Can Streaming Music Services Survive Freemium?

As a response to Spotify's successful US launch, MOG and Rdio have both offered freemium versions of their respective streaming music services. They're scared of losing the war to the Scandinavian invaders. But is it a race to the bottom?

Let's take a look at the models that these companies have adopted. Spotify started the freemium craze by offering free, unlimited access to its desktop service with ads. However, Spotifiers will soon be limited to a certain number of hours every month. MOG's new Freeplay service rewards users with free access to the desktop service for engaging with the service. That means sharing tracks with friends, creating playlists, etc. Basically, users exchange product evangelism for free content—with ads on top, which also generate revenue for the company. Rdio hasn't revealed the full details of its service yet, but it says users will get unlimited, free, access to the service without ads. Record labels can't possibly be pleased about this.

Content providers of all mediums are already leery of the increasingly popular unlimited subscription model. TV and movie companies despise Netflix and Hulu. Record labels have been slow (although more receptive) to embrace the $5-10/month plans offered by streaming music companies. So how long do you think they'll possibly put up with freemium models? Or how long can Rdio and MOG and the rest sustain it while still appeasing their label overloards?

Spotify operated in the red for years before gaining the number of users to make money off its freemium model. Its successful U.S. launch—reportedly millions-strong—was just the cherry on top of an already highly successful European subscriber base sundae. MOG and Rdio are a different story. They both still have relatively small user bases, and going with a free access model in hopes of stealing some of Spotify's users is risky—they cant serve up nearly as many eyeballs (earholes?) to advertisers in the longrun. It's a desperation move, and one that might end up destroying them.

There's hope, though, that these companies could succeed and really change the way we get music. And it's in your smartphone.

One thing nobody offers right now is free access to their services on smartphones and tablets (Rdio hasn't said anything about this one way or another, but people in the know I've talked to say that labels aren't considering this option yet.) It's pretty easy to see the gameplan here: get users so accustomed to listening to music through the services that they stop buying/pirating music altogether. Soon they'll want anywhere access not only to music, but to the collection and playlists you've compiled. They'll realize it's easier to cough up a subscription fee than to buy and or rebuild all that saved-up content.

This strategy revolves entirely around having a lot of users actively using these services, hence the competition to see who can be more cutthroat. The companies who lose are going to lose big as a result of putting subscription numbers before revenue. I'd feel more comfortable about the prospects of all these guys if they adapted a model more like Lala used to, where everyone could listen to any song a limited number of times before having to pay for it.

I really hope someone (if not everyone) wins out here, because the unlimited streaming model is an amazing way to access music and has the potential to benefit both musicians, their corporate overlords, and most clearly you the listener. But this concept was already seen as a low profit margin venture to begin with, and it's only becoming less profitable. Failure from all of these companies would set all this progress back at least five years, when the iTunes a la carte method was seen as revolutionary.

Look, when you make yourself so dependent on advertising, it makes perfect sense that there's a race for subscribers over cash. Let's just hope that it's not a race to oblivion.