“It felt like we’d won an existential battle,” as one person from Spotify would recall.
The terms were “not great, but at least they were sustainable,” as another source described it.
In one particular feat of financial engineering, the Spotify team managed to extend the amount of time they would have to make payments. The longer window of 45 days would prove a crucial resource for at least another decade. It meant that as long as Spotify’s revenues kept growing, the company would have more cash on hand than it needed to pay out at any given time. The negotiating team essentially had given their company extra cash flow to run their operations. As Spotify grew, so would the pile of available cash.
Daniel was relieved, having escaped yet another brush with death. But the new European licenses also came with concessions, said to have been made on the insistence of Universal Music. In certain markets, Spotify’s free users could now only listen for twenty hours per month, and only stream any given song a maximum of five times total. After six months of use, the time limit was lowered to ten hours per month.
While the new European deals were largely an improvement, the streaming caps would soon do serious damage to Spotify’s metrics. The company’s growth curve—its most important tool for attracting more capital—was in fact headed toward a downward slump.
Things that Make You Go Hmmmm . . .
Securing US licenses was a matter of survival for Daniel Ek. Without them, the new round of funding would fall apart, and he could kiss that one-billion-dollar valuation goodbye.
The problem with a phrase like “a billion” was that it stuck in people’s minds and tended to travel. At this point, details of Spotify’s soaring valuation had reached Doug Morris, several sources would claim.
The buzz around the Swedish startup reminded the Universal CEO and many of his label heads of other companies that had profited from their industry over the years. Skeptics would point to examples that stretched even further back than Google’s purchase of YouTube, or the wave of file-sharing services.
“It was a psychological problem dating all the way back to MTV, which made money off of videos that we had to beg them to play,” as one source described it.
Whether Spotify was headed for an exit by selling to a tech giant, like Google or Microsoft, or by securing its own funding, Universal had plenty of reasons to be skeptical. A deal with Spotify could cannibalize the label’s revenues from iTunes and upset their friend and collaborator Steve Jobs.
“All of that to help some little Swedish startup flip their company and get rich. Morris had no interest or incentive to do the deal,” as one source would explain it.
Universal Music was well known for having close ties to Apple—Steve Jobs had even floated the idea of buying the label outright on at least one occasion. Such a deal would likely have benefited many of its label heads. Jobs had also spent years cultivating powerful allies by means of Apple’s enormous marketing budget.
One source would recall that Jobs, as early as 2003, paid $150,000 to Jimmy Iovine for putting a new version of the iPod in the video for 50 Cent’s “P.I.M.P.” At the time, the rapper was represented by Jimmy Iovine’s Interscope Records.
The following year, Iovine spearheaded U2’s long-standing partnership with Apple, starting with the cross-promotion of the album How to Dismantle an Atomic Bomb involving a special U2 edition of the iPod. The arrangement, in which Steve Jobs was personally involved, culminated ten years later, in a deal involving the album Songs of Innocence—worth a reported $100 million. Iovine’s ties to the Irish superband spanned decades. He had produced their albums Rattle and Hum and Under a Blood Red Sky in the 1980s, and later signed them to Interscope, although U2 also had contracts with other Universal labels over the years.
Apple presents the U2 Special Edition iPod in October of 2004.
From left: Jimmy Iovine, co-chair of Interscope Records, Apple’s CEO Steve Jobs, Bono and The Edge from U2. (ZUMA Press, Inc. / Alamy Stock Photo)
According to four sources, Jobs was now using his sway over Universal to try to block or delay Spotify’s arrival in the US. He appeared to do so by discrediting the Swedish company’s free service.
The Apple CEO was in frequent contact with Universal’s top executives in 2010, as the sources would recall. Two of them claimed that Jobs implied that Apple could withhold marketing money, or even shut the entire iTunes Store down.
“If the monopolist in the marketplace is subtly threatening you, you’re going to have to listen,” as one well-placed source would describe it.
One source claims that representatives from Apple also considered, in 2010, launching their own streaming service. The idea was to undercut Spotify’s price with a subscription that would cost six or seven dollars per month, instead of the going rate of $9.99. Another source would suggest Apple planned to launch a radio service, similar to Pandora, that would coexist with downloads in the iTunes Store.
The idea of revamping iTunes may partly have been the result of lobbying by the music industry. Edgar Bronfman Jr. would recall how he, as Warner Music’s CEO, flew to Silicon Valley to meet with Steve Jobs in the years after iTunes launched. He wanted the Apple CEO to incorporate a subscription service into iTunes, and he said that his counterpart at Universal, Doug Morris, had a similar agenda. Alas, Steve Jobs was not having it.
“He said people want to own their music. They don’t want to rent their music,” Edgar Bronfman Jr. would recall.
In 2010, the talks between Universal and Spotify were slowed down by constant chatter and gossip. One theory suggests that Steve Jobs wanted to buy time, at least until he had moved iTunes into the cloud. Others would claim that Spotify was but a blip on Steve Jobs’s radar and that he was simply looking after his own interests.
