Spotify Won't Kill Pandora or Sirius XM

Europe's hot digital-music service washed up on our shore this morning. Spotify, an on-demand offering with more (social) hooks than a Black Eyed Peas single, is making itself available to stateside listeners on an invitation-only basis today.

For Spotify, getting here wasn't easy. Negotiations with the major labels have been going on for two years, and it wasn't until earlier this week that the last of the bigs -- Warner Music Group (NYSE: WMG  ) -- signed on the dotted line.

There is no shortage of fledgling aural smorgasbords in this country already. Rhapsody and Best Buy's (NYSE: BBY  ) Napster lead the way, but even Rhapsody conceded earlier this year that there were just 1.5 million paying subscribers across all of its platforms. Spotify, on the other hand, claims that 1.6 million of it 10 million registered users in Europe are on board as premium subscribers.

That's an impressive ratio for a "freemium" model. Pandora Media (NYSE: P  ) has far more users in its music-discovery service, but only a sliver pay for enhanced access.

What makes Spotify so different? Breadth, for starters, is a differentiator -- though good luck finding someone who will split hairs between the roughly 12 million tracks available through Rhapsody, Napster, and MOG and the 15 million songs on Spotify. The service also hopes to set itself apart through its sheer simplicity, something that has been a sticking point with the labels that fear that if a platform is too convenient, the need to purchase new music will dry up.

However, the real secret sauce may simply be the social element of building and sharing playlists.

The New York Times describes some of the usage restrictions that the company recently had to introduce in Europe on its free ad-supported PC listening plan to keep labels happy and its model crawling toward profitability. Non-paying users can't hear any single song more than five times a month. They're also restricted to 20 hours a month of streaming during the first six months, and a mere 10 hours a month after that. Those restrictions will also apply here.

Why not create multiple accounts or a simply start from scratch every six months? Well, that's where Spotify's social magic kicks in. After all of the time spent on building up playlists, adding your own music into the mix, and networking with like-minded music fans, going back to a clean slate is easier said than done. Would you want to keep opening a new Facebook account every six months?

Napster, Rhapsody, and even Pandora haven't excelled at making music social. Even Apple's (Nasdaq: AAPL  ) Ping hasn't been the game changer that the iTunes giant must have originally fathomed. Can Spotify be the one to break on through to the other side?

It won't be easy. Spotify's free plan is too limiting. Users can pay $5 a month for ad-free access or fork over $10 a month for the account that offers high-quality streams across portable devices beyond the computer.

Even paying $10 a month won't solve the need for perpetual online connectivity, something that Sirius XM Radio (Nasdaq: SIRI  ) solves for just a few bucks more with its coast-to-coast satellite coverage.

Spotify had better hope that its social ways are sticky and that folks value customization over letting someone else do the musical vetting, because those are the only things that will make the two years of waiting worth it.

Is Spotify a threat to Pandora or Sirius XM? Share your thoughts in the comments box below.

The Motley Fool owns shares of Apple and Best Buy. Motley Fool newsletter services have recommended buying shares of Apple and Best Buy and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors..   

Longtime Fool contributor Rick Munarriz owns none of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Motley Fool has a disclosure policy


Read/Post Comments (8) | Recommend This Article (3)

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  • Report this Comment On July 15, 2011, at 12:08 AM, jekoslosky wrote:

    As you point out here, Rick, this is an already crowded market. (And crowded with a number of companies not turning much, if any, profit yet.)

    I see Sirius having two other big advantages going forward.

    1) Original content. (See Howard Stern.)

    2) Ease of use

    I love not having to fiddle with anything at the wheel. The most I ever have to do is change a station.

    Services that require people to fiddle and pick through playlists, etc on a smartphone in a car can't match that.

  • Report this Comment On July 15, 2011, at 6:23 AM, pbillions wrote:

    You forgot Rdio. Same features as Spotify, better iPhone interface, and has social integration where you can see what your friends are listening to etc. I have used all and Rdio is still edging as my favorite with Spotify in a close second.

  • Report this Comment On July 15, 2011, at 8:53 AM, Fredlee009 wrote:

    Who said it would kill anything? Rhapsody should be worried and cloud music services. Nothing to do with Pandora actually or Sirius. But more for Pandora , sure.

