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Spotify Cracks Nut on Subscribers, Breaks 10 Million Mark

NEW YORK (TheStreet) -- Spotify announced Wednesday it has passed 10 million paying subscribers globally, an impressive figure that firmly establishes the company as the leader in the streaming music space and brightens the future of the sector generally, loosening its ties to a purely advertising-based model.

Spotify also said it now streams to 40 million active users in more than 56 countries, including subscription and free, ad-driven services. The company in March unveiled its first major redesign for its Web site and app, unifying the new look across platforms, adding some functionality and a new black background and cleaning up its menus and artwork display.

One of the biggest questions for the streaming music sector since its inception has been moving music consumers from a purchase-and-own model to a subscription model. Download, CD and vinyl collectors had to be convinced to take part in this new idea, to pay for subscriptions to a service that would grant them unlimited access to their favorite music.

As a result, offering free listening accompanied by ads has been the bread-and-butter of the space until now. But ad-driven revenue is notoriously unstable, driving services to push harder toward a "freemium" model, where each free service offers a subscription upgrade designed to supply a more predictable income stream.

So the elephant-in-the-room question for these services has been: How many subscribers can they get? 

That question matters even more to Spotify at the moment, as the company is rumored to be considering an initial public offering later this year.

Spotify charges $9.99 a month for its premium service after a 30-day free trial, although the company has said about 70% of total revenue goes to rights holders. Assuming half of the subscribers stick around for a full year, that still leaves almost $200 million a year potentially added to net revenue. In addition, the company said that 12 billion hours of music have been streamed since the company was launched in 2008 and more than 5 million playlists are created or updated every day.

Spotify reported revenue of $594 million in fiscal 2012, double the year prior, while reporting a net loss of $80 million, a wider loss than the $62 million reported for 2011.  

U.S. rival Pandora (P) views itself as a different animal, putting most of its marketing behind its free, ad-driven streaming radio service. But it nonetheless offers an ad-free subscription upgrade, Pandora One, with some 3.3 million subscribers. In March, the company showed signs of a growing emphasis on subscriptions, raising its fee to $4.99 per month, up from the previous $3.99 and scrapping its $36 annual subscription.

Pandora claims to have 75 million active users.

Like Spotify, the new guy in the space, Beats Electronics' service Beats Music, also charges $9.99 a month. Beats is unusual in that it has placed all its bets on the success of an elite brand of subscription service, with no ad-driven service. The service offers a free trial period for subscribers. A deal with AT&T (T) offers the service free to the phone company's users for a three-month period.

Beats has been rumored to be struggling to attract subscribers, with some leaked estimates ranging from as low as 111,000 households and 500,000 subscribers.

That scenario could serve in Beats favor, however, if a much-discussed buyout of the Dr. Dre-founded company by Apple (AAPL) goes through. Apple's struggling iTunes Radio could act as a free service, with Beats as its subscriber upgrade. The marriage has the potential to increase the appeal of both services, even if a marriage threatens to dilute the Apple and Beats brands

The biggest challenge that Spotify's rivals in the space face, however, is competing internationally. Spotify was founded in Sweden and launched in several European countries at once. It's expansion onto multiple continents is continuing with a significant push into African markets on the horizon.

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-- Written by Carlton Wilkinson in New York

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