Business Matters: If Big Radio Had Pandora's Royalty Rate, It Would Owe Billions
Business Matters: If Big Radio Had Pandora's Royalty Rate, It Would Owe Billions

Spotify has quietly launched in Ireland and Luxembourg, the company's 16th and 17th countries, giving it markets roughly the size of the state of Louisiana plus the city limits of Tucson, Arizona.

What exists beyond these small markets will be less lucrative, on a per-capita basis, than the wealthy countries in which Spotify currently operates. The truth is that most of the world's recorded music revenue comes from a small number of countries.

Ireland is a fairly strong music market. Its per-capita spending on physical music in 2011 was $7.75, better than the U.S. ($5.88) and Sweden ($7.28), according to IFPI numbers. However, its per-capita spending on digital music of $3.92 was about half that of the U.K. ($7.24), U.S. ($7.06) and Sweden ($7.23). Ireland is a small but productive country It has a population of 4.5 million and a GDP that ranked 44th in the world in 2011, according to the World Bank.

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Luxembourg is small --- only 520,000 people -- but wealthy. It has the second-best per-capita GDP -- $80,100 -- in the world behind Qatar, according to the International Monetary Fund.

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Bigger markets await Spotify. Over the last few months the company has posted job openings at its website for positions that will launch the service in Italy (8th largest GDP), Poland (22nd largest GDP) and Mexico (14th largest GDP).

Spotify and many of its peers have already found most of the low-hanging fruit. Italy, Poland and Mexico are large markets with fairly substantial GDPs but relatively low per-capita GDPs and low per-capita spending on music compared to the U.S. and the top countries in Western Europe. These markets are clearly less attractive and will be less fruitful than the Western European markets Spotify first entered.

In 2011, Italians spent just $2.70 per capita on physical music and $0.78 on digital music. The numbers are much worse for Poland ($1.83 physical, $0.11 digital) and Mexico ($0.87 physical, $0.11 digital).

But some people see plenty of opportunity in these smaller markets. Subscription service Deezer wants to launch most everywhere but the U.S. -- it's currently avoiding the world's most expensive digital music market -- and often has the help of local mobile carriers. In four phases, the French company will have launched or plans to launch in 160 countries.

"We don't want to be in the big countries and then middle countries and then the small countries," Deezer CEO told in October. "We need to be everywhere because the users are everywhere."

Max Hole, Universal Music Group International, also sees opportunity in emerging markets -- although over the long term. " The focus in the last 40 years has been on the major 10 markets, including the U.S., the U.K., and Germany," he said Monday. "Although the revenues from Vietnam, Cambodia, even Africa, are small, the focus in the next 30 years will shift to the emerging markets."

Dauchez and Hole are right. Users are everywhere and emerging markets have great growth potential. But there will be wide gaps between top-tier and second-tier countries, and music products and services will need to be customized for each market.

As subscription services expand around the world, they will typically enter markets that are less productive than the ones in which they started. A country like Italy or Poland will have 61 million or 38.4 million people, respectively, but a far smaller share of the population will be able to pay 10 Euros a month compared to the population in France, Germany or the U.K. Per-capita incomes and amount spent on music will vary from one tier of country to another.

Subscription services that charge $10 per month will find a small addressable market in truly emerging markets such as Indonesia, China and India. These huge and growing middle classes and widespread access to mobile phones and the Internet, but they won't provide much of a return on investment in the next three to five years. China's digital music market had a trade value of just $50.4 million for a country of 1.33 billion in 2011, according to the IFPI. India was about the same: $65.3 million in a country of 1.2 billion. Indonesia, a country with 246 million people, had a music market worth $24.4 million last year.

Spotify has about 4 million subscribers in markets such as the U.K., the U.S., France, Sweden, Norway and Germany. Those are markets with per capita GDPs at $30,000 or more and strong per-capita spending on music. There will be growth in developing markets in the coming years, but subscription services will find less fruitful markets as they leave wealthy Western Europe.