Better Than Piracy

THREE YEARS AFTER STEVE JOBS launched the iTunes Music Store, Daniel Ek and Martin Lorentzon started Spotify. The economy was picking up steam and venture capitalists were feeling more optimistic about tech startups.

During Spotify’s first two years, the founders oversaw the launch of a beta version of their music player. Meanwhile, they were trying to secure licenses to launch the service internationally. For them, persuading the major labels would prove much harder than it had for Steve Jobs a few years prior.

Martin mainly presided over the finances, while Daniel flew to London, New York, and Los Angeles to meet executives at the major labels. In the early days, Martin would accompany him. Several people in their orbit would recall them as polar opposites. Where Martin’s handshake was firm, Daniel’s was weak and clammy. While Martin had a piercing gaze, Daniel’s eyes would often drop to the floor. Martin was the impulsive investor, Daniel the low-key innovator. But Daniel was the patient one who would wear down his skeptics and eventually win them over.

The industry was still in crisis. Every week, executives at the major record companies would hold meetings with young tech entrepreneurs who claimed to be able save them. Their efforts would invariably fail. Apple was still the dominant force, having sold two billion songs through iTunes by January 2007, but music sales were still decreasing by about a billion dollars every year. Meanwhile, the labels were still trying to stomp out piracy. Their lawyers sued file-sharing services—such as LimeWire and iMesh—but also tens of thousands of private individuals. The goal was to scare young people away from pirating music. In Sweden, prosecutors were preparing an indictment against the founders of The Pirate Bay.

At Spotify, the engineers viewed the bittorrent world not as enemies, but as competitors. Daniel would often declare that they needed to build a product experience that was stronger than downloading music files of mixed quality off the web. Spotify needed to offer all the world’s music in a manner that was easy, legal, and free to the user. The company’s revenue would come from advertising and be shared with the record companies and music publishers. One of Daniel’s early advisers was Fred Davis, a music lawyer from New York who acted as outside counsel for Spotify in the early years. He would describe how Daniel wanted to “build something that was better than piracy.”

This pitch would often fall flat when Daniel presented it to people in the music industry. At times it provoked anger. On an early trip to Los Angeles, the two founders are said to have visited the office of Tom Whalley, then CEO of Warner Bros Records in Burbank. According to this account, the meeting ended with Tom Whalley raising his voice, lecturing the Swedes about how free music would never save his industry. Despite frequent setbacks, Daniel Ek stuck to his vision. Eventually, the record label executives began taking him seriously.

London Calling

When Fred Davis first heard about Spotify, the company was in its infancy. He was an accomplished music rights lawyer with his own team, and digital clients such as Myspace and MOG. He visited Stockholm regularly, since he sat on the board of Stardoll, where Daniel Ek had previously served as CTO. Davis called the Stardoll alum to offer his firm’s services. Soon enough he was paying visits to Spotify’s first office, on Riddargatan 20.

Daniel quickly took to the American lawyer with the receding hairline and the no-nonsense East Coast accent. Fred seemed to know a lot about the industry, perhaps because he had grown up around it. His father was the legendary producer Clive Davis, who became CEO of Columbia Records in the late 1960s and later signed artists such as Bruce Springsteen and Whitney Houston.

At an early meeting in the upscale London area of Kensington, Fred met with Rob Wells, who was head of digital at Universal’s international arm, UMGI. A jovial former rugby player with curly dark-blond hair and a Cockney accent, Rob Wells had hammered out licensing agreements with Fred Davis in the past. They sat in a conference room with Daniel, who briefly explained how his new service could change the industry. Rob Wells had heard a lot of pitches over the years, but this one was different. He would recall thinking that Spotify really could become a billion-dollar idea.

“Do you think we have a shot at getting licenses?” Daniel asked.

“Yes,” Rob Wells would recall answering. “But I’d really like to try out a prototype.”

