The Spotify Play

by Sven Carlsson

  After high school, Martin enrolled at the prestigious Chalmers University of Technology in Gothenburg. He liked to party and was involved in the committee that planned the school’s annual carnival. People would remember him as boisterous and impatient. An old story about Martin claims that he once broke up with a girl because she had broken her leg. But he was also an ambitious student. While at Chalmers, he took a few classes at the Gothenburg School of Economics. He also worked part-time as a cleaner at the Volvo factory in the nearby district of Torslanda.

  In 1995, Martin was accepted as a trainee at Sweden’s main telecoms firm, Telia. As part of the program, he was able to spend some time working at the search company Alta Vista in Silicon Valley. There, he learned early lessons in internet advertising, but also in how technological ecosystems could connect the academic world with founders and investors.

  Martin did not formally graduate from Chalmers until 1997. His grades were high but not spotless. At some point, he ditched the more common spelling of “Lorentsson” found on his diploma for “Lorentzon,” joining the growing number of Swedes who thought a “z” would add a touch of worldliness to their names. Soon, Martin Lorentzon had moved to Stockholm and started working at Cell Ventures.

  His new boss was Pär-Jörgen Pärson, a man who would become an important figure in his career. Pär-Jörgen was a confident thirty-five-year-old with dark blond wavy hair and a gap between his front teeth. He spoke the colorful vernacular of a venture capitalist and would pepper his stories with American business terms. He noticed how Martin and Felix often stayed behind to work on their secret project. He let this minor transgression slide, hoping to be first in line to invest if the project showed promise.

  The sprawling portfolio of Cell Ventures kept Pär-Jörgen busy. One of the investments was a company called PriceRunner, which would later evolve into a successful price comparison website. Another was DX3, which offered a tool to help record companies distribute music digitally. A third company was Tradera, the auction website that would employ Daniel Ek as acting CTO a few years later.

  Start Me Up

  In the summer of 1999, Martin Lorentzon and Felix Hagnö started building their own company. They sat in Felix’s apartment in the posh area of Östermalm in central Stockholm and cobbled together a business plan for something they called ClickCab. While Felix developed the technology, Martin would put on a suit and stroll down to Stureplan to have lunch with potential investors. He was surprised by their lack of understanding for his idea. The principle, after all, was simple: ClickCab was an advertising system that connected sellers and buyers on the Internet.

  After a few frustrating months, the duo finally had a breakthrough when they presented their idea to Magnus Emilson, Felix’s college buddy from the Gothenburg School of Economics. Magnus Emilson had made a small fortune by founding and listing the internet consultancy firm Mind on the Stockholm Stock Exchange, and was now looking to invest. One late Friday evening in August, he agreed to pay around $600,000 for 30 percent of the new company. The deal would, in time, make all three of them wealthy.

  Martin and Felix started to hire staff and moved into an office on Grev Turegatan 21 in Östermalm. Their online ad service, which they soon renamed Tradedoubler, was launched in November 1999, and took off immediately.

  While building Tradedoubler, Martin developed a habit of working late and sleeping in. He would start his days at a local Chinese restaurant, ordering the standard “four small dishes” main course accompanied by a glass of milk, and vanilla ice cream for dessert. He was now a thirty-something tech founder who enjoyed running his company the way he saw fit.

  Pär-Jörgen Pärson missed his chance to invest in Tradedoubler. By the time the company was on its feet, Cell Ventures was about to be sold to a British company, and then the market tanked. But he would follow the founders’ careers and get his chance seven years later, when Martin had moved on to a new project.

  99 Luftballons

  In early 2000, the internet boom in Stockholm reached its peak. In February, a picture of central Stockholm was featured on the cover of Newsweek. The headline read: “Hot IPOs and Cool Clubs in Europe’s Internet Capital.”

