Spotify CEO Daniel Ek on Taylor Swift, His 'Freemium' Business Model and Why He's Saving the Music Industry
Apple, UMG and Jay Z’s superfriends all have a common enemy: “freemium,” the ad-supported, free-to-users tier that aims to convert listeners to subscribers.
“It’s hard to criticize someone who’s hugely successful,” says Daniel Ek. The Spotify CEO is sitting inside a diner-style booth in one of the many thoughtfully placed nooks at the company’s 100,000-square-foot Manhattan office, the day after a May 20 press event during which he announced the service’s new music recommendation and video-streaming features. He’s not referring to himself. Although, as the 32-year-old co-founder of the world’s dominant music streaming service, he’s profoundly successful — and as such, a prime target for musicians, major labels and maybe most pressingly, the richest company in the world, Apple. Ek’s talking about Taylor Swift, who in fall 2014 yanked her music off Spotify, calling the company a “grand experiment” that doesn’t fairly compensate creators of music. “I was a little surprised” by the attention Swift won for her cause, says Ek, who is Swedish. “But at the same time, I knew I was dealing with America’s darling.” Yet, he adds, it’s “ironic” that she’s not as massive a star in Sweden, “because all of her producers are Swedish.”
Ek is referring to the Swedes Max Martin and Shellback, who helped write Swift’s latest album, 1989. And in daring to throw a little good-natured shade at Earth’s most powerful pop star (with whom he has never met or spoken), he’s also revealing the precision blend of moxie and modesty he has cultivated during a tech career that made him rich even before he created Spotify. It turns out, though, that Swift denouncing his company was only an early skirmish in a war now opening up on multiple fronts for Ek, and that his vision is facing its greatest-ever test. Talks with Universal Music Group (UMG) about renewing its licensing deal have spilled over into a sort of proxy battle involving antitrust regulators; and on June 8, Apple will announce its own long-awaited streaming initiative at an event expected to feature Drake and Pharrell Williams, who, sources tell Billboard, will provide the service — which will launch at the end of June — with exclusive content.
Meanwhile, even the ill-received March 30 launch of Jay Z’s Tidal — purpose-built to get more money for artists and big-ticket exclusives for listeners — sounded a loud warning that Spotify’s very business model has come under attack. Apple, UMG and Jay Z’s superfriends all have a common enemy: “freemium,” the ad-supported, free-to-users tier that aims to convert listeners to subscribers (and pays one-fifth to one-seventh what its subscription service does, according to royalty data provided to Billboard). “At last the record companies are moving against ‘free’ streaming in general, and Spotify in particular,” former U2 manager Paul McGuinness tells Billboard. “I expect the iTunes subscription service to be a game-changer because of superior curation and all the smart stuff that Apple does. Artists worldwide are aware that Apple’s iTunes store is honest and pays them real money, unlike Spotify, where the sums are trivial.”
Spotify claims more than 60 million active users, approximately a quarter of whom pay about $10 a month for subscriptions, and says that they account for half the streaming market by revenue. The company depends on its free service to draw consumers who might otherwise use iTunes or YouTube. Freemium “is the only thing that’s working,” says one Spotify executive. Ek points out that Warner Music Group (WMG) just reported that streaming revenue exceeded that from downloads in the first quarter of 2015, during which time, Spotify says, it accounted for 10 percent of the U.S. recorded-music business. Since 2008, a Spotify spokesman tells Billboard, the company has paid $3 billion-plus to rights holders worldwide, more than $300 million of which was distributed in this year’s first quarter.
Ek’s tech optimism — or at least, his Swedish reserve — shines through when discussing the Apple threat. “Apple will probably be pretty successful, but it doesn’t have to be at the expense of Spotify,” he says, citing the sheer growth of smartphone use and the increase in streaming that he believes that growth guarantees. In fact, the rate at which Spotify adds subscribers has increased over time — even immediately after Swift pulled her music from Spotify —thanks, in part, to mobile use. “If we think of this as an opportunity instead of trying to maximize the piece of pie we have today, the music industry will be many, many times bigger, and there won’t be any arguments about how many percent we pay. When Apple starts doing streaming, streaming will start growing even faster.” (Today, a combined 41 million people subscribe to all of the world’s streaming services, according to the International Federation of the Phonographic Industry.)
