Spotify's Daniel Ek created a free, Facebook-enabled platform that could save the recording industry from piracy and iTunes
It’s a typically damp, dark November afternoon in Stockholm, and Daniel Ek is ill. Over the past month, the 28-year-old chief executive of Spotify has worn himself down jetting from his Swedish base to San Francisco, New York, Denmark, the Netherlands and France to visit his expanding sales force and launch his music service in one or another of the dozen countries it now operates in.
But there’s no rest for the weary. Next week he’s scheduled to return to New York to unveil Spotify’s new platform in front of his first-ever press conference—a platform that he admits still isn’t ready for a public debut. “I should be home in bed,” sighs Ek, his voice weak and scratchy, “but we need to get this thing perfect.” So the bald, barrel-chested Ek zips his white hoodie to his chin, swaps tea for his morning cup of coffee—the first of six he throws down in a typical day—and heads into an office that resembles a university library during finals. The pool table has been traded for more IKEA desks, and gray daybeds offer a place to nap between all-nighters. Forgoing his large office, which he mostly uses as a meeting room, Ek plops himself down at an open desk. Around him, a dozen engineers from nearly as many countries, united by their geek-chic uniforms—skinny jeans, printed T-shirts and cardigans—frantically bang out code on their silver MacBooks.
All this frenetic energy reflects the strange new reality of the music business. More than New York or L.A. or Nashville, this rented office space along Stockholm’s Birger Jarlsgatan has become the most important place in music, with Ek now standing as the industry’s most important player. Superstar bands like the Red Hot Chili Peppers—formed the year Ek was born—now trek to Sweden to kiss the ring; he sits shotgun in vintage cars with Neil Young (his iPhone boasts a picture of them cruising in a white 1959 Lincoln Continental); he texts breezily with Bono. “Both my [maternal] grandparents were in the music industry,” shrugs Ek, “so I’m fairly grounded about the whole thing.”
The music industry has been waiting more than a decade for Ek. Or more specifically, someone—anyone—who could build something (a) more enticing to consumers than piracy while (b) providing a sustainable revenue model. In the 1990s Shawn Fanning and Sean Parker essentially broke the recording industry with their short-lived illegal download site, Napster, which Ek describes as “the Internet experience that changed me the most.”
In building his iTunes juggernaut out of the wreckage, Steve Jobs subsequently proved that the cure could be almost as destructive as the disease. By training consumers to buy singles, rather than the CDs that had been the industry’s lifeblood, and taking an outsize cut of the action, Apple stoked the continuing spiral. Recording industry revenue, a healthy $56.7 billion in 1999, according to IbisWorld, clocked in at about $30 billion in 2011.
Enter a third disrupter, Ek. In the current tech landscape, where Google provides the search, Facebook the identity and Amazon the retail, Ek wants Spotify to supply the soundtrack. As he describes it: “We’re bringing music to the party.” Which explains what’s keeping his sleep-addled engineers on a 24-hour cycle: Rather than a mere music player—albeit one with a revolutionary model that allows legal access to almost every song you’ve ever heard of, on demand, for free—Spotify aims to create an entire music ecosystem.
For a consumer, Spotify is an easy sell: The service’s 10 million active users (people who have listened in the past month) have access to 15 million songs on their desktops, all for the cost of hearing an occasional advertisement. It has the speed and ease of iTunes, the flexibility and breadth of Napster and the attractive pricing of online radio service Pandora. And unlike those predecessors, Spotify was social from the start, with tools that let you share playlists with pals—more than 1.5 billion songs have been swapped on Facebook so far.
After he was bounced as Facebook’s first president, Sean Parker begged Ek to let him invest: “Ever since Napster I’ve dreamt of building a product similar to Spotify,” his introductory e-mail read. The service impressed Mark Zuckerberg, too. “I checked it out and I thought, This is pretty amazing,” the Facebook founder tells me. “They internalised a lot of what we’ve talked about in terms of social design of apps.” That means turning the core product—in Ek’s case, a hard-fought song library—loose on third party app developers to help Spotify evolve, making it even more tempting to potential customers.
Here’s how that social stickiness translates into revenue: You explore your friends’ playlists, discover new music with apps from Rolling Stone, Billboard and Last.fm, and build your own jukebox. Eventually you want to take it everywhere. That’s where Ek has you trapped. With Spotify you pay for portability—$ 10 a month buys you access to your collection on your mobile device.
