The Streaming Wars

SPOTIFY’S TENTH YEAR AS A company was a phenomenal year for pop music. During 2016, artists like Beyoncé, Drake, and Rihanna put out memorable albums—and they all did it exclusively on either Tidal or Apple Music. Hit songs had now become a weapon in the escalating war between competing streaming services. Daniel Ek had returned the music industry to growth, but he did not appear to have the artists on his side. He and Spotify now needed to forge closer ties with the creators in the music industry. Luckily, they had a billion dollars at their disposal.

In 2016, Spotify nearly acquired the Swedish-German outfit SoundCloud, which was now becoming synonymous with emo-tinged independent hip-hop music, or SoundCloud Rap. Spotify also considered buying Tidal from Jay-Z. Details of that deal would not emerge until the publication of this book. Together, the acquisition targets formed two sides of the same coin. Tidal was close to many of the world’s biggest music stars, while SoundCloud was a platform where millions of musicians, big and small, could upload music directly and challenge the major labels.

Meanwhile, Spotify would begin to wage a more public lobbying campaign against Apple’s dual role as both competitor—through Apple Music—and distributor—through the App Store. American senator Elizabeth Warren would side with Spotify and publicly criticize Tim Cook.

Eight Days a Week

During the summer months, Daniel Ek spent much of his free time with his family. He and his children played in the family’s new summer house in the Stockholm archipelago. Aside from that, he spent most of his time at work.

“I don’t have a lot of free time,” the Spotify CEO said in a live interview on TV4 in 2016.

The host, Casten Almqvist, lingered on Daniel’s stint as a newly rich party animal in the early aughts. Journalists had frequently revisited this period of Daniel’s life ever since he first described it on national television and radio four years prior.

“I had a really good time for about a year,” Daniel now recalled. “But that wasn’t at all something I was passionate about. It all comes back to the company and the music,” he said, repeating the same story.

Several of Daniel’s old friends and colleagues struggled to make the timeline of his origin story fit. Few remembered any stint of intense partying followed by a depression. The sports car he sometimes mentioned also seemed mysterious. It seems that Daniel first became rich in March 2006, when he sold Advertigo to Tradedoubler. Yet at that point, he and Martin Lorentzon had already begun recruiting employees for Spotify. Was that when he bought the red Ferrari? A few weeks after the Advertigo deal, Daniel and Martin founded the company that, according to Daniel’s oft-repeated story, would become his purpose in life. It wasn’t until that summer that he left his mother’s old apartment in Rågsved for a new place in central Stockholm.

Where was he able to squeeze in “about a year” of partying and a bout of mild depression, followed by the insight that music and technology combined would be his calling? Like quite a few stories told by Daniel over the years, it did not seem to add up.

Now, live on TV, the tale was being revisited. Daniel stopped short of confirming any details or adding any new ones. Regardless, the larger point of the story rang true. The Spotify founder grew up in modest surroundings with a single mother, and probably spent some of his early money frivolously. The upshot of his “party boy” episode was that, at twenty-three years of age, he quickly matured and wedded his existence to Spotify.

Daniel Ek’s appearance on TV4 was one of the few interviews he conducted during 2016. He had created his own playlist for the occasion, featuring new artists such as Tove Lo, Francis and the Lights, and Anderson.Paak. Spotify had just launched its new algorithmic playlist, Release Radar. The next ten years, Daniel said, would be all about bringing his company closer to artists.

“The barriers to creation have gotten much, much lower. You can use your cell phone to record an entire song,” he said.

His new vision, based on a decade of studying the music industry closely, was that Spotify would become a marketplace where listeners paid for access to music, while artists paid to reach their audience. Casten Almqvist asked the obvious question: whether record companies would survive in such a scenario.

“We absolutely believe they have a role to play,” Daniel said, before stressing that every part of the value chain had to reinvent itself in the new digital landscape.

Not Nice

One of the grandest releases of 2016 was Beyoncé’s Lemonade. The tracks had been interpreted visually in a longform music video that spanned the whole album and debuted in a primetime slot on HBO. The pop star rapped under water, danced with tennis star Serena Williams, and hurled a baseball bat through a few car windows to avenge a cheating partner. The release was an event that brought together millions of listeners across the globe, the way a new Michael Jackson video might have done on MTV in the 1980s.

Trendsetters like Rihanna, Drake, Kanye West, and Frank Ocean would all release new albums that year. Nearly all of them would top the Billboard album chart and feature prominently in critics’ year-end summaries. The albums shared another common denominator: on their respective release dates, none could be found on Spotify.

