From Quirky to Mainstream

For eMusic, this transition towards a catalog that focuses more on mainstream tastes has been rocky. When eMusic added the Sony Music catalog to its repertoire, the company also had to raise its subscription prices. Quite a few of eMusic's most loyal users were unhappy with the direction the service was going and left the service. So far, however, eMusic's users have reacted positively to the Warner deal.

Streaming Coming Soon?

According to eMusic CEO Danny Stein, the company also wants to offer a streaming music service in the near future. Stein told Reuters that the company still has to work out deals with the respective rights holders, though. Given that Apple just bought streaming music service LaLa, it probably doesn't come as a surprise that eMusic is also looking at streaming music. As consumers warm up to services like Pandora and LaLa, download services like LaLa and Apple's iTunes have to react to the trend.

According to Ek, the notion of overnight success is "very misleading and actually rather harmful to any hope for long term and sustainable growth in this industry." Despite this fact, he calls out the music industry for doing just that and expecting to see business models proven "within months of inception."  That's just not how it works, he says, reminding us how iTunes was not initially the powerhouse it is today. In its first year, the company missed its revenue targets by 30% and most label executives doubted its staying power at the time.

While Ek realizes that comparing iTunes to Spotify is wrong given the very different business models for each company, it does prove the overall point: success in this industry takes time.

Spotify, which is currently hugely popular in Europe, has yet to launch in the U.S. due to contract negotiations over licensing agreements. However, as popular as the service is, it still has a long way to go in terms of both product and monetization. Ek acknowledges that one thing which needs to be addressed is how difficult it is for Spotify users to actually buy the music they're listening to. Yet despite the fact that nearly 80% of the company's users are unaware that they can purchase the tunes they're hearing, Spotify is still one of the biggest affiliates to music downloads.

Another challenge facing the company is how to earn a profit considering the large costs of licensing the music it plays... especially when reliant on an ad-supported model. (Spotify offers multiple service levels, one being ad-supported. It also offers subscriptions.) Earlier this year, another streaming service, Last.fm, had to do away with its ad-supported model for the same reason.

The Music Industry Needs to Change

If it was up to Spotify, the music industry would be embracing the future instead of constantly fighting against it. Ek says that in order for the industry to find success, it needs to realize that the new business model is "a mix between ad-supported music, downloads, subscriptions, merchandising and ticketing where the user comes first and where the key to monetization comes from portability and packaging access rights." If willing to adapt, the music industry could then have the potential to become a $40-50 billion industry and one that could grow stronger than it ever was.

Until that time, it looks like Spotify has a long road ahead of it, but it's good to know that it is up for the challenge. "We aren't interested in just trying to hype the company and then flipping it," Ek says. "We are in this for the long haul."

According to recent reports, however, Spotify may do things a little differently when it reaches the States. Says Andres Sehr, Spotify's global community manager, the company is considering going the "freemium" route for the U.S. market.

"Freemium" is a word coined to describe a business model where basic services are free while special or advanced features are available for a fee. That's a slightly different spin on the business model Spotify uses today. Currently, Spotify offers its European users a choice between a free, ad-supported application and a paid app which costs around about €10 (around $16.60) a month. With a Spotify "freemium" service, however, there would be just the one application in which users would pay for the extra features they want to use. Details on how exactly this would work and what features would come at additional cost is still unknown. Sehr says it's far too early say at this point. Also unknown is whether this "freemium" model would forgo the monthly subscription fees in favor of the premium upgrades.

In an interview published today in the Wall Street Journal, Sehr explained why the company is considering making this sort of change. "The U.S. is a completely different market, and the competition landscape's different," he said, adding that "when we launch there, it'll definitely be a challenge for us."

What Sehr is referring to is the particularly crowded market here in the U.S. where services like Imeem, Pandora, Last.fm, and many others are already well-known and popular destinations for streaming music online. In other words, Spotify isn't just rivaling iTunes in the U.S., it's going up against a number of other companies doing nearly the same thing, too.

Spotify on the Mobile

Where Spotify has an edge over its competition is on the mobile front. Although there are plenty of streaming music applications available for both the iPhone and Android platforms, Spotify's app does things a little differently...and considering the glowing reviews, better. Instead of simply providing a streaming radio of sorts based on a user's musical preferences, Spotify's mobile users can actually pick and choose the songs they want to listen to and build a custom playlist. That playlist can also be streamed when the mobile device is offline thanks to Spotify's caching technology.

For this reason, there were originally concerns that Apple would reject the streaming music app because selecting tracks, making playlists, and playing music offline puts it in direct competition with iTunes itself. Those concerns were soon discovered to be unfounded as Apple recently approved the app for distribution via App Store - a decision no doubt influenced at least in part by FCC scrutiny over the company's app approval process and anti-competitive tactics.

While the initial launch of the Spotify mobile iPhone/iPod Touch app is only in the European counties where Spotify is currently licensed, the Apple "seal of approval" means that (in theory), Spotify won't have any trouble making it into the American App Store, too. That is, once they get the American licensing agreements worked out.

Although the company already has European deals with Universal, Sony, Warner, and EMI and it solidified an American licensing agreement with the Independent Online Distribution Alliance (IODA) in July, its the Stateside licensing agreements that are holding up the service's U.S. launch. Still, the company remains optimistic and expects to make its American debut later this year or in early 2010.

