For a clue on what the Spotify on-demand streaming music service might look like when it finally launches in the U.S., take a close look at what the company did in the Netherlands this week.
In the process of launching there, Spotify launched two new service tiers – Spotify Open and Spotify Unlimited.
Open is the more interesting: It limits free listening to 20 hours a month, while fully ad supported. Those who want to listen to unlimited ad-supported free music need to be invited.
The move shows how Spotify is under pressure to make its ad-supported model work, reflecting a dual need to reign in costs as well as appease record labels growing wary of free ad-supported offer. Whether this Open tier came about due to one or the other is unclear. But it goes a long way to satisfy both.
Offering a trial period based on usage rather than a set time period is a great way to drive conversion to paid tiers. That’s only a theory, as there’s no data to compare conversion rates between different services, but on paper it makes total sense.
Streaming music costs money, and the more users engage in a free service, the more they cost the provider. Spotify figures that anyone using the service more than 20 hours a month is costing it money rather than making it money.
Labels like Warner Music Group are concerned that on-demand free access will take value out of the market by giving music fans who today are still buying CDs and even digital albums a cheaper alternative that ultimately reduces their bottom line rather than increasing it. Capping usage at 20 hours a month should ease those fears, and the uber-user will quickly surpass that limit and have more reason to either migrate to a monthly subscription or simply buy the music they sampled during the free phase.
And it helps the overall market by offering a casual music discovery solution. With the pending shuttering of Lala, the world is about to lose one of the best free on-demand solutions out there. Services as diverse as Billboard.com, Google search entries and Pitchfork rely on Lala to provide that one free stream to let users sample new music in full, and all are searching for a solution to replace it.
Now there have been versions of this already from the likes of Napster and Rhapsody. Napster at one point offered a free tier that let users play any one song up to five times for free, but soon after banished that offer. Rhapsody still lets non-paying users play 25 songs a month for free, but it’s got a clunky login process and 25 songs isn’t really that much.
In the U.S., only Dada Entertainment’s Play.ME service has a similar offer, letting users play five hours of music a week free before requiring a subscription (total = 20 hours a month). Interestingly, Dada still lacks deals with Universal Music Group and Warner Music Group, so it’s not clear whether those majors are as onboard with this model in the U.S. as they apparently are overseas.
Hopefully, they all get onboard, because setting 7-day free trials before forcing a subscription simply won’t cut it. Tying a paid option to usage rather than an arbitrary time period is a far more elegant solution. Pandora discovered this when it began asking users to pay $1 for any month that their listening exceeded 40 hours, and offered a $36 yearly subscription for those who tired of that cap. The company says only about 5% of its users fall into this range, but they were the heaviest burden to carry.
Sources say Spotify is trying to convince labels to do exactly this, and my guess is that we’ll see more iterations of this capped-usage tier in other countries before the U.S., so the company can prove with real data that it satisfies their needs.