Update: The sometimes reliable New York Post says that Apple is currently in negotiations with the labels to do this very thing.

Spotify has been a pretty unmitigated success in Europe as our European readers can probably attest.  The subscription model it has built is pretty compelling.  For a (~$10) subscription fee, you have access to most of the popular music on earth through streaming channel.  What’s more is that you can download playlists for offline listening.  This all fits under a monthly fee model.  But that’s not why Spotify is a success.

You might be saying that Napster has been trying this for a few years (the legit version) so what gives Spotify an edge?

Spotify’s success also hinges on a great interface and more importantly an ad-supported mode which people basically have access to the world’s music for free if they listen to a few ads.

Now you are probably thinking Pandora does this.  But Spotify lets you pick your songs, whereas Pandora is more like a radio.

And that’s where the issue lies with Apple apparently.  Greg Sandoval at CNET says Apple Executives have been trying to convince music execs that Spotify will remove some the demand for paid music (it will) from iTunes and Amazon.  That, in turn will directly hit their bottom line.

There is already a huge testbed in Europe to show results one way or another.  The fact that a deal still hasn’t been worked out is probably an indication of how Spotify is hurting downloads.  Spotify has set a Dec 31st 2010 or bust deadline…

In meetings in Los Angeles recently, Apple executives told their music industry counterparts that they had serious doubts about whether Spotify’s business model could ever generate significant revenues or profits, according to two sources with knowledge of the discussions.But Apple executives worried about the effects of a free music service might have on the rest of the market. They noted that it’s tough to sell something that someone else is giving away, the sources said. One industry insider said it is only logical that if Spotify were allowed to launch a free-music service here, at a time when Nielsen recently reported that the growth of digital sales has flattened out, it could eat into the businesses of proven revenue-producers like Apple and Amazon. Apple is working on a digital cloud service that, according to the sources, would allow users to store their iTunes music libraries on the company’s servers and then enable them to stream songs from the cloud to Web-connected devices. According to music insiders, Apple is considering whether to attach these features to a streaming music subscription service. Some at the labels are worried that allowing Spotify to encroach on Apple’s turf may dampen Steve Jobs’ desire to launch a subscription service.

Apple is no music industry darling, since they are basically running the show right now.  Being featured on iTunes is now the most important way to get music sold.  The industry does want a shakeup, but they also don’t want to lose their only digital cash cow, Apple (and to a lesser extent Amazon.

Add to that Google is rumored to be readying a streaming music service in the very near future and you’ve got a tipping point for the music industry.  The next few months will be telling in terms of which direction Internet music goes.

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