Yet there were also several problems with SoundCloud’s core business. Ivarsson balked at the company’s recent licensing deals with the major labels.
“They’re worse than the very first ones we signed,” he said, referring to the draconian terms Spotify managed to secure in 2008.
Complaints against SoundCloud from music rightsholders were another concern. It was one thing for a smaller streaming service to slip up paying artists and songwriters for their streams; it was quite another for a market leader like Spotify, with plenty of cash on hand, to do so. To some, taking over SoundCloud’s disputed catalogue would be tantamount to inviting publishers and labels worldwide to come after Spotify with lawsuits.
“That kind of stuff costs serious dough,” one person would recall.
By late September, information about Spotify’s latest acquisition target had leaked to the press. The Financial Times reported that Spotify was in “advanced talks” to acquire SoundCloud. Pundits began to speculate about what such a deal would mean. In New York, the potential deal had been discussed by both the Spotify board and executive team. At the very last moment, they decided to back out. Two people would recall that the Spotify top brass thought an acquisition of a controversial service might worsen relations with the record labels. Spotify was a year or two away from going public. It couldn’t risk estranging the record executives ahead of the next round of negotiations.
“We came very close to buying them,” one Spotify executive would tell one of his colleagues.
In early December, TechCrunch reported that Spotify had walked away from the negotiations. Daniel Ek needed to find his interactive platform for artists elsewhere. Martin Lorentzon did not seem particularly sentimental, later questioning SoundCloud’s user numbers in a private conversation.
“What are we supposed to do with 175 million email addresses?” the Spotify founder asked.
It would be another six months before SoundCloud’s future path had been set. Alexander Ljung laid off half his staff to bring in new funding from a group of investors that included Raine Group, where the former Spotify adviser Fred Davis served as partner.
With the stroke of a pen, SoundCloud’s valuation was slashed to $150 million, less than half of Spotify’s second bid.
Weapon of Choice
Rather than make a grand acquisition, Daniel Ek and his executive team began to work on their own way of approaching artists. They would devise a plan to let artists upload their music to Spotify directly, bypassing record labels and conventional distributors.
Meanwhile, the legal tussle with Apple intensified. Apple Music was growing quickly, unimpeded by the antitrust investigations into whether it had colluded to impede Spotify’s freemium offering. None of the investigations had led to any fines or charges.
But Spotify had armed themselves by hiring a range of lobbying firms in Washington, DC, and Brussels. Their grievances with Apple were many. It was partly about Apple abusing its power as a distributor while operating its own service. Another issue was Spotify’s insistence that proprietary voice technology, such as Apple’s Siri or Amazon’s Alexa, should be open to outside developers and not place services like Spotify at a disadvantage. After all, Spotify’s strategy of being available on every device was dependent on accessing platforms controlled by other companies.
In June 2016, Spotify scored its first major lobbying landmark. Around lunchtime in Washington, DC, the Democratic senator Elizabeth Warren stepped into a large building with white pillars, around the corner from the White House. She was about to deliver a keynote speech at the New America Foundation, and one of her main talking points lined up nicely with Spotify’s public affairs efforts.
“For markets to work, there must be competition. But today, in America, competition is dying,” Elizabeth Warren said emphatically.
According to Warren, several large corporations were infringing on the competition in industries such as banking, food, aviation, and technology. Specifically, she name-checked Google, Amazon, and Apple.
“While Apple Music is readily accessible on everyone’s iPhone, Apple has placed conditions on its rivals that make it difficult to offer competing streaming services,” she said, stopping just short of mentioning Spotify.
At this point, Spotify had been available in the App Store for nearly seven years. During that time, 30 percent of the revenue from all of their subscription sales through that channel had gone directly to Apple. What critics would call the “Apple tax” made Apple’s services business grow explosively. At Spotify, frustration over Apple’s model was widespread. The product division had long struggled to get their app updates approved and released in the App Store. Several times, Spotify staffers would recall, the process would grind to a halt until Gustav Söderström personally called California to make a complaint.
Gustav Söderström, Chief Product Officer at Spotify, in Stockholm, 2016. (Jesper Frisk)
Daniel Ek would hardly ever speak publicly about how difficult Apple was making life for Spotify, not to mention Steve Jobs’ whisper campaign to thwart his company in the United States. Only once, during an on-stage interview in 2012, did Jobs’ interference come up in stark terms. The online video footage of that interview shows Daniel tackling a touchy subject.
“There’s another story I’ve heard, that Apple tried to keep you out of the US,” the journalist and conference host Walt Mossberg says in the clip. “Is there any truth to that?”
Daniel glances silently at the audience, flashing an awkward grin. Several seconds pass. Finally, his stage partner Sean Parker interjects.
“You want me to answer this one?” he asks the Spotify CEO.
“Yeah, why not,” Daniel mumbles.
“I can get away with saying things he can’t get away with,” Sean continues. “There was some indication that that might have been happening. It’s a small industry in a lot of ways. Certainly a lot smaller than it was ten or twelve years ago,” Sean says, chuckling at his cheeky callback to when his service, Napster, ruined the outlook for a music industry that had just hit its prime.
