Spotify hopes to follow its most famous artists by cracking America

Music-streaming service signs up major labels as industry finally wakes up to power of the playlist. Rhodri Marsden reports

When spotify launched in the autumn of 2008, it was greeted with delight by music fans. The idea of a comprehensive, free and legal digital jukebox seemed almost too good to be true.

In late 2009, however, one well-publicised statistic suggested that the dream might fizzle out: 1 million plays of "Poker Face" on the music-streaming service had earned Lady Gaga a mere £108. The music industry was horrified; Spotify didn't deny the story, however, merely explaining that as they brought in more listeners and advertisers, artists would see more money.

It seems that they were right. Spotify paid out a total of €45m (£38.5m) last year to record companies in the seven European countries in which it operates, and this has reportedly persuaded at least two of the four major labels in the United States to strike deals with the service; with one more in the bag a North American launch of Spotify could be imminent. The website TechCrunch reported last week that Spotify is raising a new funding round of more than $100m (£62m), valuing the company at $1bn. And as we migrate to an à la carte form of consuming music, it's putting the listener in control. The contents of our Spotify playlists are, according to industry insiders, becoming the new online musical currency; you may be able to hype an artist in the media, but you can't hype a listener to repeatedly play a song. In this new landscape, financial reward only comes if we keep playing the music.

But just how much financial reward? Spotify reported 750,000 subscribers to its service at the end of 2010; this is split between its £4.99 per month service (which allows you to listen on your computer without seeing or hearing adverts) and its £9.99 per month service (which allows advert-free listening on mobile devices and offers exclusive content). We don't know how that's split; nor do we know how much of the €45m paid out last year came from subscription payments, and how much came from advertising revenue generated by free users. It's this latter question that is exercising the minds of the US music industry as they wrestle with their spreadsheets, but the overall figures are undoubtedly getting healthier.

Data from Scandinavia, where Spotify was co-founded in Stockholm by Daniel Ek, who recently turned 28, and Martin Lorentzon in 2006, indicates that the streaming revenues of record labels there are starting to overtake download revenues for the first time, and that some artists earn as much as 80 per cent of their royalties from Spotify.

Record labels are now focusing on ways of boosting the number of Spotify plays. Last week, the music industry publication MusicAlly reported rumours (unconfirmed officially by Spotify) that the proportion of revenue coming from playlist plays – as opposed to listeners dipping in and listening to a track or an album – is huge. Spotify's tie-in with Facebook means that the act of making a compilation for a friend, once a matter of wrestling with cassette or CD-R, can now be done in seconds – and not just shared with that friend, also shared with the rest of the world.

The entrepreneur and digital media adviser Jeremy Silver foresaw this a decade ago when he created an online playlist service called Uplister. Way ahead of its time, it went under in the aftermath of the dotcom boom, but Silver believes that playlists give meaning to a digital music sphere that has become completely atomised. "Our view 10 years ago was that distribution of music was eventually going to be complete," he says. "All music would be available. So then it becomes about what to listen to, and at that point the playlist becomes the new unit of consumption."

Ultimately, Spotify's potential to change the listening habits of the world is dependent on them filling the gaps in their catalogue to realise Silver's vision of all music available for us to compile, re-order, re-sequence and re-present. While they continue to negotiate with labels, however, we can always make our friends a CD-R or a cassette. That's also illegal, of course, but who's watching?

Spotify: Who's in, who's out...

Jessie J: In

In the latest weekly chart of Spotify's most-played tracks by UK users, the Critic's Choice Brit award-winner led the way with her current single "Price Tag".

Adele: In

"Rolling In The Deep" by the Grammy award-winning 22-year-old from Tottenham, is the second most played UK track in Spotify's current list.

Rihanna: In

The R&B singer from Barbados is currently embroiled in a certain amount of controversy after the banning of the video for her current single, "S&M", in a number of countries. The song was the third most played by UK users on Spotify last week.

AC/DC: Out

AC/DC have refused to sell their music online. Without a glimmer of hope that the band would consider putting its catalogue in Apple's iTunes store, Spotify's chances of getting the tracks are slim.

The Beatles: Out

The lengthy dance between Apple (the tech giant) and Apple (the Beatles' label) to bring the band's catalogue to iTunes finally ended in November. Spotify have no similar name-based issues, but no one is expecting a streaming deal soon.

Arcade Fire: Out

One of a number of acts whose music once appeared on Spotify but now no longer does. No official reason has been given for its removal.

So what's in it for...

The listener

Prior to Spotify, finding specific songs to listen to online was a tedious and often illegal process. Now we have access to a freely available online jukebox – and if advertising annoys you, you can always subscribe.

The bands

To be absent from the world's biggest online digital jukebox is like not bothering to send your records to DJs. The listeners are the new DJs – for themselves and each other – and making your music available to them is becoming crucial.

The labels

Services such as Spotify have been the biggest single factor in reducing filesharing, an activity that has arguably brought the industry to its knees. The royalties may not be huge, but other solutions to the industry's woes are thin on the ground.