Daniel Ek on viability of an on-demand model

Daniek Ek (CEO/founder of Spotify) on sustaining an on-demand model (in paidContent today):

“The truth is, if we only have ad-supported users, the model won’t be sustainable; if we only had paid users, the model won’t be sustainable either. If you look at the history of paid services, none of them really caught on. The key here is the balance of both.”

Completely agree about the challenge of on-demand music:  the high royalty rate makes an ad-supported model untenable, while the unwillingness of consumers to pay a fee to rent music for on-demand streaming leaves a subscription-supported model as a niche play (to date).

In the former case, the issue is margin; in the latter the issue is volume.

Clearly, the key for Spotify is to achieve sufficiently high conversion from its free user base such that the positive contribution margin from subscribers can more than offset the negative contribution margin from free listeners.