by Randall Lane
“Imagine the power of surfacing what’s happening in the world through images, and potentially other types of media in the future, to each and every person who holds a mobile phone,” Systrom told me. At its best Instagram would be a pocket-size window to the world that would deliver a live view of what’s unfolding across the globe—say, Syrian street protests or the Super Bowl sidelines. “I think they have a Thomas Edison–like opportunity,” says Thrive Capital’s Joshua Kushner. “At some point . . . you’ll go onto Instagram and see what’s happening in real time anywhere in the world, and that’s world-changing.”
Then there’s the whole revenue thing. Facebook does not break down Instagram revenue, but the platform has won large marketing campaigns from the likes of Heineken, Mercedes-Benz, Oreo, and Armani. Systrom predicted this back in 2012: “I think the visual format works well with advertisers. If you follow Burberry or Banana Republic, you see their Instagram posts are really ads—but they’re also beautiful. Right now we’re focusing on growth. It’s not about squeezing a buck out of an advertiser.”
He’s similarly cash-oblivious at home. Systrom, who still lived in the same one-bedroom apartment, relished his relatively shoestring life. On another night I headed with the Instagram gang to the old Army bowling alley in San Francisco’s Presidio to celebrate an employee’s birthday. Four Instagramers and I squeezed into Systrom’s black 2002 BMW that he had bought used when he worked at Google. The car’s GPS was broken, and the $400 million man almost mistakenly steered us across the Golden Gate Bridge. “I think not focusing on money makes you sane,” he said. “Because in the long run it can probably drive you crazy.”
CHAPTER 5
Daniel Ek, Spotify:
Hacking the Music Industry
To a stunning degree, the business disruption caused by this coterie of Internet-savvy enfants terribles is an all-American affair. No one proves that better than Spotify’s Daniel Ek, the only non-U.S. citizen to belong in the company of this book. While this shy founder, who just passed thirty, is in fact Swedish, with headquarters in Stockholm, his base of operations increasingly shifts toward New York, with his money now flowing from Silicon Valley. While many of his digital peers feel the need to destroy the old economy village in order to save it, when it comes to the songs business, Ek has a distinct advantage: Hackers had already started that job, and Steve Jobs and iTunes largely finished it. When Steven Bertoni began hopscotching across the Atlantic with him in the second half of 2011, Ek was regarded by many as the most important man in music, perhaps even the person wearing the white hat. By 2014, when Apple bought Spotify’s largest competitor, Beats, for a staggering $3.2 billon (that number buttressed, of course, by their high-end headsets), almost 25 percent of recorded music revenues was generating via streaming.
On a typically damp, dark November afternoon in Stockholm, Daniel Ek was ill. Over the past month, the chief executive of Spotify, then twenty-eight, had worn himself down jetting from his Swedish base to San Francisco, New York, Denmark, the Netherlands, and France to visit his expanding sales force and launch his music service in one or another of the dozen countries in which it now operates.
But there was no rest for the weary. He’d scheduled a return to New York the following week for his first-ever press conference, to unveil Spotify’s new platform. A platform that he privately admitted still wasn’t ready for a public debut. “I should be home in bed,” sighed Ek, his voice weak and scratchy, “but we need to get this thing perfect.” So the bald, barrel-chested Ek zipped his white hoodie to his chin, swapped tea for his morning cup of coffee—the first of six he throws down in a typical day—and headed into an office that resembled a university library during finals. The pool table had been traded for more IKEA desks, and gray daybeds offered a place to nap between all-nighters. Forgoing his large office, which he mostly used as a meeting room, Ek plopped himself down at an open desk. Around him, a dozen engineers from nearly as many countries, united by their geek-chic uniforms—skinny jeans, printed T-shirts, and cardigans—frantically banged out code on their silver MacBooks.
All this frenetic energy reflected the strange new reality of the music business. More than New York or L.A. or Nashville, this rented office space along Stockholm’s Birger Jarlsgatan had become the most important place in music, with Ek standing as the industry’s most important player. Superstar bands like the Red Hot Chili Peppers—formed the year Ek was born—now trekked to Sweden to kiss the ring; his iPhone boasted a picture of himself cruising with Neil Young in a white 1959 Lincoln Continental; his texts were filled with breezy messages from Bono. “Both my [maternal] grandparents were in the music industry,” shrugged Ek, “so I’m fairly grounded about the whole thing.”
