Bridge to America

SPOTIFY’S BUSINESS MODEL RELIED ON volume. In order to succeed, Daniel Ek had to outgrow his competitors, enter the US market, and become one of the world’s biggest music-streaming providers. If investors didn’t see constant breakneck growth, they would stop pumping in the cash that fueled the company and Spotify would likely spiral to its death. Daniel knew it, the heads of the record companies knew it, and Steve Jobs knew it, too.

The Apple CEO had seen enough streaming companies fail and falter to understand the importance of momentum. Apple had allowed Spotify to be part of the App Store and keep growing in Europe. But, when its founder heard that Daniel was looking for music licenses in the US, he pushed back, as several people would recall.

Some saw Jobs’s behavior as a whisper campaign intended to stop, or at least delay, Spotify’s entry in the US. Apple’s chief executive had, after all, spent years building and marketing iTunes together with his allies at the major labels. It had become the world’s largest music store, and an integral part of Apple’s ecosystem, driving the sale of Macs, iPods, and iPhones. Spotify was like a foreign vermin threatening to invade Apple’s walled garden.

Many music executives shared Jobs’s perspective. Sure, Apple was dominant, but the company was selling downloads for billions of dollars, giving around 70 percent back to the industry. Spotify’s growth was based on giving music away for pennies on the dollar, with a vague promise of changing digital distribution down the line.

If Daniel wanted the keys to their market, he needed to make them an offer they couldn’t refuse.

California Dreamin’

On a sunny day in September 2009, one of America’s best-known tech journalists stepped into Centre Point in London. The sound of her heels hitting the marble floors echoed through the lobby. Kara Swisher had covered the industry for more than ten years, interviewing names like Bill Gates and Steve Jobs. Today, she had an appointment to see Daniel Ek.

Swisher took the elevator up to Spotify’s offices, set up her video camera, and opened the interview with a bit of flattery.

“You’re it in Silicon Valley,” she said, as the camera started recording.

Daniel smiled cautiously.

“We’re quite big here in London,” he said. “Hopefully we can make our leap over to the US quite soon.”

He then launched into his usual pitch: Spotify was going to beat the pirates and save the music industry. When asked about the company’s future direction, he was clear.

“I want to grow and become an independent company. I don’t want to sell to anyone.”

Daniel did not want Spotify to be acquired by a US tech giant.

“What I hope to do is build a good, independent company that hopefully can start acquiring US businesses,” he said.

The Spotify CEO had now adopted a more polished style. His disheveled combover had been shaved off, and at times he’d throw a suit jacket over his usual garb of polo shirts or t-shirts.

Daniel had recently relocated to London with his Swedish girlfriend, Charlotte Ågren, whom he had been dating for more than six months. A few years younger than Daniel, Charlotte was a charming and outgoing Stockholmer who loved to organize dinners and was often the life of the party. She would later acquire and develop an online community for Swedes based in London.

When they met at a poker night for entrepreneurs in Stockholm, Charlotte had been saving money to study in Australia. Instead, she settled for Marylebone, a picturesque area of central London known for its quaint high street with cafés and book shops. She and Daniel moved into an apartment with a large balcony and hardwood floors, within walking distance of the Spotify UK office.

The young Swedish couple lived on Great Portland Street, just a few buildings down from Shakil Khan. In fact, Shak had been the one who found their rented condo apartment and welcomed them with membership cards at trendy members’ clubs like Soho House. He would also introduce Daniel to restaurants like Nobu in the posh, nearby area of Mayfair.

“Shak took Daniel’s life to a whole new level,” as one person familiar with their interactions would recall.

Like Daniel, Shak was a self-made entrepreneur who had spent years hustling on the startup scene. Charlotte was a self-starter, too. In the years to come, Daniel would often be drawn to people—whether colleagues, friends, or lovers—who were bold in character and in their achievements.

When the CEO made public appearances, the charismatic Shak would work the room, using the buzz around Spotify to make new connections and keep building what his friends called his “global favor bank.”

When they weren’t working, Daniel and Shak would binge-watch the HBO series Entourage, which chronicled a young actor’s ascent in Hollywood alongside his crew of male friends and his over-the-top agent, Ari Gold.