    U just told me another rhapsody service is opening. Not another radio service. Spotify isnt radio.

    Only people concerned about it is the media. To get article clicks.

  • Report this Comment On July 15, 2011, at 9:22 AM, pete163 wrote:

    This is nothing more than a poor web site radio that is going fail like Pandora. Why do people wast there money on this junk radio stuff! I say save time and money with this trash and Go Long With Sirius XM

  • Report this Comment On July 15, 2011, at 10:05 AM, redsncars wrote:

    Rick, what have you heard about IPHONE5 having a SIRIUS sattelite chip? Free-trial for 3 months that can be converted to a permanent subscription that is paid through your IPHONE account? No data charges! Buy and save music automatically to your ITUNES account?

  • Report this Comment On July 15, 2011, at 11:14 AM, waterinfo wrote:

    The essence of Pandora's business concept of "low cost" Internet radio is the underlying assumption that a listener is not paying for his incremental use of the radio spectrum delivering his personal programming.

    Until recently only AT&T was charging high usage wireless accounts for excessive usage. Now Verizon has announced similar usage based service for large volume users. Thus, the two largest wireless companies have both moved to pricing in the order of $10 per Gigabyte for large users.

    How much capacity will a radio listener consume over the Internet. Full CD quality transmission requires 40 KiloBytes per second, which is 144 Megabytes per hour, or 0.144 Gigabytes. At $10 per Gigabyte, full, CD rate transmission would cost $1.44 per hour.

    But audio and video transmission over the Internet utilizes compression. Compression always compromises quality, and compression of more than ten to one would destroy the listening quality of an audio stream. (It might be useful for phone calls, but not for high fidelity music). At ten to one compression, the volume sensitive pricing represents a cost of $0.14 per hour to listen to the radio. More realistically, the actual cost would be more likely between $0.25 and $0.75 per hour. Even at $0.25 per hour, just two hours a day of usage, would cost more than the unlimited monthly use of the SiriusXM service. This doesn't even begin to consider the overall coverage, quality, and variety of programming available on SiriusXM that is not available on any Internet based service.

    Pandora, like many similar services, is doomed to failure because it has no control of its delivery mechanism, and in fact the delivery of its product will eventually cost much more than the product itself. Its business model is vague at best, and its business is not unique and it is easy to duplicate and imitate by competitors.

    Dump any shares of Pandora that you might have and if you want to invest in "radio" or music distribution look for a facilities based provider like CBS or SiriusXM.

  • Report this Comment On August 28, 2011, at 3:40 AM, shanebauer wrote:

    Pete,

    It's not a website radio. In fact, it's neither a website, or a radio.

    FYI

  • Report this Comment On February 17, 2012, at 2:04 AM, iango wrote:

    To me these streaming services are the future. Which will prevail I don't know, but I'm guessing whoever manages to become truly borderless. I gave up on broadcast radio nearly 20 years ago. I don't buy music anymore. So either it will be provided via a streaming service that is cheap or I'll get elsewhere. I've recently been kicked off Pandora because I no longer live in the US, and even Spotify I had to finagle an account because I don't live in a country they officially support. I have not yet looked at Rdio or Sirius' internet options (I presume Sirius satellite is not available here either). One thing is clear though, these music labels need to get their act together, because either streaming is available worldwide at a low cost or people will simply download it from somewhere.

    So far what makes Spotify great is that if I want radio-style listening I can pick some genres and it just plays music or I can select specific music to listen to, both of which make it superior to broadcast radio. No annoying DJs and adverts. No talk shows, no-one phoning in. Can't say I care about the social aspect of Spotify though. If it wasn't there I wouldn't even notice.

    At the moment I only really use Spotify over ADSL, but with mobile broadband costs coming down, and operators introducing unlimited usage plans at low prices, ones that also allow the use of something like Spotify, I can see it becoming viable for mobile music as well. For now that is easily handled by a digital music player, which could even include music downloaded from Spotify.

    waterinfo you're wrong about compression. Lossy compression reduces quality. The very best lossy compression is essentially indistinguishable however.

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