The music industry had been waiting more than a decade for Ek. Or more specifically, someone—anyone—who could build something (a) more enticing to consumers than piracy while (b) providing a sustainable revenue model. In the 1990s Shawn Fanning and Sean Parker essentially broke the recording industry with their short-lived illegal download site, Napster, which Ek describes as “the Internet experience that changed me the most.” It was fast and free and limitless—through the site Ek discovered his two favorite bands, the Beatles and Led Zeppelin—and he became one of the eighteen-to-thirty-year-olds now considered a lost generation: those who don’t believe you need to pay for music.
In building his iTunes juggernaut out of the wreckage, Steve Jobs subsequently proved that the cure could be almost as destructive as the disease. By training consumers to buy singles, rather than the CDs that had been the industry’s lifeblood, and taking an outsize cut of the action, Apple stoked the continuing downward spiral. Recording industry revenue, a healthy $56.7 billion in 1999, according to IBISWorld, clocked in at about $30 billion in 2011.
Enter a third disrupter, Ek. In the tech landscape, where Google provided the search, Facebook the identity, and Amazon the retail, Ek wanted Spotify to supply the soundtrack. As he described it: “We’re bringing music to the party.” Which explains what’s keeping his sleep-addled engineers on a twenty-four-hour cycle: Rather than a mere music player—albeit one with a revolutionary model that allows legal access to almost every song you’ve ever heard of, on demand, for free—Spotify aimed to create an entire music ecosystem.
For a consumer, Spotify is an easy sell: The service’s 24 million active users (people who have listened in the past month, as of mid-2014) have access to more than 20 million songs on their desktops, all for the cost of hearing an occasional advertisement. It has the speed and ease of iTunes, the flexibility and breadth of Napster, and the attractive pricing of online radio service Pandora. And unlike those predecessors, Spotify has been social from the start, with tools that let you share playlists with pals—more than one billion songs were swapped via Facebook in its very first month on the social network.
After he was bounced as Facebook’s first president, Sean Parker begged Ek to let him invest: “Ever since Napster I’ve dreamt of building a product similar to Spotify,” his introductory e-mail read. The service impressed Mark Zuckerberg, too. “I checked it out and I thought, This is pretty amazing,” the Facebook founder told me. “They internalized a lot of what we’ve talked about in terms of social design of apps.” That means turning the core product—in Ek’s case, a hard-fought song library—loose on third-party app developers to help Spotify evolve, making it even more tempting to potential customers.
Here’s how that social stickiness translates into revenue: You explore your friends’ playlists, discover new music with apps from Rolling Stone, Billboard, and Last.fm, and build your own jukebox. Eventually you want to take it everywhere. That’s where Ek has you trapped. With Spotify you pay for portability—$10 a month buys you access to your collection on your mobile device.
According to Mark Dennis, who ran Sony Music in Sweden, Spotify single-handedly stemmed a decade of nonstop revenue drop when it launched in 2008; by 2011 Sweden
’s music industry saw its first growth since the Clinton Administration, with Spotify accounting for 50 percent of all sales (up from 25 percent the previous year). This in a country that was long a hotbed of piracy.
Extrapolate that on a global scale, and the music industry felt like it had its magic bullet. Roughly one-quarter of Spotify’s users currently subscribe to the premium plan—that’s ten million people who now lend credence to Ek’s original pitch that he could rescue the record labels by waging a three-front battle with Apple, Amazon, and Google—and give their product away for free.
• • •
THE TWO FACETS OF Spotify—music and technology—were introduced to Daniel Ek at age five, when over the course of a few months he received a guitar (his mother’s parents had been an opera singer and a jazz pianist) and a Commodore 20 computer (his father left the family when Ek was a baby, but his stepfather worked in IT). He was a natural at both instruments. Within two years he was writing basic code as MTV played in the background of his family apartment in the rough neighborhood of Ragsved (known to the locals as “Drugsved”).