One day, Shak returned from a trip to Los Angeles, where he had visited the Entourage set. He brought back a t-shirt with a bulging “Suits Suck” print on the front, a version of which had been worn in several scenes in the series. It quickly became one of Daniel’s favorite items of clothing.

In London, there were constant demands for Daniel’s time. He would frequently dine with celebrities and tech millionaires eager to get to know him in an informal setting. He’d often bring Charlotte, who would join him at dinners, events, and even business trips to the United States. The couple would show up casually dressed, comfortable with each other and their surroundings. Daniel would also give keynote interviews and once traveled northwest for an appearance at the University of Oxford, one of the few occasions for which he slipped on a button-up shirt.

Once he had moved to the UK, the life that Daniel would describe as “a fairytale” appeared to have begun.

But his calendar was demanding, and constantly shifting. Most of the time, the twenty-six-year-old only had a firm itinerary for the upcoming week. And at any moment, his personal assistant could throw in yet another cross-Atlantic flight.

Up Where We Belong

Around the time of Daniel Ek’s interview with Kara Swisher, the Spotify founders flew to New York to meet Sean Parker.

When he was in New York, the Napster co-founder would live and work out of a luxuriously renovated townhouse in the West Village. It was called “the Bacchus House,” after the Roman god of wine and intoxication. The place was famous for its parties and its unapologetic mixing of business with pleasure. The basement featured a gym and a pool, and the rooftop terrace offered a view of the Manhattan skyline.

The Swedes rang the doorbell and were let into a hallway filled with people who were also there to see Sean. After a bit of confusion, Daniel and Martin were finally approached by the wide-eyed, curly-haired entrepreneur who, without knowing it, had inspired Daniel to start Spotify.

As they settled into the meeting, Daniel and Sean were quick to find common ground. They reminisced about their teenage years as file-sharing computer nerds, and Daniel got the impression that Sean, four years his senior, may even have been a part of the same online hacker forum. In yet another hard-to-confirm story, the Swede would faintly recall chatting with “Napshon,” an alias he assumed had belonged to Sean Parker.

The meeting’s fourth participant was Peter Thiel, one of PayPal’s founders and Facebook’s first outside investor. He ran the Founders Fund, where Sean was now a partner. Daniel would recall how the meeting lasted for hours, during which the Americans expressed an interest in investing in Spotify. Having recently secured new funding from other investors, the Swedish duo didn’t exactly need the money, but the offer felt like a breakthrough, nonetheless. Having the energetic Sean Parker on board could prove strategically valuable, not least because he could get them closer to Facebook, which was about to surpass 300 million monthly users.

In late December 2009, the Founders Fund invested $16.5 million in Spotify in exchange for five percent of the company. According to public records, the deal valued Spotify at $330 million. It was a fraction of Facebook’s $10 billion price tag, but Sean sensed that Spotify had upward momentum. He joined the board and would quickly surpass Shakil Khan as the company’s ambassador and informal dealmaker in the US. At this point, the Napster co-founder was still a rising star. (He would soon be portrayed by Justin Timberlake as a tech billionaire in the hit movie The Social Network.)

The primary objective was now to bring Spotify to the US market. All that stood in their way were the very same record companies that had brought Napster to its knees. Daniel would recall saying that he thought Spotify could obtain the necessary music licenses within six weeks, a goal Sean thought sounded unrealistic.

“Daniel, it’s going to take twelve weeks,” he said, as Daniel would recall.

By the end of 2009, Daniel returned to New York City, where he would remain for several months. He was also booked to appear at South by Southwest, a music and technology festival in Austin, Texas.

Among tech reporters, the forthcoming appearance was taken as a sure sign that Spotify would soon hit the US.

I Want it All

To ensure broad appeal in Sweden, Daniel Ek wanted Spotify to abandon its deal with Bredbandsbolaget and start working with the country’s biggest telecoms firm, Telia. Representatives of the telco appeared willing to switch from offering their own clunky streaming service, Telia Music Player, to Spotify. They did, however, make a few requests.

As the meetings wore on, it became clear that Telia essentially wanted to “skin” the Spotify player, adding their own colors and design. As the business developer Andreas Liffgarden started going through Telia’s ballooning list of demands, Daniel made it clear that he would not compromise.

“We’ll let them put their logo on it, but nothing else. Otherwise forget about it,” he said.