Kanye West and Rihanna chose Tidal, in which they both owned shares, which carried their albums exclusively for a few weeks before they appeared elsewhere. Beyoncé’s new album was initially only available on iTunes or Tidal. Lemonade would remain exclusive to those two outlets for years to come. In 2018, Beyoncé would rap about the episode, calling out Spotify by name and saying she didn’t give “two fucks” about streaming numbers.

Frank Ocean and Drake inked expensive deals with Apple Music. Drake’s contract, which gave Apple a few weeks’ exclusivity, was said to have cost more than $10 million. According to the industry press, the architect of the deal was Larry Jackson, one of Jimmy Iovine’s understudies, who, like his mentor, had moved from Universal Music to Apple. As Iovine and Jackson switched companies, so did their loyalties.

Within twenty-four hours in August of that year, Frank Ocean released two albums, both through Apple Music. One, an experimental album called Endless, was released via the Universal imprint Def Jam, apparently ending Ocean’s contractual obligations with the label. The other, Blonde—containing a handful of hit songs—was under Ocean’s own label, giving him a much higher share of the streaming royalties. Universal saw none of the royalties from Blonde, which would soon enter the Billboard album chart at number one. As Billboard magazine would note, it had taken Frank Ocean twenty-four hours to go from earning 14 percent of the royalties paid out, to earning the whole take from various streaming services, or around 70 percent. The deal, brokered by Iovine’s Apple Music, reportedly left his former boss, Lucian Grainge, fuming.

As the streaming world fought over exclusive releases, Spotify was hardly in the mix. Jay-Z and Jimmy Iovine did what they were best at—striking competitive deals for new music—while Spotify had little exclusive content. In the fall of 2015, Spotify had the opportunity to premiere the video to Justin Bieber’s song “Sorry,” but, as one person would recall, the Spotify team could not get their technology up and running in time to do it.

Daniel Ek was uncomfortable with the prospect of artists shopping their material to streaming services, as if they were record labels fighting over the next hot album. He knew that Spotify needed to strengthen its position in popular culture and secure a strong catalogue to keep its user base growing. Therefore, as several sources would recall, he entered top secret talks with Tidal about a potential acquisition.

Power

Stefan Blom, Spotify’s content chief, led Spotify’s talks with Tidal. He knew a bit about the industry, having previously served as Nordic head of the record label EMI.

During the meetings, Stefan sat across from Desiree Perez, one of Jay-Z’s closest associates. A handsome woman in her mid-forties, Perez had long black hair, an unmistakable Bronx accent, and plenty of business acumen.

At Roc Nation, Desiree Perez had brokered deals that would define the interplay between artists and musicians. Recently, she had negotiated multimillion dollar deals with Samsung that helped both Jay-Z and Rihanna push their respective album releases to consumers. The money was not coming from actual music sales, but from sponsorship deals or investments—such as Jay-Z’s stakes in anything from Tidal to the Brooklyn Nets basketball franchise.

“Selling music as a product is over,” Perez once told an affiliate in the music industry.

Perez was used to delivering under pressure. In the 1990s, she acted as an informant for the Drug Enforcement Administration. For several years, she helped the DEA investigate drug-related crimes in Puerto Rico and Colombia. According to the New York Daily News, her work for the DEA had begun after she was sentenced for possession of thirty-five kilograms of cocaine. Perez had been Jay-Z’s business partner since the early aughts, in charge of everything from music catalogues to nightclubs. And, in the summer of 2016, she was negotiating the sale of Tidal with a blond, bespectacled man from Sweden.

One thing was certain: Spotify had money. The Roc Nation team had read the reports of the company’s billion-dollar loan. Perez set a price tag of $400 million, a hefty sum for a streaming service with a small user base still posting significant losses. That price would give Jay-Z around five times his initial investment. Stefan said he would consider a deal at half that price, but Perez did not back down. Stefan thanked her for her time and reconvened with the executive team at Spotify.

Daniel Ek could see the appeal of buying Tidal. It would get Spotify closer to Jay-Z and shareholders such as Madonna, Alicia Keys, Coldplay, and Nicki Minaj. Their goodwill could be worth billions in the long run.