At fourteen Ek latched onto the late-1990s dot-com mania, making commercial websites in his school’s computer lab. The going rate then for a commercial home page was $50,000, but Ek charged $5,000 and made it up in volume: He recruited his teenage friends, training the math whizzes in HTML and the artists in Photoshop. Soon he was netting $15,000 a month and buying every videogame out there (one favorite: a business game called Capitalism).
True to the first generation to grow up online, he sought to master everything Internet. He bought some servers to see what made them tick, and wound up earning another $5,000 a month hosting Web pages. At sixteen, obsessed with Google’s speed, he applied to be an engineer there (“Google said, ‘Come back when you have a degree.’ ”) and then set out to build his own search company.
That project failed, but led to a gig at a company called Jajja, where he worked on search engine optimization. The money was good, but the high schooler wasn’t really into it. He used the paychecks to buy more servers and tuners to chase his latest obsession: recording every program on TV at once (he had no clue TiVo was pulling off the same trick). The stacks of servers in his room got so hot that Ek would strip to his underwear as soon as he walked in.
After high school Ek enrolled in Sweden’s Royal Institute of Technology to study engineering. After eight weeks, realizing that the entire first year would focus solely on theoretical mathematics, he dropped out. Eventually a Stockholm-based ad network called Tradedoubler asked him to build a program to tell them about the sites they contracted with, and Ek built something so effective that the company paid him about $1 million for the rights to it in 2006; he made another $1 million selling related patents.
Then things fell apart. A self-made millionaire at twenty-three, Ek found himself holed up alone in the woods twenty miles south of Stockholm enduring a harsh Swedish winter and a harsher bout of depression. Seeking the fast life, he had bought a three-bedroom apartment in central Stockholm, a cherry-red Ferrari Modena, and entrée to the city’s hottest clubs. But it was still hard to attract girls, and the big spending attracted the wrong ones. “I was deeply uncertain of who I was and who I wanted to be,” Ek said. “I really thought I wanted to be a much cooler guy than what I was.”
Miserable, he sold the Ferrari and moved into a cabin near his parents, where he played guitar and meditated. Ek had already started three tech companies, but he now toyed with the idea of getting by as a professional musician. (Ek plays guitar, bass, drums, piano, and harmonica; he doesn’t sing.) “I wouldn’t be rich, but I could have made a living.” There in the woods Ek finally decided he’d somehow marry music and tech, the two passions that drove him. During this time Ek started hanging out with Tradedoubler’s chairman, Martin Lorentzon, who had fifteen years on him, but similar stamina (he works out twice a day). A Silicon Valley veteran (AltaVista), Lorentzon took Tradedoubler public in 2005, netting himself $70 million. No longer involved in the day-to-day operations, he too was bored and adrift. The first time Ek visited Lorentzon’s Stockholm apartment he found only a mattress and a laptop balancing on an IKEA chair. “I asked him when he had moved in,” says Ek. “When he said it had been more than a year ago, I knew he wasn’t happy.”
The pair bonded over marathons of gangster films like the Godfather trilogy and Carlito’s Way (a ritual they repeat each year). “I got a very strong feeling when I met Daniel,” said Lorentzon. “To partner up I have to like the person like a brother, because we’ll face so many problems. The value of a company is the sum of the problems you solve together.”
Ek doubted Lorentzon would leave Tradedoubler, so later in 2006 he set a one-week deadline. Before they committed to partnering, Lorentzon would have to publicly resign as chairman and transfer a million euros of seed money into Ek’s account. The next Monday Tradedoubler sent out a press release announcing Martin Lorentzon’s resignation. Later that day he told Ek to check his bank account. The money was there. The two men had yet to decide the type of business they would start.
• • •
LORENTZON AND EK WERE in a unique place: The former no longer needed the money, and the latter no longer cared about it. So they decided to ignore the dollars and aim for disruption. Their target: music. “It disturbed me that the music industry had gone down the drain, even though people were listening to more music than ever and from a greater diversity of artists,” said Ek.
