Is Spotify Feeling The Youtube Effect?

Sometimes being too popular is not good for business and uber-trendy online streaming service Spotify might have been the latest victim of this trend, much to the chagrin of its owners.

The company had to revert to invite-only subscription only and although it just said that this was because of the huge demand in the UK; it leaves us with two distinct possibilities.

Firstly, that the cost of streaming is rising too fast. Every song that is played on Spotify costs money to the startup as it has to pay the record labels for these rights even if the songs are played for free.

Then there are the physical costs of streaming (servers, bandwidth, human resources etc) that grow proportionally to the number of users on the service.

Andres Sehr said on Spotify's blog that the significant rise in demand came after the mobile service launch. It is likely though that it did not happen BECAUSE of it.

Spotify already has two million users in the UK and anedcotal evidence points to the fact that not many iPhone/iPod Touch users purchased the premium account (many didn't know that the free Spotify App required a paid for account).

Before the launch of the mobile service, Spotify had 100,000 paid for users. Even if they managed to double that after the mobile launch (highly unlikely), that would have increased the number of subscribers by 5 percent which is hardly back-breaking.

And we're not assuming that a portion of the existing premium users who already have iPhone or iPod Touch devices simply downloaded the app.

Like Youtube, Spotify might need a buyer with very deep pockets to swoop in to avert impending doom. At least Youtube did not have to pay licensing costs at first.

The bottom line therefore could be that Spotify has been overwhelmed by new users (Alexa & Compete show big rises over the last few days), more than they would have expected and certainly not of the paying type, and the startup could only take the abrupt step of stopping new members to stave off exploding licensing payouts. This has been confirmed by a source who told NMA that they have to monitor their costs.

Our Comments

Although Spotify says that existing Spotify users could invite new subscribers for free, we know of at least one instance that failed. On the whole, this has been a badly managed period since Spotify has had to close the door to new users. How many businesses do you know of that do that?

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