The Spotify Play

by Sven Carlsson

  But in practice, Spotify risked running up costs that would eat away at their 30 percent. In order to protect themselves against lost revenue, the record companies had negotiated all kinds of extra measures. For instance, they had demanded that a minimum charge per stream be met if Spotify’s revenues from ads and subscriptions dipped below a certain level. Spotify’s negotiators had also agreed to making advance payments on their expected payouts. If Spotify missed its targets, the labels would keep any unearned advance. The labels had also secured a significant amount of shares in the company, for which they paid next to nothing. It was a complex arrangement. In short, Spotify would be punished harshly if the service didn’t take off quickly, but the major labels would get paid either way.

  During Spotify’s first few years of operation, the payments to the music industry would exceed the company’s total earnings. This meant that Spotify was turning a loss before they even started counting the expense of running the actual business. For years to come, a long line of investors would question if Spotify was a viable business.

  Everything surrounding the deals with the music industry was top secret. Only a few of Daniel’s trusted officers knew the details. It certainly wasn’t a conversation starter during a festive launch party at Berns. The short answer was that the deals were basically done, and could you please pass me another shot of Xanté?

  Spotify’s launch party became a boozy affair. One employee reportedly drank so much Xanté that he lost his keys, forcing him to break into his own apartment in the middle of the night, ending with a police interrogation.

  Rockin’ in the Free World

  The deals with the labels were signed a few weeks later and on October 7, Spotify’s head of marketing, Sophia Bendz, sent out a press release. It stated that the streaming service had now officially launched in Sweden and that a premium, ad-free version was available for ninety-nine Swedish crowns (around twelve US dollars) per month, but only to customers of the broadband provider Bredbandsbolaget. This was essentially a soft launch. Free subscriptions were still invite-only, and the premium deal with Bredbandsbolaget was a limited promotional offer.

  The Spotify team gather to witness the commercial launch in October 2008. (Rasmus Andersson)

  Around the same time, Sophia started calling the many journalists who had wanted to interview Spotify’s founders during the beta period. A few weeks later, near the end of October, one of us interviewed Daniel Ek and Martin Lorentzon while on assignment for Sweden’s biggest morning newspaper, Dagens Nyheter. Martin, who was more experienced in dealing with journalists, took charge of the interview. It was held on the sofa underneath the big Spotify sign in the lobby.

  “This could become huge,” said the thirty-nine-year-old chairman, dressed informally in a white sweatshirt, with an intensity about his person. He then proceeded to describe Spotify’s mission.

  “We want to be the best music player on the market. I think that within two to three years, we will have twenty million users,” he said.

  At the time, those figures seemed outlandishly optimistic—but he wasn’t too far off. It would take Spotify around four years to reach twenty million users. Martin also explained that Spotify’s free tier was the key to rapid growth.

  “We believe that 2–15 percent of our users will be paying subscribers. The rest will use the free version,” he said.

  Again, his prediction wasn’t far off. Spotify would grow quickly, but it would take many years before the level of paying users was high enough to appease skeptics in the music industry.

  According to its chairman, Spotify would initially launch in eight countries. The number would later be dialed back to six, due to delays in Germany and Italy. Sweden was the first country to launch. In the UK, Spotify was rolled out gradually during 2009, closely monitored by various music industry bosses. The other early launches took place in Finland, Norway, France, and Spain.

  The article in Dagens Nyheter was published on October 31 with the headline, “Swedes are Apple’s Nightmare.”

  Spotify’s founders Martin Lorentzon and Daniel Ek around the time of the launch in October 2008. (Niklas Larsson]

  California Love

  The founders of Spotify and SoundCloud built their visions on software, but there were also Swedes who believed they could revolutionize the music industry through innovative hardware.

  In the summer of 2008, one of them landed at the LAX airport in Los Angeles. His name was Ola Sars, and he was one of the founders of Pacemaker, a pocket-sized DJ gadget that could be used to share playlists and MP3 mixes online.

