January 29, 2012 at 11:12 am

Rhapsody Chief Defends Its Un-Spotify-Like Approach to Free Music

The hair of Rhapsody CEO Jon Irwin, who is pictured here before and after shaving his head as promised when Rhapsody hit one million subscribers, is growing back.

CANNES, FRANCE — Spotify gets a lot of attention, especially since its U.S. launch last year, but Rhapsody chief Jon Irwin didn’t appear fazed about that when Evolver.fm sat down with him at the Midem conference for an update on his music subscription service.

According to him, despite Spotify’s current lead (with 2.5 million paying subscribers to Rhapsody’s one million), Rhapsody is happy with its business model, and he doubts about whether Spotify will be able to sustain its freemium approach. Spotify currently serves up six months of unlimited listening before limits kick in, with Spotify paying rightsholders each time a free or paid song is streamed. Irwin suspects Spotify will have to add new limits at some point to keep up with royalty payments.

The main difference between the companies lies in their free trials. Spotify’s free trial is desktop-only, and lasts forever. Rhapsody’s lets you try the service on your smartphone too, but requires a credit card and lasts only 14 days.

“The biggest driver of conversion is when somebody’s committing upfront and providing you with a credit card to start the trial,” said Irwin. “Then, they’re committed.”

We responded that we’re always a bit scared to enter a credit card for a free trial, he agreed, but said it’s still the best way for Rhapsody to go.

“You’re right — you get fewer signups, because people have to make that commitment,” he explained.” But because they’ve made that commitment they’re engaged, and the likelihood of them converting to an ongoing long-term subscriber is much higher. Well over half of those people will continue. If someone comes into a no-credit-card trial, where they say ‘Okay cool, I can listen to music for free’… they’re going to convert in single-digit percentages.”

Spotify’s current conversion percentage appears to be 25 percent — 2.5 million paying subscribers as compared to 10 million free users — which would put above Irwin’s estimate that Spotify would need a 15- or 20-percent conversion rate in order to survive. Nonetheless, he thinks that in order to keep up with royalty payments, Spotify will have to restrict its free offering more than it already has.

“They’re going to drive conversion by adding restrictions, whether it’s the amount of advertising, the number of hours and times you can listen — all of those are designed to cut off the bleeding,” added Irwin.

What if Spotify’s freemium model works? According to Irwin, Rhapsody would be ready to flip the switch at that point and become a freemium service, but it’s not willing to risk its current system, which generates enough money to cover operating costs and the development of new products.

“We’re monitoring [Spotify] very closely, obviously, to see if we’d do it,” said Irwin. “I have deals on my desk that would allow me to follow that business model if I wanted to — if we thought that was  a sustainable model for us to go forward.”

  • andrekibbe

    The cost per conversion is at least as important as the conversion rate. It might make more sense from the outside looking in to offer a free trial, but subsidizing six months of music for unqualified leads is enormously expensive. The only reason Spotify can afford this is the $1.1 billion of VC they’ve raked in. For every customer they’re not getting to stick around (i.e. pay for) six months after the free ride ends, they’re going to need additional conversions to pick up the slack.

    My guess is that Spotify will continue to lose money and gradually shake investors out of their irrational exhuberance, then they’ll be sold to Facebook.

  • Kurt Hanson

    Andrekibbe, I do not believe Spotify has raked in $1.1 bil in VC.  I believe they recently raked in $100 mil at a $1.1 bil *valuation.*  That’s quite different.

    Also, BTW, Eliot, if Spotify has 2.5 million paying users and 10 million free users, that’s typically considered a 20% conversion rate, since the denominator should be total users, not free users.   (Sorry, like the character Ben Wyatt on “Parks and Rec,” I’m a math nerd.)

  • http://twitter.com/spotidj spotidj

    Spotify has 3 million paying subscribers in the mean time. Every day it gains 8000 new paying subscribers.