The Spotify Play

by Sven Carlsson

  The finance chief did not mince his words. In a pointed email to Spotify’s executive team, Barry wrote that Peter had twelve months to sort out the company’s forecasting, or else he would be gone. The email was written as if Peter weren’t in the loop, but in fact he remained on the executive team’s emailing list. A piece of radical transparency had just been delivered to the top of his inbox.

  Another of Barry’s email blasts was aimed at Henrik Landgren, the head of Spotify’s analytics team. Shortly after he arrived, Barry wrote a company-wide email saying Henrik had done an “okay” job creating and running the analytics team; but it was now time for him to step aside in favor of Adam Bly, the founder of a data-oriented startup in New York that Spotify had just acquired. The announcement seemed to surprise Henrik, who had spent the morning in meetings and talking to colleagues about how to invest the money he was due to make from his stock options. He left the Spotify headquarters upset, to never return, as one person would recall.

  Afterward, Daniel Ek followed up with an email praising Henrik for his efforts. Privately, Daniel then helped Henrik find the funds necessary to buy the shares allotted to him through his stock options, as one person would recall. The former analytics chief came away with a multimillion-dollar profit.

  The unusual but widely praised corporate culture at Netflix would influence Spotify in several ways. At Netflix, numerous employees had access to its running tally of subscribers, information that was highly coveted by anyone trying to make stock trades. A wide group of employees was entrusted with knowing the subscriber count, and directors would sometimes learn of the company’s financial performance before Netflix told the market. They were all entrusted not to leak the information.

  Many years after Barry McCarthy’s arrival at Spotify, Daniel Ek would claim that his company operated with similar levels of internal transparency, disclosing key financial information to many employees but, according to the Swede, never seeing it leak.

  “You have to think hard about when to close the trading window for employees and board members,” Barry McCarthy would recall in an interview for this book.

  The way he put it, Netflix and Spotify opted to offer employees insight into key metrics, while also shortening the amount of time during which they could trade shares freely in between quarterly reports.

  Bosses at Netflix were also known for frequent performance reviews of their employees. Nobody, not even a top executive, was indispensable. Every staff member had to meet exacting internal standards, knowing they could be fired at any time. The only exception, some would claim, was the Netflix CEO, Reed Hastings—though he would retort that he answered to his board.

  In the late 2010s, the board members had few reasons to complain. Hastings had presided over a remarkable rally in Netflix’s stock price that made the company not just Spotify’s blueprint on Wall Street, but one of the giants of Silicon Valley.

  As Spotify’s new CFO, Barry McCarthy took several pages out of his old company’s playbook. He was eager to install loyal lieutenants who would follow his orders, and he rarely backed away from firing people. He was disliked by many, but he was also resolute. And Spotify needed a firm plan if it were to enter the public markets. With time, Daniel Ek would pick up some of his leadership traits.

  Early on, Barry drew up a plan to raise a billion dollars in funding, an eye-catching sum that he would frequently brandish in conversations around the office. On the ninth floor at Jarla House, staffers would ask themselves if the company really needed more money. After all, it had only been a few months since the former CFO and his team raised around $500 million.

  Years later, Barry would say that he wanted the money to be able to weather some tough label negotiations ahead of Spotify going public. Another source would remark that the billion dollars might have been intended for acquisitions, to fend off Apple’s advances within streaming. It also could have served as a safety net in case the economy went sour ahead of the IPO.

  New Kid in Town

  Spotify was now transitioning from a startup to a multinational corporation. Many of the early staffers who quickly advanced to senior positions had been forced to change roles. Some, like Jonathan Forster, the company’s first head of sales, had stayed with Spotify, taking positions further down in the hierarchy. Others, like the marketing whiz Sophia Bendz, had left in acrimony, but kept her peace with Daniel. Then there was a rare cohort of employees who kept climbing the ranks of the company. Among them was Alex Norström, who would become one of Daniel Ek’s most entrusted operatives.

  During one of his few stage appearances, at the 2013 edition of the internet conference Slush in Helsinki, Alex explained how he viewed his mission.

  “We’re trying to build something that will last for more than a century,” the head of growth said.

  When he joined Spotify in 2011, he was met by a bunch of “long-term thinkers,” he said, showing a photo of industrial-era businessmen who founded the Swedish engineering giant Sandvik in the 19th century.

  “We want to grow fast, and we would like to be around,” Alex said.

  Alex valued his close ties to Daniel and was one of a few high-level managers who could make a joke at his CEO’s expense. Initially, he was not part of the Spotify executive team, yet he managed to bypass the traditional corporate structure and report directly to Daniel.

  “People like Alex Norström and Gustav Söderström know how to navigate Daniel’s big picture ideas the best,” as one former employee would put it.

  Within a year or two, Alex earned his stripes as the head of growth. Daniel felt it was time for a promotion and, in the spring of 2015, he tapped him for a new role as vice president of subscribers. Alex’s task was now to convert free users to paid subscribers.