Features

Rhapsody has all the features you would probably want from a streaming music app. Browsing by genres, charts, or simply searching for artists and specific tracks is easy and fast. Once you have found something you like, you can also easily add it to your 'library' so that you can find it quickly at a later point. Rhapsody also offers radio stations based on genres or artists, similar to what the Slacker Radio and Pandora apps offer on the iPhone.

One thing we especially like about the app is how easy it is to manage and create playlists. While this feature is somewhat hidden - you have to keep pressing the name of a song or album for a second or two for the right menu to pop up - it does give you the ability to create a library of songs you like and to manage playlists.

We are not quite sure at what rate Rhapsody is actually streaming this music to the iPhone, but at least over Wi-Fi and the AT&T 3G network, the sound quality is quite good.

Rhapsody vs. Spotify

In the US, Rhapsody is currently the only game in town when it comes to on-demand music streaming. Unlike Spotify, Rhapsody doesn't offer an offline mode, thanks to the arcane licensing restrictions the music industry still favors, and is only available in a select number of markets in Europe at this point. Maybe later versions will feature this ability - especially given that Apple has now allowed the Spotify app into the App Store.

Once Spotify launches in the US App Store, however, Rhapsody will come under a lot of pressure, especially if Rhapsody doesn't offer offline storage at that point. Currently, Rhapsody does offer more songs (8 million vs. 4.5 million) and the prices are similar (€9.99 vs. $15).

Free Trial

Signing up for the free 7-day trial is easy and doesn't require a credit card, so if you are on the fence about trying Rhapsody out, just install the app and follow the instructions from the home screen. Apple just pointed out that it doesn't believe in music subscriptions during its annual iPod event yesterday, but depending on your listening habits, a $14.99 subscription per month might actually turn out to be a pretty good deal.

Unlike other mobile streaming music applications, the Android and iPhone applications allow members to cache streaming files for offline listening. In other words, there is no need to download a file for listening. It's an amazing mobile feature for users, but as a free application it would cannibalize Spotify's revenue stream from downloads. However, with the subscription requirement, the company is destined to make money from both downloads and streaming lists.

If the application doesn't make it into the App Store, Spotify has other opportunities to generate revenue with downloads. Ek announced plans in late June to launch a one-click download solution for easier on-site purchases. The company's ability to gain referral sales revenue shows potential, but the access model is less attractive than subscriptions. Spotify could offer a tiered file pricing system without compromising its existing service. The company could continue to stream compressed files for free while offering higher-quality files or rare releases for purchase and download. This option might appeal to diehard music fans, but it certainly doesn't have the cool factor of the mobile applications.

Regardless of Spotify's revenue streams, the company's US release is widely anticipated. Americans are eager to see what UK and Swedish audiences have been raving about. Some of the company's latest 3rd party tools look like amazing additions to the community. Spotify's blog featured the following:

1. SpotifiTunes: Independent web developer Phil Nash's iTunes playlist tool allows you to upload your iTunes library and generate additional links to your favorite artists in Spotify. Members can discover new album releases and sometimes surprising band collaborations from the past.

2. We Are Hunted: The curated We Are Hunted music community created a Spotify playlist complete with the site's top tracks and artists. Once users can cache this on their devices, they'll have the ability to listen to the community's 99 hottest streaming songs in offline mode.

3. Share My Playlists: This site contains almost 4000 pre-compiled Spotify playlists for your listening pleasure. The service offers amazing potential to leverage the popularity of existing celebrity deejays, music bloggers, labels and music properties. Just think about the range this service could offer. From indie electronic labels to Motown, if brands were to release weekly tribute playlists you can bet there would be listeners.

After this sort of a build up for the North American launch, it would be a let down if American audiences thought the service was anything short of fantastic. We won't have to wait long for a reaction, the release is expected before the end of summer.

Until yesterday, for example, users could just re-download songs they purchased from the service (quite useful when your hard drive or MP3 player dies on you). Now, however, most likely in order to combat fraud, eMusic has put some restrictions on the number of downloads it permits per song.

Also, while even long tracks (often in the classical or electronic music section) used to cost just one credit (users get a certain amount of credits per month, depending on their subscription plan), a lot of albums now cost 12 credits even when they only feature four or five tracks. The 12 credit idea was actually sold as a positive by eMusic, as it would allow users to download any album without having to pay more than 12 credits. That's great for albums with lots of short tracks, but now, for a lot of users, this actually brings down the value of their subscriptions and raises prices significantly.

There is also some inconsistency here, as some albums don't yet feature the 12-credit price. According to eMusic, only about 50% of all albums have transitioned to album pricing so far.

Some songs are now also only available when users purchase a complete album, whereas before, any songs could be downloaded individually.

The Good

Of course, there are also some positive aspects to the new eMusic. A new feature, for example, now shows users which tracks from an album they have downloaded before and allows them to complete this album.

EMusic also still offers all of its tracks as DRM-free MP3s, and some albums are now a real bargain, as you can often get albums with far more than 12 tracks for only 12 credits, and while taste is obviously debatable, we have to admit that there is also some interesting music in Sony's catalog.

Is the Customer Still King at EMusic?

Where eMusic failed though, even though we have to acknowledge that it tried to communicate with its customers, is in preparing its users for these changes by being completely transparent about the updates. It's no secret that most users don't like change, and while there is a lot of talk on the eMusic forums about unsubscribing from the service, we will have to see how eMusic's subscriber stats develop in the next few months. While some of eMusic's loyal subscribers might indeed leave, having the Sony catalog in its repertoire might actually attract quite a few new users as well.