In what is becoming a familiar narrative, an innovative music company – in this case Spotify, the slick P2P streaming app – has invented a service that music fans love. But in order to satisfy the labels' licensing demands in order to roll out in the US, the company will either have to sell an overwhelming amount of intrusive advertising or otherwise force users to pay high monthly fees to get rid of the ads.

This could result in a service no one wants to use (not that the labels would care, because they generally receive hefty upfront licensing fees well before a music startup goes under). A disagreement over these fees appears to be holding up the American release of Spotify, which has grown popular in those countries where it is available. The problem, according to one major label's distribution arm, is that Spotify doesn't include enough ads in its free version, so nobody gets annoyed enough to upgrade.

"Unfortunately, nobody is upgrading to the premium models, which is the hope down the road," said Amanda Marks, executive vice president and general manager of Universal Music Distribution, according to Digital Music News. "There's almost no advertising in the free section [of Spotify], so there's no impetus to upgrade."

This strategy of trying to extract as much money as possible from Spotify's desktop app might make sense on the surface. But it ignores – and would stifle – a larger revenue opportunity in the mobile space. People will indeed pay for Spotify, I contend, but only if it's portable. On the desktop, they'll always have cheaper or less-ad-ridden alternatives like web-based streaming, P2P, sneakernet, and so on. If the strategy of charging monthly fees for a desktop music app truly worked, we'd all be paying for Rhapsody by now.

Instead, the labels should allow Spotify to operate more or less as it already does in Europe: as a free, ad-supported P2P streaming service with a paid option that gets rid of those ads. Universal's Marks is correct in noting that most people will refuse to upgrade to the paid desktop version of Spotify. But she fails to see that once people are hooked, they'll want to carry their Spotify collections around with them (and indeed, iPhone and Android Spotify apps are already in development). At that point, both Spotify and the labels stand to earn even more from the app stores springing up around every important mobile platform.

Mobile is where Spotify's value proposition truly lies – especially as Apple rolls out the option for selling iPhone apps as subscriptions with the 3.0 version of iPhone software (a model the other mobile platforms are all but certain to copy). Paying for portable access to a service you already love on the desktop is a compelling proposition – moreso than paying Spotify to remove ads from its desktop version.

By allowing the free, computer-tethered version of Spotify to attract and addict new users, labels will grow the pool of music fans who would be willing to pay a monthly fee for a portable version of the service. It's a fairly simple idea, but the labels will see it as risky, due to the heavy probability that desktop Spotify users will continue to prefer the free version.

Nonetheless, labels should align their licensing efforts with consumer demand. And judging from what the last ten years of digital music history have taught us, consumers are more likely to pay for portable music than they are for music streamed to a desktop. The infrastructure just about in place for this – all that remains is for the labels to take a small leap of faith.

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