Music intelligence company The Echo Nest will power Spotify's new radio features. The improved, personalized radio function, along with apps by Billboard and other companies, are available in an update of the Spotify desktop client made available today (December 16).
Spotify Radio has a few advantages over traditional Internet radio. Users get an unlimited number of skips. And because on-demand services are hands-on (unlike non-interactive services) a listener can skip forward and backward while a song is streaming.
But Spotify Radio has one potential disadvantage: royalty rates are higher for on-demand services than non-interactive webcasting services. Then again, additional streams may not lead to an increased royalty bill. If Spotify is paying out a percent of revenue to content owners, an increase in the quantity of streams only means a fixed revenue pool is being divvied up into smaller per-song royalties.
An improved radio function may even help Spotify to convert free users into paying users at a better rate. With its freemium business model, the service can be enjoyed by both paying and non-paying customers. After six months of unlimited streaming, new users were to be limited to 10 hours of free listening per month. Paying subscribers can stream an unlimited about of music.
It's now mid-December, five months after Spotify's U.S. launch in July. Stateside consumers who have been using Spotify's free, ad-supported service since the launch must soon decide between paying for unlimited streaming or being capped at 10 hours per month. If they're not hitting their monthly quota, they don't have an urgency to upgrade.
Active listening hours typically take a back seat to passive listening hours. A normal Spotify user might not listen to 10 hours of on-demand music each month. But that person is far more likely to listen to more than 10 hours of radio in a given month. Radio is passive listening; it takes far less effort to listen to radio than MP3s, CDs or (especially) vinyl records.
That's where the Echo Nest comes in. A good radio function could be a great way to get non-paying customers to max out their monthly listening time. A Spotify user who falls in love with the radio function suddenly has a choice to make: go back to commercial-filled terrestrial radio; switch to a free, non-interactive service like Pandora (which doesn't allow unlimited skipping); or become a paying subscriber.
Without radio, fewer Spotify users will reach the monthly listening cap and face the decision to upgrade. A greater need for listening hours means a better conversion rate and more revenue for both Spotify and rights owners. And that's the value of the Echo Nest.