DANIEL EK, SPOTIFY’S founder, is pale, boyish, cerebral, and calm. Jantelagen, the Scandinavian code of humility and restraint, is strong in him. He is a rock star of the tech world, but he isn’t long on charisma. No firm handshake is offered from behind an imposing desk; he doesn’t use a desk. He sprawls on a couch with his laptop, like a teenager doing his homework. Wandering the office floors, around the open core of a big building on Birger Jarlsgatan, in central Stockholm, he says he likes to encourage “random encounters,” which Ek once read was Steve Jobs’s plan in laying out Pixar’s offices.
Ek’s phlegmatic Swedish manner makes his unshakable, almost spiritual belief in Spotify, the Netflix of streaming music service, burn all the more brightly. His vision, that Spotify is a force for good in the world of music, is almost Swedenborgian: salvation in the form of a fully licensed streaming-music service where you can find every record ever made. Spotify doesn’t sell music; it sells access to it. Instead of buying songs and albums, you pay a monthly subscription fee ($9.99), or get served an ad every few songs if you’re on the free tier. You can listen to anything on the service—the Beatles (as with iTunes, the surviving members are not rushing in) and Taylor Swift (who left the service in a blaze of publicity) notwithstanding. There is an astonishing amount of music on Spotify. It’s a music nerd’s dream, which may be why the user population on Spotify tends to lie outside the mainstream. On Spotify, the Pixies’ top songs have about four times as many streams as Neil Diamond’s biggest hits.
Spotify launched in Sweden and part of Europe in 2008, nine years after Napster. In some respects, Spotify was Napster—a site where you could find almost any song you wanted, for free. Ek was even one of the pirate band. Before starting the company, he had briefly been the CEO of uTorrent, which made money in part by monetizing pirated music and movies on BitTorrent, a major file-sharing protocol. Later, the Napster co-founder Sean Parker, for years public enemy number one to record-company executives, joined forces with Ek. Who would have imagined, as one label head put it, that “your enemy could become your friend”?
One factor in the evolution of the labels’ thinking was Apple, which had proved to be an unsatisfactory business partner. The iTunes store, the industry’s attempt, in partnership with Apple, to build a digital record shop, opened in 2003 to sell downloads, but that didn’t alter the downward trajectory of sales revenues; indeed, by unbundling tracks from the album so that buyers could cherry-pick their favorite songs, Apple arguably hastened the decline. Music had been an important part of Apple’s business when Steve Jobs first negotiated the iTunes licenses, back in 2002—the music helped sell the iPod. But by 2011 music was more important to the Apple brand than to its business. Apple would not even let Android users, who represent more than 80 percent of the global mobile business, have iTunes on their phones, because it wanted to sell iPhones. Spotify offered a way out of a troubled marriage.
By 2014, Spotify was in more than fifty-eight countries. (Canada, its latest market, got the service that September.) It had raised more than half a billion dollars from investors, including Goldman Sachs, to fund its expansion, and there were rumors of an IPO in its future, to raise more. Spotify’s user base exceeded 50 million globally, with 12.5 million paying subscribers. At the current rate of growth, that number could reach 40 million subscribers by the end of the decade. It had paid out more than $2 billion to the record labels, publishers, distributors, and artists who own the rights to the songs. “I’m very bullish on it,” Tom Corson, the president of RCA Records, says. “The all-you-can-eat access model is starting to make sense to people. And we expect that free is going to roll into subscription and that is going to be a really huge part of our business.”
ON SPOTIFY, THE SONG is once again king, just as it was in my maternal ancestors’ time. Yes, you can listen to albums if you want to—it’s the same price as listening to a song, after all—but that’s not the way the system is organized. Instead you are pushed to listen to playlists of songs by different artists, often ranging across traditional genres, made by Spotify’s own curators and editors, as well as by Spotify users. In enabling Spotify’s playlist culture, Ek has done as much as his countryman Max Martin to break down traditional genres like R&B, rock, hip-hop, and pop.
The playlist is the album of the streaming world. Ek thinks top artists will start making their own playlists. They will be organized around activities and moods—“moments” Ek calls them—rather than around the artist’s creative vision, as it was in the age of rock ’n’ roll. “A workout playlist that is a collaboration between Avicii and Usain Bolt,” for example, Ek says.
