The Spotify business model relies on attracting users to a free service that offers a selection of music but with limited functionality, with the aim of converting those users to paying subscribers. Spotify generates some revenue around the free service but makes more via paid subscriptions.
A person close to Universal says there was clear evidence the availability of free music on Spotify was hurting digital downloads from stores such as Apple’s iTunes. “The market data really speaks for itself,” the person said. “It’s clear that the key to success for artists, consumers and Spotify alike is developing an offering that drives more free users to the paid tier.
Spotify says its model is working, and the best thing the industry has going for it right now.