Music For Free, And It’s Legal

Imagine a future in which music is free. No, we're not talking about the bad old days of Napster, when illegal downloads of MP3 files sent the music industry into a tailspin. In this new world, the record companies would actually make money through licensing deals, and piracy would be a thing of the past. The MP3 player would be obsolete and the shelves would be cleared of CDs. Instead, one vast digital jukebox would supply the needs of every music lover with access to a computer or other digital device connected to the Internet.

It's a world millions of Europeans are already inhabiting. Subcribers to an online service called Spotify can now tap a catalog of tunes that is fast approaching Apple's iTunes in scale. It's a kind of Google for music. With connections to PCs and digital devices getting easier and more reliable, the idea is to avoid having to download your music library to your PC and save it on an iPod. Instead, there's unlimited access to a vast library of tunes that can be accessed and played in real time. And for most listeners, it's free as long as they are willing to hear 20 seconds of ads between songs every half hour. Otherwise they can pay a subscription fee of $14 a month or a daily charge of $1.30.

Since the service started in October, it's caught on so quickly that some analysts are hailing it as a possible savior of the music industry and a potential rival to iTunes. The record companies are throwing their weight behind the service in the hope that it will help stem piracy. Critics are impressed. "Google is one example," says British music critic Chris Salmon. "YouTube [is] another. Spend a little time with Spotify and you could be adding it to the list." The excitement over the service's early success is a commentary on the music industry's need for a new business model.

The two Swedish businessmen behind the venture, Daniel Ek and Martin Lorentzon, both serial online entrepreneurs with backgrounds in the advertising business, have reportedly raised more than $18 million to produce the service. With no traditional marketing budget, the company has used the Internet to collect more than 1 million users in seven western European countries since its launch, including 250,000 in Britain. "This is one of the most impressive rollouts of social-media marketing that we have yet seen," says Alex Hoye, chief executive of the London-based digital-marketing agency Latitude. "It took five years for Facebook to reach critical mass. These guys have come close in something like six months."

As with any new technology, simplicity helps. Installing the Spotify freeware on a PC takes a few minutes, and songs are available without having to wait for them to download. "They have out-Appled Apple on usability," says Hoye. For the time being, music can't be played on a portable device—it must be heard in real time at a PC—but analysts expect Spotify to roll out mobile service soon. Already it's considering working on a phone-specific application.

In the past two years, the founders have struck licensing deals with many of the world's best-known record labels, from Sony and EMI to Warner Music and Naxos. A few artists have held out—don't bother looking for Led Zeppelin, Metallica or the Beatles—but the library already has many of the essentials, from country to classical, and is expanding at the rate of 10,000 tracks a day as more labels sign up. Spotify's founders are counting on the wide range of music to entice people to pay the subscription rate.

For the music companies that have teamed up with Spotify to supply the content, it's a leap in the dark. But they are desperate. Sales of CDs plunged 20 percent last year in the United States, the world's largest market. Spotify has the potential to provide the music labels with a steady revenue stream from licensing deals—their returns are based on how often tracks are played—and free music on demand for the public. In an industry that fought online music tooth and nail for a decade, this is a big change. "In the past we had closed minds," says Jim Selby, of Naxos, the leading classical-music label. "To replace the sales we have lost, we have to be open to new ideas. We have to try different business models."

Perhaps the biggest advantage, from the record companies' point of view, is that the service provides a way around the piracy issue: since there are no downloads, there's nothing to steal. (About 95 percent of music downloads are illegal, according to industry estimates.) "We have no problems with Spotify at all," says Julian Hobbins of the British-based Federation Against Software Theft. "Why would anyone pirate content or steal if they can get it as they want it for free?"

The hope is that Spotify will even boost conventional sales. When U2 released its album "No Line on the Horizon," it appeared on Spotify a week before it reached stores in the hope of spurring interest.

The big question, of course, is whether the service will continue to grow at its current rate. That depends on whether listeners are willing to endure a few ads in return for their music, as they do with commercial radio and television. If not, subscription revenues alone may not be enough to satisfy the music companies. Continued success might tempt Apple into the market, stealing Spotify's thunder. If free music sounds like the future, it's far from clear who'll be calling the tunes.