You can design your own Spotify day. You wake to the “Early Morning Rise” playlist (Midnight Faces, Zella Day), and get ready with “Songs to Sing in the Shower” (“I’m hooked on a feeling/I’m high on believing”). Depending on how much work you have, there’s “Deep Focus,” “Brain Food,” or “Intense Studying.” By eleven thirty, you’ve hit “Caffeine Rush,” and, after a sandwich at your desk (“Love That Lazy Lunch”), it’s time to “Re-Energize” (Skrillex, Deorro) for the afternoon. A late-in-the-day “Mood Booster” (Meghan Trainor) gets you pumped for your workout (there’s a “House Workout,” a “Hip Hop Workout,” and a “CrossFit Mix,” to name just a few). Then it’s “Happy to Be Home” (Feist, the Postal Service). After “Beer ’n Burgers” (rockabilly) or “Taco Tuesday” (Celia Cruz), you “Calm Down” (Wilco, the National) and then, depending on your love life, click on “Sexy Beats” or “Better Off Without You” (or maybe “Bedtime Stories,” for the kids), followed by “Sleep” (heavy on Brian Eno, king of the z’s).
“We’re not in the music space—we’re in the moment space,” Ek declares, with the slight air of spiritual superiority that tech visionaries sometimes give off. The moments are created by Spotify programmers, using song analytics and user data to help them select the right songs for certain activities or moods, and build playlists for those moments. In 2014, Spotify bought a Boston-based startup called the Echo Nest, which has developed a form of artificial music intelligence—a kind of AI hipster that finds cool music for you. The Echo Nest powers Spotify’s automated radio stations and is also behind an in-house programming tool called Truffle Pig, which can be told to sniff out music with combinations of more than fifty parameters, such as “speechiness” and “acoustic-ness.” Now that the Echo Nest is part of Spotify, its team has access to the enormous amount of data generated by Spotify users showing how they consume music. Spotify knows what time of day users listen to certain songs, and in many cases their location, so programmers can infer what they are probably doing—studying, exercising, driving to work. Brian Whitman, an Echo Nest co-founder, told me that programmers also hope to learn more about listeners by factoring in data such as “what the weather is like, what your relationship status is now on Facebook.” (In 2011, Facebook entered into a partnership with Spotify.) He added, “We’ve cracked the nut as far as knowing as much about the music as we possibly can automatically, and we see the next frontier as knowing as much as we possibly can about the listener.”
Playlists can be customized according to an individual user’s “taste profile.” You just broke up with your boyfriend, you’re in a bad mood, and Justin Timberlake’s “Cry Me a River,” from the “Better Off Without You” playlist, starts. Are you playing the music, or is the music playing you?
BY THE TIME HE turned twenty-two, Daniel Ek had achieved his life’s ambition: he was rich. A gifted programmer, he had been making money by working on Internet-based tech products since he was fourteen. After selling an Internet advertising company called Advertigo, in 2006, he retired. He rented a big place in Stockholm. He bought a red Ferrari and drove it to nightclubs, where he arranged for good tables for friends and attractive female companions, whom he plied with expensive Champagne. He lived like this for a year or so, until one morning he awoke to a startling realization. “I was completely depressed,” he says.
“I realized the girls I was with weren’t very nice people,” Ek goes on, “that they were just using me, and that my friends weren’t real friends. They were people who were there for the good times, but if it ever turned ugly they’d leave me in a heartbeat. I had always wanted to belong and I had been thinking that this was going to get solved when I had money, and instead I had no idea how I wanted to live my life. And no one teaches you what to do after you achieve financial independence. So I had to confront that.”
Ek describes himself as “missionary,” by which he means he likes to formulate five-year missions for himself. “That’s how I think about life,” he says. “Five years is long enough for me to achieve something meaningful but short enough so I can change my mind every few years. I’m on my second five-year commitment on Spotify. In two years, I will have to make my next one. I will need to ask myself if I still enjoy what I’m doing. I’m kind of unusual that way, but it gives me clarity and purpose.”