  Ola Sars was a former management consultant who hung around some of the people who would form the DJ collective, Swedish House Mafia. He had traveled to Los Angeles to pitch his vision of a new community in which “tastemakers” shared music with “taste takers.”

  “I’m here to see Jimmy Iovine,” he said at the reception of Universal Music in Santa Monica.

  Jimmy Iovine was a big deal. He had founded Interscope Records, which had spawned the pop sensation Gwen Stefani, as well as Dr. Dre’s two celebrated albums, The Chronic and 2001. Recently, he and Dr. Dre had started a company, Beats Electronics, that would soon introduce its headphone brand, Beats by Dre. Their products would be a huge success, but they hadn’t reached the market yet and Jimmy was still open to new ideas. So, Ola found himself waiting outside the label boss’s office, nervously stroking the Pacemaker that sat in his lap. The AC was on full blast and the thirty-five-year-old Swede was freezing in his black t-shirt. Finally, he was called into Iovine’s office.

  “The future of the industry will be all about lifestyle products,” Ola would recall the fifty-five-year-old Iovine saying in a thick Brooklyn accent.

  Ola briefly demonstrated how the Pacemaker worked, but Iovine didn’t need to be convinced. He’d been thinking about digital music distribution for years and explained that he and Dre would love to be partners in Tonium, the company behind Pacemaker. Ola liked what he heard, but soon realized that Iovine wasn’t willing to invest actual money in his company. Any deal was essentially going to boil down to trading shares for promotional value. Still, Iovine was a master at promotion. He had helped Steve Jobs market Apple’s products with artists such U2 and 50 Cent. He could, Ola thought, have a decisive impact on the future of the Pacemaker.

  Back in Stockholm, the investors in Ola Sars’s company weren’t seeing it. Why would they let the head of an American label become a shareholder at a bargain price? After a bit of back and forth, the negotiations fizzled out.

  A few months later, when Jimmy Iovine and Dr. Dre launched their first products, the Beats by Dre brand became an instant phenomenon. Iovine used his connections to get artists and sports stars to pose with the fat headphones that sold for around three hundred dollars apiece. In 2009 alone, the company sold headphones for $180 million, which was about a third of the entire US market.

  The Pacemaker never became a hit, but Ola Sars would be reunited with Jimmy Iovine three years later, when the Beats co-founder decided to take on Spotify.

  Hung Up

  Spotify’s launch with Bredbandsbolaget started on a small scale. But in early December 2008, Daniel Ek raised the bar in order to kickstart the company’s growth. He let the provider run Christmas ads promising half a million free accounts to its broadband customers. In a country with only nine million inhabitants, that was a high number.

  It was only a matter of time before Spotify opened up its free version to all of Sweden. Still, the ad campaign caused a stir in the music industry. A business developer at Warner Music named Jacob Key was astonished to see the ads in the Stockholm subway.

  “You can’t do this,” he yelled over the phone to his contact at Spotify, as he would recall.

  “You can’t make money off of Bredbandsbolaget while letting them market Spotify as a free service. If you do that, we need to get paid as well,” he said.

  Representatives from Universal and Sony
also complained. They all resented that music was ostensibly being given away for free—and was marketing the very broadband subscriptions that were killing their industry.

  Soon, their criticism had reached Andreas Liffgarden, the business developer behind the deal with Bredbandsbolaget. He quickly learned to be careful when using words like “free” or “free of charge” in ad campaigns with telcos and broadband providers.

  Yet it was clear to Andreas and Daniel that the larger telcos of Europe could play an important role for Spotify. To most customers, they offered services that looked the same. These companies urgently needed to differentiate themselves and partnering with Spotify could be the perfect way to do so.

