Spotify Finally Launches Web Radio, for Real. And That’s a Problem for Pandora.

A lot of people confuse Spotify’s streaming music service with Pandora’s streaming music service.

Now they’re going to be a lot more confused. In a way that’s good for Spotify and a problem for Pandora.

Spotify, which lets people listen to music for free, on demand, has finally launched its own Web radio service, which more or less mirrors Pandora’s core radio service. That is, this is a “real” Web radio service, that comes with advertising, unlike iterations Spotify has released in the past.

I saw Spotify’s offering via a very quick demo yesterday. If you’re a Pandora fan, it looks pretty compelling, though you’re much better off checking it out for yourself, as long as you have an iPad or iPhone — an Android version is in the works.

But here’s the key takeaway: Spotify now has an option that lets people use the service for free, on mobile devices. Up until now, the only way to get Spotify on the go was to pay $10 or more per month, while Pandora’s key selling point was free mobility.

So Spotify now has a chance to expose many more people to its product, in the hopes of eventually converting some of them to paid subscribers.

And Pandora, which has consistently argued that it hasn’t seen any impact from Spotify’s U.S. launch last summer, may no longer be able to say that. Because if you like Pandora, you may very well like Spotify just as much.

A few notes:

• Like Pandora and every other Web radio offering (including Clear Channel’s iHeartRadio and the newly popular Songza), Spotify’s radio service is “DMCA compliant,” which means that Spotify doesn’t need permission from music owners in order to roll it out. That means you’ll be able to hear the Beatles and other streaming music service holdouts. [UPDATE: Spotify does have the ability to play music it hasn’t licensed, but hasn’t introduced it yet. So no Beatles for you, for now.]
• But that also means the service comes with restrictions, like a limited ability to choose songs and skip past songs you don’t want to hear. And just like Pandora, the free service won’t work outside the U.S., because of licensing issues.
• Because Spotify also has a paid music service, it can integrate the two in interesting ways for subscribers. For instance, paying subscribers can fast-forward through songs. They can also access auto-generated playlists of songs they’ve heard on the radio service, and pick and choose songs from there.
• One other difference between the two services: Pandora programs music based on a complex algorithm based on songs’ musical “DNA.” Which means that if you tell Pandora you like the Ronettes’ “Be My Baby,” it will find other songs that feature “rock & roll roots,” “a subtle use of vocal harmony,” “acoustic rhythm piano,” etc. But Spotify says it is relying on the “social graph,” so it will find music that people who like the Ronettes also like. You may notice this, or not.
• Web radio is free for Spotify’s users, but not for Spotify: It will have to pay music owners a set price for every song it streams, and that gets expensive. And those costs keep going up the more people use it. Which is why Pandora has yet to earn a profit.
• Spotify says it will be able to defray its costs through the advertising business it has already established. But as Pandora has shown, selling mobile advertising for music services is a challenge.

Why is Spotify rolling out Web radio now?

If you’re a Spotify bull, you can tell yourself that this was always on the product road map, and they just got around to it now. If you’re a bear, you can argue that it’s having a hard time moving its user numbers — at last report, 10 million active users, and three million paid subscribers — up, and that it needs to find new users if it’s going to make good on sky-high investor expectations. Could be both.