Spotify’s music player wasn’t quite ready, but within a few months, Rob Wells would become one of the company’s early beta testers. Eventually, he would prove to be one of Daniel’s most loyal supporters in the music industry.

I’m a Believer

Early on, Daniel Ek estimated that it would take around six months to secure the rights to a full music catalogue. He had Googled the topic and found indications that music licenses should cost around five percent of a company’s annual revenue. However, that estimate was way off. There were several other lessons he needed to learn. For example, how to distinguish between linear licenses—which he needed—and the non-linear music rights that enabled internet radio services such as LastFM and Pandora.

Fred Davis did his best to enlighten Daniel and help him navigate the waters. The industry was changing quickly, and ad-based solutions were both gaining ground and becoming controversial. Record labels that licensed their music to new digital services would sometimes end up feeling short-changed. In September 2006, Warner Music had astonished onlookers by signing a licensing agreement with the nascent video platform YouTube. The deal gave YouTube the right to stream Warner’s music videos in exchange for part of the advertising revenues. A few weeks later, Google bought YouTube for the record sum of $1.7 billion.

“This left the record labels feeling screwed, Warner in particular. There was bad blood between Warner and YouTube for years because of that,” as one industry lawyer would recall.

Daniel was a fast learner, and he was aiming high. During some of his early meetings with record companies, he claimed that Spotify could bring the industry back to its heyday in the late 1990s. He would describe his product as the link between a declining industry and hundreds of millions of digital consumers. Some label executives found the young Swede conceited and would describe unbearable meetings during which he droned on about the future of their industry. But he also made a few convincing points—the industry couldn’t win in the long term by playing whack-a-mole with individual file-sharers.

Daniel was perseverant, coming back for meeting after meeting. Many of them took place at EMI’s head offices in London, in a sandstone building just off of Kensington High Street.

“He had a sort of force field around him. He was convincing, and seemed to be getting good advice from somewhere,” a former label executive would recall.

An appealing aspect of Daniel’s pitch was that he seemed to be backed by real money. Unlike many music startups, he wanted to launch with commercial licenses from the very start. Daniel offered to pay proper advances and, in time, even showed a certain willingness to compromise.

“He had a big head,” another source would recall, noting that the Swede was “smart, but also a bit full of himself.”

In his travels, the Spotify founder made new connections, sometimes recruiting them to join his company. In the summer of 2007, he was introduced to Ken Parks, an affable, straight-talking music-industry lawyer in his early forties with a slender build and a mischievous smile. Parks had previously handled digital business development at EMI, where he, among other things, negotiated strategic deals with Apple.

At a meeting in New York, Ken and Daniel struck up a conversation that quickly evolved into a friendship. Daniel had a beta version of the service with a trial license from the Swedish collection society, but he had little idea of how to get the linear music rights he needed for a commercial launch.

Ken was already a veteran of the digital music industry. He had been general counsel of a startup called GetMusic that had, among other things, built one of the world’s first online karaoke applications. Now he was open to new ideas and would soon join Spotify as a consultant. Together with Spotify’s negotiating duo in Stockholm—Niklas Ivarsson and Petra Hansson—he began to tinker with the business plan, figuring out how to secure the music licenses that would get the service off the ground. In time, he would become one of Daniel Ek’s closest advisors.

Partner in Crime

In February 2007, at a dinner with friends in London, Daniel Ek met a tech entrepreneur who would become both an important Spotify ally and one of his closest friends. Shakil Khan had raven-black hair, a disarming smile, and, at thirty-three, was already a well-known figure in London’s tech community. Within a few years, Shak, as he was widely known, would invest in Spotify and become Daniel’s envoy in areas beyond the Swede’s reach.

Just like the Spotify founders, Shak had done business in search engine optimization and online advertising. At this time, cunning entrepreneurs could exploit flaws in Google’s search infrastructure for quick profits. Shak’s company, Lightstate, collected personal information online and sold it to companies in the financial industry.

