The freemium music model favored by Spotify Inc. is under pressure with reports that at least one major record company is pressuring the company to change its free tier.

The Financial Times reports that Universal Music Group is using license negotiations with Spotify to push for changes to the company’s free service “privately arguing that it is not sufficiently distinct from its paid-subscription tier.”

An unnamed source went further, blaming Spotify’s free tier for the decline in digital sales from stores such as Apple Inc.’s iTunes.

“The market data really speaks for itself” the source is quoted as saying. “It’s clear that the key to success for artists, consumers and Spotify alike is developing an offering that drives more free users to the paid tier.”

To what new model though isn’t clear, with some, including most famously Taylor Swift, deriding the idea of a free tier at all, while others suggest a reformed free tier that does more to encourage take up of the paid level.

“We need to accelerate the growth of paying subscribers — that’s a slightly more positive way of saying we need to limit free,” a source told Rolling Stone. “You can make the subscription service more attractive, with high-resolution sound or exclusive albums, or you can make the free version worse, by limiting the amount of stuff you can listen to.”

Proposed changes include limiting use of the free tier (say x number of hours per month) through to degraded quality streams or one proposal that may actually have some merit: limiting new release music to the paid tier only in a way that new movies first appear at the cinema, before appearing on Netflix.

Spotify maintains that maintaining the free tier is the only way to get people to sign up to the paid tier.

“Any content you restrict on your free service is going to be all over those places where no one pays for content — like piracy,” Spotify’s Jonathan Prince told Rolling Stone. “We believe that our free tier is a critical element to driving subscriber growth, and, frankly, we’re so committed to the freemium model because we agree so much with the labels that subscribers are key to bringing the industry back to health — and we need the free ‘funnel’ to drive subscription.”

It’s all about the money

The labels are starting to get twitchy at a time that digital downloads continue to decline, and more recently, income from streaming sites surpassed the income from CD’s and other physical forms of media.

But what they seem to forget is services like Spotify actually bring those who previously pirated music into listening to music legally, along with a source of revenue for the record companies; it can’t be emphasized enough that although users don’t pay to listen on the free tier, the record companies make money from them (through advertising) that they would never have made otherwise.

The rates may not be high enough for record companies, but attempts to cripple the free tiers on services such a Spotify will only achieve one thing: drive users back into pirating music.

Perhaps some more can be done to encourage a switch to the paid tier, but that should be in the form of improving the paid tier versus downgrading the free tier; one such idea: extending full Spotify functionality to the mobile application for paid users versus its current limited utility of playing tracks by artists randomly.

Disclosure: the author of this article is a Spotify Premium member.

Image credit: Taylor Swift/ UMG