Analysis: Why Spotify Should Not Attempt The Chinese Market ... Just Yet

Spotify expanded into Hong Kong, Singapore and Malaysia in April, with plans to take the rest of the Asian markets as soon as possible. But the company should think twice before expanding into China, however, as that market is already saturated with music streaming sites that are finding it tough to generate income and combat China’s rampant music piracy.

Spotify’s newly-appointed regional director for Asia, Sunita Kaur, said that the London-based online music provider is applying for licensing permits in Asian countries, according to Bloomberg.

“The number one priority honestly is the market developments, the new market launches,” said Kaur, who joined Spotify in June. “The market rollout is led by our licensing, so we tend to launch in markets where we see we have a good enough library to go into.”

The company has a presence in Hong Kong that it hopes to use as a stepping stone to China, a nation with more internet users than any country’s population except India, Bloomberg reported.

The sheer number of Chinese using the Internet may be sizeable and, thus, attractive for Spotify, but China already has many music streaming sites similar to Spotify, and even domestic companies are finding it tough to survive in the Chinese market, as music piracy continues to be a problem in the country.

Last year, Google shut down its China-only music download service, citing disappointing performance, according to the Wall Street Journal.

"The influence of this product turned out to be lower than we expected, and as a result we decided to transfer our resources to other products instead,” a Google company blog said.

At the time, western media companies considered China a problematic market because of the easy accessibility of pirated music, the Wall Street Journal reported. Unfortunately, this still remains true.

Chinese music streaming sites have always generated income through ad sales, but that avenue is proving unsustainable as listeners, unlike online video audiences, do not usually keep their eyes on the music streaming page – they are less likely to click advertisement. As such, music sites are looking for other ways to generate profit, but have run into trouble.

Chinese music listeners are accustomed to not having to pay for music – music is readily available through piracy. According to an online survey, over 80 percent of so-called netizens surveyed indicated that they “cannot accept music downloading is not free," according to P5W, a Chinese financial news resource.

More than listeners’ habits, it is competition between sites that preclude any chance to charge and profit. As early as 2003, Jiutian Music, one of the early music streaming sites, attempted to stream music legally charging a small fee, and lost over 90 percent of its users to Baidu Music. Any streaming site risks the same in the current market.

In addition, the music streaming industry is not well-regulated. If all major sites decide to charge users for listening and downloading, users will simply find other sites to download from, according to P5W.

Record companies charge streaming sites a flat fee once a year under the current business model. No consideration is given to how many users will download a particular song. A better model, one keeping smaller labels and independent artists, as well as how streaming sites can profit, will need to be derived for the Chinese market, before a foreign company like Spotify can hope to make money there.