INTERVIEW: Spotify’s head of business talks online music challenges

Spotify’s business development head, Faisal Galaria speaks about the obstacles involved in launching in the US, the lack of threat from new music rivals such as Google and how growth is still the most important thing to Spotify.

Spotify originally planned to launch in the US in 2009, then in 2010. It still hasn’t. Why the delays?

First of all, I’m not sure that we’ve actually ever said we were going to launch in 2009 –the press might have done. We did talk about launching in 2010 and found it difficult. We have to get the labels on board; we have to get the collecting societies on board. In the US there are over 5,000 collecting societies. By the time that we go live, we’re expecting massive, massive growth, which means that everything has to work.

We’ve had to build out data centres, we’re hiring ad sales people, marketing people, people who have got expertise in US monetisation. How do you take credit card payments? How do you take PayPal payments? All that takes time, because the US is one market that’s equal to the rest of Europe combined. On top of that, the labels have their own issues with licensing the music.

Is it true that the labels will only support the premium side of the business, not the ad-supported service?

Clearly we’ve licensed the model in Europe and we’ve become a very major revenue source for the labels in Europe. We assume they’re happy with that. We’re the second-largest contributor to their digital revenues now across Europe. We’ve overtaken everyone except iTunes. So does the model work? Yes it does.

What’s the difference [between Europe and the US]? Well [in] the US we’ve got different personalities, different people – it’s the world’s largest music market. If your bonus resided on physical music sales, as opposed to digital music sales, then you might be a little bit worried about Spotify entering. There’s a bunch of different factors at play here. Not all of them are completely obvious.

Of course the competitive landscape is very different. There are existing music services that we would presume pay the labels a lot of money. Not least iTunes – it’s its back yard. We don’t know how the competitors are lobbying the labels, what they’re saying and how they might react. But it’s a multi-faceted problem for them, because when we do launch, our anticipation is that we will quickly outpace the competition in the same way that we have done in Europe. Maybe that’s what they [the labels] are worried about. Maybe they like having multiple revenue streams.

Do you think there’s politics at play between the labels and iTunes, given it essentially controls the digital music market in the US?

Well I don’t know. But if you were iTunes what would you be doing?

Building a rival cloud music service?

If you assume it takes years and years to build a cloud service – it took us two and a half years – then what do you do in the interim? You use your clout presumably with the labels to say ‘if you do this, I will do X, Y and Z to you.’

But aren’t the labels eager to break iTunes’ monopoly?

If you’re the digital team [at a label] and 80% of your revenue was coming from one place, how much are you going to p*ss them off until someone else can guarantee all that revenue from a new source?

Put yourself into their shoes for a moment – you’re a nice, fat big executive at label X, Y, Z. You’re getting half a million dollars a year as long as you hit your bonus. Your bonus means that 80% of your revenues comes from iTunes. Are you going to tell iTunes where to go? Because your half a million dollar bonus has now gone.

Even if you’re this big, fat executive, you might agree that Spotify is the best thing. Am I going to risk it?

Are there any labels that are being specifically obstructive?

We can’t really comment on that.

Do you have a new US launch date?

We do, but I’m not going to tell you. As I said, the process of launching in a new market is pretty much a military exercise in terms of getting everything right. We’re not ready to launch with a service that we know has some gaps. We want to make sure that on the day we launch everything is fully functional, operational and works as well as it does in Europe. Otherwise, the first experience that you’ll have in the US of Spotify won’t be the best experience and that’s not the way we want to launch.

Have the US delays damaged Spotify’s overall growth plans?

I think it’s only built up the appetite and demand. They know that there’s 10m people in Europe enjoying the service. We only launched Spotify mobile in September of 2009 and we’ve got 750,000 [premium] users. Compare that to a Rhapsody or a Napster in the US. Neither, despite being around for the last 10 years, has that many users.

There’s a reason why Spotify is growing, there’s a reason why it’s growing very, very quickly. The Americans know that and they want to get their hands on it. It’s almost like the longer it’s kept away from them, the more curious they are to see what all the fuss is about. That’s partly the beauty of having an invitation system. Often when we launch in new markets, we launch with invite-only. People trade those invites on eBay and it becomes very desirable to get a hold of an invite.

Are you threatened by new competitors such as Google, Rdio and MOG?

No. Ultimately the consumer will decide. We've beaten out every service in Europe hands down. We believe that we've got the best product and continue to. So [we’re] not particularly worried about the competition. If you look at the size of the music market, it’s a USD17bn market globally. It doesn't have to only be Spotify.

What percentage ofusers do you need to convert from free to premium to become profitable?

I'm not going to tell you that. It’s more relevant to think about it on a market-by-market basis; conversion is going to be different in every market. Think about it this way, if you look at the number of people that click on a paid link on Google – that’s the only way that Google makes money, by clicking on the right-hand rail. About 2% of all searches result in a paid-for click. If you look at Skype, which also offers a free service combined with a paid-for service, between 7% and 8%, depending on which market you're in, of users make paid-for calls.

Those are examples of freemium services where the cost of the content is zero. We do have content costs, so our conversion isn't going to be 2% like Google or 7% like Skype. It’s not going to be that much higher. What we're showing is that you can get good conversion on a premium service and it doesn't have to be that much higher for the service to continue to balance its books.

What is the profits situation now?

Again it depends on which markets you look at and which costs you look at. We're more interested in growing and investing internationally and being in more markets. Creating a small company that’s profitable, that’s not why we’re in business. We’d rather be a big company, an international company, a company that at scale is worth billions of dollars and we're prepared to invest in that to make it happen.

We might be profitable on a market-by-market basis, but clearly as we enter new markets that won't be the case. The management and the board have made a decision to try and make this a multibillion dollar company, as opposed to a small company that’s profitable.