Just A Friend
As the IPO in New York drew closer, Spotify braced for the scrutiny that would come from authorities and media outlets alike. The Securities and Exchange Commission would be looking closely at everything from business contracts to its accounting, and the background of every person with significant influence at the company.
Daniel Ek may have wondered whether that level of scrutiny would also apply to his close friend and adviser, Shakil Khan. During 2017, Daniel got drawn into a family feud between Shak and his older brother, Tanweer. The spat would create headlines in a range of international news outlets.
Tanweer, who felt that Shak had spoken ill of their father when he appeared on a podcast, was convinced that Spotify and Daniel Ek were not being forthright about the amount of influence his brother held at the company. He sent more than seventy emails to Shak, Daniel, and a Spotify investor claiming that the company was trying to tone down Shak’s role ahead of going public.
Tanweer suggested that Spotify and Daniel were nervous about Shak’s past, which included several convictions, one of them a “serious drug offense.”
“Once a company moves onto the market, journalists have a habit of digging up in the strangest of places to find some very bizarre answers that can leave companies a little bit embarrassed,” Tanweer wrote in one of his emails to Daniel.
Daniel did not respond, instead asking his general counsel, Horacio Gutierrez, to step in. Gutierrez stressed that their “patience had run out” regarding Tanweer’s “unfounded claims and misguided threats.”
“I’m hoping we can avoid the costly and protracted actions that will follow, including those involving your employer, so and [sic] I’m reaching out to you in good faith to discuss before we act,” Gutierrez wrote.
According to Tanweer, Shak had described himself as Spotify’s “head of special projects” on LinkedIn as late as 2018, despite having claimed to step down from that role six years prior. He would also point out that Daniel had tweeted, after Shak’s apparent departure, that the Brit would soon be “hustling” for his company again.
In practice, Tanweer argued, his younger brother had been serving as Daniel’s number two, effectively as co-CEO. A person with that amount of influence would ordinarily be declared openly in an IPO filing.
Tanweer wanted Spotify to “provide full details about Shak’s background so that the reasonable investor can make an informed decision about whether to invest or not,” according to court documents in the UK.
According to Shak, the conflict between him and his brother had begun when Tanweer was starting his company Carbaya, an online platform for selling used cars. Tanweer had described Shak as a key adviser to the company, which Shak denied.
“In fact, I had nothing to do with Carbaya,” Shak said in his witness statement.
In early 2018, two months before the IPO, Shak brought his brother before the UK High Court, arguing that he was being harassed. Ultimately, the judge decided not to move forward with an injunction against Tanweer, arguing that the impact on Shak did not “go much beyond annoyance and distress.”
The ordeal is said to have taken a high personal toll on Shak, who had already been shaken by a heart attack one year prior. As Spotify approached its listing, his LinkedIn profile stated that he was merely an “investor and advisor” to the company.
Once Spotify’s dense IPO filing surfaced, amounting to 200-plus pages, the name of Daniel Ek’s long-time consigliere was nowhere to be found.
C.R.E.A.M.
As signs of Spotify’s listing started to spread, the company’s valuation began skyrocketing on the secondary market. It reached its peak just before the IPO on Wall Street in April 2018. Rarely have shares in an unlisted company traded so intensively. Daniel Ek would soon seize on an opportunity to strengthen his control over the company.
Many of Spotify’s early employees had become millionaires. Key figures such as Sophia Bendz, Mengmeng Du, and Jonathan Forster had converted their stock options and sold off large amounts of shares. Andreas Ehn, Spotify’s first CTO, was said to have earned tens of millions of dollars on his stock options. In the early days, he owned one percent of the company.
The early employee with the largest uptick was Ludvig Strigeus, who held five percent of the company after he sold μTorrent to the Spotify founders back in 2006. His percentage had shrunk as new investors came in, but the share price kept rising. Between 2014 and 2017, the self-taught coder sold shares worth north of $30 million, but that was only a fraction of his total holdings.