After a few seconds, Walt Mossberg starts to laugh, and several members of the audience join in. Even Daniel cracks a smile, flashing an admiring glance at his outspoken partner. Daniel would say that Sean was the only person he had met who had spent longer than him thinking about the digital future of the music industry.
In 2016, Daniel Ek still wasn’t calling out Apple in public, but his company was in a stronger position to challenge the state of play behind the scenes. A few weeks after Apple Music was introduced, Spotify’s press department sent out an email. The recipients were all Spotify subscribers who were paying thirteen dollars via the App Store. They were advised to end their subscription there and instead pay Spotify directly.
“You can get the exact same Spotify for only $9.99/month, and it’s super simple,” the email read.
Spotify had stepped up its campaign against the App Store. The following summer, Tim Cook finally tweaked the terms of his distribution platform, cutting Apple’s revenue share to 15 percent after the first twelve months. But that did not mark the end of the legal squabble between Spotify and Apple.
Around this time, Spotify’s product team was trying to get an update through the App Store. Despite several attempts, it wasn’t accepted. Staff at Apple had noticed that somewhere in the app, Spotify asked users for their email addresses, which might let the Swedish company get in touch directly with users they had acquired through Apple, potentially tapping them to start paying Spotify directly. The hardware giant stopped the update.
At the end of June 2016, Spotify’s general counsel, Horacio Gutierrez, sent a letter to his counterpart in Cupertino. He wrote that Apple was using its power as a “weapon to harm competitors.” Apple’s general counsel refuted the criticism.
The row over the App Store terms would continue for many years.
Wall Street
BY 2017, THERE WAS NO tur
ning back. Spotify had to go public, and Daniel Ek dreaded it. Holding quarterly presentations and keeping investment bankers happy was not how he had envisioned leading a tech company. He had no desire to ring the opening bell on the stock exchange or give loads of interviews. But an IPO was the only way he could provide a lucrative exit for his early investors, while at the same time retaining control over his company.
Plenty of challenges lay ahead. Spotify had a loan, which risked costing them hundreds of millions of dollars a year in discounted shares, that needed to be paid off. The company had to get closer to turning a profit. Daniel and his CFO also needed to devise a strategy that would show Wall Street that Spotify was moving up the food chain, and becoming less reliant on the music labels—in other words, that their profits would grow substantially over time.
Some of this was familiar territory. The Spotify CEO had delivered quarterly briefs to a limited group of shareholders for years, and the company’s stock had been trading through a variety of brokers in the secondary market. Big names were waiting for a chance to invest in Spotify. Many of the world’s best-known names in finance and tech were already lined up, hoping for a piece of the action.
Work
To reduce its losses, Spotify once again needed to improve its licensing terms with the music labels. The negotiations were led by Spotify’s chief content officer, the mild-mannered Stefan Blom, who was based in New York. His goal was to ensure that Spotify would retain a larger portion of its revenue than before. The hard-hitting CFO, Barry McCarthy, had made his view clear: It was unacceptable that Spotify, when all the payouts to labels and publishers were complete, only kept around fifteen cents on the dollar.
Toward the end of 2016, negotiations with Universal were at an impasse, which took its toll on Stefan. Daniel Ek had provided the forty-four-year-old father with a luxurious four-room apartment on the Upper East Side of Manhattan, but his work was so demanding that he hardly had time to see his family. His life was essentially a series of nonstop flights to and from Stockholm, London, and Los Angeles to get the label deals over the line.
As usual, Daniel had impossibly high expectations of his executive team. Stefan Blom would rarely push back.
“His weakness was perhaps that he wasn’t very good at saying no to Daniel,” one of his colleagues would recall.
Despite having been in the US for six years, Spotify’s free tier was still controversial. Stefan found himself caught between tough-talking label heads and his own demanding bosses. In the end, Barry McCarthy and Spotify’s general counsel, Horacio Gutierrez, were said to have swooped in and dragged the deal across the line.
“I congratulate Daniel on Spotify’s continued growth and innovation,” Universal’s CEO, Lucian Grainge, said in a written statement when the new deal was signed in April 2017.
The press release made no mention that the negotiations had stood still for several months. One of Spotify’s main concessions to Universal was to let its major artists, like Drake and Taylor Swift, release albums exclusively to Spotify’s premium subscribers for the first two weeks. For the record label, the arrangement was reminiscent of an age in which newly released albums were priced higher than the rest and still sold the most copies in record stores. For Spotify, however, it was another case of the free tier being diluted.
Stefan Blom signed similar deals with Merlin, the digital rights agency for independent record labels, and Sony Music. Then Warner Music, still the caboose of the negotiating process, agreed to their terms. The talks progressed partly because the music industry stood to gain from a successful IPO. The big three still owned more than ten percent of Spotify and understood that if the deals were welcomed by investors, their shares would go up in value.
