Apple faces iTunes threat from overseas

NEW YORK (CNNMoney.com) -- Just as every smart phone claiming to be an "iPhone killer" has failed to dethrone Apple's iPhone, every so-called "iTunes killer" has so far fallen short of expectations.

But a new music service from Europe might be the first legitimate iTunes contender. And it's coming soon to the United States.

Spotify, based in the U.K. and available in a handful of European countries, looks just like iTunes at first glance. Both allow users to buy music from a library songs (8 million for Spotify, 11 million for iTunes), make playlists, store music on their computers, and sync that music with their iPods, smart phones or other MP3 players.

But unlike Apple's (AAPL, Fortune 500) iTunes, Spotify gives users total control over their music -- with a Facebook tie-in. Users can listen to any of Spotify's 8 million tracks online for free, if they're willing to endure the occasional advertisement, or pay $15 per month for ad-free access. They can also upload their existing music to get access to their personal libraries over the Internet.

So while using iTunes across several computers -- say, home and work, plus phone -- can be aggravating, Spotify allows you anytime-anywhere access to your music.

Of course, with Spotify, you don't technically own all of the music. You're just accessing tracks from the library. Which raises the question: What do you do when you don't have an Internet connection?

Premium users can download up to 3,333 songs on their iPhones or Android smart phones so the music is available when they're offline if they're going to be away from a wireless connection.

Last week, Spotify launched a new version of its software that integrates its service with Facebook. Now, users can share music on Facebook with other Spotify users, see what their friends are listening to, and access their friends' playlists and libraries.

Sound better than iTunes? It does to many analysts.

"Be in no doubt, Spotify has stolen a march on Apple," said Mark Mulligan, analyst at Forrester Research. "Spotify has long, and wrongly, been positioned as an 'iTunes killer'. The comparison was inappropriate, until now."

Rumors have swirled around for months that Apple would soon launch its own subscription-based music service. In December, Apple bought Lala, a tiny subscription-based service. But on Friday, Apple announced it would shut down Lala at the end of May.

"If Apple wasn't planning on doing something similar with the Lala acquisition, it will be now, especially when Spotify comes to the U.S.," Mulligan said.

Though many subscription-based services, like Rhapsody, Napster and Mog, are available in the United States and offer many of those features, none incorporates all of Spotify's offerings.

A spokeswoman from Spotify said the company is planning to launch in the United States by the end of the year, though news reports have suggested the service could come across the pond as early as this summer.

Spotify may have beat iTunes to the punch in the European market, and as they're presently constructed, Spotify may be the better music service of the two, say a number of analysts. But underestimating Apple's ability to create a worthwhile competitor may be a mistake.

"Apple realizes it has to bring a subscription-based iTunes to the market," said Matt Anderson, partner at Booz & Co.'s consumer, media and technology practice. "Using iTunes across multiple PCs is terrible right now, but no one really knows where this thing is fully going yet."

Even if a subscription-based iTunes doesn't incorporate all of Spotify's features, Apple's name alone gives it a leg up over the competition.

"Customers want a simple experience endorsed by a big company," said Anderson. "People are overwhelmed with choice now, and they know iTunes. Very few people are saying, 'iTunes does only 80% of what I want, so I'm going to look for some shareware replacement.'"

Cost may prove to be an issue for consumers as well. One of Lala's features was the ability to access your iTunes library from any computer with an Internet connection. Industry experts say providing the ability to access music that users already own costs significantly less than licensing millions of songs for users to access on demand. That's why on-demand music services either place ads between songs or cost users an average of $10 a month.

"Historically, the challenge for services that offer on-demand music is that they have very onerous costs from a licensing standpoint, which means they need to charge a lot for the service," said Tim Westergren, founder of Internet radio service Pandora. "But if you're talking about just giving you access to music you already own, that's a very different animal."

Subscription-based services have also had a bit of a tormented past. Imeem and Lala were bought by MySpace and Apple, and were both eventually shut down. Subscribers who set up their playlists and paid a monthly fee to access their music had to start all over again with another service once those were shuttered.

As a result, analysts said Spotify will need to build up a level of trust with users before it catches the United States by storm -- a trust that they say Apple has earned over the years.

"I don't think it will be a case of Spotify comes to the United States and everyone's going to stop buying music on iTunes," said Sonal Gandhi, music media analyst at Forrester. "Not everyone wants to pay $10 a month. This will be limited to mostly big music fans to start."