  Alex used a number of tricks straight out of the e-commerce playbook. One of his senior team members was Gustav Gyllenhammar, who had previously been head of Tradera, the Swedish subsidiary to eBay. Together, they identified customers who spent a lot of time inside the Spotify app without paying, and then inundated them with promotional offers. First, they would offer three months of premium listening for the price of one. If that didn’t work, their follow-up would be a premium account for one dollar per month for three months. Families and students got their own discount plans.

  Lowering the price that millions of users were paying caused the number of “subs” to grow even faster. Toward the end of 2015, nearly a third of all Spotify users were subscribers, up from a quarter a year earlier. Lower prices for some meant the average revenue per user would decline, but that did not matter. Once the new subscribers got used to music without ad interruptions, and a fully functional mobile app, chances were they would keep paying the full price. Alex continued to move up the ranks. In September 2016, his title was upgraded to chief premium business officer, and he finally joined the executive team.

  To some, it was glaringly obvious that only men with a certain rapport with Daniel Ek were offered the opportunity to advance at Spotify. Of the dozen-plus people who made up Spotify’s executive team and board, the HR boss Katarina Berg was the only woman. In conversations with employees, Daniel would acknowledge the problem, but also claim that the lopsided representation had been unintentional.

  Piece of Me

  In the fall of 2015, the Skype co-founder Niklas Zennström made a brief appearance in his old hometown of Stockholm. The Swedish Londoner, who had become a billionaire long ago, gathered a group of influential investors and entrepreneurs for a dinner party. One of its most prominent guests was Martin Lorentzon, who struck up a conversation with the head of a Swedish pension fund with over $30 billion at its disposal.

  “I think it would be good for you to have more owners based in Sweden,” Mats Andersson, the head of the Fourth General Pension Fund, told Martin.

  Typically, Swedish public pension funds would only invest in listed companies. But Mats Andersson seemed prepared to make an exception. He explained that Swedi
sh owners would stand firm in a crisis and prove more reliable than private equity funds elsewhere.

  The message struck a chord with Martin. Soon, Spotify had agreed to terms with several institutional investors in Sweden. Even the Wallenberg Foundation—an investment arm of the Wallenberg Swedish industrial family, whose name was synonymous with the corporate elite—began to show their interest. It seemed that Swedish money would make up a large part of Spotify’s next round of financing. But in January 2016, the plans they had drawn up leaked in the daily newspaper Svenska Dagbladet. The article clearly laid out that Spotify was looking for a convertible loan rather than equity funding, and that the plan was to float the company on the stock exchange.

  The article infuriated Barry McCarthy. Rumors swirled that the leak had come from the Swedish bank Nordea, which was involved in brokering the deal. Fuming, the Spotify CFO insisted that he would not “deal with any Swedes ever again,” as several people would recall.

  The row caused a stir among the reputable Swedish institutions. A representative for the Wallenberg sphere called one of Spotify’s Swedish shareholders to vent his frustration.

  “You can’t treat us like this,” the representative said. He made it clear that the two heads of the Wallenberg family empire—the normally understated Marcus and his cousin Jacob—were not happy.

  Fallin’ & Flyin’

  In February 2016, stock prices were falling in China, a hugely important source of growth for the global economy. Fear was spreading among investors that the global economy was headed for a contraction, and loss-making companies such as Spotify were especially vulnerable. Barry McCarthy saw Netflix’s stock price drop over 20 percent within a few weeks. As a result of the market turbulence, one of Spotify’s shareholders, the US mutual fund Fidelity Investments, would soon write down Spotify’s valuation by 30 percent.

  In a market plagued by uncertainty, the Spotify CFO saw even more reason to raise a large round of capital. The billion dollars he sought could get Spotify through a prolonged downturn. The idea was to borrow the money and let the lenders convert what they were owed into Spotify shares at a later date. The upside with a loan was that it would not let investors put a valuation on Spotify. That way, Barry could avoid raising funds at a lower valuation than before. In the tech world, so-called “down rounds” were to be avoided at all costs; it signaled a downward trajectory and irked earlier investors who would simultaneously see their ownership diluted and their shares drop in value.

  Time was not on Barry’s side. If he didn’t act quickly to close the funding round, things might begin to look even worse. Representatives from TPG, an American fund which had invested in both Airbnb and Uber, had been in touch and proposed conditions. TPG wanted at least a 20 percent discount on Spotify shares when the company was listed, as well as interest on their loan.

  “The terms were draconian,” as one person would put it.

  Barry revised his boycott of Swedish investors. The pension funds AMF, Folksam, and the SEB Foundation all joined in on the transaction. The prospective lenders found that the deal guaranteed them at least a 30 percent return once Spotify was listed. And chances were their profits would rise even more.

  “We didn’t understand how they could offer those conditions. It was too good to be true,” as one source on the lenders’ side would put it.

  At the end of March 2016, the Wall Street Journal reported that Spotify was due to take a massive loan that would finance its path to the public markets. TechCrunch called it a “devilish deal,” noting that Spotify needed all the fuel it could get “to win the race against Apple.”

  The terms of the loan were a major concession for Daniel Ek and Martin Lorentzon. Gone was the secrecy surrounding their intention to list Spotify, a piece of information they had kept under lock and key for years. The terms of the loan stated that a listing had to happen, and preferably within a two-year time span. If it didn’t, the lenders would quickly start enjoying larger returns.

