Can music sellers survive?

Spotify, anew personalised, internet radio station, has been launched in Britain. Will this be the final blow for the already-reeling music industry? Simon Wilson reports.

What is Spotify?

A music streaming website, run from London by Swedish entrepreneurs. It's soaring in popularity after launching to the British public and in a few other European countries in January. Streaming just means that instead of downloading music onto your computer from iTunes or Amazon, say, you listen to it in real time like hearing a song on the radio. You don't own the music, and can't save it for future use (although a planned link-up with iPhone means music lovers with the latest phones will eventually be able to use Spotify on the move). The big advantage is that it's completely unlimited and free, as long as you can bear to listen to a 30-second advert every 20-25 minutes. Otherwise, you can pay £1 a day or £10 a month for unlimited access to millions of tracks.

Aren't there sites like that already?

There are some, most obviously Last.fm. But Spotify's library is much bigger, and every track is played in full with no delays for buffering, rather than (as often happens) in 30 second chunks. Users can swap playlists, or listen to other people's ideas, or use Spotify's suggestions by decade and genre. Reception has been positive users rave about having their own personalised radio station, and advertisers are also keen. The government's Central Office of Information, HMV, Nissan, Sainsbury's, Sony, Vodafone and Xbox have been among the first brands to take the plunge.

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What's in it for the record companies?

Some of the usual digital refuseniks have so far refused to let record companies sell their material to Spotify, including The Beatles, Pink Floyd, Led Zeppelin, AC/DC, and Metallica. But they are in a small minority. Most major labels are happy to experiment with licensing their product to a new service whose main competition is pirates, from which the industry earns nothing, and Apple's iTunes, which has 80% of the download market and is widely seen by the record industry as too dominant. With Spotify, and sites like it, record companies earn tiny sums per listen, but are betting that online streaming will make illegal filesharing obsolete, thus protecting their legal download and CD markets for people who still want to own their own copies.

Can this business model really work?

It's certainly unproven. But then the whole music industry is in a state of flux as it tries to work out how to make money in the digital age and change its core business model. That uncertainty was illustrated this week when private-equity group Terra Firma wrote £1.3bn off its £2.3bn acquisition of music publisher EMI. In the case of Spotify, the industry seems to have taken the view that 'every little helps'. Britain's record industry produced the five best-selling album artists in the world last year: Coldplay, Amy Winehouse, Duffy, Leona Lewis and (Caledonian-Aussies) AC/DC. But it is wrestling with several interlinked issues: the partial shift from physical to digital delivery; the collapse of high-street retail channels; illegal filesharing; and the plethora of new distribution models (YouTube, sponsors such as Starbucks and Nokia). In macro terms, there is one structural change that is even more significant: the rise of concerts as an artist's most important revenue stream.

Are concerts already bigger than recording?

If not, they soon will be. According to French consultancy IDATE, the global music business is worth $67bn a year. Online distribution will exceed physical distribution (CDs, etc) by 2011. But between them, the two forms of recorded music will account for only 41% of the market (from 50% in 2007). By contrast, concerts including sponsorship deals and the sort of TV tie-ins being forged by ousted Radio 2 boss Lesley Douglas (in her new role at Universal) will account for 48% (from 38% in 2007). The balance of the market is mostly publishing. So to make much money, artists will have to get out on the road.

What does it mean for retailers?

Take Britain's sole remaining large-scale music retailer, HMV. It's a reasonably nimble operation, quick to revamp its product range and with a thriving web retail arm. But the fact is that CD sales are falling by 10% a year, as more consumers download (legally or illegally) or stream their music. Hence its decision to make a determined push into the £1bn market for live music in Britain. In a joint venture with Mama Group, the country's number-two venue owner, HMV is taking over and rebranding 11 big concert venues, including the Hammersmith (now HMV) Apollo and the Kentish Town (HMV) Forum. Expect many more similar deals with retailers and record companies.

Rockonomics the future of music

In 2002, no less an expert than David Bowie predicted that music itself would become like running water or electricity. You'd better be prepared for doing a lot of touring, because that's really the only unique situation that's going to be left, he declared. He was right. By 2005, a paper by two Princeton academics - Rockonomics[pdf] -found that only four of the top 35 artists still made more from recording than from lucrative live shows. Then, in 2007, Madonna became the first megastar to dump her record company in favour of a deal covering all of her activities with concert promoter Live Nation.