Ek sold the Ferrari, got rid of the apartment, and moved to a cabin near his parents’ place in Ragsved, a Stockholm suburb, where he meditated about what to do with his life. He had soul-searching conversations with Martin Lorentzon, the Swedish entrepreneur who had bought Ek’s advertising company, and was himself looking for a new project. “And we always came back to the music industry,” Ek says.
Like many teenagers around the turn of the millennium, Ek had become infatuated with Napster—in particular, with the idea of a site where all the world’s music was available for free. Radio offered free music too, of course, but radio wasn’t interactive; you couldn’t pursue your own interests, the way you could on Napster. Ek says, “Before that, I was listening to Roxette,” the Swedish pop-rock band from the ’80s. “I discovered Metallica and learned that they were inspired by Led Zeppelin, and King Crimson, and then I got into the Beatles. And from there I went to Bowie and the whole British scene from the Eurythmics to the Sex Pistols. Hearing the anger and frustration of the Sex Pistols or the Clash made you feel like you were in the seventies. You started to understand culture. It was pretty magical.”
Ek goes on, “It came back to me constantly that Napster was such an amazing consumer experience, and I wanted to see if it could be a viable business. We said, ‘The problem with the music industry is piracy. Great consumer product, not a great business model. But you can’t beat technology. Technology always wins. But what if you can make a better product than piracy?’ ” Ek continues: “Piracy was kind of hard. It took a few minutes to download a song, it was kind of cumbersome, you had to worry about viruses. It’s not like people want to be pirates. They just want a great experience. So we started sketching what that would look like.”
Their “product vision,” in tech parlance, was that the service had to give the impression that the music was already on your hard drive. “What would it feel like?” Ek asks. “That was the emotion we were trying to invoke.” The key was to build something that worked instantly. Streaming, whether audio or video, tends to have built-in delays while you wait for the file, which is stored on a server in the cloud. But if the music starts in two hundred milliseconds or less—about half the time it takes, on average, to blink—people don’t seem to perceive a delay. That became Ek’s design standard. He told his lead engineer, Ludvig Strigeus, a brilliant programmer he had worked with before, “I don’t accept anything that isn’t below two hundred milliseconds.”
Strigeus responded, “It can’t be done. The Internet isn’t built like that.”
“You have to figure it out,” Ek insisted.
The solution involved designing a streaming protocol that worked faster than the standard one, as well as building their own peer-to-peer network, a decentralized architecture in which all the computers on it can communicate with one another. In four months, they had a working prototype.
“And I knew when we had it that it was going to be very special,” Ek says.
Ek’s original idea was to launch Spotify in the United States at the same time that he launched the service in Europe. Ken Parks, Spotify’s chief content officer, says, “Daniel thought he could just go down to the corner store in Stockholm and pick up a global license.” He didn’t realize that he would have to negotiate directly with all the different copyright holders, a herculean task. Not surprisingly, the labels weren’t interested. Ek was an outsider—a techie, and a Swedish one at that.
Parks, an attorney who’d worked at EMI recalls, “We needed to overcome the music-is-free mentality that Spotify represented.” Of the labels’ attitude, he continues, “If you have something you’ve invested a ton of money in, and you’ve been selling it for a lot, and you feel raped by piracy—to say to that person, ‘The only way to beat this is to co-opt the people who are stealing from you,’ that was a challenge.” Ek says, “If anyone had told me going into this that it would be three years of crashing my head against the wall, I wouldn’t have done it.”
Eventually, Ek decided to start regionally and prove that his concept worked. “And I invested all of my personal money in it,” he says, “saying, you know, here’s my balls on the table. For them, the risk of trying it was kind of zero.” Swedish labels, gutted by piracy, literally had nothing to lose.
SEAN PARKER WAS LIVING in the Plaza Hotel, in a private residence in the northeast corner of the building, looking out at Fifth Avenue and Central Park South. His townhouse in the Village was undergoing long-term renovation. The grand, high-ceilinged dining room had commanding views in both directions, and it was there that the thirty-four-year-old billionaire was sitting on a warm fall afternoon, dressed in jeans and rust-colored high-tops, drinking tea from a white china cup. It was a setting that would have impressed Edith Wharton, even if the owner’s attire might not have.