Besides being a fantastic investment for venture capital funds, Spotify also enriched many influential private investors. One of them was Ian Osborne, who had advised companies like Uber and individuals such as the former UK Prime Minister David Cameron. Another was the US hedge fund tycoon Robert Citrone.
Throughout 2017, every new licensing agreement signed by Spotify sent the share price up. In April, when the deal with Universal was finally finished, the price jumped by 50 percent to $2,700 per share. Suddenly, Spotify was valued at around $10 billion, nearly four times what eBay had paid for Skype in 2005. For a Swedish tech company, Spotify’s new valuation was enormous; yet this was only the beginning of a remarkable ascent.
The titans of the tech world had now begun to circle Spotify like sharks in shallow water. They followed its impressive growth in paid subscribers and saw how Netflix, another streaming service, was making a splash on the New York Stock Exchange. Masayoshi Son, the CEO of Japan’s SoftBank, explored buying a large stake in Spotify, according to two sources. Softbank’s Vision Fund was currently betting around $20 billion a year on tech companies like WeWork and, in late 2017, Uber. But according to one rumor, things had soured between Masayoshi Son and Martin Lorentzon, who had somehow managed to offend the sixty-year-old Japanese executive.
The global appetite for Spotify stock benefited swaths of brokers and bankers in Stockholm’s financial district. Investment banks such as GP Bullhound would facilitate deals on the secondary market, taking a cut on every transaction. One person who tended to take the bait was Martin Söderström, an energetic young businessman whose wife Charlotte was the daughter of the clothing giant H&M’s majority owner, Stefan Persson. The Perssons now had an investment fund, managed by Martin Söderström. In the fall of 2017, the fund held 0.7 percent of Spotify. Martin Söderström would constantly scoop up small positions under the banner of DIG Investment, a name that originally stood for Djursholm Investment Group, taking its label from the wealthy area where Sofia Ek had grown up.
By the time the licenses from all the major labels were in place, Spotify’s shares had shot up to $4,000 each. The share price had doubled in just over six months. The closer the IPO came, the harder it was to find sellers. As one source would recall, Jack Ma, the founder of the Chinese tech conglomerate Alibaba, placed an order to buy at least $50 million of Spotify shares. But by this time, its shareholders had started to exercise their “right of first refusal,” which meant they had first dibs on any share sale. That effectively put an end to all transactions with third parties. By the time Jack Ma arrived, the game was gone.
At its peak, the secondary-market trading in Spotify was more intense than for any other unlisted tech company, as one person in finance put it. Shares in US tech companies like Uber and Airbnb would also be traded on the private markets, but in their case, rigid US shareholder agreements would block many of the deals. Daniel Ek could have stopped the secondary trades in Spotify, but he didn’t—the trading put upward pressure on the share price, and it allowed his employees to cash in on their stock options. When reputable financial institutions got on the cap table, it also boded well for the IPO.
Some of the busiest buyers were the hedge fund managers at Tiger Global in New York City. When a large option package for Spotify’s staff vested in early 2017, the company encouraged employees wishing to sell to turn to Tiger Global. The firm was an offshoot from Tiger Management, a h
edge fund run by the legendary stock investor Julian Robertson between 1980 and 2000. During the fall of 2017, Tiger Global’s managers asked various investment bankers to find Spotify shareholders willing to sell. Since they were being contacted by brokers representing different institutions, many got the impression that the demand was high. This may, in turn, have driven up the price.
“Tiger was sucking up as much as they could,” as one source would put it.
Shortly, Tiger became one of Spotify’s biggest shareholders. By December 2017, the fund owned six percent of the company, and they would soon come close to Daniel Ek on the list of the largest holdings. But the CEO had no need to worry. It would later be revealed that Tiger’s top executives—the billionaire Chase Coleman and the internet investors Lee Fixel and Scott Shleifer—had transferred their voting rights to the Spotify founder.
It was the same trick that Yuri Milner had deployed when he turned Spotify into a unicorn in 2011. He’d invested tens of millions of dollars without taking a seat on the board. Daniel got the money he needed but didn’t have to relinquish any formal control.