The gambit paid off. In October 2009, a year after Spotify’s first commercial launch, the startup presented a two-year deal with Telia. For an extra monthly fee, customers were offered the ad-free version of Spotify on their computers, mobile phones, and Telia’s set-top boxes.

The deal was Spotify’s biggest sale to date, and an important milestone for both companies. It is said that Telia bought Spotify subscriptions at a wholesale discount for around $7 million.

The bundle had given Telia a “hero product,” something they had been without ever since they partnered temporarily with Apple as exclusive distributor of the iPhone in Sweden. For Daniel Ek, it was an opportunity to reach Swedish households en masse. The bundle promised a stable source of income and free marketing, beginning with a broad Christmas campaign.

The local record labels generally approved. Telia had been given a hefty discount on its Spotify subscriptions, but the “sticker price” in the promotional campaigns was in line with Spotify’s full price of around ten dollars per month. Crucially, the messaging did not dilute the perceived value of music. Telia also promised that the subscriptions would be renewed automatically at full price when the promotional period ran out.

Most importantly, the partnership with Telia gave Daniel Ek a blueprint for telco bundles down the line, one of his best arguments when he needed to convince music executives that Spotify could convert free listeners to paid subscribers. In the coming years, Spotify’s paid service was bundled with Virgin Media in the UK, Telefonica in Spain, KPN in Holland, SFR in France, and Deutsche Telekom in Germany. Spotify would often enter a new market by partnering with a telco and expanding from there.

Spotify’s competitors—from the Swedish-Norwegian service WiMP to Deezer in France—would follow suit. Many years later, WiMP’s parent company, Aspiro, would be purchased by the hip-hop mogul Jay-Z and change its name to Tidal.

Everybody’s Changing

As Spotify turned into a commercial service, major changes were in store for its engineers. Many of the original programmers would complain that the company was becoming too corporate and too concerned with pleasing the music industry. For more than two years, they had ruled the roost. Now, business developers and marketing people were starting to call the shots.

When CTO Andreas Ehn heard that Spotify was going to procure a certain type of enterprise software, he strongly objected.

“We can build something better ourselves,” a former colleague recalled Andreas saying.

This do-it-yourself attitude made no sense to his new, business-oriented colleagues. Spotify was clearly too big to be cobbling together its own software. Surely the engineers had better things to do. Frustrated by his dwindling authority, Andreas Ehn started feeling estranged from his own company. He missed the early days of dreaming big and solving problems with his team on the whiteboard.

Toward the end of 2009, Andreas Ehn resigned from the company he had helped build from the ground up. In the following months, several early engineers followed him out the door. One of them was Spotify’s first head of product, Fredrik Niemelä. To him, the final straw was when his colleagues introduced Spotify Unlimited, a later-discontinued subscription option which offered an ad-free experience, only without access to the mobile app. The head of product found the name to be misleading. He felt the whole idea ran counter to Spotify’s core value of inclusiveness. Spotify’s head of mobile, the rising star Gustav Söderström, took Fredrik’s place and within a year, he had assumed the title of CPO.

Spotify was now growing in leaps and bounds, with new challenges cropping up every day. In lieu of a clear organizational plan, colleagues would compete over who should do what. Some quit while others stayed on, honing their skills as Spotify grew bigger and became more international.

Outgoing employees were often given a chance to sell their stock options, rights that were worth hundreds of thousands of dollars or more. Despite his frustration, Andreas Ehn held onto his shares, a decision that would, in time, make him very rich.

What You Waiting For?

In mid-March 2010, Daniel Ek sat down in a tall director’s chair on a stage in Austin, Texas. The twenty-seven-year-old looked like he’d been through a rough winter. He was heavyset and pasty, dressed in a pullover with white and blue horizontal stripes. The spotlight made his head shine. He was about to be interviewed by a reporter from Wired magazine during a keynote appearance at South by Southwest.

Many in the audience hoped that Daniel Ek would announce when Spotify was going to enter the US. On that, he would disappoint. Talks with the labels, particularly Universal and Warner, had ground to a near halt in the six months that had followed his first meeting with Sean Parker in New York.

Universal Music’s long-serving CEO, Doug Morris, is said to have told one of his staff members that the label “should hitch its ride to Apple’s train.” In early 2010, Morris even told his digital team to “stop talking to Spotify,” according to one source, although the silent treatment would only last for about a month.

