KKBOX: A Freemium Music Model That’s Actually Profitable

While the music industry watches Spotify’s endeavor to make money on streaming music via the freemium model in Europe, one company has figured out how to turn a profit by converting free listeners to paying subscribers in Asia. Taipei-based KKBOX, which currently provides a catalog of songs from all four major labels plus Chinese-language music, has signed up 200,000 paying users in Taiwan and Hong Kong for its desktop and mobile streaming music service — and is now setting its sights on the U.S.

To be clear, KKBOX won’t compete directly with Spotify in the American market (whenever Spotify manages to reach the U.S.). According to co-founder and Stanford grad Chris Lin, the service currently sports a fairly limited catalog of Western music, with the majority of user searches in Asia targeting songs published by Chinese independent labels. In the U.S., though, KKBOX will aim for the niche market of overseas Chinese by offering primarily Chinese-language songs, with no Western songs at all. KKBOX is also planning launches in Malaysia and Singapore, while managing global licensing from the local offices of international record labels in Taiwan.

Although 30 percent of Taiwanese Internet users have signed up for KKBOX, the company still has a fairly low conversion rate of free to paid users. Among its 6 million members, who have access to an online magazine and community-driven site, only 200,000 — about 3.3 percent — are paying for full-song streams rather than free preview clips. (By comparison, Spotify reportedly has 250,000 paying customers among 7 million users — about 3.6 percent — who get full songs for free.)

However, as part of its November 2009 launch in Hong Kong, KKBOX struck a deal with mobile access provider Hutchison Telecom that offers bundled streaming music services to iPhone (s aapl) buyers, and Lin said half of those new customers are becoming paying subscribers. And by paying relatively low royalty rates in Asian markets, compared with what it costs to stream songs in the U.S. and most of Europe, KKBOX has managed to reach profitability by charging consumers about $4.50-$5 each month — significantly less than most Western music subscription services that include mobile components.

KKBOX is aiming to cross the Pacific by the third quarter of 2010, with an eye on the 4 million overseas Chinese in the U.S. Lin said the company will charge no more than $10 per month to U.S. users, with both the desktop and mobile services included. Eventually, by 2011, KKBOX plans to launch in the especially piracy-plagued mainland Chinese market — an area Spotify is also pursuing.

Since it doesn’t offer ad-supported free streams, KKBOX’s freemium model isn’t just like Spotify’s. It’s more like traditional music subscription services such as RealNetworks’ (s RNWK) Rhapsody in the U.S. And with lower royalty rates in Asian markets, its path to profitability is much easier than in Europe or the U.S., where just about everyone¬†else has struggled.

But KKBOX has also succeeded in landing mobile customers through a creative carrier deal, which it hopes to repeat in other geographies. If Spotify does attempt to enter China, where analysts have suggested that premium music services are a tough sell, KKBOX is doing well enough in the greater Chinese music market that it may have the upper hand on it, if and when the two companies reach the world’s largest country.