Parker recalled the end of Napster, and the havoc that followed in its wake, as illegal file-sharing sites bloomed. As for him, “I went off and did other things.” He became president of Facebook in 2004, and helped turn it into a company, which helped turn him into a billionaire. “But in the back of my mind I was thinking about the untimely fate that Napster had met. That aborted mission.” He had watched while other entrepreneurs tried to realize the dream that was Napster. “They’d try to negotiate with the record labels and they really didn’t speak the language and they’d end up adapting their product vision to the terms they were able to get,” he says. In 2009, a friend told him about a Swedish service called Spotify. Parker had never heard of it. He sent Daniel Ek an email, and they arranged to meet.
“The thing that made Spotify very different when I first met Daniel and Martin was that they had this incredible stubbornness,” Parker goes on. “In a good way. They were willing to let the product vision lead the business deals.” He agreed to invest in the company and help Ek in his negotiations to enter the US market. “Daniel said, ‘I think it’s going to take six weeks to get our licenses complete.’ It ended up taking two years.” Of the four global music companies at that time—EMI, Sony, Warner Music, and Universal—Ek had managed to get EMI and Sony on board, but Universal and Warner were holdouts. The latter was led by Edgar Bronfman Jr., who had spearheaded the move to close Parker and Fanning down back in 2001.
This time, Parker was more persuasive. “He did know a lot of people,” one top label executive says. “Daniel Ek didn’t. And he worked it nonstop.” The Swedish trial period, during which piracy plummeted, was key. The record industry’s total revenues in Sweden grew by more than one-third between 2008 and 2011. As the label executive recalls, “It was like—OK, proof of concept, we should be doing this if we can get the right license.”
Thomas Hesse, who led the negotiations for Sony, says, “The main reason it took so long for Daniel to get all the majors on board was that he had this free tier, where all the music was on demand. Was that going to cannibalize the download world?” In the end, the free tier was limited to personal computers, so users would have to pay for subscriptions in order to listen on their mobile devices, a major incentive to convert to the paid tier. Nevertheless, Hesse continues, there was “a lot of discussion about how much Spotify needed to pay for the free streaming and how many paying subscribers it could potentially guarantee.”
After Universal made a licensing agreement with Spotify, Warner was virtually compelled to join the other major labels in negotiating. At the time, the company was also looking for a buyer. Parker says that he tendered an offer to buy Warner with Ron Burkle, the Los Angeles–based venture capitalist. When another buyer, the Russian oligarch Len Blavatnik, expressed interest, Parker recalls telling him, “Look, if you make Spotify contingent on the deal, I will withdraw my offer and you’ll get the company.” In 2011, Blavatnik bought Warner, for $3.3 billion. Parker became a Spotify board member and helped broker its partnership with Facebook.
The exact terms of the licensing deals that Spotify made with the label groups are not known; all parties signed nondisclosure agreements. In addition to sharing with other rights holders nearly 70 percent of the money Spotify earns from subscriptions and ad sales—about the same revenue split that Apple provides on iTunes sales—the labels also got equity in Spotify, making them business partners; collectively, they own close to 15 percent of the company. Some analysts have questioned whether Spotify’s business model is sustainable. The company pays out so much of its revenues in fees that it barely makes a profit. It operated at a loss before 2013. (The company maintains that its focus has been on growth and expansion.) The contracts are renegotiated every two or three years, so the better Spotify does, the more, in theory, the labels could ask for. This makes Spotify unlike many Internet companies, in which the fixed costs of doing business become relatively smaller with scale. For Spotify, scale doesn’t diminish the licensing fees.
When Spotify began in the United States, in the middle of 2011, labels demanded up-front payments as the price of getting in the game. These payments were not always passed along to the content creators, even though it is their work that makes the catalogues valuable in the first place. Month by month, Spotify pays the major labels lump sums for the entire market share of their catalogues. How the labels decide to parcel these payments out to their artists isn’t transparent, because, while Spotify gives detailed data to the labels, the labels ultimately decide how to share that information with their artists. The arrangement is similar on the publishing side. Artists and songwriters basically have to trust that labels and publishers will deal with them honestly, which history suggests is a sucker’s bet. As one music-industry leader puts it, “It’s like you go to your bank, and the bank says, ‘Here’s your salary,’ and you say, ‘But what is my employer paying me? I work for them, not you!’ And the bank says, ‘We are not going to tell you, but this is what we think you should get paid.’ ”
Parker’s tea had grown cold, and he poured some hot water into it. The October light dimmed in the high Plaza windows. He pondered the progress of the tide of humanity flowing up and down Fifth Avenue. For him, he tells me, Spotify is a do-over—a second chance to get Napster right. And that felt “very vindicating.”
