Last updated: December 6, 2012 11:35 pm

Spotify closes subscriber gap with rival

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Spotify has attracted 1m US subscribers, catching up with the 11-year-old American pioneer of digital music subscriptions, Rhapsody, in only 16 months.

The US growth takes Spotify’s total base of paying customers to 5m, from 4m in July, and will come as music to the ears of new investors, after its $100m fundraising last month, led by Goldman Sachs.

Daniel Ek, Spotify’s co-founder and chief executive, announced the figures at a New York event as he presented fresh features to help users discover more music among its 20m track catalogue.

“We did in one year what it took others a decade to do,” he told the FT. Rhapsody, a US digital-music service launched in December 2001, says it leads the US market in terms of subscribers with about 1m.

Mr Ek said that its total payments to record labels and other industry bodies doubled in the last nine months to $500m. This was driven by higher user numbers, more advertising inventory and “a higher propensity” among users to convert to paying subscribers, he said.

Tests of the new features had increased some users’ activity on Spotify threefold, he added.

Spotify has been unable to shake criticism by some artists that they earn far less from plays on its service than when consumers buy CDs or iTunes downloads.

Mr Ek has said one purchased download is equivalent to 200 plays on Spotify. “On iTunes, people only purchase the stuff they truly love,” he said. “On Spotify, there is vastly more consumption and different kinds of consumption going on.”

Mr Ek also argues that some artists’ complaints stem from the delay – often a year or more – in receiving payment from their labels. He said Spotify pays 70 per cent of its revenue to the music industry and keeps 30 per cent – the same as Apple’s App Store – to cover costs such as credit card processing.

“Those are thin margins, it’s not great. But we know that at scale it’s a great model and it works for us,” he said, adding that streaming was “building the value of the entire ecosystem” rather than cannibalising downloads.

Exacerbating some artists’ concerns, Spotify is yet to turn a profit. According to Spotify’s 2011 accounts, filed in Luxembourg in August, its revenues last year more than doubled to €187.8m but losses grew 59 per cent to €45.4m.

“We are very comfortable that if we didn’t invest in growth and [in] adding more markets, we would be a profitable company,” Mr Ek said.

Although several big bands including The Beatles and Pink Floyd have kept catalogues off streaming services, Metallica on Thursday said it would add all its albums to Spotify for the first time.

The deal was announced with an onstage reconciliation between Metallica and Sean Parker, the Spotify investor and director whose Napster file-sharing service was sued by the heavy metal band in 2000. Lars Ulrich, Metallica’s drummer, said one trigger was the band taking control of all its master recordings last week.

Mr Parker told the FT Spotify’s new features would deepen engagement, making more users willing to subscribe. Its model had the potential to restore growth to the music industry, which often pins its decline to Napster’s launch, he said: “I think we’re close to it.”

Spotify has more than 20m active listeners in 17 countries, 80 per cent of whom listen for free to a restricted amount of music every month, accompanied by advertising. Subscribers pay up to $10 (€10, £10) for unlimited ad-free listening, including on mobile devices.

Spotify’s audience is still dwarfed by Pandora, the US internet radio service which had 59.2m listeners in October.

Yet its latest fundraising valued Spotify at more than $3bn – twice as much as Pandora. Shares in Pandora fell almost 20 per cent on Wednesday after it lowered fourth-quarter revenue guidance. Pandora blamed advertiser caution about the US “fiscal cliff”, but analysts cited competitive pressure.

Mr Ek would not comment about Spotify’s fundraising but said that investment in improved “music discovery” and geographical expansion, especially in Latin America and Asia, were priorities.

Spotify’s latest innovation builds on the launch of its “app store” a year ago. Since then, 100 developers, artists and music reviewers have built fresh gateways to its library.

These third-party services will now be incorporated into Spotify’s mobile app, via a Twitter-style newsfeed called “Discover”. Another Twitter-like idea will let Spotify users “follow” the listening habits of other members of the community, including celebrities.

“We’re finding new ways to monetise data all the time,” Mr Ek said, pointing to how new features let bands notify fans of new album releases and upcoming concerts: “It creates content for users, as opposed to advertising.”

Rdio, a smaller streaming service formed by the founders of Skype, launched a similar “following” feature this year. Mr Ek does not deny the similarity, but argues Spotify’s combination of personal and algorithmic recommendations will set it apart.

“Last year, I said music discovery is important. This year I’m saying music discovery is important,” he says. “It’s not like the concepts are novel. The best ideas, a lot of people have them. It’s really down to execution.”

“I definitely think our platform could be used for [streaming] other forms of media,” Mr Ek said, but it was focusing on music for now.

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