CNet’s Greg Sandoval has an update on Spotify, the music service best known for streaming free, ad-supported songs.

Although Spotify debuted in Europe two years ago, the service has yet to launch in the United States. Record labels are worried that Spotify can’t convert enough people to its premium subscription plan, and that its free version would cut into iTunes and other a la carte download services. As a kind of insurance against cannibalization, record labels want to charge Spotify a premium for licensing.

Now, Sandoval reports, Spotify will miss its promised 2010 launch, and Daniel Ek, the company’s founder and chief executive, won’t commit to a later date. No major labels have licensed music to Spotify in the United States.

The labels have good reason to be worried: Spotify’s premium element — pay a flat fee every month for unlimited music on computers and smartphones — has already been duplicated in the United States by services like MOG, Rdio, Rhapsody, Zune Pass and Napster. In other words, record labels are already making money from the more lucrative side of Spotify. Adding a free version might dissuade people from subscribing to these other services or buying individual songs and albums.

But a free version would also attract people who aren’t paying for a lot of music to begin with. The ad revenue might be negligible, but the value is in leading people towards the paid service, which removes ads and, most importantly, allows access on smartphones.

Therein lies the big question for Spotify: As smartphone adoption grows, would a free on-demand music service for computers do a good enough job of selling the premium version for mobile devices? Right now, Sandoval reports that only 7.5 percent of Spotify’s 10 million users made the leap, and the company reported losses of $26 million in 2009. The potential is only going to get bigger, if only Spotify can last long enough to reap it.

 
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