At this point, the billion-dollar valuation of Spotify from 2011 looked almost quaint. Yuri Milner’s firm, DST Global, had sold its last shares in Spotify just before Christmas of 2015, when the share price was $1,800. Two years later, the shares were worth more than twice that.
By the end of 2017, Spotify was valued at $16 billion on the secondary market. And Daniel Ek was about to push that figure even further.
Empire State of Mind
Signs of some new, mystery investor began to show in the spring of 2017, when Chinese delegations started visiting the Spotify headquarters at Jarla House. Employees began to hear the word “Tencent.” The Chinese tech giant would soon become an important Spotify ally.
Tencent had been founded in November 1998 by Ma Huateng—better known as Pony Ma—and his four co-founders. Tencent’s first product was an unapologetic rip-off of ICQ, the popular desktop chat tool that Daniel Ek once used to woo girls in high school.
In the late 1990s, Pony Ma had just enough imagination to call his version IOCQ. After complaints from AOL, the owner of ICQ, he renamed it QQ. Within a few years, the instant-messaging platform would attract hundreds of millions of users.
As Tencent advanced, Pony Ma became known for encouraging competition within the group. Sometimes he’d build several teams with similar assignments and let them duke it out in order to arrive at the best product.
In 2004, Tencent went public on the Hong Kong stock exchange. Its breakthrough moment would not come until seven years later, with the launch of WeChat. By 2017, WeChat had evolved into a social network that covered anything from payments to mobile games to news. It was quickly approaching one billion active users.
Like many Chinese tech giants, Tencent was controversial in the West. Chinese authorities would soon admit that they could erase messages in WeChat, which seemed to tie Tencent closely to the regime. Tencent had also launched a new streaming service, QQ Music, which had recently merged with China Music Corporation’s two competitors, Kugou and Kuwo. The three music services had become one, and the new company would soon come to be known as Tencent Music.
Music streaming was only one area in which Tencent was gaining ground. In the 2010s, the company began to invest widely in the global tech sector. Within a few years, Tencent had invested heavily in Tesla, the ride-sharing service Lyft, and Epic Games, whose hit Fortnite swept over the world in 2017.
Like Yuri Milner, Pony Ma won favors by taking a passive role in his portfolio companies. In October of 2017, he bought twelve percent of the shares in Snap, which was listed on the New York Stock Exchange, and relinquished his voting rights. In the months leading up to the Snap deal, he had also been interested in acquiring all of Spotify, as two sources would recall.
Tencent’s talks with Daniel Ek were said to have begun cautiously. The initial idea was a partnership between Spotify and Tencent Music. But over time, Tencent made it clear that they would be ready to buy the Swedish outfit for around $20 billion. The idea was to merge the two into one. According to one source, Daniel was offered the role of CEO of the new company. Spotify’s Chinese counterpart already had hundreds of millions of users in China, but far fewer paying subscribers.
Publicly, Daniel had often proclaimed that he wouldn’t sell Spotify. Privately, his stance was slightly more flexible. To his executives, he would maintain that selling would only become an option if the deal would provide a better platform to deliver on the company’s vision. The proposal from Tencent, with him as chief executive, looked like it might fulfill his criteria. Yet the Spotify founder was hesitant, viewing an acquisition by Tencent as a backup plan, much as he had with Microsoft and Google in 2010, and with Google again in 2013. He and the Spotify board ultimately decided that they would rather take the streaming giant public, and remain independent.
“Daniel and Martin have always wanted to negotiate with companies like Microsoft, Google, and Tencent to understand the strategic value of the company. But I don’t think they’ve ever had the intention of selling,” one source would recall.
But the negotiations with Tencent did not stop there. In the fall, executives from both companies forged a new plan based on Spotify and Tencent swapping shares in each other’s companies. Spotify would stay out of China, while Tencent would invest in Spotify at a high valuation and help the company clear its debts. The deal was finalized, and in mid-December, the Spotify press department sent out the press release.