Troy Carter, a forty-three-year-old African-American former music manager from West Philadelphia who was relatively new to Spotify, strongly advocated for the deal. Troy had joined the Swedish streaming service to handle relationships with artists and record labels. As a teenager, he was one of the members in the hip-hop group 2 Too Many, which for a short time was signed to Will Smith’s record label Wiljam Records. Prior to joining Spotify, Troy had helped Lady Gaga become one of the world’s biggest artists.

While some of his colleagues would belittle Jay-Z’s business ambitions, Troy took the rapper seriously. He believed acquiring Tidal would raise Spotify’s status in the music industry, not least in the African-American community.

“We don’t have enough street cred,” Troy told his colleagues, as one person would recall.

Daniel recognized the problem, but did not want to pay $400 million for a streaming service with inferior technology and a tiny user base.

“We’re growing by several Tidals every month,” one of the directors told Daniel.

Spotify eventually declined the offer from Roc Nation and Desiree Perez, but they did look at buying several other companies, people close to the discussions would recall.

Spotify’s business development team, led by the handsome Canadian Sumit Varshney, also met with representatives from Deezer. The French competitor had recently pulled back from a stock market listing and seemed to struggle to grow. After several meetings, however, Spotify abandoned the effort.

Another target was one of Spotify’s competitors in India. Both Saavn and Gaana Music were up for discussion, but Spotify’s executives decided to launch conventionally in India once they had secured the music licenses to do so.

There was, however, one company that Spotify courted quite seriously over a long period. During the summer and fall of 2016, the streaming giant came very close to buying SoundCloud, which had plenty of street cred but a failing business model.

On the Low

Late in the summer of 2016, Barry McCarthy stepped into Spotify’s offices in Berlin, located a short walk from Potsdamer Platz, which had once been cut in half by the Berlin Wall during the Cold War.

Spotify Germany was far from its most important subsidiary. It ranked well below the Stockholm headquarters and the New York and London branches. The local staff wondered what brought the CFO to Berlin, as Barry had not given a reason for his visit. Things became clear when he asked someone to book him a cab to The Factory, a converted office building in the central Mitte district with brick walls and large glass windows. The Factory was home to a handful of well-known startups, among them SoundCloud, which by now had reached 175 million monthly listeners. Nine years had passed since Daniel Ek had sat down for coffee in Stockholm with the SoundCloud co-founder Eric Wahlforss. Since then, the pair had stayed in touch, with Daniel offering advice on keeping their stock structure as simple as possible so that investors did not gain outsize influence over their company, among other things.

SoundCloud had built an online community for musicians with a business model that exasperated record labels. The Spotify leadership saw potential in combining the two businesses. Together, they could create a European music giant with nearly 300 million users.

Only a select few were aware of the negotiations taking place. In fact, Spotify had already made an offer to buy SoundCloud the year before. At that time, SoundCloud’s founders passed on the $500 million figure, mostly in Spotify shares. Barry was now about to make an even lower offer. He knew that SoundCloud, yet another music tech company struggling to convince investors, was on the ropes.

Cloudbusting

By mid-2016, SoundCloud had become a pop-culture phenomenon. Artists like Kanye West and Justin Bieber would turn to the platform to premiere new songs.

It had also given rise to new genres, such as the unpolished songs with mumbled lyrics that internet users had dubbed SoundCloud Rap. Unlike Spotify, the Berlin-based service had a strong social component. It was a place where artists and music fans could interact. Some artists who had gotten their start on the platform had later turned into global stars. At its best, SoundCloud could kickstart careers that brought artists to the top of the music game.

In January 2017, Chance the Rapper won a Grammy for Best Rap Album. On stage at the Staples Center in Los Angeles, the young Chicagoan thanked God, his loved ones, and his distributor in Berlin.

“Shoutout to SoundCloud for holding me down,” he said, as the audience cheered.

Yet for all its accolades, SoundCloud was a troubled business. Like YouTube, they were persistently being accused of making it harder than ever for musicians to earn money. A large portion of their catalogue was unlicensed. Between 2012 and 2015, SoundCloud made around $60 million in revenue, but ran up costs that were three times as high.

For a time, it seemed that SoundCloud would be acquired by Twitter. The price tag was rumored to be one billion dollars, which would have made it Twitter’s largest acquisition to date. But, as two sources would recall, Twitter pulled out of the deal at the last moment. The social media platform’s declining stock price had apparently caused its CEO, Dick Costolo, to reconsider.

