Spotify

Is Spotify the future of music? (Chris Moran illustration)

Major labels are going to abandon the CD format by the end of 2012. That's the rumor reported by Side-Line Magazine last month.

"We were approached by several people working with major labels, who indeed re-confirm that plans do exist to give up the CD," the article said in a footnote. "We keep on trying to get an official confirmation, but it seems that the matter is very controversial."

The labels will still release limited-edition CDs for collectors, but plan to shift their focus to downloads and streaming. And with the recent explosive popularity of the music-streaming service Spotify, tossing CDs in the obsolete-technology pile with the tapedecks and the pagers makes pretty good business sense.

A free, ultralight desktop and mobile app on which millions of songs are instantly available to stream, Spotify is currently the most efficient way to listen to music. You don't have to sync an iPod (Spotify automatically syncs your playlists in its cloud, accessible under your login from anywhere, including on your phone), and you don't have to download a torrent, unzip the file and drag it into your player. Spotify makes illegal downloading irrelevant. It also makes CD-buying even more irrelevant.

Streaming services are in no short supply, but few have enjoyed the success Spotify has. Pandora, Rdio, Rhapsody, Napster and AOL Music have all struggled to draw a profitable consumer base, with little luck. (According to Business Insider, Pandora, despite its popularity, has never shown a profit.) It turns out, however, that Spotify is profitable, or at least it was in 2010, and it's likely the company will profit again this year.

Spotify got popular in 2009 when the Swedish company made its services available in the U.K. It was a long two years of negotiations with record companies and labels in the U.S. before Spotify could finally make its debut here in August. Then, shortly after its U.S. launch, the service partnered with Facebook. And since that partnership in September, Spotify has added 4 million users.

According to Richard Conlon, senior vice president of corporate strategy at the creative-licensing giant BMI, Spotify is an exciting model for the future of the industry.

"We badly needed a poster child for a successful service like this to hit the U.S. market," he said in a phone interview. "With other services, you were tethered to your computer. [Spotify] cut the cord in terms of devices."

One of the cords it cuts is the iTunes cord, and what a relief. Spotify's interface is simple, easy-to-use and quick. It's a fast download and a light-running application. It's respectful where iTunes is rude; iTunes, with its pain-in-the-ass 20-minute update installations it bugs you about every three months, its wheel-spinning clunkiness and interference with your other apps, is a program begging for banishment. And Spotify's free if you're willing to endure slightly annoying ads every few songs, and its inventory is humongous. Over 15 million songs can be streamed from your desktop, or, for $10 a month, on your tablet or phone. For $5 a month you never have to hear another ad again.

I recently went in for the $5-a-month no-ads plan because, whatever, it's $5. Because many people have that same attitude, Spotify seems to be working. In an interview with the L.A. Times, Kenneth Parks, chief content officer and head of U.S. operations for Spotify, said the reason his company succeeds is it engages users and draws them in with free memberships, and then they invest time in curating playlists and favorite albums and songs. From there, it's easy to get someone to pay $5 for adless play, or $10 for mobile streaming.

"The barrier to entry is too high if you have to pay $9.99 right up front, without the ability to try out the experience for a substantial period of time," Parks told the L.A. Times. "You need to lower the barrier for potential customers. This is the free part. It gets people who have been totally lost to illegal file-sharing services away from piracy back into the music industry."

Spotify boasts in some of its ads that it offers a legitimate free service that gives back to the hardworking musicians who help populate its archives. Through ad and subscription revenue, artists are being paid royalties on their songs, it claims.

Since digital-music services have begun to appear, licensing agencies like BMI have seen increased profits. Conlon said in the first 10 years BMI began focusing its attention on digital media, the company made $100 million dollars in profits. He predicts they'll make their next $100 million in just three years.

"Good old capitalism does win out here," Conlon said.

Except that while the industry giants managing copyrights and licensing find ways to profit on new technologies, the piece of the pie left over for artists and musicians is considerably smaller.

Carlos Wells of Safety Meeting Records in New Haven said "a great number" of his label's bands are on Spotify. Like many independent labels, he works with a distributor who makes sure Safety Meeting's records make it to streaming services and iTunes. But Wells says there's no profit to be made there for him or his artists.

"[Streaming services] are great for exposure but there's very little chance to make money," he said. "We just try to focus on selling records."

Safety Meeting specializes in vinyl recordings, with hand-numbering and carefully designed sleeves. Wells says he's considering not participating anymore in the digital side of the business, though he said he's not exactly sure he would withdraw completely.

"The reason we got more into vinyl is that people like records. They tend to want the artifact. They're not really interested in a crappy MP3 rip," Wells said. "They'd rather hear it in all its analog glory. And the packaging also adds to that value. It's a real thing."

But because services like Spotify help his artists grow their audiences, he's hoping there's a way to stagger vinyl and digital releases to encourage more record sales.