How Spotify Can Challenge Apple iTunes' Market Dominance

Spotify's mega launch in the US has probably alarmed Apple, whose pioneering iTunes service cut a new path in digital music business.

In 2010, Spotify paid labels a whopping $60 million in royalties, emerging as the second biggest paymasters to music labels after Apple iTunes. If Spotify replicates this success in North America, then iTunes will have reason to worry.

Although Spotify's music streaming service looks too good to be free, it does have a solid business model. Labels are paid royalty instead of a fee charged for each download. Though this means each song has to be streamed multiple times over for labels to make serious money through advertising, the experience so far has proved worthwhile.

It is no coincidence that leading music labels have considerable stake in Spotify, a giant cloud offering millions of songs.

Within the United States, Spotify also enjoys another unique advantage: Spotify's music streaming service is integrated with Facebook, which means users can easily share songs with friends.

Operating in only seven European countries, Spotify has 1.6 million paid subscribers and more than 10 million registered users. Spotify is seen as the future of digital music business and is billed to eclipse pioneer Apple iTunes.

Instead of selling individual downloadable tracks, Spotify will offer a three-tiered subscription model that lets customers choose between a free, ad-supported service, an ad-free subscription for $5 and a premium service available on mobile devices for $10.

Users can now stream whichever song they like to their computer or mobile phone. “We want to make it simple for people ... If you want to take your music with you, you shouldn’t have to worry about 15 different sync programs or anything else. It ought to be as simple as pressing play and it works. And ultimately when you get to that point, that’s when people are prepared to pay. People are prepared to pay for convenience,” Spotify founder Daniel Ek says.