Even Apple showed an interest in what SoundCloud was doing. Jimmy Iovine was charmed by Alexander Ljung, the SoundCloud CEO. As one person close to Iovine would recall, he saw that the Berlin-based company had a rare understanding of how to interact with the artist community. At the time of the meeting, Ljung felt his company was worth $800 million, according to the source. The valuation made Jimmy Iovine back down.

SoundCloud needed investment to keep their business running, and they were trying to avoid raising money at a lower valuation. A few years prior, they had promised several venture capital firms to chase higher revenues by launching a commercial streaming service with a complete, licensed catalogue. By 2016, when they finally secured the rights from the record labels, launching a competitor to Spotify and Apple Music looked like their only shot at offsetting their losses.

SoundCloud Go, which—like other streaming offerings—cost ten dollars a month, made a negligible dent on the competitive market. A year after launching it, SoundCloud reported losses of another $70 million.

Mo Money Mo Problems

Barry McCarthy’s second offer for SoundCloud was 30 percent lower than his initial bid. This time, he offered $350 million of shares in Spotify.

SoundCloud’s valuation had plummeted to a third of what it was in 2014, during the acquisition talks with Twitter. Yet a deal with Spotify would ensure the company’s survival and give the founders tens of millions of dollars to share. Alexander Ljung and Eric Wahlforss swallowed their pride and accepted the bid, as two people would recall.

Before a deal could be struck, one obstacle remained. Spotify’s team of experts had to examine SoundCloud’s business in a due-diligence procedure. In the fall of 2016, Sumit Varshney traveled to Berlin with several colleagues, including Niklas Ivarsson, the licensing expert who, after serving nearly nine years at Spotify, had left the company to become a consultant. The team spent several days in a conference room in downtown Berlin. Eric Wahlforss, the SoundCloud founder, was there to answer any questions.

The narrative around the deal was nearly perfect: two companies, each with a pair of Swedish founders, uniting to fight Apple, Google, and Amazon. The Spotify team saw a number of strengths in SoundCloud’s offering. Their user base was largely made up of music aficionados, the catalogue full of unique material and rare releases. By buying the company, Spotify could boost its indie credibility, get closer to artists, and, with time, challenge the record labels.

“Instead of record labels being the middleman, you’d have artist managers creating small record companies that would market their music directly on Spotify,” as a source would recall.

Yet there were also several problems with SoundCloud’s core business. Ivarsson balked at the company’s recent licensing deals with the major labels.

“They’re worse than the very first ones we signed,” he said, referring to the draconian terms Spotify managed to secure in 2008.

Complaints against SoundCloud from music rightsholders were another concern. It was one thing for a smaller streaming service to slip up paying artists and songwriters for their streams; it was quite another for a market leader like Spotify, with plenty of cash on hand, to do so. To some, taking over SoundCloud’s disputed catalogue would be tantamount to inviting publishers and labels worldwide to come after Spotify with lawsuits.

“That kind of stuff costs serious dough,” one person would recall.

By late September, information about Spotify’s latest acquisition target had leaked to the press. The Financial Times reported that Spotify was in “advanced talks” to acquire SoundCloud. Pundits began to speculate about what such a deal would mean. In New York, the potential deal had been discussed by both the Spotify board and executive team. At the very last moment, they decided to back out. Two people would recall that the Spotify top brass thought an acquisition of a controversial service might worsen relations with the record labels. Spotify was a year or two away from going public. It couldn’t risk estranging the record executives ahead of the next round of negotiations.

“We came very close to buying them,” one Spotify executive would tell one of his colleagues.

In early December, TechCrunch reported that Spotify had walked away from the negotiations. Daniel Ek needed to find his interactive platform for artists elsewhere. Martin Lorentzon did not seem particularly sentimental, later questioning SoundCloud’s user numbers in a private conversation.

“What are we supposed to do with 175 million email addresses?” the Spotify founder asked.

It would be another six months before SoundCloud’s future path had been set. Alexander Ljung laid off half his staff to bring in new funding from a group of investors that included Raine Group, where the former Spotify adviser Fred Davis served as partner.

With the stroke of a pen, SoundCloud’s valuation was slashed to $150 million, less than half of Spotify’s second bid.

Weapon of Choice

Rather than make a grand acquisition, Daniel Ek and his executive team began to work on their own way of approaching artists. They would devise a plan to let artists upload their music to Spotify directly, bypassing record labels and conventional distributors.

Meanwhile, the legal tussle with Apple intensified. Apple Music was growing quickly, unimpeded by the antitrust investigations into whether it had colluded to impede Spotify’s freemium offering. None of the investigations had led to any fines or charges.