THE QUESTION OF WHETHER Spotify is good for artists is wickedly vexed. The service has been dogged by accusations that it doesn’t value musicians highly enough. In 2013, Radiohead’s Thom Yorke memorably called Spotify “the last desperate fart of a dying corpse,” a remark that “saddened” Ek. Taylor Swift wrote in a Wall Street Journal editorial, “In my opinion, the value of an album is, and will continue to be, based on the amount of heart and soul an artist has bled into a body of work.” For Swift, streaming is not much different from piracy. “Piracy, file sharing and streaming have shrunk the numbers of paid album sales drastically, and every artist has handled this blow differently,” she wrote. But was pulling her music from Spotify a gesture of artistic solidarity, or, as one insider put it, “a stunt to wring the last drop of blood out of what is a dying model”—that is, album sales?
Ek’s answer to the question of whether Spotify is good for artists tends toward the tautological. If it’s good for listeners—and almost everyone who uses Spotify likes it—then it must be good for artists, because by encouraging more listening it will “increase the over-all pie.” Many music-business people think he’s right. Richard Jones, the Pixies’ manager, says, “Particularly for artists who are established with solid catalogues and are big live-touring acts, streaming services can be extremely beneficial. I’m a massive supporter.” He says of Taylor Swift’s decision to pull her music, “It’s purely PR-driven, which is fine. But let’s not pretend it’s artist-friendly. Because actually the most artist-friendly thing here is for everyone to make streaming into something that is widespread.”
But for a lot of musicians, Spotify has further eroded their CD and download sales, without coming close to making up the difference in streaming revenues. Ek acknowledges that the switch from a sales model to a streaming model could be bumpy for some artists. “In Sweden, there was one tough year and then the debate changed,” he says. “That will happen in the larger markets. The end goal is to increase the entire pool of music. Anything else is part of the transition.” He adds, “This is the single biggest shift since the beginning of recorded music, so it’s not surprising that it takes time to educate artists about what this future means.”
Two artists who are part of that transition are Marc Ribot, an esteemed jazz guitarist, and Rosanne Cash, whose work has won two Grammys and received twelve nominations. Both are midlevel, mid-career musicians who are a vital part of the New York City music scene. Both have worked with major labels. The long tail is supposed to benefit artists like Ribot and Cash, and Spotify’s payment system is a good example of why it hasn’t, so far. You can spend all your Spotify time in the tail, listening to Ribot and Cash, but 90 percent of your subscription fee is still going to the megastars in the head, because that’s how Spotify’s share-based system works.
They got together in New York one afternoon in October to talk to me about Spotify. Ribot and Cash brought along their Spotify numbers. In the past eighteen months, Ribot reported, his band made a $187 from 68,000 streams of his latest album, available on Spotify in Europe and the United States. Cash had made $104 from 600,000 streams. The math doesn’t fit Spotify’s benchmarks, but that is how their labels and publishers did the accounting.
On hearing that both Ek and Parker seemed to be sincere in their desire to help artists, Ribot said he and his fellow musicians had been hearing this for almost fifteen years now. “Our ‘friends’ in the online-distribution business have helped artists to go from a fourteen-billion-dollar domestic record business to a seven-billion-dollar one, and now Spotify wants to help us reduce it even further. With friends like that, give me the old Brill Building system.”
Ribot goes on, “Here’s the simple fact that no one wants to talk about. Spotify says it pays out seventy percent of its revenues to rights holders. Well, that’s very nice, that’s lovely. But if I’m making a shoe, and it costs me a hundred dollars to make it, and the retailer is selling that shoe for ten dollars, then I don’t care if he gives me seventy percent; I don’t care if he gives me one hundred percent—I’m going out of business. Dead is dead.”