When Spotify launched in 2008, Ek, who had briefly run a BitTorrent client that facilitated piracy, came off as a brilliant, soft-spoken visionary who had crossed over from the dark side. Now he’s an entrenched player leading a company with an $8 billion valuation and fighting to maintain a massive lead over his competitors, while key members of the music industry are going on the offensive. “The problem is, Daniel is so evangelical about the process, you can’t change his mind,” says one high-level label executive who has negotiated with Ek personally, and has doubts about Spotify’s model. (Ken Parks, Spotify’s chief content officer and managing director, USA, leads negotiations with labels.) Amid all the tumult, Ek — who’s quick to say that streaming is now growing fast enough to make up for the declines in CD and download sales — still sees Spotify as nothing less than the savior of the music industry.
When Ek came up with the idea for Spotify in 2006, he was a 22-year-old multimillionaire hanging out in nightclubs, enjoying the money he made, in part, when he sold the online marketing company Advertigo for $1.2 million. (Martin Lorentzon, who worked at Tradedoubler, the Stockholm-based ad sales network that acquired Advertigo, went on to co-found Spotify with Ek and become its chairman.) By then Ek was a tech-business veteran — he started coding professionally at age 14 and later left Sweden’s KTH Royal Institute of Technology to become an entrepreneur. “I was the kid who was spraying champagne, driving sports cars and doing a lot of obnoxious stuff,” says Ek, who now lives in Stockholm with his fiancee, Sofia Levander, a writer and one-time Swedish reality TV star, and their two young children. (They also keep an apartment in Manhattan.) “I remember waking up one morning next to someone — I didn’t know who she was — and realizing that I didn’t remember any of the last three days. I felt empty.”
Ek moved to a cabin near his mother’s house to meditate, play guitar and plan his next move. His thoughts kept turning to Napster, which had made a huge impression on him at 14. At the time, Microsoft had funded a high-speed Internet link between a high school in the Bronx and the one he attended in Ragsved, the working-class neighborhood in Stockholm where Ek grew up with his mother. The schools never connected much, but “we got computers and fixed-line Internet,” says Ek. “And then I heard about Napster, and I could download all of this music for free.” He still remembers searching for Metallica tracks, then following links and hearing his first Led Zeppelin song, “Kashmir.”
Ek decided to create a music service with the breadth and functionality of Napster that would operate legally and pay rights holders. “I wanted to work with the industry,” he insists, “not against it.” Although streaming services like Rhapsody already existed, getting the necessary licenses wasn’t easy. “I started the process with hair,” Ek dryly remembers. It didn’t help that for a few months in 2006 he was the CEO of uTorrent, a BitTorrent client that was widely used to pirate music. (Ek says he acquired the company in order to get an engineer to work on Spotify, and he sold it in December 2006.) Ek did have a huge advantage, though: The Swedish recorded-music business had declined so much — by 50 percent, to just $141.3 million in trade value — and the market had become so small the major labels were willing to take a risk there. Spotify also delivered significant cash advances. “Forgive the expression,” says Ek, “but we put our balls on the table.”
The Swedish music industry started recovering quickly, with streaming contributing 70 percent of the business’ $189.4 million in revenue in 2014. Since then, Spotify has grown into a global behemoth that operates in 58 countries and last year took in $1.3 billion. With offices in nine cities, including main branches in Stockholm, New York and London, the company employs 1,500 people, and its board includes Sean Parker, co-founder of Napster and an early Facebook investor; Barry McCarthy, former CFO of Netflix; and Rene Obermann, former CEO of T-Mobile. In early May, it reportedly raised about $350 million at a valuation of $8 billion (about four times the $1.9 billion UMG paid for EMI Recorded Music in 2012), and it is thought to be considering an initial public offering that would further enrich Ek — as well as the three major labels which used their negotiating leverage to acquire equity in the company, although they don’t get a say in management. (The major labels purchased 18 percent of Spotify in 2008, according to financial documents obtained by the website Computer Sweden, but it’s impossible to say with certainty how much the labels may currently own.) Like so many buzzy tech empires, for all of Spotify’s remarkable growth, it’s not profitable. In 2014, the company took in $1.2 billion but reported losses of $197 million.
Until February, Spotify was productively negotiating to renew its licensing deal with UMG, which concluded at the end of 2014 but has continued since then with a series of extensions. In April, in the course of answering a general question about online business models at the Code/Media conference, UMG chairman/CEO Lucian Grainge said that free, on-demand streaming was “not something which is particularly sustainable in the long term.” Days later, Sony Music Entertainment CEO Doug Morris said that “in general, free is death.”