But Spotify had armed themselves by hiring a range of lobbying firms in Washington, DC, and Brussels. Their grievances with Apple were many. It was partly about Apple abusing its power as a distributor while operating its own service. Another issue was Spotify’s insistence that proprietary voice technology, such as Apple’s Siri or Amazon’s Alexa, should be open to outside developers and not place services like Spotify at a disadvantage. After all, Spotify’s strategy of being available on every device was dependent on accessing platforms controlled by other companies.

In June 2016, Spotify scored its first major lobbying landmark. Around lunchtime in Washington, DC, the Democratic senator Elizabeth Warren stepped into a large building with white pillars, around the corner from the White House. She was about to deliver a keynote speech at the New America Foundation, and one of her main talking points lined up nicely with Spotify’s public affairs efforts.

“For markets to work, there must be competition. But today, in America, competition is dying,” Elizabeth Warren said emphatically.

According to Warren, several large corporations were infringing on the competition in industries such as banking, food, aviation, and technology. Specifically, she name-checked Google, Amazon, and Apple.

“While Apple Music is readily accessible on everyone’s iPhone, Apple has placed conditions on its rivals that make it difficult to offer competing streaming services,” she said, stopping just short of mentioning Spotify.

At this point, Spotify had been available in the App Store for nearly seven years. During that time, 30 percent of the revenue from all of their subscription sales through that channel had gone directly to Apple. What critics would call the “Apple tax” made Apple’s services business grow explosively. At Spotify, frustration over Apple’s model was widespread. The product division had long struggled to get their app updates approved and released in the App Store. Several times, Spotify staffers would recall, the process would grind to a halt until Gustav Söderström personally called California to make a complaint.

Gustav Söderström, Chief Product Officer at Spotify, in Stockholm, 2016. (Jesper Frisk)

Daniel Ek would hardly ever speak publicly about how difficult Apple was making life for Spotify, not to mention Steve Jobs’ whisper campaign to thwart his company in the United States. Only once, during an on-stage interview in 2012, did Jobs’ interference come up in stark terms. The online video footage of that interview shows Daniel tackling a touchy subject.

“There’s another story I’ve heard, that Apple tried to keep you out of the US,” the journalist and conference host Walt Mossberg says in the clip. “Is there any truth to that?”

Daniel glances silently at the audience, flashing an awkward grin. Several seconds pass. Finally, his stage partner Sean Parker interjects.

“You want me to answer this one?” he asks the Spotify CEO.

“Yeah, why not,” Daniel mumbles.

“I can get away with saying things he can’t get away with,” Sean continues. “There was some indication that that might have been happening. It’s a small industry in a lot of ways. Certainly a lot smaller than it was ten or twelve years ago,” Sean says, chuckling at his cheeky callback to when his service, Napster, ruined the outlook for a music industry that had just hit its prime.

After a few seconds, Walt Mossberg starts to laugh, and several members of the audience join in. Even Daniel cracks a smile, flashing an admiring glance at his outspoken partner. Daniel would say that Sean was the only person he had met who had spent longer than him thinking about the digital future of the music industry.

In 2016, Daniel Ek still wasn’t calling out Apple in public, but his company was in a stronger position to challenge the state of play behind the scenes. A few weeks after Apple Music was introduced, Spotify’s press department sent out an email. The recipients were all Spotify subscribers who were paying thirteen dollars via the App Store. They were advised to end their subscription there and instead pay Spotify directly.

“You can get the exact same Spotify for only $9.99/month, and it’s super simple,” the email read.

Spotify had stepped up its campaign against the App Store. The following summer, Tim Cook finally tweaked the terms of his distribution platform, cutting Apple’s revenue share to 15 percent after the first twelve months. But that did not mark the end of the legal squabble between Spotify and Apple.

Around this time, Spotify’s product team was trying to get an update through the App Store. Despite several attempts, it wasn’t accepted. Staff at Apple had noticed that somewhere in the app, Spotify asked users for their email addresses, which might let the Swedish company get in touch directly with users they had acquired through Apple, potentially tapping them to start paying Spotify directly. The hardware giant stopped the update.

At the end of June 2016, Spotify’s general counsel, Horacio Gutierrez, sent a letter to his counterpart in Cupertino. He wrote that Apple was using its power as a “weapon to harm competitors.” Apple’s general counsel refuted the criticism.

The row over the App Store terms would continue for many years.