Spotify as our partner in Europe, but we would like them to move more toward a paid subscription environment."

The startup needs special agreements with all of these labels before it can hope to build a sustainable business in the U.S. At SXSW, Ek suggested that the process had been considerably easier in Europe, where it had involved fewer parties. "Here you have to strike deals with almost 5,000 different publishers, or probably more, and then the collecting societies and then the labels," he said.

For music labels in the U.S., though, the fact is this: The industry's traditional CD business will only continue to deteriorate, and revenues from digital music haven't yet been able to compensate for those declines. To survive, the industry must experiment with as many business models as it can, and the new model that is presently showing the most promise online is Spotify. And just as when the major labels agreed to work with Apple's iTunes Store seven years ago, this may require music executives to sing a different tune.

Nicholas Ciarelli is the former publisher of Think Secret, an Apple news Web site. He currently works on the product team at The Daily Beast.