Spotify’s Promises of Profits and a US Launch? Still MIA

I’m going to keep this post short and sweet because no one likes a blogger who says “I told you so.” But, Spotify fans: Paul Carr and I told you so.

StrategyEye reports that less than 4% of users of Spotify—the gorgeous online music app with a troubled business model—are paying subscribers. StrategyEye quotes Universal Music International digital VP Rob Wells who says the company needs 10% to 12% of its users to subscribe to be a sustainable business. It’s only at the 10%-12% threshold that Spotify is able to ink revenue share deals with labels, until then, it has to pay for music by the stream, driving its costs up substantially.

StrategyEye further cites Wells saying Spotify has those numbers in Sweden, Norway, Finland and France, but not larger markets like the UK and Spain. And the only thing more far-fetched than Spotify’s claims last summer that it would be profitable by the end of the 2009 and “definitely” be in the U.S. by early 2010 is the idea that paid-subscriber rates would be higher in the U.S. than the rest of the world.

Americans don’t like to pay for things online. As we wrote in our August article about Spotify, even the giants of the Web struggle with this. Netflix only has 10 million subscriptions and has less than 1 million. Hell, US Web audiences don’t even like free services that make money through intrusive advertising. (Yes, that’s an invitation to complain about our new interstitial advertising format in the comments.)

Unlike consumer Web properties like Twitter and Facebook that can build first and monetize later, online music is a graveyard full of companies sucked dry by the labels and left for dead. Pandora is one of the few to make it and that took $56 million in venture funding, a huge user base, years of employees not taking salaries and a user revolt so extreme it broke fax machines on Capitol Hill.

As a result, Spotify is going back to its invite-only model to throttle back widespread free usage in money losing markets like the UK. Meanwhile, labels are pushing for the product to be subscription only in the US. According to Mike, Google was at one point so hungry for Spotify on Android that it was willing to subsidize those per-user fees. That deal has apparently gone cold for now, which isn’t a shock to European VCs I’ve spoken with who’ve dealt with the startup in the past. Spotify is known for naming outrageously high valuations and not budging until it gets what it wants. That’s an odd tact for a company in such a brutal market to take. While it makes sense that Google would be drooling over the application, why not sit back, let Spotify’s funding dry up and then just buy it on the cheap?

At the very least, Spotify will have to raise more money to launch in the US without a Google-like deal, and many local venture capitalists I’ve talked to echo what European investors who passed on the deal told us last August: There are just too many leaps of faith for this company at such a nosebleed valuation. Of course, the Valley being the land of too much venture capital, if worst comes to worst someone will fund it at some price—it just may not be the deal Spotify wants.

Look, I love the service, I love that the founders believe in it enough to invest their own money and I love that the company is ballsy enough to think it can succeed where hundreds of music startups have failed. But the only way Spotify can have a shot in this near-impossible market is with truly stellar execution, and the experiences I’ve had with the management team have been marked by misleading “off the record” statements and unchecked arrogance. (As always, I’d love to talk with CEO Daniel Ek more about the company. Alas, so far he’s responded to requests for interviews by telling me he “doesn’t like (my) tone.” He has offered to meet up sometime when we’re on the same continent, which I genuinely hope happens.)

I usually root for startups with great products not to sell early, but this may be one case where a stunning and much-beloved app would do better in someone else’s hands. With any luck, a bidding war could still make good on that $250 million valuation.