Cash says, “I don’t think any of us want to make the streaming services go away. We are not Luddites. We just want to be paid fairly.”
“And we’re not going to say a model is viable unless it’s viable for the creators,” Ribot adds. “I know Daniel Ek is going to do just fine. I don’t know that about the people in my band.”
“And, if the artist can’t afford to work, the music is going to suffer,” Cash puts in, with feeling. “Spotify is not acting in its own self-interest by obliterating us.”
At least Ribot and Cash can go on the road. Nonperforming songwriters don’t have that option. AM/FM radio pays the writer of the song on a per-play basis, but gives the performer and the owner of the recording of the song—generally, the record label—nothing. On most streaming services, the situation is nearly reversed: the owners of the recording get most of the performance royalty money, while the owners of the publishing get only a fraction of it. The reason for this, as one music publisher explains, is because “Basically, the major music corporations sold out their publishing companies in order to save their record labels. Universal Music Publishing took a terrible rate from streaming services like Spotify in order to help Universal Records. Which, in the end, means that the songwriter gets screwed.”
You could obliterate the Ribots and Cashes of the music world, and the labels would do just fine. But if songwriters can’t afford to work, then the whole hit-making apparatus of the song machine is doomed. Aloe Blacc, one of the songwriters of Avicii’s smash “Wake Me Up” (as well as a vocalist on the track) received only a small fraction of the song’s millions in Spotify earnings. As we have seen, the artists don’t write, by and large, which makes it easier to control them in the production of hits. The writers, for their part, already share songwriting credit with a half dozen or so other writers, because of the way song production has been industrialized since the early ’90s. And now that share is threatened by services like Spotify, because the labels are keeping more of the money for themselves. “If streaming is the future,” songwriter Savan Kotecha says, “no young songwriter will be able to make a living.”
OR MAYBE SPOTIFY ITSELF will get obliterated. Apple, Amazon, and Google are all in the on-demand streaming market. Spotify’s advantage, Ek maintains, is its data and its ability to analyze that information. “We’ve been doing this for years,” he says. “And what we’ve built is the largest set of data of the most engaged music customers. I think it would be really hard for anyone to come in and do what we do better. Maybe someone could lower the cost of a streaming service and make it hard for us to survive. But am I concerned that someone will build a better product? No, because they can’t.”
James McQuivey, an analyst with the Boston-based Forrester Research, is less optimistic about the company’s prospects. “Spotify has shown people the value of streaming,” he says, “and that means somewhere someone could use that value in a bigger chess game. Someone like an Apple or a Google is already realizing how valuable music is as a customer-engagement tool and will offer something quite similar to this, without making you pay for it, the way Amazon has included video in the Prime membership without expressly charging. And then suddenly you’ve disrupted Spotify.” He adds, “If I have to say yes or no will Spotify be as big and strong as it is five years from now, the answer will be no.”
Apple could pose a real threat to Spotify by preinstalling its service—Apple Music—on a future generation of iPhones and including the price of a subscription in the plan. Siri could be your DJ. That would ensure a paying user base in the hundreds of millions almost instantly, easily eclipsing Spotify’s. And since Apple makes money primarily from its hardware, it could afford to undercut Spotify on the price of a subscription—a scheme it was promoting to the labels. Of course, that would require the support of the labels, and they are Spotify’s business partners in streaming.
“You might want to take a discount in a business you have equity in,” one label head says. “You might not want to take a discount in a business you don’t have equity in. Would we subsidize Apple with no real upside for us? We did that once before. It was called unbundling the album.” In any case, the downward pressure on price from increased competition seems likely to diminish the pot of money that the rights holders get to divide.
Even if Spotify does manage to survive Apple, it would take years to complete the paradigm shift to streaming. Meanwhile, album sales would continue to decline—even albums recorded by Taylor Swift. Although 1989 was by far the biggest-selling album of 2014, its first-week sales, 1.3 million, were far short of the 2.4 million first-week sales of ’N Sync’s 2000 album No Strings Attached. The labels, feeling the pinch in their bottom line, may try to squeeze more money out of Spotify, imperiling its future growth. They may even try to cash in their equity stakes. Proving that, while your enemies can indeed become your friends, the reverse can also be true.