The subject matter would remain sensitive for years to come. The legal aspects are thorny. If a dominant distributor like Apple would have tried to counteract a competitor by colluding with one or several major labels, it could amount to a violation of federal antitrust laws. A similar situation was playing out with the iBooks Store. Apple would later be found to have conspired with five book publishers in 2009 and 2010, in an attempt to challenge Amazon’s dominant position in the e-book market. That case would go all the way to the Supreme Court, where Apple was smacked with a $450 million price-fixing fine as part of an antitrust settlement. (Apple would deny that it had conspired to fix prices.)
The topic would also remain sensitive because of Steve Jobs’s failing health. In January 2011, the Apple co-founder went on sick leave without stepping down as CEO.
Beyond the intrigue, Jobs’s worldview was aligned with Universal’s American executives. Jimmy Iovine would, for example, openly voice his opposition to any streaming service with an unlimited free tier, as a source would recall. The freewheeling founder of Interscope and Beats Electronics had, at least in his own mind, been fighting piracy through innovation for more than a decade.
As Iovine would recall in interviews, he and the Universal CEO, Doug Morris, had created a talent show with digital ambitions on late-night TV as early as the year 2000. It was called Farmclub, and it aired on the USA Network. The venture was backed with $25 million from Edgar Bronfman Jr., then CEO of Seagram, which owned Universal Music and 43 percent of the USA Network.
Posing for pictures on the Universal Studios soundstage, the two formed a comical duo—the thin, boisterous Jimmy Iovine, with his baseball cap and flamboyant streetwear, next to the heavyset Doug Morris, in his pinstripe suit and boardroom tie. The show—which featured former Miss USA Ali Landry and MTV personality Matt Pinfield as hosts, with Eminem in the green room—set out to challenge Napster by letting viewers vote for unsigned bands on a website called Farmclub.com. Later, they could watch the most popular acts perform on air in the hope of getting signed. It was a haphazard production, but Iovine, Morris, and the others ultimately wanted to turn it into a digital music service, and maybe even IPO the whole
thing. But the slowly bursting tech bubble put an end to the duo’s ambitions. The venture left an indelible impression on Iovine, however, convincing him that he could innovate in the digital age.
In the years to come, Iovine would hitch his star to the promise of combining digital music with physical hardware. When Apple started building the iTunes Music Store in 2002, Steve Jobs’s main motivation was to bolster the sale of iPods and Macs. Iovine was quick to seize the opportunity and make money by using his artists to help with the marketing. In 2006, he founded his own hardware company, Beats Electronics, once again using artists to market the headphones. By the time Spotify came knocking in 2010, Iovine felt that a distribution platform with free music as its selling point, had little to offer the industry—an opinion he wasn’t afraid to share.
There were plenty of Spotify critics at the very top of the Universal camp. From Daniel Ek’s point of view, the tide needed to turn. Toward the end of 2010, it seemed as though it might.
Universal’s leadership was about to change. The French owner, Vivendi, had recently tapped Lucian Grainge, the fifty-year-old chairman of Universal Music Group International, to leave London and take the reins from Doug Morris in the US. The operations were set to become more globally integrated.
The two appeared to be embroiled in what several sources would describe as a personal feud. The long-serving Morris, now into his seventies, is said to have wanted Grainge to move to New York, where he was based, so they could run things together for a while. But Grainge would instead assert his power by choosing to move to Universal’s Santa Monica offices in Los Angeles.
Along for the ride was Universal’s head of digital, Rob Wells, who had first met Daniel Ek in London a few years prior. Wells, who was now known as a vocal Spotify proponent, was promoted and given the title President of Global Digital Business in October 2010. His main task would be to create a unified digital strategy within Universal. That meant bringing Spotify to the US, while keeping Apple happy at the same time.
In a written statement, now-co-CEO Lucian Grainge hailed Rob Wells, saying that no one was better equipped for the new position.
“And he’s the best surfer I know,” he added.
Wells would have to navigate some pretty gnarly waves in the months to come.
Thorn in My Side
As Lucian Grainge was taking over the reins in the fall of 2010, it looked as though Spotify had finally reached a landmark US deal with Universal. By the end of the year a contract was drawn up and ready. But, suddenly, Universal refused to sign. The label simply didn’t return their signature page of the contract, as one source would recall.
“They took the deal and sat on it,” as another source familiar with Spotify’s end of the process would express it.
The Spotify headquarters was now rife with rumors and speculation. Its various teams had been looking forward to launching in the United States by the end of 2010, but now they were being told that everything was on hold. They were not told why. Some began to whisper that Warner was the problem, while others blamed Universal.
At the Consumer Electronics Show (CES) in Las Vegas in the early days of the new year, Universal executive Rob Wells told a Spotify employee that a deal would soon be done, according to two sources. One of them would recall him saying that Universal couldn’t be first. Spotify needed to sign with another label first, and they would follow.
Fine Print
Spotify’s first major breakthrough in the US came later the same month, in January 2011, when they signed a licensing deal with Sony Music. The terms looked much like the deal they had recently agreed to in Europe. But it also came at a hefty price for Spotify’s shareholders.