One reason for Morris’s skepticism may have been a rumor that Google was poised to buy Spotify once the service had gained access to the US. Two sources would recall him expressing this suspicion.

“And if there is one thing label executives don’t like, it’s making other people rich,” as one source would describe it.

Another source would point out that the heads of Universal would have been uneasy about Google, another tech giant, wielding even more influence over their industry, having already acquired YouTube and its music rights in 2006.

The Google rumor was not unfounded. One well-placed source would confirm that Daniel Ek was indeed talking to Google representatives about selling his company, perhaps as early as 2009. By the following year, Google’s co-founder, Larry Page, its CEO, Eric Schmidt, and their legal counsel, Zahavah Levine, were all said to be involved. According to the source, the price tag grew from a figure in the hundreds of millions to, at one point, a billion dollars. For Google, the choice stood between buying Spotify and building their own service. The following year, the search giant would launch the cloud-based Google Play Music.

Daniel’s true intentions would remain hotly debated among people who were close to him. Many sources would claim that his wish was never to sell, but that he would use the negotiations to see what kind of strategic value Spotify had in the world of tech and entertainment. The talks also served as leverage in Spotify’s negotiations with investors. Others claim that Google simply never offered enough money and that Larry Page didn’t prioritize music highly enough. Regardless, the Google rumor would impact Spotify’s negotiations with Universal for years to come.

Around early 2010, Warner Music wasn’t cooperating with Spotify either. A month before Daniel’s appearance in Austin, Edgar Bronfman Jr.—now CEO of Warner—had publicly attacked the business model that powered Spotify. Bronfman declared that the label would not license its music to any free, ad-supported streaming services in the future. Daniel had responded by saying that Spotify was taking on music piracy and was on its way to becoming one of the industry’s “top four” sources of revenue.

During the interview in Austin, Daniel made no mention of the drama with the labels or his meetings with Google. He limited the interview to a demo of Spotify’s desktop client and mobile app, which were both projected on the big screen behind him.

“One of my personal favorites, that I think will be very big, is our collaborative playlists,” Daniel said in his fluent, carefully articulated English.

On stage, the Spotify founder hardly mentioned his main rival, Apple. When he pulled up the Spotify mobile app, it was on an Android-based Sony Ericsson X10 mini, not an iPhone. At one point, he remarked that many users found Spotify to be faster than iTunes.

As Spotify struggled to gain access to the US market, Apple appeared to be making strides. A few months earlier, Steve Jobs had acquired a streaming service called Lala for what was believed to be $80 million. The deal led some in the music world to speculate that the Apple CEO was about to make the shift to streaming, or at least to a cloud-based version of iTunes.

Daniel also had to worry about other competitors. Niklas Zennström’s streaming service, Rdio, was gearing up to go live in the US in a few months’ time. But the Skype founder’s Spotify rival did not have a free service.

In some ways, Spotify was making progress. A few weeks after Daniel’s appearance in Austin, he presented a Facebook integration that let users browse their friends’ playlists. Ever aware of trends in the online space, the Swede would now begin to describe Spotify as a “social” music service more frequently.

Yet Daniel Ek still lacked what his company needed most: a date when Spotify would enter the US.

Learning to Fly

What Spotify lacked in firm launch dates, it made up for in buzz and hype. Throughout 2010, Shakil Khan continued to spread the word among the many rich and famous people he met.

The British smooth talker had managed to impress Chris Sacca, an early investor in Twitter, and would soon ask his friends in Stockholm to set up a free account for the R&B star Frank Ocean. Spotify was an increasingly hot topic among the pop-culture elite.

“Spotify is the sh*t!” actress Demi Moore tweeted in August 2010, having been fed an account by Shak.

Later the same year, she and then-husband Ashton Kutcher held a Christmas party in Los Angeles. Their guests all received dedicated Spotify invites prepared by the staff in Stockholm.

Daniel Ek welcomed the attention. He appreciated the value of hype and would make use of his increasing base of supporters. Two years after Spotify’s launch in Sweden, the young CEO had met many of the most powerful people in the American tech and entertainment industry. But there was one exception.

“I’ve met all of them—except Steve Jobs,” he said, according to one person he spoke to. Many others believe that Daniel never got to meet Steve Jobs.

