Four months after Swedish digital music sensation Spotify launched its music service in the U.S., the company has amassed more than 4 million users who can play any song they want from Spotify's catalog of more than 15 million songs — absolutely free.
For Spotify, however, those songs don't come cheap. Every time a user plays a song, Spotify must pay an undisclosed royalty to music labels and publishers.
Like a high roller who keeps doubling down, Spotify is optimistic it can eventually make money, even if it means giving away music at the outset. The hope is that customers, once hooked, will open their wallets for premium features, such as being able to listen to music without commercials, or on their mobile devices.
It's not a bad bet. The market for subscription music services is projected to grow from $532 million this year to more than $2.2 billion in 2015, according to Gartner Inc., a media and technology research firm. Among those who hope to share in the pie are Rhapsody, MOG, Rdio and Slacker.
Spotify has been operating for years in Europe. But the stakes in the U.S., the world's largest music market, are far higher. For Spotify, success in the U.S. means opening its service to an unprecedented number of listeners, many of whom won't pay Spotify a dime.
Spotify isn't saying how many of its 4 million U.S. users have sprung for the paid services, which cost $4.99 for subscribers who want to listen to commercial-free music on their computers or $9.99 for those who want to listen on smartphones and tablets.
What makes Spotify so confident it won't lose its shirt? We spoke with Kenneth Parks, Spotify's chief content officer and the head of the company's U.S. operations.
Parks started his career in the late 1980s as an electrical engineer designing integrated circuits for AT&T, then became an intellectual property attorney at Weil Gotschal & Manges. He went on to become chief technology counsel for Reuters Group, and senior vice president for strategy at EMI Music. He joined Spotify in 2008.
Parks explains how his company plans to make "free music" pay off.
What has to happen before people start paying for a music subscription service?
It starts with a great product and a great user experience. Spotify is extremely fast and extremely engaging. That's because we think the key to getting the business model to work is to have an experience that people want to invest in.
There have been lots of great services here before Spotify. Why haven't they taken off?
The barrier to entry is too high if you have to pay $9.99 right upfront, without the ability to try out the experience for a substantial period of time. You need to lower the barrier for potential customers. This is the free part. It gets people who have been totally lost to illegal file-sharing services away from piracy back into the music industry.
So you start by giving it away. Then what?
You get them to build playlists and libraries. When people invest 500 hours into their music, building their collections and making playlists, they look at music in a different way. The equation changes when you get them to invest in the experience. After spending several months, you ask them to pay the price of a couple of sandwiches a month, the answer is likely to be yes. It's a no-brainer.
Spotify now requires users to have a Facebook account in order to listen. Why?
We know from experience that people who are engaged socially are much more likely to become subscribers. Their own behavior is influenced by the social aspect. It drives a deeper level of engagement. That's important to us. It's also a great way to get the word out about our service when people see that their friends are using us.
If people are getting the music for free, whenever they want, won't they end up buying less music?
There's no evidence of our service cannibalizing music sales. On the contrary, there's evidence that we're generating new revenue from a demographic that hasn't purchased a lot and are now reengaged. The [International Federation of the Phonographic Industry] does an annual survey of the European market. It shows that in all the places where we operated, the market for music purchases actually grew.
When people listen to more music, they also tend to buy more music. We're starting to rebuild a healthy recorded music business. It's all about reengaging a demographic that was lost to piracy and giving them an experience that they're willing to invest in.