Streaming site Spotify offers an alternative distribution model for music, but can it prove a money maker and does it pose a threat to traditional retailers?

What is it?

Spotify is a free, legal streaming service that enables users to listen to pretty much any track of their choosing. It was launched in the UK in February by Swedes Daniel Ek and Martin Lorentzon and is funded by advertising. Users can pay for a premium service at £9.99 a month for an ad-free version.

Last week it submitted an application to Apple to develop a Spotify iPhone application to broaden its customer base. Spotify has more than 2 million UK users and more than 6 million across Sweden, Norway, Finland, France and Spain. It has about 7 million licensed tracks.

How does it work?

Users must create an account before downloading and installing the software onto their desktop. They can then bring up tracks that are streamed onto their computer. Tracks cannot be downloaded and cannot be stored on MP3 players, but tracks can be purchased by clicking through to Spotify’s download partner’s site, 7digital. All music is licensed and royalties are paid to the rights holders, but not all music publishers have partnered with the site.

How big a threat is it to retailers?

Spotify regards itself as a “compelling legal alternative to piracy”, but the threat to entertainment retailers is stark, say analysts. Although not the first service of its kind – Last.fm is a well established alternative – after Spotify launched, one analyst said: “The ability to listen to music for free not only puts pressure on the entertainment retailers but also the existing digital distributors including iTunes. Spotify could well be an indicator of what the future holds for musical distribution.”

Retailers, namely HMV, have been quick to dismiss the danger Spotify represents. HMV points out that the model is not yet profitable, although Spotify says it is hoping to be in the next few months. HMV has its own streaming offering, Jukebox, which is built within its own digital online store. An HMV spokesman says: “We don’t see Spotify as a threat. For more established brands streaming represents a great opportunity to stand out.”

Is there anything like it in other sectors?

Video game specialists are likely to come under threat too with US online game distribution system Onlive. It allows players to stream high quality on-demand games onto computers. In the past Game has insisted Onlive does not pose an immediate threat, as it is yet to launch fully in the US, although it has not ruled out moving into streaming digital games if customers demand it.

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