  To the markets, it looked as if Barry McCarthy had painted himself into a corner, but the CFO appeared to see two primary upsides with the new arrangement. First, it gave Spotify a better negotiating position with the record labels and publishers. Since Spotify was now well-funded, the labels would not be able to put a “gun to [their] head” by stalling the licensing talks, Barry would recall. Second, the loan made it possible for Spotify to acquire companies.

  Besides, the “devilish deal” had another, hidden benefactor. One of Spotify’s lenders was Barry McCarthy himself, who put up $175,000 with the same favorable conditions attached. Within a few years, the Netflix veteran had made a tidy sum by lending his own company money.

  Losing You

  Daniel Ek and Martin Lorentzon wanted Sweden to remain the base for Spotify’s operations, but they felt that they lacked political support. In April 2016, they decided to voice their concerns.

  “We need to act or we’ll be left in the dust,” they wrote in an open letter to Swedish politicians.

  Former Moderate Party strategist Per Schlingmann, now a political consultant and personal friend of Martin’s, helped draft the letter.

  “It is madness to us that Europe, with a bigger population than the US, does not have a single company on a par with Facebook, Google, Apple, Microsoft, Amazon, or the other major American corporations. We want to show that it is possible!”

  The founders wanted computer programming to be made a compulsory subject at school. They also demanded more rental apartments be built in Stockholm and for the tax on employee stock options to be lowered in Sweden. Spotify’s personnel department was employing fewer people in Stockholm, preferring instead to create jobs in New York, where it was easy to arrange accommodation and advantageous stock options.

  “If no changes are made, we will have to consider focusing our expansion on other countries than Sweden,” the founders wrote. A few weeks later, a group of around sixty protesters from Stockholm’s tech community gathered outside the Swedish Parliament demanding better conditions for fast-growing companies. “If Spotify leaves, Tidal wins,” read one of the signs.

  Spotify’s founders would make good on their threat a year later, in February 2017, when the company signed an agreement with the City of New York to create one thousand new job opportunities. In return, Spotify would get $11 million in rent reductions.

  The new US headquarters occupied floors twenty-seven and twenty-eight in 4 World Trade Center, just across from the Freedom Tower. Eventually, Spotify would extend the lease to occupy nearly six hundred thousand square feet of office space, becoming the building’s second-largest tenant.

  Through the panoramic windows in Daniel Ek’s corner office, the Brooklyn Bridge looked like a miniature toy. It was a major outlay. Even before the extensions, rent for the new space totaled more than half a billion dollars over seventeen years.

  The Spotify headquarters, however, remained in Stockholm. The new building on Regeringsgatan initially covered 215,000 square feet. Daniel Ek would have a corner office there, too.

  Put a Ring on It

  At the end of August 2016, Daniel and Sofia celebrated their wedding at Lake Como in northern Italy. It was an exclusive affair. Photographs of the many celebrity guests would soon make their way onto social media, and to news outlets across the world.

  The ceremony took place outside, overlooking the lake. Daniel—dressed in a light beige linen suit, with a blue shirt and a little flower on his jacket lapel—stood at the head of the aisle next to the officiant, comedian Chris Rock.

  Sofia, wearing a strapless wedding dress, walked down an aisle of pink rose petals to a piano version of “November Rain” by Guns N’ Roses. One of the first guests she passed was Mark Zuckerberg, the Facebook multibillionaire, sporting a dark suit jacket, a white shirt, and a baby-blue tie.

  Friends and family filmed the ceremony on their mobile phones. Shakil Khan, in a white Panama hat tilted to the side, looked on from his place clos
e to the aisle.

  The couple’s two daughters—the three-year-old Elissa and one-and-a-half-year-old Colinne—had traveled with them from Sweden. Daniel’s stepdad, Hasse, and his younger brother, Felix, both posed for photographs that were later posted online.

  Martin Lorentzon was one of the few guests from Daniel’s old group of friends in Stockholm, and only a handful of Sofia’s old crew were there to celebrate.

  When the ceremony ended, the couple walked back over the rose petals hand in hand to applause from the guests. Daniel was now married, and Sofia Levander was Sofia Ek.

  “Drinks with Chris Rock in Como,” Moha Bensofia, Sofia’s old friend, wrote on Instagram beneath a photo of himself and the world-famous comedian. “Just your average Saturday with the Eks.”

  The joke rang true. Daniel Ek now belonged to a world of vaunted tech founders, famous musicians, and Hollywood stars.

  “I don’t know how many other Swedish CEOs have managed to penetrate that bubble,” as one former colleague would put it.

  Later that night, the pop star Bruno Mars performed for the scores of international wedding guests. Photographs from the event would soon end up in news outlets across the world. Hello magazine reported the news and posted pictures, as did Vanity Fair, trade journals such as Billboard, and business magazines like Forbes.

  Mark Zuckerberg uploaded a photo that showed him and Daniel in conversation with Mark’s wife Priscilla in the early afternoon sun, with Lake Como in the background. Priscilla wore a red dress with a beige scarf that matched Daniel’s suit jacket.