Over dinner, Shak told Daniel about his recent experiences in Shanghai. China already had a booming tech sector, full of venture capitalists ready to take risky bets.

With time, Spotify’s young founder would understand that the self-made Brit had a rocky past. Shak had a history of homelessness and at least one court conviction in the 1990s. Since then, Shak had modernized his schemes, selling search words and domains, and marketing erectile dysfunction pills online. Slowly, he had climbed the ladder into more respectable areas of business.

“What are you up to right now?” Daniel asked him at the dinner.

As Shak would recall, he explained that he was close to selling Lightstate. A bond was beginning to be forged between the two. Barely a year had passed since Daniel had sold Advertigo to Tradedoubler. His money was now largely tied up in Spotify.

During his business trips to London, Daniel would stay at cheap hotels to keep his company’s costs down. Hearing this, Shak offered him to stay in his apartment, adjacent to a train station in East London. Daniel accepted.

When Daniel showed him an early version of Spotify’s music player, Shak knew his Swedish friend was onto something big. Shak would recall one night when Daniel was staying over at his place. Having gotten up to get a glass of water from the kitchen, Shak caught a glimpse of Daniel sitting in bed, staring into a glowing laptop screen. A few hours later, when the sun had risen, Daniel had fallen asleep with his computer on his lap.

Looking back, Shak would comment, “This guy is either going to be really successful—or die trying.”

Boom Clap

Spotify wasn’t the only Swedish startup hoping to transform the music industry. In 2007, two former KTH students started SoundCloud, and quickly moved the office to Berlin. One of the founders was Eric Wahlforss, who had spent a few years in the German capital working at a tech company and making electronic music. His co-founder was Alexander Ljung, a half Swedish, half British sound designer who had run a media agency alongside his studies in Stockholm. Their first office in the German capital was located in a refurbished attic on Auguststrasse 5, above a nightclub in a historic building that had once belonged to the German post office. From their rooftop terrace, they had a splendid view of the gilded dome belonging to Berlin’s Neue Synagoge, and the spear-shaped television tower shooting up from Alexanderplatz.

The duo saw the need for a website where musicians could share their work and interact with each other. Until recently, the American company Myspace had served this purpose, and was still one of the world’s largest websites. But now, the company—which had been acquired by the media mogul Rupert Murdoch—wanted to do everything at once: e-commerce, social networking, online dating, and so on.

SoundCloud’s founders envisioned something more like YouTube, but for audio. They considered the name Clap.com, but reconsidered when they realized that “the clap” was slang for gonorrhea in the US. They finally decided on SoundCloud, a digital platform for audio stored in the cloud.

Daniel Ek heard of the project early on and was quick to meet with Eric Wahlforss at a café in Stockholm. The SoundCloud founder explained his vision to Daniel, who seemed to like it.

“This is perfect,” he said. “You’re building something for creators, and we’re taking care of the listeners.”

There were also cultural differences between the two companies. The circle around SoundCloud tended to be music nerds, while the Spotify team consisted mainly of engineers.

In the summer of 2007, the SoundCloud founders released a closed trial version of their website. Alexander Ljung and Eric Wahlforss had dreamt of building something as big as Flickr, which had been sold to Yahoo! in 2005 for around $25 million. With time, SoundCloud would grow much bigger than that.

One in a Million

In April 2007, Spotify CTO Andreas Ehn spoke publicly about the music service for the first time. The 27-year-old engineer had returned to the KTH campus to partake in a tech conference called “Hey! 2007.” Other speakers at the event included SoundCloud’s co-founders and Henrik Torstensson, Ehn’s former colleague from Stardoll.

Andreas stepped onto the stage dressed in dark blue jeans, a white collared shirt, and shiny black shoes that matched the belt around his waist.

“We’re trying to make music fun again,” he said.