  Within a few months, it all came crashing down. Shares in technology companies fell in Stockholm, and on the Nasdaq in New York. Boo.com went belly up in May and was soon followed by American peers such as Pets.com and Webvan. In the public eye, the celebrity tech founders went from being emissaries from the future to a thing of the past.

  Martin Lorentzon and Felix Hagnö were lucky. In March 2000, they were looking to fill Tradedoubler’s coffers with $10 million. They had a handshake agreement with none other than Soros Private Equity Partners, the investment vehicle of George Soros. His company was looking to invest alongside the Swedish VC firm Arctic Ventures. But time was running out. Tradedoubler’s US competitors had already begun to slide in the public markets.

  The finance team in Stockholm hurried to close the deal and by April the press release had gone out. With time, the Tradedoubler founders would clash with George Soros’s firm over the size of their stock returns, eventually taking the battle to court and winning. But that tussle lay far in the future. All that mattered now was that the young adtech company had secured funding in the nick of time.

  As valuations came crashing down, the capital markets dried up. One by one, Tradedoubler’s European competitors started folding, unable to secure the funding they needed to grow. Suddenly, the job market was full of programmers looking for work. Competition for new deals in the ad space faded.

  In the years to come, Tradedoubler’s valuation would rise significantly, making the company worth hundreds of millions of dollars.

  Livin’ on a Prayer

  When Daniel Ek graduated from high school in 2002, the hype had dissipated from the internet sector. He wanted to build something like Google, but had to make do with a job at Jajja, a local search engine optimization firm. Daniel did not love the work, but he was good at it and eventually became the company’s CTO.

  In his spare time, he toyed with several pet projects in his family’s old apartment in Rågsved. Daniel would describe how he recorded and indexed tons of live TV broadcasts, and tried to figure out how to make use of the material. He was fascinated by how quickly file-sharing could spread content online.

  In media interviews, Daniel would later claim that he was accepted to the KTH Royal Institute of Technology. In his telling, he started to take classes at the prestigious university, but opted to drop out after less than two months. The story is hard to confirm. KTH has no records of Daniel being admitted to the school, nor of his registering for any classes.

  In 2005, when Daniel was twenty-two years old, he got a call from London. On the other end of the line was an investor who had taken note of the Swede’s open-source search engine project. The investor wanted to know if Daniel was interested in working for a hot new website. Perhaps he could take a meeting with the CEO of Stardoll?

  Candy Shop

  During the seven years that passed between the launch of Napster in 1999 and Spotify’s founding in 2006, the music industry underwent a dramatic transformation. Plummeting CD sales had put the record companies on the defensive. Their focus was less on technical innovation and more on legal action against file-sharing websites and services.

  The first man to bridge this digital divide was Apple’s CEO and co-founder, Steve Jobs. In 2001, he launched the music player iTunes, which was used to organize tracks and play music locally on a Macintosh computer. The technology was an instant hit, but the record companies were not amused. They felt that Jobs’s digital jukebox went hand in hand with pirating music. Music executives also criticized Apple’s ads for iTunes for making illegal practices appear acceptable, even cool.

  Later the same year, when Jobs launched the iPod, his portable music player, CDs started becoming less relevant. Users could now collect and organize all their music in the iTunes player on
their Mac and transfer the tracks straight to their iPod, which could be carried around like a Walkman or hooked up to a stereo system. Apple’s influence over the music business was increasing, and it was beginning to hurt the record companies’ own attempts at selling music online.

  By this time, Universal and Sony Music had banded together to launch a digital music service called PressPlay, while EMI, BMG, and AOL Time Warner had built their own service, MusicNet. The major labels seemed to be on a collision course with Apple. But that was about to change.

  Throughout 2002 and early 2003, Steve Jobs devoted a great deal of time and energy to signing new, secret deals with the heads of the music industry. One by one, he received visitors from the five biggest record companies at Apple’s headquarters in Cupertino, Silicon Valley.

