Apple, Google Fail to Dominate Internet Radio; Spotify Makes a Move

In among the giants, which include Pandora Media Inc. (NYSE: P) and Sirius XM Holdings Inc. (NASDAQ: SIRI), Sweden-based Spotify has offered a paid, ad-free streaming service and ad-free mobile service for about $10 a month in the United States since November 2011. Spotify now says it will introduce a free, ad-supported version of its streaming music for mobile devices to compete with Pandora and the possible YouTube streaming service. Spotify claims 6 million paid subscribers and 20 million active users worldwide, still far fewer than either Pandora or Sirius.

Privately held Spotify just closed another funding round, raking in $250 million in new financing and valuing the company at more than $4 billion. That is not far behind Pandora’s market cap of $5.4 billion, and the Swedish firm hauled in $585 million in revenue in 2012, significantly more than Pandora’s revenue total of $427 million.

Spotify has reached licensing agreements for its new service with the music division of Sony Corp. (NYSE: SNE), Vivendi’s Universal Music Group and Access Industries’ Warner Music Group, and the service will offer users a limited number of on-demand songs as well as a service similar to Pandora’s ad-supported model.

Content licensing is the key, and as the music rights holders get more experience they have apparently become more willing to take on some of the risk associated with streaming. The deals that Spotify just struck have got to be less onerous than the company’s earlier deals, which paid out virtually all the company’s revenue for licensing fees. The music business is big, slow and mostly dumb, but it seems its players are not ineducable.

The big threat to Spotify, Pandora and even Sirius is YouTube. If Google succeeds in tying YouTube to free video streaming, all bets are off. YouTube is by far the most dominant music service in the game, even without a non-video music streaming option. Even Apple’s iTunes Radio, which has seen some success because of Apple’s tightly controlled ecosystem, could be toast if Google gets the YouTube music thing right.