• by Mark Walsh  @markfwal, December 9, 2011

Taking direct aim at Pandora, music-streaming service Spotify Friday is launching an upgraded radio feature that allows unlimited channels and more narrowly tailored music categories. Spotify, which launched in the U.S. in July, said it will begin rolling out the expanded radio offering over the next few days.

With the move, Spotify is gearing up to take on Pandora at its own game. By letting users create an unlimited number of customized stations, it’s going well beyond Pandora’s limit of 100. Spotify Radio also allows users to skip tracks they dislike as many times as they want, while Pandora has a limit of six per hour because of licensing restrictions, according to GigaOm.

Rather than building channels based on different genres, Spotify now also lets people pick a song or an artist and the service will “instantly create a station of similar music,” using a new recommendation engine, according to the company, which boasts a catalog of 15 million tracks globally.

Spotify Radio will be available to both free and paid users.

One big advantage Pandora still enjoys is that its online radio offering is available on mobile phone devices, where the majority of listening now takes place -- and where Pandora now derives about half its revenue. The revamped Spotify Radio is only offered on the desktop at launch. Cofounder and CEO Daniel Ek said at the Le Web conference in Paris this week that a mobile version of Spotify Radio was coming soon.

So far, Spotify’s entry into the U.S. market hasn’t derailed publicly traded Pandora’s growth. Last month, the company said total listening hours in the third quarter reached approximately to 2.1 billion hours, double the amount from a year ago and up from 1.8 billion in the second quarter. It also doubled revenue in the quarter to $75 million from the year-earlier period.

Unlike Spotify, which gets the bulk of its revenue from paid subscriptions, Pandora gets most if its income through advertising. Spotify says it has 10 million active users, 2.5 million of which are paid subscribers. Pandora reported having 40 million active users in the third quarter, up 65% from a year ago.