This model has proven it can save the music business—in Sweden. One-third of Ek’s home country has signed up, and about one-quarter of those pay for premium access. According to Mark Dennis, who runs Sony Music in Sweden, Spotify single-handedly stemmed a decade of nonstop revenue drop when it launched in 2008; in 2011 Sweden’s music industry will likely see its first growth since the Clinton Administration, with Spotify accounting for 50 percent of all sales (up from 25 percent last year). This in a country that has long been a hotbed of piracy.
Extrapolate that on a global scale and the industry will have its magic bullet. With the stakes nothing less than the future of the recording business Ek arrived in the US in July for a three-front battle with Apple, Amazon and Google. Some 400,000 Americans have already subscribed to the premium plan, according to a well-placed music executive, lending credence to Ek’s pitch that he can rescue the record labels by giving their product away for free.
The two facets of Spotify—music and technology—were introduced to Daniel Ek at age 5, when over the course of a few months he received a guitar (his mother’s parents had been an opera signer and a jazz pianist) and a Commodore 20 computer (his father left the family when Ek was a baby, but his stepfather worked in IT). He was a natural at both instruments.
At 14, Ek latched onto the late-1990s dotcom mania, making commercial Web sites in his school’s computer lab. The going rate then for a commercial home page was $50,000, but Ek charged $5,000 and made it up in volume: He recruited his teenage friends, training the math whizzes in HTML and the artists in Photoshop. Soon he was netting $15,000 a month and buying every videogame out there (one favorite: A business game called Capitalism).
True to the first generation to grow up online, he sought to master everything Internet. He bought some servers to see what made them tick, and wound up earning another $5,000 a month hosting Web pages. At 16, obsessed with Google’s speed, he applied to be an engineer there (“Google said come back when you have a degree”) and then set out to build his own search company.
That project failed, but led to a gig at a company called Jajja, where he worked on search engine optimisation. The money was good, but the high schooler wasn’t really into it. He used the paychecks to buy more servers and tuners to chase his latest obsession: Recording every programme on TV at once (he had no clue TiVo was pulling off the same trick).
After high school, Ek enrolled in Sweden’s Royal Institute of Technology to study engineering. After eight weeks, realising that the entire first year would focus solely on theoretical mathematics, he dropped out. Eventually a Stockholm-based ad network called Tradedoubler asked him to build a program to tell them about the sites they contracted with, and Ek built something so effective that the company paid him about $1 million for the rights to it in 2006; he made another $1 million selling related patents.
Then things fell apart. A self-made millionaire at 23, Ek found himself holed up alone in the woods 20 miles south of Stockholm enduring a harsh Swedish winter and a harsher bout of depression. Seeking the fast life, he had bought a three-bedroom apartment in central Stockholm, a cherry-red Ferrari Modena and entrée to the city’s hottest clubs. But it was still hard to attract girls, and the big spending attracted the wrong ones.
Miserable, he sold the Ferrari and moved into a cabin near his parents, where he played guitar and meditated. Ek had already started three tech companies, but he now toyed with the idea of getting by as a professional musician. (Ek plays guitar, bass, drums, piano and harmonica; he doesn’t sing). “I wouldn’t be rich, but I could have made a living.” There in the woods Ek finally decided he’d somehow marry music and tech, the two passions that drove him.
During this time Ek started hanging out with Tradedoubler’s chairman, Martin Lorentzon, an energetic 42-year-old who works out twice a day. A Silicon Valley veteran (Alta Vista), Lorentzon took Tradedoubler public in 2005, netting himself $70 million. No longer involved in the day-to-day operations, he too was bored and adrift. The first time Ek visited Lorentzon’s Stockholm apartment he found only a mattress and a laptop balancing on an IKEA chair. “I asked him when he had moved in,” says Ek. “When he said it had been more than a year ago, I knew he wasn’t happy.”
The pair bonded over marathons of gangster films like the Godfather trilogy and Carlito’s Way (a ritual they repeat each year). “I got a very strong feeling when I met Daniel,” says Lorentzon. “To partner up I have to like the person like a brother, because we’ll face so many problems. The value of a company is the sum of the problems you solve together.”