His underlying suspicion appeared to be that Apple’s CEO was conspiring against the vision he had for his company.

“I’m sure he wanted to know why Jobs was fucking with us,” a source who worked closely with Daniel at the time would put it.

Daniel articulated his mission to upset the iTunes order during one of his trips to Los Angeles in 2010. At a meeting in Beverly Hills, the Swede met with several executives at Myspace, who wondered whether he might be willing to sell his company.

The social network, having already squandered their lead over Facebook, was looking to return to its roots in digital music. Myspace had recently acquired several music startups, but Spotify was the hottest of them all. As one person familiar with the talks would recall, one of Myspace’s assets was exceptionally cheap and long-running licensing deals with the record companies. But the Spotify founder did not take the bait.

“If you’re going to help me kill iTunes, we can keep talking,” Daniel said, according to one person who was close to the Myspace leadership at the time.

“Otherwise, I’m not interested.”

Wind of Change

In 2010, Spotify’s burn rate was becoming a cause for concern. The company now had nearly 200 employees and around five million users, but no profits in sight. In June, the company moved out of its head office on Humlegårdsgatan and into a bigger space on Birger Jarlsgatan 6, next to Riche, a well-known, upscale bistro where bankers would rub elbows with entrepreneurs and creatives.

Spotify also had offices in London and New York, where a small team had recently moved into a massive brick building on 8th Avenue in Chelsea. The New York team was led by Ken Parks, Spotify’s Chief Content Officer.

Spotify’s costs kept swelling and the company was, once again, in need of funding. And, despite there having been no US launch, its valuation needed to increase substantially. It was the only way to ensure that the newly issued shares would not overly dilute the company’s investors and founders, threatening their continued control over the company.

By the spring, Spotify’s funding had become such an urgent problem that Martin Lorentzon had to put the company’s new CFO to work earlier than expected.

“I’d like a valuation of a billion dollars. That’s a nice, round figure,” he told Peter Sterky, who wasn’t due to start as finance chief until later in the year.

By Swedish standards, the number was staggering. It would be another three years before the expression “unicorn” was coined to describe companies with billion-dollar valuations. At this point, Facebook and Twitter were among the few tech startups that had reached that level.

Peter Sterky was used to Martin’s boundless ambition. They had worked together at Tradedoubler, which Peter had joined as one of the first hires. He knew that many investors would balk at the Spotify chairman’s aggressive asking price.

But the new CFO found that there was one influential investor willing to pay that high a price: a Russian backed by Alisher Usmanov, an oligarch with ties to the Kremlin and the Chinese tech giant Tencent.

And if that didn’t pan out, the Spotify founders had other options.

Man in Black

One cloudy day in October 2010, dozens of students and hordes of journalists squeezed into a packed lecture hall at the KTH Royal Institute of Technology. Daniel Ek was about to take the stage, but right now, the cameras were pointed at a six-foot-five man pacing back and forth in front of the podium.

The man in the white collared shirt with the rolled-up sleeves was Microsoft’s energetic CEO, Steve Ballmer, whom Bill Gates had personally selected as his successor twelve years earlier.

“The cloud drives advances that drive the cloud,” Microsoft’s CEO roared in a well-rehearsed routine about the software giant’s cloud services.

Then he looked across the sea faces and welcomed a special guest.

“Danyelek,” he exclaimed, compressing all the syllables into one loud burst of sound.

The audience exploded in applause for the man who had employed countless KTH engineers and built one of Europe’s hottest startups. The Spotify CEO looked tanned and in good shape, dressed in a black shirt and suit jacket. Steve Ballmer shook Daniel’s hand and gave him a double back pat before yielding the stage.

As the applause carried on, Daniel let an anxious gaze drift over the room. For an instant it looked as if he were going to start clapping, too, as if to honor Steve Ballmer, but instead, he brushed his hands against each other. Perhaps he didn’t want to appear to be clapping for himself. Finally, the auditorium settled down.

“It’s great to be here, back in Sweden, which is always nice. I don’t get the chance to be back that often,” he said, in English, assuming the stance of a returning rock star. “As Steve said, I’m Daniel Ek, the CEO and founder of Spotify.”

He used the opportunity to introduce a new partnership between Spotify and Microsoft, explaining how the service would be integrated into the Windows Phone. News of the collaboration would soon make headlines in a dozen Swedish media outlets.