  The labels would soon push for Spotify to prioritize growing the number of paid customers. At Warner Music, Jacob Key demanded that Spotify’s promotional deals with broadband companies result in paying customers. He also pushed for those subscriptions to be renewed automatically at the end of a promotional period in which Spotify’s monthly fee may have been bundled into some sort of package deal.

  These principles would prove important as Spotify approached an even bigger broadband provider.

  Everybody’s Talkin’

  In February 2009, Spotify became broadly available in the UK, gaining a million British users in just over two months. The founders soon opened a London office located on the fifteenth floor of Centre Point, a skyscraper on the eastern end of Oxford Street, adjacent to Soho. Daniel Ek would also introduce himself to the British public.

  “I’ve created things that millions of people have used before,” the twenty-six-year-old CEO said in an interview with The Independent in Stockholm, “but this is the first time people have started to recognize me in the street.”

  The article describes Daniel’s early years at Stardoll and lets him pontificate about the future of the music business. In it, the founder describes Spotify as a potential tool for launching artists in new markets. He mentions that the Scottish rock band Glasvegas started being played on the radio in Sweden as a result of their music being on Spotify.

  “Record companies need to think about the way they break artists internationally. Why not just make the music free everywhere and see where it gets picked up?” Daniel is quoted as saying, airing an idea often used to defend file-sharing that must have irked people in the music industry.

  In London, the Spotify CEO would often hang out with Shakil Khan, whose role ranged from friend to investor to fixer to paid consultant. Shak liked to do people favors, knowing that he might be able to ask for something in return.

  Daniel and Shak would eat and work late in Spotify’s office, with views over the river Thames and the Tower Bridge.

  By now, Spotify had risen to become one of Europe’s hottest startups.

  “The user experience is beyond even the best web based streaming services like LaLa, MySpace Music, and Imeem,” the website TechCrunch wrote in early 2009, explaining in detail, how to access Spotify via proxy servers. That way, listeners based where the service wasn’t available could cheat the system and gain access.

  “It acts like a fully stocked iTunes, with everything hyperlinked to easily find related music. Creating playlists is a snap,” the article read.

  One evening in their near-empty office, Daniel and Shak received a visit from someone looking to partner with Spotify— Joe Cohen, who had encountered a then-unknown Daniel Ek at the Essential Web conference a few years back.

  The trio sat down and Daniel began to wax lyrical about the challenges ahead for Spotify. They casually exchanged business ideas before Cohen got to the point. He wanted Spotify to partner with his company, Seatwave, an online marketplace for concert tickets.

  As he argued his case, Cohen noticed the interaction between Daniel, the introverted boss, and Shak, the extroverted dealmaker. The two appeared to be acting almost in unison, as if they were two parts of the same person. Finally, Daniel put his foot down.

  “Listen, the thing is, you guys are selling tickets on the secondary market and that would just piss off artists and labels. I can’t be in the business of pissing off artists and labels,” Daniel said, sounding assured.

  Spotify had launched in the UK using the words “instant, simple, and free.” But the blowback from the labels was severe, and Daniel was now carefully avoiding anything that could be seen as his succeeding at the expense of the industry. It was important for Spotify’s operations, but also for raising much-needed capital.

  Back in Stockholm, Spotify’s developers had done their part to clean up the company’s act. They had just carried out what was internally known as “The Big Clean,” a purge of the last pirated files from the Spotify catalogue.

  Taxi

  In February 2009, the entertainment industry was set for a decisive victory against the piracy movement. The founders of The Pirate Bay were brought before the Stockholm district court.

  During the seventh day of trial, representatives from the creative industries were due to testify. Per Sundin, now head of Universal Music Sweden, hopped in a cab and headed to the court. On his way there, he noticed that the driver had a small plastic case of what looked like blank CDs stuck in the sun visor of his car. After a polite inquiry, the driver admitted that he often listened to pirated music.

  “I figure it’s OK. I’ve bought so many CDs in my life,” he said.

  Once again, Sundin felt the indignation rise within him. When the taxi pulled up outside the court building, he told the driver that he wouldn’t be paying the fare.

