Death Valley

DURING THE TWO YEARS LEADING up to the launch of Beats Music, Daniel Ek and his team had endured a prolonged existential crisis. Throughout the negotiations with Google, and the attempts to build Spotify TV, his startup had been scrambling to future-proof its business. It was urgent. The “mobile revolution” was already underway, and Spotify appeared to be on the wrong side of history.

The most promising technology company in the music space had entered the app era with what was essentially a desktop product. Spotify’s mobile apps had launched as early as 2009, but mobile access was a perk reserved for paying customers. That meant that on the smartphone, Spotify could not deploy its most effective growth engine: recruiting young listeners through its endlessly free tier.

For the second time in Spotify’s brief history, the service stopped growing. Daniel would describe this period as a near-death experience for his company.

The crisis originated in 2012, five years after Steve Jobs introduced the iPhone. Young people started viewing smartphones as a full-fledged alternative to the desktop computer. Mobile data was cheaper than ever, the phones had become faster, the screens bigger, and companies like Uber were able to build groundbreaking services that worked exclusively as apps. The “mobile first” era had begun, and investors were throwing themselves at yet another area of explosive growth.

Tech companies that lacked a clear mobile strategy began to be punished by the market. During the summer and fall of 2012, Facebook spent its first six months on the stock exchange. The share price was on a downward trajectory, largely because Mark Zuckerberg had not convinced investors that he could make money off of mobile advertising. Facebook’s rocky IPO was a clear warning sign for Spotify. Its board members followed the stock price closely, worried about the implications for their own company. Their medium-term aim was, after all, to float Spotify on the stock exchange and sell their shares.

Since U Been Gone

On the front line of Spotify’s mobile crisis was Henrik Landgren, a former McKinsey consultant who started learning computer programming at the age of six. The tall, handsome thirty-one-year-old, admired among coworkers for his dogged and selfless approach to problem solving, had joined Spotify in 2010 as one of Daniel Ek’s assistants. Henrik had insisted that Spotify needed an analytics division, so Daniel had him create one and lead it.

At Jarla House in Stockholm, the analytics team had set up a wide range of dashboards visualizing the music service’s performance in real time. Starting in early 2012, Henrik and his team watched as the inflow of new users switched from desktop—where they could listen for free—to mobile, where Spotify only offered a free trial for forty-eight hours. That clearly wasn’t enough time to convert them into subscribers. Of the new users who tried Spotify on a smartphone, only a small percent would stay on and pay for the service. The conversion rate on desktop—the backbone of Spotify’s business—was much higher. But that was of little comfort if desktop use would keep dropping dramatically.

Spotify executives would often describe the conversion process as a funnel where new users flowed in at the top, and a stream of paying subscribers eventually trickled out at the bottom. But if new users only stayed for forty-eight hours, there was no time for them to build playlists, discover new music, and become habitual users. In addition, the declining intake of free users on desktop meant that the top end of the funnel was growing more narrow. Henrik grew more worried. It was clear that Spotify needed to take a plunge into the mobile era. At the very least, the mobile app needed to have its trial period extended.

During the summer of 2012, music listening on Spotify plateaued as it usually did during the season. But when fall began, a growing number of users did not return. The analytics team suspected that a large number of them were now using their computers less often, opting for their phones instead. It was an early indication that the massive shift to mobile computing was beginning to pick up speed.

“The edge of the cliff was getting closer,” Henrik would recall. “We didn’t know when it would happen, but we knew it was coming soon.”

Bridge Over Troubled Water

In May 2013, influential investor Mary Meeker published her insights on the smartphone revolution. Her annual Internet Trends Report had served as the tech sector’s favorite slide deck since the early days of the dotcom era. In this edition, Meeker noted how the mobile trend had shifted from “rapid” to “aggressive.” Young consumers appeared to abandon desktop computers and laptops faster than expected. Gustav Söderström flicked through Meeker’s slides and drew the obvious conclusion: without a free version of their mobile app, Spotify’s growth would stop, investors would flee, and the company would die.

At this point, Spotify’s licensing team had spent more than six months negotiating deals for what they called a “mobile free tier.” It was not an easy task. While the record labels were making hundreds of millions of dollars every year in payouts from Spotify, they still disliked the idea of millions of people listening to music without ever being forced to pay. Now, Spotify wanted to expand their free service to include all smartphones, not just the ones belonging to paying subscribers.

“We had to go back to the music industry and say, you know what, the thing we used to charge money for, you now need to give it to us for free,” Daniel Ek would recall years later, on stage in Helsinki. “That wasn’t an easy sell.”

Spotify’s talks were being led by its head of content, Ken Parks, now considered a master negotiator by his team. Among his aides was Petra Hansson, who had stepped down as general counsel but still served as the lawyer overseeing Spotify’s licensing talks. They knew the labels wouldn’t grant them a free tier without restrictions, but they also entered the negotiations with an informational edge.

From extensive internal testing, they knew precisely which limitations would serve Spotify best. What remained was a game of poker that they knew would span months, perhaps even years. Their strategy was to act like their preferred set of restrictions was a concession to the record labels, when in fact it was precisely what Spotify’s product division wanted.