“This transaction will allow both companies to benefit from the global growth of music streaming,” Daniel said in a written statement.
In practice, Spotify was allocated shares in Tencent and Tencent Music worth a total of one billion dollars. Tencent acquired shares in Spotify worth just as much. Tencent also bought convertible loans from several of Spotify’s lenders for around $600 million, and converted them into shares in the company. The lenders who sold to Tencent had thus seen their investments double in value. The remaining lenders would also convert their loans into Spotify shares.
Suddenly, Daniel had the kind of anchor investor that normally came with an IPO. Tencent even echoed a traditional listing by agreeing not to sell its shares within a certain time period. In this case, the lock-in wasn’t a few months, but three whole years.
The new shares Spotify had issued to Tencent held a price of $5,300. That pegged Spotify’s valuation at a whopping $25 billion. That share price had effectively set the floor for Spotify’s listing, which was now only weeks away.
Within a year, Spotify had tripled its valuation. It was now worth more than the telecoms giant Ericsson, one of Sweden’s largest public companies. Daniel Ek had paved the way for a grand entrance on the New York Stock Exchange.
Walk Straight Down the Middle
To please Wall Street, Daniel Ek and Barry McCarthy had started to identify a number of new ways to make money, even ones that would set them up for a clash with the major labels.
One of these ideas had been kicking around Spotify for a few years. It revolved around shifting listeners, even slightly, away from music owned by the major labels and toward songs that were less expensive to license. At scale, that could make a big difference to Spotify’s bottom line.
Another project, grown out of the Spotify for Artists platform, was meant to bring the company closer to creators and producers. From a business perspective, it made sense for Spotify to move from being a distributor of music to becoming a destination for consumers and creators alike. This was a red flag to the major labels. So, Spotify would inch forward while drawing a firm line that they promised not to cross.
“We do not own rights, we’re not a label, all our music is licensed from rightsholders and we pay them—we don’t pay ourselves,” a Spotify spokesperson wrote in an email to Billboard magazine in the summer of 2017.
Just a few days later, Daniel found himself under attack. Music Busines
s Worldwide had published a list of fifty unknown artists whose music was trending on some of Spotify’s major playlists, such as “Peaceful Piano” and “Music for Concentration.” All together, the tracks had been streamed more than five hundred million times. Anonymous sources in the music industry railed against what they dubbed “fake artists.”
It emerged that Spotify had licensed music from a Stockholm-based tech company, Epidemic Sound, who would sell access to a database full of music by no-name musicians to YouTubers and the film and TV industry.
The optics were bad. While Apple was signing multi-million-dollar contracts with huge pop stars, Daniel Ek seemed to be peddling a catalog of filler music. Spotify retained a larger portion of the revenue on the songs but had to face the criticism that they were watering down their catalogue. By July 2017, almost 1,500 tracks from Epidemic Sound had found their way onto Spotify. That number would keep growing.
“We’ve found a need for content,” Spotify’s policy and communications director Jonathan Prince said in a statement that appeased few label executives.
Daniel had also started taking an interest in a researcher named François Pachet, who had spent twenty years working at Sony. The Frenchman believed that hit songs could be created through artificial intelligence. His interpretive AI engine was used to scan dozens or hundreds of tracks in order to interpret and replicate their style.
Often, the computer would make independent decisions, such as inserting a few chords from the beginning of the Beatles’ song “Michelle” into a bridge of one of its creations. In another project, François Pachet and his colleagues asked the AI engine to emulate pieces by Johann Sebastian Bach. A survey later showed that more than half of the listeners thought the AI-powered songs were Bach’s own work.
In mid-2017, François Pachet became head of Daniel’s new Creator Technology Research Lab in Paris. There, he would develop AI tools intended to help artists create new music. One of Pachet’s colleagues was already producing AI music together with actual musicians. The band appeared on Spotify under the pseudonym SKYGGE, whose album Hello World got around ten million streams on Spotify in 2018. The AI engine didn’t claim royalties, and never staged a Spotify boycott.
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