“We’ve looked at the data, and what has become clear is that the free funnel isn’t working,” another major-label executive tells Billboard. While the percentage of users that Spotify converts to paid subscribers is among the highest for popular consumer Internet companies, at about 25 percent, 69 percent of those who subscribe after using the free tier do so within 90 days, according to a major-label executive who has seen Spotify data. Spotify says that keeping consumers engaged with its free service gives the company more opportunities to turn them into subscribers. In December, when Spotify offered three-month subscriptions for 99 cents, 38 percent of those who signed up had been using the free service for more than a year.
Billboard interviewed more than two dozen music executives for this story, and their opinions on Spotify generally depended on whether they thought the service was replacing sales or piracy -- and whether imposing limits on free use would push users to subscribe or find a source of free music that generates even less revenue. The answers aren’t simple. Spotify’s growth has coincided with a decline in download sales, but it’s hard to prove a causal relationship: Digital sales began falling in Canada, for example, before Spotify launched there. And while limiting Spotify’s free service would encourage some users to subscribe, it could also weaken the company’s expansion. In 2011, when Spotify imposed a 10-hour limit on its free service in several European markets, its subscription growth slowed, at least initially, and the company backtracked.
The freemium debate has “been around since the beginning,” says Ek. “Do I think the future will not have any radio for free? Do I think you will not, in some shape or form, be able to enjoy music for free? No, I think you will, for a lot of different reasons.” Even today listeners can avail themselves of online radio sites like Pandora and stream almost any song they wish on YouTube. (YouTube plans to launch its own paid streaming music service, possibly before year’s end.) As soon as Swift quit Spotify, Ek points out, “Her YouTube streams went through the roof. What that tells me is the audience that was listening to Taylor Swift on Spotify went on YouTube to do it instead. Then you may ask, ‘Well, what was the benefit of it?’ ” (Jason Aldean was the only major artist to follow Swift’s lead, pulling his catalog from Spotify later in the same month and releasing a statement saying, in part, “I want everyone who is involved in making my music to be paid fairly.”)
Plenty of executives (and musicians) also think limiting freemium would be short-sighted. In a mid-May earnings call, WMG CEO Stephen Cooper warned against thinking “freemium should be burnt at the stake.” (He’s more interested in how it generates potential subscribers than advertising revenue.) And Beggars Group founder/chairman Martin Mills tells Billboard that “the rush to ditch free is premature.” Mills likes Spotify’s subscription service because “it’s the gift that keeps on giving.” If subscribers keep listening to their favorite albums over time, that music could eventually generate more revenue, and potentially royalties, than it would in a one-time sale. “Most people,” says Mills, “don’t intuitively understand that.” Earnings can be significant, even in the medium term: With Spotify’s top payout rate of $.0084 per stream, Avicii would have earned an estimated $2.7 million from 339 million plays of his 2013 hit “Wake Me Up!”
Spotify says it pays out 70 percent of its gross revenue to rights holders, and has implied that low payouts could be the result of recording contracts and label accounting practices. (Tidal pays 75 percent, presumably because Spotify pays 70.) “You can honestly argue that either Spotify is not paying fairly or the labels aren’t passing the money through,” says David Lowery, the Cracker and Camper van Beethoven frontman who champions creators’ rights. “But part of the problem is that too many of my spins are on the free platform, and that doesn’t pay enough.” (Songwriters get even less, since in the United States the company allocates only 10.5 percent of its gross revenue to music publishers and collecting societies.) And while the major labels may have a financial interest in letting Spotify use their music to build its business, with the expectation of profiting from a future IPO, artists wouldn’t share in such a payout.
For Apple -- which bought Beats Music and Beats Electronics for $3 billion in May 2014, bringing on former UMG executive Jimmy Iovine in the process -- the anxiety over freemium could be a useful wedge between labels and Spotify. In fact, multiple music industry sources tell Billboard that Spotify and other streaming services believe that Apple is actively pushing the labels to fight freemium. Several antitrust authorities, including the European Commission, the Federal Trade Commission and the New York State Attorney General, are looking into this, presumably to see whether it could constitute a violation of antitrust law. This is a rather sensitive issue for Apple, since in 2014 a U.S. court found that Apple colluded with five of the six major book publishers to raise the price of e-books and appointed an antitrust monitor to ensure the company acts fairly. (Apple declined to comment on Spotify and antitrust issues.)
