Faisal Galaria, global head of business development at Spotify

Digital music subscription services look like a good model on paper, yet few have proved their worth in the real world. Spotify, at just over 18 months old, is one of those exceptions, having captured the attention of fixed line consumers and successfully taken its offering mobile. Telecoms.com spoke with Faisal Galaria, global head of business development at Spotify ahead of the Industry Outlook event which takes place in London later this month.

It’s still very early days for Sweden-headquartered Spotify, which at 18 months old with 180 employees and venture backing, still falls firmly into the ‘startup’ bracket. And despite the firm’s fledgling success, having attracted around 10 million subscribers, of which an estimated 500,000 are paying, Faisal does not claim to have cracked the market.

“You can’t yet say we’ve figured it out. We’ve just thought ‘what does the end consumer want? What does the operator want? And what’s important for the music company?’ Fundamentally it’s all about providing a service that the end user really wants, which is social music – the ability to listen to your music and see what your friends are listening too and share that with your friends on mobile, on the TV, on the games system, or on the car radio,” Galaria says. “It’s that experience, on demand wherever you are, at a price point that makes sense.”

It is the price point that is key to Spotify’s success. The company operates a two tier model. Users can get access to the content for free, in exchange for listening to ads, or they can pay £10 per month for premium access, which removes the ads, allows them to listen to tracks offline and also puts Spotify on a mobile device such a an iPhone or Symbian handset.

“Essentially music is for free,” Galaria says. You can go to the internet and steal whatever music you want and it’s easy to do. So because music is free, people will only pay for the service and that service has to be compelling. You have to be able to discover new music send and get recommendations, it has to be cross platform and easy and that’s what people will pay for.”

Galaria believes that digital music and telecoms go hand in hand, simply because users have been paying for ringtones and ringback tones for years, and consumers interested in music understand that they have to pay for it. Spotify’s sales pitch is that one track or ringtone delivered to your phone might cost £3, but for £10 “you can have access to everything”.

Spotify is a subscription service, so it’s faced with the task of explaining to users that they never really ‘own’ the content, they’re just renting it. Because Spotify tracks are protected by DRM, once the user’s subscription lapses, they no longer have access to the premium services. They can still listen to ad supported tracks however.

“What we’re saying is: For the price of an album you get access to eight million tracks. We’ve got ten million ad supported users on the service and we’re trying to change user behaviour to accept content rental,” Galaria says. “In last ten years if you wanted to pay for digital music the only place to go was to Apple but then you were locked into the hardware, so really you have to pay for the content each time you change hardware. Also, if you’re in the demographic of people that don’t pay for music anyway, then as a music service you can’t get in to that ecosystem as people aren’t buying the hardware.

“It’s taken Netflix ten years to get people used to not buying DVDs. The BBC iPlayer is another example where you don’t own the content, you just enjoy it on simpler, less expensive devices. Why clutter the computer and download everything?”

Faisal Galaria is speaking at the Industry Outlook event, November 25

Spotify’s way around the problem of tying users into hardware and letting them rent content via a device of their choice is to be platform agnostic. “Spotify is extendable across many platforms. We’re a music company and I don’t mind if you bring a Nokia phone or a Dell computer or whatever to my service. We’re a cloud based service which allows you stream anything you want, anytime on any device, whether it’s a TV, a games console, a car stereo or a phone. This is the fundamental difference to Apple which says ‘you must buy my equipment’. With Spotify you just need an internet connection a screen and speakers.”

Spotify has an API, Lib Spotify, which has been made available to partners so the service can run on more devices via an application and still deliver CD quality sound. Spotify found HTML to be unreliable as a delivery mechanism.

The API has been used to extend the service across a multitude of other platforms, social networks being a natural channel for that expansion. While Spotify does enter into exclusivity deals with some entities – 3 UK for example – it’s not a model that benefits the firm. 3 can bundle the service at a reduced price but anyone can still download the app in any given market.

“We have partnerships with Facebook, Microsoft and Twitter. Users can see their Facebook friends in Spotity and they can also share content over Twitter and Microsoft Windows Live. Spotify wants to partner with networks that have the furthest possible reach,” Galaria says. “The value of a network, like Skype, is measured by how many people are in that network. So why build a parallel social network like Apple is doing with Ping? Facebook has half a billion people already. And over time we’ll be integrating with games consoles where there are yet more social networks like Xbox Live. Whereas today you have people playing games together, in the future we envision people listening to music together, just like they do in the real world now.

A joint research paper from Spotify and Informa Telecoms & Media is available exclusively through the Informa Analyst Community group on LinkedIn

“Clearly from the point of view of an operator one of the most compelling things that people do over a mobile phone or fixed line network is consume music. It’s been part of peoples telecoms experience for many years, whether it’s users illegally downloading music in the late 90s or listening to ringtones or having iTunes on their handset. Content is at the heart of the growth of the ever increasing bandwidth that’s available – you don’t need 100Mbps to read email,” he says. “But while music has gone hand in hand with telecoms for many years, what we haven’t yet done properly is found a way for music on demand to flow freely on the internet and that’s what Spotify is trying to address.”

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