Rdio

Will Spotify's hat trick help it pull ahead of competition?

March 28, 2014: 11:11 AM ET

Acquiring The Echo Nest, closing its app program, and offering student discounts are just the beginning of a plan for streaming domination.

By Courtney Subramanian

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FORTUNE -- The music-streaming service Spotify rolled out a discount for U.S. college students on Tuesday, offering its $10 premium service for half the price. The announcement seemed fairly simple: The discount gives students a chance to experience an ad-free platform with offline access on any device. But the move is the Swedish company's latest effort to gain market advantage over encroaching competition in the horse race that the music-streaming industry has become.

Paid subscription services shot up 57% to $628 million last year, while digital downloads decreased 1% to $2.8 billion, according to the Recording Industry Association of America. Recognizing that streaming is the future of music, more companies are investing in user growth over solving the question of how to generate more revenue.

With 25 million active users, 6 million subscribers, and 20 million tracks, Spotify has emerged as one of the biggest streaming networks in a market boasting around 450 licensed services worldwide. Though Spotify expanded to 38 new markets in 2013, more competitors are cropping up.

Aside from its major rivals like Rdio, Pandora, Clear Channel's iHeartRadio, and Rhapsody, Spotify faces new competition from Apple's iTunes Radio and Beats Audio, the company behind the Dr. Dre headphones that launched in January.

MORE: Libraries are branching out into digital

Rdio began offering student subscriptions last year, while Beats Music provides a discounted family plan for $15 per month through AT&T (as opposed to its $10-per-month membership). Pandora offers an ad-free service for only $5 per month, but doesn't come close to the Spotify catalogue with only an archive of 1 million songs.

The race for market share, however, is just getting started. More recently Beats Music announced it acquired 525,000 paying subscribers just two months after its launch with the help of a strategic partnership with AT&T, Bloomberg reported. To become more attractive to artists, Beats Music also acquired Topspin Media, a company aimed at helping musicians sell their music and merchandise to fans.

Apple is also reportedly focusing on artists, pressuring labels to release albums exclusively through iTunes before sharing content with streaming services. Apple could easily point out successful examples of Beyonce's secret release on iTunes last year, which resulted in 1 million album sales within its debut week, or Kid Cudi's release of Satellite Flight: The Journey to Mother Moon, which ranked at No. 4 last week on Billboard's album chart.

But E. Michael Harrington, a music-business professor and member of the Future of Music Coalition advisory board believes though it's critical to appease artists and industry folks, when it comes to consumers, it's all about instant access.

"If we don't have access to everything, everywhere, anytime we want it, then there will be piracy," Harrington says.

MORE: How Amazon and Netflix can take on Apple in the TV streaming biz

But Spotify's efforts to ramp up brand loyalty and platform adoption through targeting 18- to 24-year-olds -- one of its biggest audience segments -- is not its only recent strategy to gain market share.

In early March, Spotify rocked the industry landscape when it acquired The Echo Nest, the big data company responsible for powering music discovery for the likes of Rdio, Rhapsody, iHeartRadio, and Vevo. The discovery API collects data to create a "taste profile" for users, which in turn informs the recommendation algorithm. Though The Echo Nest has promised to fulfill its remaining contracts, competitors like Rdio will be forced to create a new algorithm while Spotify enjoys unfettered access to the troves of user data that The Echo Nest has amassed.

Spotify CEO Daniel Ek and The Echo Nest CEO Jim Lucchese told TechCrunch that the partnership was an obvious fit. With it, Spotify is now poised to have a more comprehensive look at listening habits across the web, which could be advantageous in advertising on its freemium platform as well as honing its own algorithm.

In fact, the strategy to target college students could also be a boon to the company's data collection. Students who want the half-off discount are required to provide personal information, which may include student schedules, tuition receipts, and other proof that a user is a student. That information could be a potential source of revenue for advertising.

"They're signing people up for premium services but what they learn through that user base can be helpful for how they deploy advertisements on the free service," FMC spokesman Kevin Erickson says.

MORE: iTunes Radio overtakes Spotify, gaining on iHeartRadio in U.S.

But this isn't Spotify's first time offering a discount to students. The company launched a similar campaign in the U.K. in 2012, where the company touts positive feedback but did not disclose any data about percentage of users who continued to pay after the promotion.

This week the company also announced it would no longer accept new submissions to its Spotify Apps platform, which allowed developers to build apps within the desktop client. Shifting focus to mobile and the web, the move also signals further exclusivity to the Spotify ecosystem.

Still, the company faces the challenge of resolving how it distributes royalties to artists and rights holders. Though Spotify has pushed back on the scrutiny over artist payouts, reducing the price for its biggest demographic of users could pose a risk, Erickson says.

"They keep emphasizing that these payouts get better when the service comes to scale," Erickson says of Spotify. "The service comes to scale by increasing the subscriber base."

But for some smaller artists, this doesn't always make sense, Erickson points out. The argument that payouts will improve rests on the idea that artists and bands are going to see their listenership scale up at the same rate. That's not always the case.

"The industry often views tech as a threat instead of an opportunity," Harrington says, but the consumer craving for instant access means there is no time to figure out how to monetize things first.

Armed with label approval, rich data, and competitive pricing, Spotify has quite a head start.

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