Spotify Changes the Tune in the Streaming Music World - Again

The business of free music streaming apps got a bit more crowded last week when Spotify beefed up its ad-supported offerings.

Spotify is a service that more than 20 million people around the world enjoy on their PCs, but 6 million of those subscribers pay as much as $10 a month for commercial-free access to their favorite tracks across smartphones, tablets, and other Web-tethered devices. That's different than market leader Pandora (P), which is consumed largely by folks willing to put up with ads to hear tracks that Pandora's algorithms think they'll like.

Pandora isn't perfect. The matches aren't always on target, and there are only so many tracks that a user can skip. However, it's hard to beat the price -- free -- and that's why more than 72 million people a month fire up Pandora.

Now Spotify is making things a bit more interesting with a new platform that it introduced on Wednesday.

Turn Up the Volume

Mobile music buffs on a budget have historically shunned Spotify. Instead of hearing the exact songs that they want to hear, they download free apps including Pandora and the recently introduced Apple's (AAPL) iTunes Radio.

Spotify is now making things interesting by allowing tablet users the ability to cherry pick the songs that they want to hear for free if they're willing to put up with ads. Smartphone users don't have that kind of leeway with the free service, but the new terms allow them to play any artist, CD, or playlist in shuffle mode -- with audio ads worked into the content, of course.

Pandora's matching service doesn't offer that kind of artist- or album-specific shuffling. Enter an artist on Pandora and you will mostly be hearing artists that are similar. Let's see if Pandora stays that way. If it sees Spotify starting to take market share away with its new artist-centric free service it may very well consider following Spotify's lead.

The Spirit of Radio

We are still early in the streaming music revolution. There has already been a shakeout during which smaller players have buckled under or have had to dramatically change their models. Even Pandora finds itself tweaking everything from the number of ads it serves up every hour to the monthly limits on free listening.

For now, it's working. Pandora served up nearly 1.5 billion hours of audio last month. No one else even comes close. Apple may have bragged about delivering a billion tunes to 20 million listeners in its first five weeks of availability, but that's nowhere near the volume that Pandora's cranking out.

Tech giants thought that Pandora was vulnerable. Google (GOOG) and Microsoft (MSFT) introduced music services late last year, and neither company seems to have gained serious traction. Apple threw its hat into the streaming ring in September with the Pandora-like iTunes Radio. Pandora has been able to grow through all of these events -- but now it will be directly competing with a standalone music service that isn't treating digital tunes as a side business.

The good news for the players still on the dance floor here is that the market is expanding. Smartphone usage continues to grow in popularity. Industry tracker IDC reported last month that smartphone shipments surged to 211.6 million devices during the third quarter, and that's a nearly 40 percent pop over the past year.

Spotify clearly senses an opportunity here, going for the same penny pinchers that have flocked to Pandora in the past.

It's a battle of the bands -- or brands -- and both Pandora and Spotify want to make sure that they're still around for an encore.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Apple, Google, and Pandora Media. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our newsletter services free for 30 days.