Spotify have announced their 1 millionth premium subscriber. No doubt about it, 1 million paying subscribers is a big deal.  No one else has done it in Europe or the US despite years of trying (that’s including stalwarts Rhapsody and Napster and new boys MOG and rDio).  But the true significance of the milestone will be defined by what comes next. 

1 million subscribers is an achievement worthy of celebration, but it is not (yet) evidence that premium subscriptions are a mass-market value proposition.  Indeed when you take an impassioned view of Spotify’s premium offering, it’s actually not a lot different from what’s been in the market for years in the shape of Napster’s and Rhapsody’s portable subscription products.  Sure, it is implemented in a superior manner (offline playlists, etc.) but the fundamentals remain the same: pay a monthly fee for music you never own.

The simple fact is that rented music for a monthly 9.99 fee is not a mass-market value proposition.  Spotify’s 1 million represents 10% of their total installed base (though closer to 15% of their active users).  So it is clear that the free Spotify product is many many times more popular than the paid-for product.

To break through to the mass market, Spotify will need to more aggressively pursue their subsidized partnerships (e.g., 3 and TeliaSonera) where the end user pays little or nothing for the service with it bundled with another product.  That third way, navigating between the mass-market free consumers and the niche premium customers is the long-term route to mainstream premium customers for Spotify (and all other subscription services).

Of course, they could also do with more discovery features, unlimited MP3, music video, interactive tools, etc.  Some of that should come soon; some of it is a long way off.  The fact that they’ve secured another $100 million dollars in funding (just as rival Beyond Oblivion also closed another $77 million) shows that there is some appetite among the investment community for licensed services.  But they’re largely the exceptions rather than the rule.  There is a strong sense of everyone collectively holding their breath, waiting to see whether Spotify can be a sustained success before deciding on next steps.  And of course a successful US launch will be a crucial component.

Spotify has reached a milestone: they just finished the first lap.  Now it is time for the race proper.