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Rhapsody CEO: Freemium Doesn't Work

A free streaming plan has helped both Pandora and Spotify get thousands of users. Rhapsody's John Irwin says it's a losing strategy in the long run.
Rhapsody has partnered with automakers like Ford to incorporate the service into vehicles.
Rhapsody CEO Jon Irwin

Rhapsody CEO Jon Irwin


I used to be a Rhapsody user. Actually, Rhapsody bought me when it acquired Napster. The subscription plan I had then gave me all the streaming music I wanted through my PC, along with a set number of MP3s to download every month--a model Rhapsody doesn't offer anymore.

Then someone told me to check out Spotify and it seemed too good to pass up: I could stream as much music as I wanted for free, and unlike Pandora, I could pick what I wanted to hear. I could listen to music on my iPhone whether or not I was online  (mobile service is spotty where I live), and this too would be free for the first month. By the end of that month I was hooked and I quit Rhapsody.

Stories like these must infuriate Jon Irwin, Rhapsody president and CEO, since his company offers the same service at the same price. Recently, Irwin spent time with me, discussing the future of the streaming music industry.

Spotify has 5 million paying users compared to Rhapsody's 1 million, and 20 million users if you count the free ones. (Rhapsody doesn't offer any free subscriptions.) But here's what Irwin wants you to know: "Freemium" doesn't work.

"If anything, Spotify is chasing us," he claims. "Their model is to give music away for free as a way to communicate the value proposition around on-demand music. They said, 'we're going to raise capital and fund paying for music for free and then gradually introduce restrictions so that people move toward paying for music in a truly mobile setting.'"

It's certainly an effective strategy for building up a large user base quickly, but does this business model have any hope of making money? "Pandora has a very challenging situation with the statutory rates they pay," Irwin says. "They went public, and some multi-millionaires came out of that, but they're not creating much cash flow."

Irwin suspects Spotify is planning the same strategy: Build a big name and a big user base by giving away the store, then do an IPO and leave the shareholders to figure out if the service can make money. "You have to pay to stream music for free and you can't totally offset that with advertising, so it becomes a marketing expense," Irwin says. "The nearly $60 million Spotify lost in 2011 was to create a big pool of subscribers." Rhapsody was at a disadvantage, he adds, because it didn't have that option.

Instead, Rhapsody's heading in a completely different direction, toward bundles and partnerships with everything from auto makers (drivers will be able to control their playlists from the steering wheel) to mobile providers, where an all-inclusive plan might come with a Rhapsody subscription, to set-top manufacturers so you can stream your cloud-based music collection into the living room via your TV.

"Do you have one for Roku?" I asked, since a Roku is what I happen to have in my living room.

"Not yet," Irwin said, "But we'll be launching one soon."

Maybe, I thought, when the Roku app launches, I should give Rhapsody a second try. Then again, Spotify already has one.

Last updated: Jan 10, 2013

MINDA ZETLIN | Columnist | Co-author, 'The Geek Gap'

Minda Zetlin is a business technology writer and speaker, co-author of The Geek Gap, and former president of the American Society of Journalists and Authors. Like this post? Sign up here for a once-a-week email and you'll never miss her columns.

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