Ek doubted Lorentzon would leave Tradedoubler, so later in 2006 he set a one-week deadline. Before they committed to partnering, Lorentzon would have to publicly resign as chairman and transfer a million euros of seed money into Ek’s account. The next Monday, Tradedoubler sent out a press release announcing Martin Lorentzon’s resignation. Later that day he told Ek to check his bank account. The money was there. The two men had yet to decide the type of business they would start.
Lorentzon and Ek were in a unique place: The former no longer needed the money, and the latter no longer cared about it. So they decided to ignore the dollars and aim for disruption. Their target: Music. “It disturbed me that the music industry had gone down the drain, even though people were listening to more music than ever and from a greater diversity of artists,” says Ek.
Sitting in two different rooms at Ek’s apartment, the pair yelled out possible titles for a music site—without even yet knowing what it would do—when Ek misheard one of Lorentzon’s suggestions. He typed the word “Spotify” into Google. There were zero hits (today: 64 million). Ek and Lorentzon registered the name, and started working on the ad-based plan. Once that gelled, they recruited a handful of engineers and took the new team to Barcelona to party and listen to what Ek calls “weird German electro-pop.” Then they got to work.
Back in Stockholm they built a prototype based on the interface of Apple’s iTunes and the sleek black styling of Ek’s Samsung flat-screen TV. Unlike music sites that had launched with pirated music, Ek wouldn’t debut Spotify until he signed deals with the labels. “We wanted to show that we were not in it to use their content to flip the company like others have done,” Ek says.
Ek, with the help of industry lawyer Fred Davis, initially tried to get global music rights and was quickly turned down. So he aimed for European licenses, which he figured would take three months—it took two years.
Ek and his team hounded label execs, pitching them that their free, ad-based model would eventually lead to more sales. No one bit. “They’d say, ‘Yeah, this sounds really interesting’ or ‘Send me over some stats,’ which really means ‘There’s no way in hell we’re going to do this,’” Ek says and laughs. “But I was 23 at the time, and I thought, wow, this is great, we’re going to get this done.”
Ek eventually loaded Spotify with pirated songs and sent demos to industry execs. That got them noticed. “With Spotify people don’t get it until they try it,” Ek says. “Then they tell their friends.” As Ek negotiated with the music companies, Spotify burned through cash. On top of salaries and overhead, Ek and Lorentzon were pledging million-dollar advances to labels for access to their music catalogs. VCs wouldn’t touch them. To stay afloat, they plowed nearly $5 million into Spotify, atop the $2 million Lorentzon had already seeded. “We bet our personal fortunes, and sometimes we bet the entire company,” says Ek. “We led with our conviction rather than rational, because rational said it was impossible.” In October 2008 Spotify went live in Scandinavia, France, the UK and Spain. It took nearly three more years to finalise deals in the US
“He’s the only tech entrepreneur who’s had the patience to achieve what he has with the record business,” says Sean Parker, now a Spotify board member, who helped open the door to US deals, including one with Facebook. “He has this Zen-like patience and an ability not to crack under pressure or get frustrated. Over and over again he puts himself in a situation where a normal person would have thrown in the towel.” As I talk with Ek in his office, he sits straight and motionless like a Swedish Buddha; the only thing moving is his mouth, not even blinking his icy blue eyes.
Such calm helps manage the chaos: Last year Ek was on the road 100 days—mostly a triangle between Europe, New York and California, a schedule that recently cost him his girlfriend of two years. When he’s in Stockholm, Ek wakes around 8:30 a.m., answers e-mail for an hour, then takes the five-minute walk to Spotify. He spends about 25 percent of his time recruiting; otherwise he’s at his open desk or walking the floor. “Ek’s one of the few people,” says Parker, “who can handle the technology side, the strategic side and the deal side of the business.”
Ek works in the office until 8 p.m., eats dinner out and then returns home to unwind, either by playing guitar for a few hours or juggling a rotating trio of books (most recently, the Steve Jobs biography, a primer on typography and a guide to bonzai trees). Then he hops back on e-mail, before typically turning in around 2 a.m. Lorentzon wants Ek to find a balance: More exercise, less junk food, more sleep, less work. The last goal will be tough to achieve for the foreseeable future.