For months, the product and analytics teams had experimented with various trial versions of their mobile app on thousands of users at a time. One version offered unlimited access to the catalogue, but only for a few hours per month. Another version worked on Wi-Fi, but not with mobile data. The best results came when users could listen without a time limit, but only access a subset of the catalogue which would only play on a shuffle mode. The data showed that this offering would be strong enough to attract new users, yet weak enough that existing paying customers wouldn’t downgrade.

While the Spotify delegation knew what they wanted, the record labels knew that stalled negotiations would weaken their opponent. Perhaps they could sense that Daniel Ek needed the free tier extended to mobile devices for his company to survive.

The data became more and more distressing for Spotify. In the late summer of 2013, more listeners went “mobile only,” by now a common term. Smartphones now appeared to have become a real alternative to computers. Gustav Söderström would later describe this period as “the summer when Europe went mobile.”

Spotify’s number of active users—the lifeline that kept investors funding the company—was now shrinking. Internal estimates showed that Spotify’s user growth nearly halted between the second and third quarters of 2013.

Daniel Ek felt like his company might be headed for a crash landing. He would describe the task of pivoting toward mobile phones as “switching out the engines mid-flight.”

I Want to Break Free

To get the record labels on board, Daniel Ek and Martin Lorentzon had to make concessions. In the fall of 2013, as the license talks continued, they extended the “schmuck insurance” agreement they had reached with Universal Music before launching in the United States. The founders and a select group of early investors in Spotify would have to shell out at least two percent of the purchase price in the case of an acquisition.

By this time, that would have amounted to at least $80 million. According to company filings in Cyprus, the deal was renewed in October 2013, around the time that Daniel Ek was talking to Google about selling his company.

The second-largest label, Sony Music, also gave their go-ahead for the mobile app, while Warner Music, as usual, were late to agree. The smallest label of the three majors had by now been taken over by Access Industries, a conglomerate led by the billionaire Len Blavatnik.

Blavatnik, who would later invest in the French streaming service Deezer, seemed eager to make digital strides with Warner Music. Spotify’s negotiators hoped that Warner Music’s new CEO, Stephen Cooper, would be more accepting of their business model than his predecessor, Edgar Bronfman, Jr. They were soon disappointed. Warner had not changed its hard-line stance on Spotify’s free service.

During November, the Spotify team sat in seemingly endless meetings at Warner’s offices in the upscale London neighborhood of Kensington. There, in the same white stone building that had housed EMI before the label was carved up and sold off, a small delegation of lawyers and product staff went over the terms line by line. The talks were progressing slowly. Spotify had a deadline by which they needed to launch the free tier, and it looked like they weren’t going to meet it.

On December 10, the day before Spotify’s free tier was due to launch, Stephen Cooper finally agreed to the terms at a meeting in New York. The Spotify free tier lived another day. A wave of relief spread through the upper echelons of the company.

The next day, Daniel Ek announced the news to a group of journalists in New York. The free app could only play music in shuffle mode with regular ad breaks. Unlike paid listeners, free users would not be able to listen offline. Daniel also revealed that Spotify would soon launch in six new European markets and fourteen countries in Latin America. Spotify would take the lion’s share of the digital music market in Mexico, ahead of competitors such as Google and Deezer.

In an interview with CNN after the presentation, Daniel explained what he and his team had been trying to tell the record labels for years: the more music people listened to on Spotify, the more likely it was that they would start to pay.

“That is, ultimately, our business model,” he said.

He also touched on the concept of ubiquity, one of Spotify’s core strategies. The idea was to introduce the service on as many operating systems and hardware units as possible.

“We want to be everywhere music is. So we’re building Spotify into more things, whether it’s home stereos or potentially even wearable jackets. Who knows?” Daniel said.

It’s the Most Wonderful Time of the Year

A few days after Warner signed, Spotify threw a Christmas party in the Chelsea Terminal Warehouse, a building that once housed the legendary nightclub The Tunnel, where rap stars like Jay-Z would perform. The warehouse was a relic from an era in which goods traveled by rail through Manhattan and were transferred to freight cars that were floated across the Hudson River on barges into New Jersey. Now, it was where Spotify’s staff celebrated a free mobile app that would catapult them back into their natural state of rapid growth.

It was enough to make the Spotify executives feel giddy. Gustav Söderström, who had built Spotify’s first mobile app four years prior, was in a celebratory mood, thanking the colleagues who had sealed the deal. Ken Parks, not usually one to get emotional, gave one of his colleagues a big bear hug. Martin Lorentzon and Daniel Ek held court at opposite ends of the warehouse. Everyone was dressed up and elated that the mobile crisis had finally ended.

A few years later, Daniel would admit that Spotify would have gone bust within six months if things hadn’t changed. To him, this was one of Spotify’s crowning achievements. Originally conceived as a desktop product, the company managed to adapt to the mobile era—and they did it “mid-flight,” under constant pressure from competitors and from the music industry, which at this time still swallowed around 80 percent of all of Spotify’s revenues.

“This was our Netflix moment,” one source would recall, referring to the company’s pivot from DVD rental to online streaming.