NEW YORK (Reuters) - Spotify, the popular European digital music service, is "a few weeks away" from inking a deal for U.S. rights to songs from Universal Music Group, the world's largest music company, according to people familiar with the talks.
But the London-based startup, which was valued at up to $1 billion this week by investors according to reports, could end up launching without Warner Music Group, the No.3 music label group, one person said.
And there are still doubts internally at Universal Music about whether a deal will be reached soon, according to another person familiar with the label owner's plans.
Spotify, which was founded by Swedish entrepreneurs Daniel Ek and Martin Lorentzon, has captured the imagination of digital music fans in Europe where it is the market leader with a streaming music service much admired for its intuitive and slick customer interface.
The service works on a so-called 'freemium' model which offers a vast choice of music for free with advertising on the hope that it will convert a good portion of users to its premium paid service. The premium service does not feature ads and allows users to choose their songs as many times as they like.
Spotify has licensing deals with all the major music companies in Europe. In the U.S. it has announced a deal with Sony Music and sources confirm it has also reached a deal with EMI.
But executives at both Universal Music and Warner Music have expressed concern that offering free music on Spotify could cannibalize sales at services like Apple Inc's iTunes Music Store or harm competing paid music subscription services like Rhapsody and MOG.
A Universal Music spokesman said his company is still in negotiations with Spotify but would not elaborate on the timing. Warner Music declined to comment.
One of the biggest concerns for the label owners is whether Spotify will be able to convert enough users from its free service to a paid-for subscription. Spotify says it has 10 million registered users of which around 750,000 are paid users, in other words a 7.5 percent conversion. Insiders say Spotify is projecting a 6 to 8 percent conversion rate, which they worry may not be enough to cover costs for the loss-making startup.
"They need to have a conversion rate of 15 to 18 percent if they want to stay in business," said one executive, who asked not to be named since the talks are confidential.
Added to existing concerns about Spotify is the likelihood that new cloud-based subscription services will launch this year from Google Inc and Apple -- with a revamp of its iTunes service.
"It doesn't make sense to give away so much music up front with Spotify if we don't quite know what Google and Apple's plans are yet since Spotify would have to compete with these guys after they launch," said the same executive.
While a deal with Universal Music, owned by French media giant Vivendi, could still happen early enough for a Spotify summer launch according to several people, it could mean the service launches without Warner Music whose chief executive, Edgar Bronfman, was alone last year in publicly expressing his doubts about Spotify's business model in the U.S.
One person said Spotify was prepared to start off without Warner's acts which has 20 percent of the market with acts like Bruno Mars, Death Cab for Cutie and Red Hot Chili Peppers.
Even though there are no advanced talks between both sides at present there's still a possibility of a last minute deal, the person said. Bronfman was more positive about Spotify's European contribution on Warner Music last earnings call earlier this month. "We do see very real growth from Spotify and we do see Spotify, and services like Spotify, as being evermore meaningful to our results," Bronfman said.
Spotify was reported in several outlets to have raised $100 million in funding this week at a valuation of around $1 billion. The company declined to comment on the funding reports or on any of its label deals.
(Reporting by Yinka Adegoke; Editing by Phil Berlowitz)