* Spotify may launch without Warner Music in U.S.
* Deal with Universal "few weeks away" - sources
* Label execs still concerned with Spotify model
* Spotify could launch in U.S. this summer
(Adds quotes, background)
By Yinka Adegoke
NEW YORK, Feb 23 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
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 WMG.N, 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
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 (AAPL.O) 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 (GOOG.O) and Apple -- with a revamp of its iTunes
"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 (VIV.PA), 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)