The audience perked their ears. Andreas Ehn was a respected figure at KTH, and his new company was clearly up to something exciting. Andreas spoke of how a future with broader bandwidth was paving the way for new possibilities in the music industry.

“It is only a question of time before someone gathers all the music in one place. The users expect as much,” he said.

The students were now eating out of his hand. When he mentioned that Spotify’s client only weighed 700 kilobytes, whispers began to spread through the room. At one point, an audience member asked where Spotify was getting its money.

“The people funding the company already have several successes behind them. And they are very brave,” Andreas said.

The guests at the conference received some of Spotify’s early beta invites. The same day, rumors of the new service spread through blogs and various Swedish tech forums. Fredrik Cassel, a young investor at the venture capital firm Creandum, had missed the conference, but he read up on it and called Daniel Ek the following Monday.

“We haven’t really started looking for capital yet,” the Spotify CEO said, sounding reassured.

Daniel knew that his partner, Martin Lorentzon, had already shown the client to Pär-Jörgen Pärson at the competing venture firm Northzone. And he had no idea who Fredrik Cassel was.

“What did you say you guys are called? Creandum?” the young founder reportedly said.

A slim thirty-three-year-old with brown eyes, Fredrik Cassel was new to the business of venture capital. At this point, his only previous investment was in a Finnish startup company that would later go bankrupt. He promised himself not to let Spotify slip out of his grip.

The Heat Is On

In the spring of 2007, Spotify had outgrown its first office. The heat from the servers was making the air thick and muggy. The engineers were getting restless. Fredrik Niemelä, the head of product, was dealing with endless arguments over product design. At one point, he put his foot down on a controversial issue, approving a feature that let the listener queue the next song without interrupting the listening experience.

Ideological discussions were frequent, particularly on the subject of immaterial rights. Hailing from the north of Sweden, Niemelä had grown up with traditional, Social Democratic values. He tended to take the side of the little guy, favoring a system that would assure the artists’ right to be paid for their music. Andreas Ehn, ever the prep school type, was more laissez-faire and believed in the principle of free and open platforms. His vision was always that Spotify should evolve into a free service in the style of Skype, and quickly reach hundreds of millions of users across the world. With a little luck, a percentage of them might be convinced to pay.

The engineers generally saw the music industry as hopelessly backward. Many felt a stronger kinship with the founders of The Pirate Bay, whom they would run into in various social situations. None of them thought file-sharing was a serious crime, but they generally recognized the need for a legal alternative.

The label negotiations now devoured most of Daniel Ek’s time. At Spotify’s monthly employee meetings, he would often claim that a breakthrough was close. The more honest conversations were reserved for the negotiating team, or for Martin Lorentzon, whose incurable optimism was an important asset.

“Martin saw the brilliance in Daniel, but also that he lacked resolve early on, and tended to overthink things,” as one source would recall.

Where Daniel might get bogged down in details, Martin shunned complicated arrangements. He encouraged the young CEO to keep things simple and avoid straying from their original plan.

Tightrope

The Spotify client remained in beta in 2007 and for most of 2008, but the engineers treated it as if it had been commercially launched. They tinkered with product updates until they were blocked by Petra Hansson. Sensitive to the needs of the music industry, she had a reputation for being a hard-ass, corporate-style lawyer who would clamp down on their impulsive ideas, like letting users import their own downloaded MP3 files into the Spotify client.

In late June 2007, Spotify’s staff were finally able to move into a real office, located a few blocks west on Humlegårdsgatan. They ordered food from a Thai restaurant and drank beer to inaugurate the new space. Martin saw to it that the new office was equipped with a foosball table and a pool table. In the entrance, guests were met by a large, three-dimensional logo with the word Spotify in big white letters against a pea green wall above a dark gray sofa. Soon, the little TM symbol above the “y” in Spotify fell down. The office administrator, Martin Birkeldh, had to order a new one.

The new office was a huge step up, but Spotify still had no revenue and no outside investors on the cap table.