  The Apple CEO’s vision appeared to go beyond signing the labels up to his new music store. Around this time, Steve Jobs is said to have expressed his desire to acquire Universal Music outright, which would have been a major foray into the business of owning content.

  “Steve said he wanted to buy the business, but was only going to pay some very low price,” as Edgar Bronfman Jr., then the vice chairman of Universal owner Vivendi, would recall in an interview for this book.

  During the call, Jobs indicated that he was willing to buy Universal Music for “around $3 billion,” Bronfman said. That was around half of what the Vivendi vice chairman thought the label was worth at the time.

  “I don’t think anything close to that price will fly,” Bronfman told Jobs, who was undeterred and continued to make progress on his music store.

  Warner Music was first to sign a licensing deal with Apple. When it was time for Universal to come onboard, its CEO, Doug Morris, sent his trusted West Coast executive Jimmy Iovine to take the meeting. Gregarious and business minded, Iovine had once founded Interscope Records. He was captivated by Jobs’s vision, and quickly gave the deal his wholehearted support.

  During this time, Thomas Hesse, BMG’s Chief Strategic Officer, flew from New York to San Francisco to meet the Apple leadership. He sat down with Steve Jobs and Eddy Cue, who was head of iTunes.

  “I know that our iPods are full of pirated tracks, but I have an idea,” Jobs told Hesse during the meeting, as the German would recall.

  Apple’s co-founder explained that he wanted to build a music store where the tracks were sold individually, for around a dollar each. As the negotiations continued, the five major record companies pushed back against the notion of letting customers cherry-pick songs, fearing it would hurt album sales. But they also saw several advantages in Jobs’s approach. They found the share of revenue going to the labels—70 percent—especially compelling. That was a much better deal than what they were getting from physical CD sales.

  In the end, all the major labels signed on: Warner, Universal, BMG, EMI, and Sony. Within a few years, Apple had become the record industry’s most important digital business partner.

  The Message

  On April 28, 2003, Steve Jobs stepped on stage for an Apple Special Event, wearing his signature blue jeans, a black turtleneck, and a pair of New Balance running shoes. The audience was hoping the visionary founder would once again surprise them with new products that would send shockwaves through Silicon Valley.

  Jobs started by showing Apple’s first television commercial for iTunes, which ended with the words “Rip. Mix. Burn.” Then he moved on to talk about how iTunes, which was already being used by twenty million Mac owners, had spawned the iPod, which in turn was the world’s most popular portable music player. He then attempted to clear up some controversy by translating the youthful expressions “Rip. Mix. Burn.” into a more adult version: “Acquire. Manage. Listen.” The updated phrase was perhaps less catchy, but it was more likely to sit well with the music industry.

  “We acquire our music off of CDs, right?” the Apple CEO said, pausing to suppress a smile.

  Pirating music had been standard practice in the tech world for years. Many members of the audience had likely file-shared music themselves.

  “But we all know that starting in 1999, there was this phenomenon called Napster. It was shut down in 2001, but it demonstrated a few things for us. It demonstrated that the internet was made for music delivery. And its offspring, Kazaa, is still alive and well today,” Jobs said.

  The reference to Kazaa was timely. By now, Niklas Zennström’s creation had become the world’s biggest file-sharing service. Steve Jobs went on to praise the “near instant gratification” it brought.

  “But the downside is, it’s stealing,” he added. “It. Is. Stealing.”

  The Apple CEO explained that people steal largely because of the lack of legal alternatives. Audience members nodded thoughtfully as the words “No legal alternative” popped up on the screen behind him. What he was saying wasn’t quite true. Over the past few years, several legal music services had been launched in the US. A year prior, Rhapsody had begun offering unlimited access to an extensive music library for ten dollars per month. As usual, Jobs had the answer.

  “But what about Rhapsody and PressPlay? What about these things? Well, they’re subscription services. You can’t just go get a song and pay a little.”

