Making money from social media platforms without alienating your audience can be a difficult balancing act.

Last Thursday Spotify announced some pretty big changes to its free account structure, the splashiest news being that free accounts would now be limited to 10 hours per month of music and only 5 plays of each song.

As a business decision I feel this is probably a good move for Spotifty. It is losing 16m Euros a year at the moment and advertising revenue is clearly not covering the costs of all those plays made by free users; indeed I don’t think Spotify advertising has taken off at all (it seems to me, as a regular free user, that most adverts are actually for Spotify itself and they are certainly poorly targeted!).

These changes will have three main effects:

1. Decrease in costs: Free users will obviously play less music, meaning less billing from record companies
2. Increased revenue: The limiting factors involved in the new model will (Spotify hopes) better push users into paying for the service = more revenue!
3. Decreased advertising revenue: With the limits on free accounts and with paid accounts free of advertising Spotify is clearly pushing more into a subscription based revenue model where advertising will have less of a role to play

Unsurprisingly there has been an online backlash. People who have become used to getting something for free don’t like suddenly being told “erm, sorry but now you have to pay.” Social media groups like this are inevitable and I am sure competitors like Grooveshark will get a boost from this move, but Spotify is a business. The company’s freemium model was clearly not sustainable so they adapted quickly; good for them.

However, I do feel that Spotify have missed a trick with this change.

Spotify is, largely, a young person’s tool; the core users are people like my 17 year old sister (one of the first people I saw using the service) and her young friends along with students. Now these young listeners often don’t have debit cards or a regular income to pay for a £10 a month subscription and as avid consumers of music will not submit to 5 plays per track and 10 hours a month of music. Some kids may get Mum or Dad to pay for their subscription, but the rest will just go back to piracy or find another service to use.

Looking at the comments on Spotify’s blog and the above Facebook group you can see the problem; here are some choice grabs:

But what’s strange is there is such an easy way to deal with this problem and turn it into a revenue generator.

These type of iTunes vouchers have been around for years and follow the precedent of PAYG phone cards for “top ups” or old fashioned gift cards / vouchers. All Spotify needs to do is distribute a PAYG Spotify card and Spotify gift cards via popular European retailers, maybe even linked to an iTunes-style online purchase element, and market them properly (for a start, using the free Spotify adverts).

Spotify suddenly goes from losing the youth market to converting them into paying customers. Easy, right?

Of course this needs to happen quickly to work, before they all jump ship, but it seems to me it would make the difference between a mass customer defection or embedding Spotify even further into our culture.

What do you think?

Tags: music industry, social media, social media ROI, spotify, word of mouth