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Spotify US launch delayed by record labels’ concerns

Spotify’s hopes of launching its online music service in the US are being held up by record labels’ concerns about its ability to convert users of its free service to paying subscribers, according to music industry sources.

The company, which has attracted glowing press and strong interest from venture capitalists in Europe, said last week that a US launch now looked unlikely until early next year because of the complexity of the US market, where it would need agreements with thousands of music publishers.

However, sources in three of the four largest music companies told the Financial Times that record labels’ financial concerns were the greater hurdle. “We think Spotify is a great service but they’re going to have to convince us they can convert enough people from free to paid subscriptions to make it worth our while,” one label said. “As an ad-supported service the economics don’t work at all.”

Daniel Ek, Spotify’s co-founder, acknowledged at the Monaco Media Forum last week that subscription revenues would be critical, saying: “It’s not about the ad service and not about the subscription business, it’s about the two working together.”

However, Spotify has also played up the rates it can charge advertisers, saying that its ability to determine a listener’s mood based on the beats per minute in the songs they are listening to has helped it achieve high click-through rates of as much as 6-7 per cent.

Music industry executives told the Financial Times that they needed to see evidence that Spotify could achieve a mooted conversion rate of about one in 10 users paying for a premium service such as its iPhone application. The number of free users who convert to subscribers is currently well below that figure.

“We’re not asking them to show us a better conversion rate but to at least tell us how they’re going to do it,” another label insider said. The stalemate comes as Spotify is looking at using its relationship with Li Ka-shing, one of its investors, to enter the Chinese market. “In China, the number one thing people do online is listen to music. But it has a minuscule [legal] music industry,” Mr Ek said.

The industry’s disagreements over digital strategy emerged again yesterday when EMI announced it would start putting videos from some artists, starting with Norah Jones, on Hulu, the online video site backed by NBC Universal, News Corp and Walt Disney.

Hulu’s first music industry deal comes as YouTube, Google’s online video service, is planning to launch Vevo , a Universal Music-backed music video site, on December 8.

Universal has support from Sony Music, but is still in negotiations with EMI and Warner Music.