Sitting in two different rooms at Ek’s apartment, the pair yelled out possible titles for a music site—without even yet knowing what it would do—when Ek misheard one of Lorentzon’s suggestions. He typed the word “Spotify” into Google. There were zero hits (today: 23 million). Ek and Lorentzon registered the name, and started working on the ad-based plan. Once that gelled, they recruited a handful of engineers and took the new team to Barcelona to party and listen to what Ek calls “weird German electro-pop.” Then they got to work.
Back in Stockholm they built a prototype based on the interface of Apple’s iTunes and the sleek black styling of Ek’s Samsung flat-screen TV. Unlike music sites that had launched with pirated music, Ek wouldn’t debut Spotify until he signed deals with the labels. “We wanted to show that we were not in it to use their content to flip the company like others have done,” Ek said.
Ek, with the help of industry lawyer Fred Davis, initially tried to get global music rights and was quickly turned down. So he aimed for European licenses, which he figured would take three months—it took two years. Ek and his team hounded label execs, pitching them that their free, ad-based model would eventually lead to more sales. No one bit. “They’d say, ‘Yeah, this sounds really interesting,’ or ‘Send me over some stats,’ which really means ‘There’s no way in hell we’re going to do this,’” Ek said and laughed. “But I was twenty-three at the time, and I thought, Wow, this is great, we’re going to get this done.”
Ek eventually loaded Spotify with pirated songs and sent demos to industry execs. That got them noticed. “With Spotify people don’t get it until they try it,” Ek said. “Then they tell their friends.” As Ek negotiated with the music companies, Spotify burned through cash. On top of salaries and overhead, Ek and Lorentzon were pledging million-dollar advances to labels for access to their music catalogs. VCs wouldn’t touch them. To stay afloat they plowed nearly $5 million into Spotify, atop the $2 million Lorentzon had originally seeded. “We bet our personal fortunes, and sometimes we bet the entire company,” said Ek. “We led with our conviction rather than rationale, because rationale said it was impossible.” In October 2008 Spotify went live in Scandinavia, France, the U.K., and Spain. It took nearly three more years to finalize deals in the U.S.
“He’s the only tech entrepreneur who’s had the patience to achieve what he has with the record business,” said Sean Parker, now a Spotify board member, who helped open the door to U.S. deals, includin
g one with Facebook. “He has this Zen-like patience and an ability not to crack under pressure or get frustrated. Over and over again he puts himself in a situation where a normal person would have thrown in the towel.” As I talked with Ek in his office, he sat straight and motionless like a Swedish Buddha; the only thing moving was his mouth; he wasn’t even blinking his icy blue eyes.
Such calm helps him manage the chaos: In 2011 Ek was on the road 100 days—mostly a triangle between Europe, New York, and California, a schedule that cost him his girlfriend of two years. When he’s in Stockholm, Ek wakes around 8:30 a.m., answers e-mail for an hour, then takes the five-minute walk to Spotify. He spends about 25 percent of his time recruiting; otherwise he’s at his open desk or walking the floor. “Ek’s one of the few people,” said Parker, “who can handle the technology side, the strategic side, and the deal side of the business.”
Ek works in the office until 8:00 p.m., eats dinner out and then returns home to unwind, either by playing guitar for a few hours or juggling a rotating trio of books (when we spoke, the Steve Jobs biography, a primer on typography, and a guide to bonzai trees). Then he hops back on e-mail, before typically turning in around 2:00 a.m. Lorentzon wants Ek to find a balance: more exercise, less junk food, more sleep, less work. The last goal will be tough to achieve for the foreseeable future.
• • •
EK BOUNDED UP ONTO the sleek white stage in Greenwich Village’s Stephan Weiss Studio right after Thanksgiving in 2011, as dozens of typing journalists and rows of live TV cameras stood ready. Though thrilled that the new platform was set for launch, he couldn’t wait for his first press conference to end. When Ek operated just in Europe, he could lie low. But with Spotify’s entrance to America—home to the cults of Bezos, Gates, Zuckerberg, and Jobs—Ek had to switch from programmer to preacher. For Spotify to scale, he needed to hype his platform, generate buzz, and get labels, artists, and developers excited to partner up.