Spotify shows success of mobile 'freemium' model

Spotify's recent announcement that it has gained over a million paying customers has been viewed by many as proof of the potential of the 'freemium' model - but analysts believe that the majority of the company's growth comes from the mobile, rather than desktop, market.

Spotify, which offers a 'freemium' music-streaming service where revenue is generated by advertising to the free users or by taking a subscription payment from premium users, is going great guns at the moment. Even before the company launches in the US, it's successfully converted around nine per cent of its user base into paying customers - a feat pretty much unheard of in the 'freemium' market.

Other 'freemium' providers like on-line notepad Evernote and business 'social' network LinkedIn struggle to convert three per cent and one per cent of their user bases respectively into paying customers - and while Spotify's 'sexy' product of unlimited music from a broad catalogue certainly helps matters, it doesn't explain how the company is outperforming others in the market so impressively.

A recent analysis conducted by Martin Scott at market watcher Analysys Mason suggests that there's an obvious reason for Spotify's success, and it's one that other 'freemium' businesses can emulate: the provision of premium mobile services.

There's certainly no denying that the mobile market is rapidly growing: smartphones in particular are selling like the proverbial hotcakes, to the extent that many mobile networks are implementing ever stricter data transfer caps in order to protect their straining network infrastructure from the growing number of users looking to stream music, video, share photos, and download content on the move.

It's this growth, Scott claimed in his analysis, that offers 'freemium' business the opportunity for growth they need. Using figures released by Spotify, Scott points out that the launch of the iPhone and Android Spotify apps, which are only available to paying subscribers, was the move that saw the reversal of a trend for increasing numbers of free users to join the service and refuse to upgrade.

"The most significant inflection point in the take-up of Spotify's premium services was the introduction of support for iOS and Android-based handsets in September 2009," Scott claims - and the figures back him up, showing the company's percentage of paying users jumps from two per cent prior to the launch of the apps to its current nine per cent.

This is something that other 'freemium' businesses can learn from, Scott claimed. "Greater innovation is possible on mobile platforms, in the form of enhanced features. For example, LinkedIn could enhance its location-based services by enabling users to see a list of LinkedIn contacts that are in the same conference hall as them," he says.

"However, service providers should reserve such enhanced mobile services for paying customers only. They might not seem quite as compelling as mobile music, but applying Spotify’s strategy towards mobility may help freemium companies to disprove the dreaded maxim that only one per cent of their customers will pay for their services," Scott concluded in his analysis.

With increasing numbers of companies investigating location-based services, near-field communications, and other mobile-driven technologies, it will be interesting to see if the majority of functionality is offered only to those willing to pay for the privilege.