Ek bounds up the sleek white stage in Greenwich Village’s Stephan Weiss Studio on November 30, as dozens of typing journalists and rows of live TV cameras stand ready. Though thrilled that the new platform is set for launch, he can’t wait for the press conference to end. When Ek operated just in Europe, he could lie low. But now that Spotify has made it to America—home to the cults of Bezos, Gates, Zuckerberg and Jobs—Ek must switch from programmer to preacher. For Spotify to scale, he needs to hype his platform, generate buzz and get labels, artists and now developers to be excited to partner up.
He doesn’t need to win over investors. Ek’s roster has surged over the past few years. Spotify went from some smallish Swedish funding to a heavyweight round from social media elite (Li Ka-shing, Sean Parker and Founder Fund), who collectively put in more than $50 million at a roughly $250 million valuation. This past summer, DST, Accel and Kleiner Perkins reportedly invested close to $100 million at a $1 billion valuation. “Daniel was an entrepreneur that we had to, and wanted to, work with,” says Accel’s Jim Breyer. “The combination of a passion for music as well as his idea of making music as frictionless as possible for discovery and sharing is where we hit it off.” Ek still holds about 15 percent of the company. Thanks to all that seed money, Lorentzon owns some 20 percent.
With 2.5 million paying customers worldwide (85 percent pay the $10 a month for portable and the rest pay $5 for ad-free access), plus advertising revenue, Spotify is currently generating a run rate of around $300 million. Using Pandora as a comp, that would make Spotify worth north of $2 billion—and Ek, at 28, worth over $300 million on paper. But the company is likely worth more: Spotify has Pandora’s radio capability as well as its limitless library of shareable songs.
Plus, Pandora doesn’t have Spotify’s social media muscle—specifically, Facebook, which is embedded into Ek’s platform, and vice versa. Those billion-plus shared songs don’t happen by accident: Before cinching the deal this September, Ek’s team spent a year perfecting the app, basing five engineers at Facebook’s headquarters. “I don’t think there’s a Facebook app so well-resourced,” says Ek. “We wanted it perfect.”
The real threat to Ek, ultimately, isn’t his product—it’s the industry Spotify purports to save. Spotify will only be as successful as its music library, and some bands—notably his two favorites, the Beatles and Led Zeppelin—aren’t playing ball. Recently Coldplay and the Black Keys denied Spotify access to their new albums. Scooter Braun, agent to Justin Bieber, understands the thinking, but tells me: “They should then tell radio not to play records for free and call YouTube and say don’t allow my music to stream on videos for free.”
More ominously, the initial music licenses expire in two years, and Ek must deliver enough cash flow to prevent the labels from demanding higher royalties—or pulling out all together. (So far, Spotify has paid them about $150 million.) Right now the labels have the leverage, and Ek has wisely brought the big players into the tent—as part of the licensing deals, Spotify granted equity stakes to the four largest music labels (Warner, Universal, EMI and Sony) and Merlin. Industry sources put their collective cut at nearly 20 percent.
Ultimately Ek needs to change the power dynamic before the licenses are up. He has two years to make Spotify the world’s dominant music source, a hitmaker so big no label or artist can afford to opt out.
Globally 500 million people listen to music online. With a 2 percent market share he has plenty of upside, albeit plenty of competition, including iTunes, burgeoning cloud services from Amazon and Google and the pirates Napster set free all those years ago. That’s another motive for opening up Spotify to developers: He’s hoping they’ll turn it into a universal music platform, while allowing him to focus all of his employees, now 500 strong, solely on growth.
“Google has 30,000 employees,” Ek says. “A part of me wonders what if they were all focussed on really solving search.” He takes out his iPhone. Using its Siri voice software, he asks it when tomorrow’s first appointment begins. After a few seconds the computerised voice says 11 a.m. “Imagine if this was three times as fast or truly understood my intent,” Ek says. “It’s probably the biggest threat to Google; it’s a whole new way of interacting.”
Does he plan on building a voice activated Spotify interface? He flashes a mischievous smile. “Play me some Coldplay,” he tells the phone. Its small speakers ring out with the opening piano chords of the band’s hit “The Scientist.” “We hacked into it a few weeks ago,” Ek says, with a satisfied nod. “I’m not an inventor. I just want to make things better.”