Spotify's Asia Expansion Sounds Right

Sweden -based Spotify announced on April 16 that its music streaming service has been made available in Hong Kong, Malaysia and Singapore as well as Mexico, Estonia, Latvia, Lithuania and Iceland . The expansion in Asia is due to the growing adoption of mobile data services, which fits Spotify's freemium business model, and BMI sees the potential for roll outs in other countries in the region, particularly Japan and South Korea.

Good Vibes: 25% of Users Paying
Spotify User Base (mn)

Spotify operates under a freemium model where ac cess to music streaming via desktop s and notebook s is free, although user s will be exposed to advertisements. Users can opt to pay a monthly fee (the price depends on the country) to remove the advertisements and gain features such as offline listening and music streaming on smartphones, tablet computers and internet-connected devices ( eg, cars and music systems). The ability to streaming music on the go requires users to have access to a reliable, high-speed mobile data service with extensive coverage. Consequently, the expansion into Hong Kong, Malaysia and Singapore is not surprising given that all three markets have a substantial portion of mobile subscribers using 3G/4G services.

Hong Kong's Office of the Communications Authority has reported that there were 9.9mn 3G/4G subscribers in the territory at end-January 2013, up from 7.6mn a year ago. Consumers' appetite for data has been on a more aggressive uptrend. The data used per 2.5G, 3G and 4G subscribers in January 2013 was 759MB, an increase of 44% from 528MB in January 2012. Meanwhile, the Infocomm Development Authority of Singapore has reported 6.6mn 3G subscribers at end-Januar y 2013, up by 13% y-o-y . In Malaysia, the Malaysian Communications and Multimedia Commission has noted 14.6mn 3G subscribers at end-2012, up by 41% y-o-y.

Subscription music streaming services are the fastest growing area in digital music, although physical music products such as CDs are still the dominant form. Spotify's move into Asia could see the company edge in front of its competitors in an increasingly crowded market. Prominent rivals include Pandora Media (fully available only in the US, Australia and New Zealand), (available in the US, UK, Germany, Canada, Ireland, Australia, New Zealand and Brazil), Rdio (primarily in the US and Europe but supports New Zealand in Asia ) and Rhapsody (the US only) largely do not serve the Asian markets.

Instead of focusing on the Western markets, targeting the comparatively underserved Asian countries is a good move, although Spotify still faces competition from companies such as Deezer (available in 182 countries). Moreover, Apple , which already dominates the music download market, is reportedly building its own music streaming service. Twitter is poised to launch a music service while Google has already struck a deal with Warner Music Group and is in negotiations with other labels such as Universal Music Group and Sony Music Entertainment for a music streaming service . That said, there is a tendency for these companies to focus on their core Western markets first due to a variety of reasons such as licensing. Whether they could follow Spotify into Asia remains to be seen given that there are substantial risks. Besides licensing costs, there is a high rate of piracy and consumers have not generally adopted the habit of paying subscription fees for over-the-top services.

We believe that Japan and South Korea could be among the next destinations for Spotify as both countries have a high adoption rate for 3G/4G services. However, there are already a number of companies (eg, Bugs , Mnet and MelOn in South Korea ) catering to local demand. That said, Spotify has a strong working relationship with Facebook , which could be used to sway consumers with the social media features . In late 2011, Hulu surprisingly selected Japan as its first international foray and Spotify could also attempt to disrupt the market. The Japanese consumers tend to prefer domestic products and services and local firms generally stick to tried-and-tested model s , but foreign companies has increasingly been able to grab mark et shares with their innovations and price competition. Another pote ntial candidate is Taiwan - which had 23mn 3G subscribers at end-February 2013, representing 80% of total mobile subscriptions. While the potential for other countries such as China, India and Indonesia is large, the likelihood of consumers opting for Spotify's premium service is low due to consumer habits and comparatively weaker mobile data networks.

This article is tagged to:
Sector: Telecommunications, Consumer Electronics
Geography: Hong Kong, Asia, Hong Kong, Malaysia, Singapore, Asia, Asia

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