Secret internal documents, which would not emerge until the publication of the Swedish edition of this book, reveal that Sony had negotiated an option—triggered four years down the line—to purchase what would amount to 2.5 percent of Spotify at a heavy discount. The label’s payoff came in the spring of 2015, when Sony paid just under $8 million for shares that, a few months later, would become worth twenty-five times more. Largely as a result of this deal, Sony would become the label with the largest Spotify holdings by the time the company went public in 2018.
The actual license agreement with Sony Music was forty-two pages long and would eventually leak to The Verge. The details show how complex Spotify’s deals can be, and why some would argue that the system favored labels over artists. For readers with a special interest in this kind of fine print, here are some highlights and analysis:
For the right to stream Sony’s music catalogue in the US, Spotify agrees to pay a $25 million advance for the two-year duration of the contract: $9 million the first year, and $16 million the second. The advance is to be paid in installments every three months, and Spotify can only recoup this money if it meets or beats its revenue targets. The contract, however, does not stipulate how Sony Music can use the advance money. Some industry insiders claim that advance money is generally spent on things other than payouts to artists. Others wonder what happens to the “breakage,” or the part of the advance that is left with the label, when Spotify fails to reach its revenue goals. Is it attributed to streams and distributed to artists, or kept entirely by the label?
The contract also includes a standard “Most Favored Nation” clause that ensures that Sony Music’s various percentages won’t fall behind those of other music labels. The arrangement stops labels from waiting each other out in the negotiation process, in hope of getting the best deal. The labels are not allowed to see each other’s contracts, so independent auditors are employed to check and compare them.
Another muddy, yet interesting, section of the contract deals with the advertising revenue from Spotify’s free tier. As a general rule, Spotify will give 70 percent of its gross revenue to labels and publishers. But here, Sony allows Spotify to keep up to 15 percent “off the top” of all advertising revenues generated by third parties. Spotify might need this money to cover the commissions they pay to external ad companies, or they might just keep it. On that point, the contract is unclear. At any rate, the money is not accounted for in Spotify’s gross revenue total.
The contract also stipulates that Spotify give Sony free ad space worth $9 million over three years. Sony can use that space to promote its own artists or resell it at any price they want. Spotify also promises to make a further $15 million of ads available for purchase by Sony at a discounted rate. On top of this, Spotify must also offer Sony a portion of its unsold ad inventory for free, to allow the label to promote its artists.
The contract also states that Spotify’s smallest payout per stream will be 0.2 cents. But this measure can’t be used to calculate how much Spotify pays for the artists’ streams. It’s only used when it results in a larger payout than the label’s regular cut of Spotify’s total revenue. In essence, it’s a type of minimum guarantee. If too many users get stuck in the free tier, and Spotify’s average revenue per user falls below a certain level, Sony Music can ask to be paid per stream instead.
The complexity of the deal shows why Daniel Ek would always prefer to talk about Spotify’s total payouts to the music industry, rather than get into the details.
How much are artists paid? It depends.
Fairytale of New York
Although a deal was reached with Sony Music, negotiations remained at a standstill with Universal. It seemed as if Lucian Grainge, having installed himself in Santa Monica, was getting cold feet.
“Lucian didn’t want to become global head of Universal and piss off his largest digital retailer, Apple, as his first official act,” as a source would describe it.
The chatter at Universal’s headquarters was still that the Swedes were hoping to launch in the United States and then sell their company to the highest bidder—and Universal Music wanted its fair share.
“If they flipped it quickly, it would not be a fair exchange,” as a different source would recall.
F
or this reason, Universal had demanded that a secret side deal be drafted. It stipulated that Martin Lorentzon, Daniel Ek, and several other major Spotify shareholders would pay Universal tens of millions of dollars if they sold their company, or went public, within a certain time frame. Two sources would recall that the agreement was in place for two years, and could be extended after that.
“They called it ‘schmuck insurance,’” as a third source described it.
The deal would remain extra sensitive since it wasn’t struck between the two companies, but rather between Universal and most of Spotify’s shareholders. This may have been a way of sidestepping the “Most Favored Nation” clause that assured that no one label could get a better deal than the others.
One source would claim that Spotify and Lucian Grainge struck this deal as early as the fall of 2010. By early 2011, it had been signed. Documents registered with Daniel Ek’s holding company in Cyprus would confirm the details. An “Exit Payment Agreement”—signed on January 25, 2011—stated that Universal had the right to two percent of the total purchase price if Spotify was sold or listed.
With Spotify’s valuation about to hit a billion dollars, that extra payment would have amounted to $20 million at the time of signing. Two years later, the same share of Spotify’s valuation had risen to $80 million. It would only be paid out, however, if Spotify was sold or taken public.
For the music industry, there was an upside in letting Spotify remain independent. A dedicated music service in which the major labels held equity would be easier to control and might be used as a counterweight to Apple or Google.
The “schmuck insurance” deal was seen as a win for Universal, but it may also have served the interests of Steve Jobs. After all, it reduced Daniel Ek’s incentive to sell Spotify to one of his competitors, like Microsoft or Google. At this point, the Swede had held acquisition talks with both of them.
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