After he was done, Daniel stepped to the side and received four more slaps on the back from the towering Microsoft CEO.

“I’ve heard a lot about Daniel through the years. It’s the first time we’ve met personally,” Steve Ballmer said. “We have a lot to talk about between us.”

The exact contents of their conversation would remain a secret. But several people familiar with the discussions would recall that Microsoft was willing to invest in Spotify, or possibly buy the company outright. On one occasion, Daniel is said to have been offered a billion dollars for his company, the very valuation his CFO was trying to fetch in the capital markets.

Daniel traveled to Microsoft’s head office in Redmond, outside Seattle, to meet Steve Ballmer again, several people would recall. Even Bill Gates, the Microsoft founder whom Daniel looked up to as a child, is said to have shown an interest. The idea was that Microsoft would integrate Spotify in its portable media player, Zune, whose own music software had failed to catch on.

At the time, Microsoft was known for its deep pockets and willingness to make bold bets. A few years earlier, Ballmer had managed to talk his way into investing in Facebook. But the software behemoth was hardly seen as cutting edge when it came to building new consumer applications or products.

Microsoft had missed the search-engine revolution, which had become Google’s domain, and Ballmer completely misjudged the potential of the iPhone when it launched in 2007.

Microsoft would later purchase Skype, another Swedish innovation, and for years be criticized for stifling the company’s development.

Daniel Ek took Steve Ballmer seriously, but he was never truly out to sell his company to Microsoft. Besides, he didn’t want Spotify to become just another play in a game of catch-up with Apple.

It’s Not Right but It’s Okay

Despite negotiating with tech giants, Daniel Ek’s core focus remained to stay independent, keep growing with the aid of venture capital, and launch in the US as soon as he could.

His best bet was now Yuri Milner and his firm DST Global, with whom Spotify’s CFO, Peter Sterky, was negotiating. The Russian billionaire was best known as the founder of the internet company Mail.ru, which had recently gone public on the stock market in London.

Since the financial crisis, DST, which stood for Digital Sky Technologies, had been making waves in Silicon Valley. In 2009, it famously spent $200 million buying 2 percent of Facebook’s shares, an investment that valued the company at $10 billion. Mark Zuckerberg had not been able to find any other investors willing to purchase shares at that price.

“We have started to actively expand abroad,” Yuri Milner said of DST’s future plans in connection with the Facebook deal.

A former physicist, Yuri Milner’s investment strategy was both simple and profound. He saw large swaths of the internet as underdeveloped territory and believed that the companies that dominated their specific verticals—be it e-commerce, social networking, or home rental—would emerge victorious.

The scale of these companies, he reasoned, would guarantee them considerably more revenue than their competitors, and they would eventually become extremely profitable. Milner, therefore, did not fear fast burn rates and high valuations.

He had built internet companies himself, but as an investor he operated in the background, seldom claiming a board seat. It was with this attitude that he, by the end of 2010, was willing to invest $50 million in Spotify, tripling its valuation in the process.

For Spotify, the DST money was necessary but controversial. One of the fund’s largest shareholders was the oligarch Alisher Usmanov, who would often praise the Russian president, Vladimir Putin. Another major shareholder was Tencent, an internet conglomerate dependent on the approval of the Chinese government.

Spotify’s board realized that taking Russian money might cause problems. The directors would ask each other who the “ultimate backer” behind DST might be, well aware of the likely ties to the Russian government.

Martin Lorentzon, who had always stood for freedom and open markets, found Putin’s authoritarian regime deplorable. Yet his ultimate goal was to make sure that Spotify had the cash it needed to break into the US market. Besides, Yuri Milner was an established, clever investor who was sure to prove himself useful. Toward the end of 2010, Spotify therefore signed a preliminary agreement with DST. The VC firms Accel and Kleiner Perkins, both based in Silicon Valley, were brought onboard as well.

The valuation was high, but it came with strings attached. One condition was that Spotify’s board guarantee that discussions of an IPO be initiated by 2014 at the latest.

The investors also placed three specific demands on the CEO: Daniel Ek needed to renew the music licenses in Europe; grow by partnering with Facebook; and secure the necessary music licenses for a US launch. The final point would become one of his most difficult challenges to date.