  “You know, I’ve paid for so many cab journeys in my life,” he said, getting out of the car.

  Outside, the hordes of journalists and young protesters with Pirate Bay flags made him reassess. Grudgingly, he paid the driver and made his way through the crowd.

  In his testimony, Per Sundin said that file-sharing had essentially cut the record industry’s sales in half. The trial made front-page news, and many Swedes were sympathetic to the young hackers that appeared to be bullied by “Hollywood lawyers.” Swedish artists, like the rapper Timbuktu, grabbed headlines by praising the technology behind The Pirate Bay. Some experts questioned the whole premise of the case, claiming that file-sharing could not be blamed for declining CD sales.

  But attitudes would soon be shifting. On the same day that Sundin testified in court, the Swedish parliament passed the so-called IPRED law. Authorities would now have a broader mandate to take action against the unlawful sharing of music and video files.

  The four defendants in The Pirate Bay case lost in the district court, and later in the court of appeals. In the election to the European Parliament, in June 2009, many young voters showed their dissatisfaction by voting for the Pirate Party. But soon, the prevalence of streaming services like Spotify would mollify the public debate. Five years later, when the Pirate Party was voted out of the European Parliament, the issue had been all but forgotten.

  Whenever, Wherever

  With the launch behind him, Daniel Ek started focusing his attention on building a mobile app. Many of Spotify’s competitors were already offering music on handheld devices. The Finnish mobile giant Nokia had just launched a massive marketing campaign for its service, Nokia Comes With Music. Its Swedish competitor, Sony Ericsson, had a music service called Play Now Arena, and Sweden’s biggest telco, Telia, had the Telia Music Player.

  But Daniel didn’t want to compete with regional players. He wanted to challenge Apple’s iPod head on, and he felt he had found the right man for the job: Gustav Söderström, an athletic KTH alum with blond hair, blue eyes, and a chiseled jawline. At thirty-two, he had already amassed some personal wealth by founding and selling a mobile internet company to Yahoo!. He was up for a new challenge and, short of moving to Silicon Valley, Spotify seemed like the coolest job around.

  Daniel wanted Gustav Söderström to build an app that worked wherever the iPod worked. The Spotify CEO explained that it needed to have an “offline mode” so
that it would work on airplanes and without access to 3G. His theory was that users would pay not only for music, but for access and ease of use. The app needed to sync automatically with Spotify’s desktop client. If you put a track into a Spotify playlist on your computer, it needed to appear on the phone as well.

  The app would require new licenses from the music industry, but Daniel had reason to believe they would cooperate. He was leaning toward making the app a premium feature, thus creating a new incentive for users to pay for the service. The math was simple: Paying users generated almost all of Spotify’s revenue, and more revenue meant higher payouts to the industry.

  Gustav signed up as Spotify’s new head of mobile, insisting on handpicking his own team, which would include some of Spotify’s best engineers. Daniel gave him his blessing.

  Gustav Söderström was used to getting what he wanted. While doing his mandatory military service as a young man, he led a ski battalion in the northern municipality of Arvidsjaur. The soldiers were loyal, following his every lead. Leading a new project at Spotify would, however, turn out to be more like herding cats.

  Spotify’s engineers had good reason to be proud of their work. They had built the world’s best streaming player from scratch and felt that their indie spirit had paid off. They had pulled off some impressive feats with mobile apps, such as hacking into Nokia’s Series 60 operating system and Apple’s first rendition of the iPhone. So, when Gustav started poaching engineers to build a new mobile team, he was met with resistance.

  In a podcast interview, Gustav would recall how he was forced to hold endless email conversations with some of the more stubborn engineers. Eventually, he managed to wear down his critics. The experience seems to have shaped his outlook as a manager. For years to come, he would send long emails to the staff, at all hours of the day, about where Spotify was heading and what they needed to do to get there.