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Has Europe’s hottest site got what it takes?

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LONDON, Aug 5 (Reuters) – Spotify is enjoying a fairy-tale success as Europe’s hottest Internet start-up this year, thanks to music industry support and rapid adoption by avid listeners. The trouble is that the young company appears to have no special technology or business model that will help it compete in an online market where many consumers expect music to be free.   The company, founded by two Swedes, combines some of the best features of other music discovery sites with the aim of taking on no less a rival than Apple Inc and its iTunes media store. It has certainly caught on — despite being on the market for only 10 months, the advertising-supported service has attracted 2 million users in the UK, Sweden and other European countries.

Unlike iTunes, which sells songs or videos by the download, Spotify is one of the many services that offer consumers streaming access over the Web to a more or less unlimited library of songs. In Britain, Spotify has rocketed to become the 10th most visited music site, up from 27th a few weeks ago, according to Web measurement firm Hitwise.

It still ranks behind sites like BBC Radio 1, Last.fm, the pioneering music discovery site, and a newer rival, the ad-supported site We7.com, which is backed by musician Peter Gabriel. Spotify also has competition from social network sites like MySpace and Nokia’s Comes with Music service on phones, among many others.

Spotify is reportedly close to securing new investment from high-profile investors including Hong Kong billionaire Li Ka-shing’s charitable foundation. The Li foundation, along with venture capital firm Wellington Partners and others are apparently looking to invest up to $50 million, which would value it at $250 million. Spotify declines to comment. But analysts think one of the four big record labels may also be looking at a stake.

The problem with getting close to any one label is that Spotify is dependent on having all the labels on its side in order to offer listeners a wide music selection. Napster learned this lesson earlier this decade when Bertelsmann’s former music label, now part of Sony, bought it, leading other big labels to shun it. On the other hand, the closer Spotify gets to the labels, the more generous the revenue split may be.

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