We7 delays iPhone app, and says Spotify can't scale in the US. Exclusive pics

we7[UK] Ad-supported music streaming service We7 and Spotify competitor has big plans to go mobile. That much was already known – an iPhone and Android app has been in the works for sometime. Earlier this month, however, CEO Steve Purdham surprised attendees at an event in Manchester by telling them that while the We7 iPhone app was ready, its release was purposely being held back. The reason, he explained, is that it could drive too many new users to the service before the advertising side of the business can afford to support them.

In other words, the economics of ad-supported music don’t yet make sense, forcing We7 to focus on ‘sustainable growth’ or acquiring users at a rate somewhere inline with any increase in ad-revenue. Where this leaves competitor Spotify‘s land grab approach to user numbers is clearly open to debate and Purdham is more than happy to chime in (hint: he thinks they’re heading for a fall).

On that note, TechCrunch Europe has learned that We7’s mobile offering will in fact be launched in Q1 2010 and, perhaps unsurprisingly, will be part of a new premium subscription offering. We’ve also managed to source some, admittedly, blurry photos of We7 running on the iPhone. The app that you can’t have – yet. But first, let’s dive into the thinking behind We7’s decision to postpone their mobile plans.

we7-iphoneAs already mentioned, sustainable growth is the key phrase here. The cost per-stream can be prohibitively high for ad-supported music services – competitor Pandora was ‘forced’ to pull out of the UK for this very reason – while the ad market is burgeoning and extremely volatile. This would explain why mobile, which is an essential component to any cloud-based music offering (or any music offering per-se), is going to be a premium offering. It’s likely to be far too popular and, therefore, too costly for advertising to fund alone.

Purdham is also determined to make ad-supported music pay its own way, not just as a marketing tool to drive users to the premium offering. This appears to be in complete contrast to Spotify on which he comments: “If you apply the reported ad funded stream sizes and just apply the standard PRS cost and allocate a similar ratio for the Labels then the monthly stream cost is very large and will be way ahead of advertising revenue.”

This would explain why Spotify has gone back to being invite-only in the UK, limiting new membership. It’s also, suggests Purdham, why Spotify’s US plans appear to have been delayed, “going into the US on the same model as UK and Sweden will be impossible given current knowledge.”

Purdham (rightfully) doesn’t think streaming services fit the classic ‘fremium’ model. Freemium, he points out, “describes the phenomenon of delivery tending to zero on scale.” Costs come down per-user, the more users you acquire, eventually becoming negligible (bandwidth and a few other costs aside). Therefore, a service that fits the fremium model can support a high ratio of free vs paying customers.

In contrast, “due to music royalties, ad-supported music tends to a large number with scale and hence is not freemium and the % of converted subscriptions cannot be big enough to cover the ad funded component.”

It can be made to work, he says, but the focus “has to be on the economics generating sustainable scale from the get-go and then apply scale.”

we7-iphone2In We7’s case, sustainable growth doesn’t mean no growth at all. With very little advertising, the UK-only service claims 2.5m monthly users. About 1.2m of them visit we7.com directly, spending an average of 30 minutes per visit, with the rest coming from syndication via various partner sites including NME, The Guardian, Glamour.com and GQ.com. Purdham says this makes We7 the number one most accessed UK music site above CBS-owned Last.fm.

We7’s catalogue has also seen significant growth. The service now offers 4m tracks from all of the major labels and a number of indies. Advertisers include Orange, COI, The Sun and Sony PlayStation.

In January last year We7 took a $7m/€5m series A round from Eden Ventures, Spark Ventures and musician turned entrepreneur Peter Gabriel.