  What followed was a rant in which Jobs took aim at music subscription services, emphasizing how they would charge extra for downloads that vanished once you stopped paying the monthly fee.

  “These services treat you like a criminal,” he said, showing a slide of a man dressed in a black-and-white striped prison uniform. The audience broke out in laughter.

  “People have bought their music for as long as we can remember,” Jobs declared as images of LPs, cassettes, and CDs appeared on the screen behind him. “We think people want to buy their music on the internet by buying downloads, just like they bought LPs, just like they bought cassettes, just like they bought CDs,” he sputtered.

  “When you own your music it never goes away, when you own your music you have a broad set of personal use rights, you can listen to it however you want.”

  By now, he was all riled up, ready to drop his big news.

  “We started about a year and a half ago to create a music store. Music downloads done right.”

  Jobs said he had met with the big five record companies, whose logos appeared behind him. Then he paused again.

  “Before we did this, I was reminded of a quote by Hunter S Thompson,” he said with a wry smile.

  The quote appeared on the screen, and Jobs read it aloud:

  “The music business is a cruel and shallow money trench, a long plastic hallway where thieves and pimps run free, and good men die like dogs . . . There’s also a negative side.”

  The audience roared with laughter, even breaking out in applause. Jobs made jokes about the war that had been raging for years between the content companies and the music industry. He explained how he hadn’t known what to expect, but that he’d met some great people in the industry over the past year and a half.

  Apple, he explained, had made landmark deals with all the major record companies and built the iTunes Music Store. It contained two hundred thousand tracks from day one, and let users download them on an unlimited number of iPods and up to three Mac computers. The tracks could also be burnt onto an unlimited number of CDs. However, the music was for personal use only, so there was a limit of ten CDs per playlist to prevent large-scale copying.

  “All this music, with all of these rights, you can buy for ninety-nine cents per song, with no subscription fees,” he explained, over the din of loud applause that lasted for a full ten seconds.

  Apple’s new music store became an instant hit. Six months later, when Steve Jobs launched iTunes for the PC, he held another live demonstration, during which he held brief video chats with Mick Jagger, Dr. Dre, and Bono.

  Bono signed off by shouting out a record company boss who had once produced U2’s album Rattle and Hum: “Jimmy Iovine! Universal!”

  H
is words would eventually seem prophetic. Both Jimmy Iovine and Universal Music would play central roles as Spotify challenged Apple for the throne of the music industry.

  Better Than Piracy

  THREE YEARS AFTER STEVE JOBS launched the iTunes Music Store, Daniel Ek and Martin Lorentzon started Spotify. The economy was picking up steam and venture capitalists were feeling more optimistic about tech startups.

  During Spotify’s first two years, the founders oversaw the launch of a beta version of their music player. Meanwhile, they were trying to secure licenses to launch the service internationally. For them, persuading the major labels would prove much harder than it had for Steve Jobs a few years prior.

  Martin mainly presided over the finances, while Daniel flew to London, New York, and Los Angeles to meet executives at the major labels. In the early days, Martin would accompany him. Several people in their orbit would recall them as polar opposites. Where Martin’s handshake was firm, Daniel’s was weak and clammy. While Martin had a piercing gaze, Daniel’s eyes would often drop to the floor. Martin was the impulsive investor, Daniel the low-key innovator. But Daniel was the patient one who would wear down his skeptics and eventually win them over.

  The industry was still in crisis. Every week, executives at the major record companies would hold meetings with young tech entrepreneurs who claimed to be able save them. Their efforts would invariably fail. Apple was still the dominant force, having sold two billion songs through iTunes by January 2007, but music sales were still decreasing by about a billion dollars every year. Meanwhile, the labels were still trying to stomp out piracy. Their lawyers sued file-sharing services—such as LimeWire and iMesh—but also tens of thousands of private individuals. The goal was to scare young people away from pirating music. In Sweden, prosecutors were preparing an indictment against the founders of The Pirate Bay.