Once the new licenses went into effect, Spotify went from earning fifteen cents to twenty-five cents on every dollar. The revenue split Spotify had aimed for—with labels and publishers taking 70 percent and Spotify keeping 30 percent—rarely worked out in practice. This was largely because the growth of the company’s free service would end up costing it extra money every year. Under the terms of the new deals, though, growing the free tier of Spotify became considerably less expensive.
Stefan was relieved. He’d survived the most intense part of his professional career, but new challenges were just around the corner.
In December 2017, Daniel Ek gathered the senior directors of his content team. Spotify’s CEO said that he was pleased with the new licenses, but he also questioned if Stefan was up for another tour of duty at the top of the company.
Daniel was now more comfortable making tough managerial decisions. He was inspired by Netflix, where leaders would refer to the company as a “team,” not a “family,” meaning underperformers could be swapped out at any time. Ek had also taken to a concept devised by LinkedIn’s founder, Reid Hoffman, in giving his top executives time-capped assignments. Every “mission,” as he called them, ran for approximately two years. After that, they could either take on new responsibilities or leave the company. In an interview, Daniel would explain that Spotify was the kind of shapeshifting growth company where it was hard for the top brass to manage more than two or three missions before moving on.
With the IPO just a few months away, the Spotify founder seemed unsure if Blom could take things to the next level. Daniel would describe how he asked his executive the same question over and over. Finally, Stefan produced the answer his boss was expecting. In early 2018, he put in his last day at Spotify after more than five years of service.
Daniel Ek—who would point to Stefan’s departure as an example of his management style—personally took over his former colleague’s duties and began to look for a successor.
Stefan’s abrupt exit would stir up feelings not just among Spotify alumni, but also in the music industry. Ek did not say much about it until he, after the Spotify IPO, recounted the episode in an interview with Fast Company. In the article, Ek appeared eager to show Wall Street that he could act resolutely if ever his top people were found wanting.
Yet few sources who had worked for Ek could recall any firing as dramatic as that of Stefan Blom. Many described how Daniel appeared to be developing a ruthless edge as CEO.
“Daniel would sometimes let people hang themselves,” as one source put it.
But several former colleagues said that publicly airing out the argument with Stefan—who had been “very loyal”—felt like an unnecessary move.
Nobody’s Child
For decades, tech founders had tended to list their companies on the Nasdaq stock market in New York. This was true of Microsoft in 1986 and Google in 2004. But after Facebook’s tumultuous IPO in 2012, the trend was broken. Twitter, Alibaba, and Snap all chose the New York Stock Exchange, with its famous pediment and columned facade on Wall Street. That was Daniel Ek’s first choice, too.
In the spring of 2017, Spotify recruited several new board members. One of them was Cristina Stenbeck, principal owner of the Swedish investment company Kinnevik and seasoned tech veteran. Her track record spanned from Avito, a Russian version of Craigslist or eBay, to the German e-commerce giant Zalando.
Two other newcomers were Disney’s former chief operating officer Tom Staggs, and Shishir Mehrotra, a former product design director at YouTube. The last new recruit was Padmasree Warrior, an old friend of Shakil Khan’s who had served on the board of Microsoft since 2015. She was now the CEO of the US division of the electric car manufacturer NIO. All four were independent board members, which meant Spotify now lived up to the requirements of US financial authorities.
To make way for the new board, several people had to step aside. This marked the end of Sean Parker’s formal ties to Spotify, a company he had made significant inroads for in the United States. He had arranged parties, lobbied behind the scenes, and done countless interviews talking up streaming, and the Swedish service in particular. He even strongly defended Spotify when Mark Zuckerberg wanted to limit its exposure on Facebook. But it
had now been years since he argued Spotify’s case in public.
As the IPO neared, Sean Parker’s Founders Fund was not on the Spotify cap table, according to confidential documents. Sean, however, still held a small personal stake in the company. The other outgoing board members were Klaus Hommels, the angel investor and early Facebook backer, and Pär-Jörgen Pärson, who had followed Martin Lorentzon since the late 1990s. Soon, Pärson’s venture fund, Northzone, would send record-breaking returns back to its investors.
Barry McCarthy would soon propose an unconventional way of going public. Instead of enlisting investment banks and raising a huge amount of capital by issuing new stock, he wished to simply register Spotify’s shares on the stock market and have unrestricted trading begin.
It was called a direct public offering, or DPO. Barry explained that Spotify could save time and money by raising capital on the private market ahead of the float. Daniel liked what he heard. The company’s shares were already trading at a record-breaking volume on the secondary market, so perhaps the company wouldn’t need banks to prop up the share price during its first weeks on the New York Stock Exchange.
There was, perhaps, an added benefit to the direct listing. The “schmuck insurance” deal that Spotify had signed with Universal to enter the US market was still in effect, as one person would recall. That deal stipulated that if Spotify were sold or listed, Universal would receive an additional two percent of the purchase price. The money would come directly from Spotify’s earliest shareholders. At this point, that percentage was the equivalent of $200 million, and the sum was about to grow.
But the secret agreement with Universal was never triggered. One person familiar with the details speculated it was because of the direct listing. In their unconventional process, Spotify’s founders may have found a way to duck out of the costly and confidential arrangement.
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