Business Matters: A $3 Billion Valuation Brings Spotify Expectations Back to Earth
Business Matters: A $3 Billion Valuation Brings Spotify Expectations Back to Earth

Spotify has amassed three million U.S. users and 600,000 subscribers since its July launch, according to figures reported Wednesday by the New York Post. A major label source tells that the 600,000 threshold won't be reached for another few weeks but the figure is basically correct.

That number isn't enough for some people. The Post characterizes the numbers as disappointing. "Spotify overpromised," an industry executive said. The 20% conversation rate may be a factor -- labels seem to hate the thought of people listening for free when they could be paying. Just how many people are disappointed isn't known, but the people has spoken with over the months have been at least content with Spotify's numbers.

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Maybe expectations should have been tempered. High expectations could have arisen from poorly chosen examples. Sweden was often hailed as a model example of the power of streaming services. But Sweden isn't necessarily a model for U.S. adoption of a subscription service, because Sweden and the U.S. are not the same markets. A streaming service arguably has an easier time stepping into a market less entrenched purchasing downloads. In 2009, the first full year after Spotify launched in Sweden, downloads were just 15% of the Swedish recorded music market, according to the IFPI. Downloads were 43% of the U.S. market that year.

In a statement, Spotify said: "This [ New York Post] story is not accurate. Spotify's growth and popularity in the US market has surpassed our expectations and we are confident that trend will continue. The ratio of paying subscribers to active free users is over 20% and that is in line with our global conversion rates."

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Whether or not Spotify over-promised will be up for debate. What is more certain, however, is that 600,000 U.S. subscribers in nine months is an adequate start given the nature of the U.S. market. Americans are a download-loving people. We were the first to get the iTunes Music Store nearly nine years ago. We rejected Napster, Yahoo! Music Unlimited, Zune Pass and nearly every other service that asked consumers to pay for access. Rhapsody took nearly 10 years to reach 1 million subscribers. If subscription services were easy, Rhapsody would have many millions of subscribers, Napster would still be a standalone business and Nokia's Comes With Music would have been a smash success.

If 600,000 subscribers is a disappointing figure today, will 1.2 million be disappointing at the end of the year? Spotify has reached roughly 600,000 subscribers in 264 days. Dec. 31 is another 272 days away. If the service gains U.S. subscribers at the same rate through the end of the year, more than 1.2 million consumers will be paying either $5 or $10 for music. I'm told Spotify's growth rate has been linear other than an uptick around September's f8 conference. Linear growth isn't as exciting as exponential growth, but it's proof customers are buying into the product and value proposition.

Of course, Spotify could very well be guilty of over-hyping itself. The company will certainly have a hard time living up to the wild predictions of its most famous shareholder, Sean Parker. Spotify won't live up to the grandiose expectations heaped upon it by an adoring media in the months and years leading up to its arrival. And labels might want to see more from Spotify now that Cricket Wireless' Muve Music, the surprise subscription story of the last year, has also reached 600,000 subscribers.

But consider the sorry state of subscription services just a few years ago. Labels desperately wanted the security of recurring revenue but nobody had put together the right service. Spotify, Rdio, Mog and Muve Music have created a market where one barely existed aside from Rhapsody. Along the way, labels got their advances and are earning royalties from well over 1 million new subscribers without any noticeable impact on download sales. What's so wrong about that?