LONDON (AdAge.com) -- Faced with declining CD sales and rampant, unmonetized online sharing of their music, record labels need to figure out new ways to make money, and their best hope may just be a much-hyped European startup called Spotify.
Spotify has been described as a cross between iTunes and a customizable online radio station. It allows its 4 million users to stream music on demand for free, provided they don't mind hearing a brief ad every 15 minutes. Or, for $17 a month, they can subscribe to an ad-free service that comes with a better choice of music, improved sound quality, special offers and unrestricted travel access.
Plenty of ad-supported music sites have failed, but Spotify has already worked with marketers including Procter & Gamble, Pepsi, Burger King, Ikea, Fiat, Volkswagen and BMW.
Banner ads are displayed only when someone is actively using the site -- choosing or searching for music and creating playlists -- so that marketing dollars are not wasted. Last week Sony Pictures ran the site's first video ad, which promoted "The Taking of Pelham 123." And Scandinavian Airlines recently ran a campaign where it bought 30-second spots but used only 10 seconds of the time, giving the other 20 seconds back to Spotify users.
Spotify can segment its users based on age, demographic and postcode, said Global Sales Director Jonathan Forster. "We recently ran a campaign for Pizza Hut targeting users who were near their restaurants at lunchtime," he said. "Eventually we want to go farther with that and target people according to the genre of music they like or the mood they're in, which we can gauge according to what they're listening to."
Another targetable group is early adopters, whom Spotify can identify because they're the first to listen to music that later becomes popular. "We can dig a lot deeper, but we don't want to do too much too soon," Mr. Forster said. "We want to keep it simple and not too granular to start with. Advertisers want creative solutions. We can offer something compelling to advertisers but protect the user experience at the same time."
Two million of Spotify's users are in the U.K., where it launched in February; 1 million are in Sweden; and the rest are split among Spain, France, Finland and Norway. The company will not release the proportion of subscribers vs. free users.
The streaming service is being hailed as a revolution in the music industry and even as its savior: The artists and record companies are getting their cuts; consumers don't have to part with cash if they don't want to; and it's all legal. It's just that users don't actually own the music, as they would if they bought it through iTunes. There are 6 million tracks on offer, with an average of 10,000 new tracks added every day.
Many of the big record companies have signed up with Spotify, including Universal, Sony, Warner and EMI, as well as smaller record companies and independent distributors. Content is constantly being added, including audiobooks, and Spotify's ultimate aim is to be a one-stop shop for all the world's music.
One reason Spotify is popular is that it's very simple to use. Once users have signed up, they can create their own playlists, listen to albums and individual tracks, and tune in to Spotify "radio," which offers in-house selections based on a decade or music style.
There's also ShareMyPlaylists.com, where users can share their favorite music with friends, stars, record companies and strangers. It's an opportunity to find people with similar tastes or to try something entirely new.
Fiat was the first to exploit that sharing option, setting up a collaborative playlist as part of the launch campaign for its new 500 convertible model. The Italian car company is encouraging Spotify users to compile soundtracks of their favorite "feel-good" songs. Each suggestion enters the user into a drawing to win a premium Spotify subscription, and Fiat has plans to use the playlist beyond the initial campaign, such as giving away the most popular tracks along with the purchase of a new car.
Another campaign brings together 20th Century Fox and the U.K.'s Absolute Radio and ShortList magazine to promote the film "500 Days of Summer." Radio listeners are asked to compile playlists that reflect the various stages of a romance, and one lucky contributor will win a "Golden Ticket" to all the music festivals in the U.K. next year. There is also an on-air tie-in with DJs who submit their own choices for the playlists and get listeners to identify tracks in order to win other prizes.
Spotify is best known as a diversion for office-bound workers, but Mr. Forster said the audience is much more diverse than that. "We have just as many mums and dads and little sisters as we do early adopters. And the activity levels are very high -- in excess of an hour a day, often at work or socially with friends. It's a big chunk of the media day spent on a product that didn't exist before."
Spotify has an application for Google's mobile operating system, Android, ready to roll and has submitted an app to Apple for approval. But it may fall foul of Apple because of its threat to iTunes.
Spotify is also working on launching in the U.S., where a private beta has gotten some rave reviews. "We want to get into the U.S. -- our vision is to be available to everyone in the world, wherever, whenever -- and it's the home market for most of the record labels, which are existing partners of ours," Mr. Forster said.
It is rumored that the sticking point is that the record labels in the U.S. are demanding either a lot of intrusive advertising or very high monthly fees.
"The critical thing is to get the business model nailed down," Mr. Forster said. "The U.S. is so big. In Europe half a million users will get the agencies interested, but that's not many in the U.S. We want to get there as quickly as we can, and we want to launch a product we're proud of."