Spotify says it did not bring an official complaint, but adds that it and other streaming services have ongoing conversations with various antitrust regulators about this and other issues. Meanwhile, just this year Spotify hired four Washington, D.C., lobbying firms (including one that has worked for Pandora) and two in Europe to represent it on a range of topics.
Apple’s in the thick of negotiating its own label contracts for its planned streaming service. A high-level label exec says that in 2015 the company will invest more money in the music business than in any previous year. Iovine — who, as a producer and former head of Interscope, is on close terms with some of the biggest acts in the business — has been busily lobbying major artists for exclusive albums. “Jimmy is as good as it gets, and he is going to use every possible advantage that comes from the Apple connection, including the company’s vast store of credit card numbers, artist relationships, new design features, the works,” says longtime Bruce Springsteen manager Jon Landau, who has known Iovine since he engineered Springsteen’s 1975 album Born to Run.
“I started this company to help the music industry, not get vilified by them,” says Ek, who seems genuinely bummed out that some artists don’t like Spotify. “This is probably the biggest change since the inception of recorded music, because since then we’ve sold music by units and we’re no longer doing that. But if you’re going to make this change and you’re the poster boy for that, I think the worst we could hope for is people being indifferent.”
Ek, whose ownership stake in Spotify is not public, stands to become a great deal wealthier when and if the company moves forward with its long-anticipated IPO. (In 2012, he entered the London Sunday Times’ “Rich List” at No. 10, with an estimated net worth of $290 million.) But if he’s in this for the money, he hides it better than most music executives, let alone young Internet entrepreneurs. (Although he does count Parker and Mark Zuckerberg as friends.) With his hard-clubbing days behind him, his main indulgence may be his collection of guitars. “It’s not often that you meet people in this business who have the right values and want to do something for the greater good,” says his friend Ash Pournouri, who manages Avicii. “He’s one of the few people who are in the business for the right reasons. He wants to make things more fair and more modern.” Ek’s also friendly with Sonos CEO John MacFarlane, who says, “Ek’s Swedish, so he’s naturally self-effacing, but there’s a very proud tech guy underneath. Though he can be overconfident in terms of his vision, he’s always respectful to other points of view.”
In 2012, Ek was flying to San Francisco for some meetings, and a music business attorney who does work for Spotify asked if he’d be interested in meeting Neil Young. When Ek landed, he received a text message that a white car had arrived to pick him up. “I walked out, saw the white car and I was about to jump in — and it was Neil Young driving,” recalls Ek. “That surprised me.” They drove around together for an hour-and-a-half, talking about music, Occupy Wall Street and Young’s frustrations with the audio quality of streaming services. Says Ek, “I got goose bumps.”
As much as he admires artists, as CEO of Spotify, Ek is ultimately more concerned with listeners. “We’re really hyper-focused on our users,” he says. Indeed, his ultimate aim may be re-engineering the very way people listen to music. He cites a recent Spotify focus group of “power users” in New York where the participants talked excitedly about how they exploit the service. “They started exchanging music ideas — not just ‘What kind of hip-hop are you into?’ but ‘What music do you work out to?’ ” says Ek. “They were taking playlists to a whole new level — they were almost hacking them. They were using them to soundtrack distinct moments of their lives.”
This breakthrough, says Ek, led to one of the key new features announced at the May 20 press conference: The service can now suggest songs based on a user’s typical behavior at a given time of day. “A playlist can be very versatile, almost like a programming language,” says Ek. At the event, Dutch DJ Tiesto talked up new music he had created especially for Spotify Running, which can find music to match a user’s exercise tempo. Want to optimize your morning jog? Spotify will provide the proper beats per minute. “This is where music is heading,” Tiesto tells Billboard. “Now the customer creates the mood, rather than the artist.”
That’s the kind of feel-good industry disruption that Ek relishes. “I’m not saying you can’t be successful in the music industry without Spotify,” he says, acknowledging freemium-averse artists like Swift. “But when I look at the future of music, I don’t think scarcity is the model anymore. We have to embrace ubiquity — that music is everywhere.”
Additional reporting by Ed Christman, Andrew Flanagan, Shirley Halperin, Andrew Hampp, Glenn Peoples and Ray Waddell.
This story first appeared in the June 13 issue of Billboard magazine.