Service the Swedish way

In the mid-2000s, the media unanimously warned of the music industry’s imminent demise: online piracy deprived it of revenue. Two Swedish millionaire entrepreneurs, Daniel Ek and Martin Laurentson, found a way out of this deadlock. The latter was the founder and owner of Tradedoubler (Scandinavia’s largest digital marketing platform) and personally knew top European developers and had connections in Silicon Valley. Eck made about $50,000 per month in high school, uploading TV shows and SEO promotion for Swedish companies to the Internet, and after high school, he set up and sold several Internet projects for a profit.

The future partners met in early 2006. Ek developed a service for Lorentsson’s platform to verify the security of customer online classifieds. Despite the slight age difference (Daniel was in his 20s and Martin in his 40s), they hit it off – thanks to a similar outlook.

The idea for Spotify began with the hypothesis that people could give up piracy by making it easier to access music legally. In part, Daniel was inspired by the example of Sean Parker, whom he knew before he co-founded Facebook and was known as the creator of Napster. Launched in 1999, this track-sharing service for MP3 files operated on peer-to-peer network technology and in just two years gained a monthly audience of 20 million users worldwide – at the time, a colossal figure.

“I would never have heard the Beatles. I wouldn’t have heard anyone I listen to now if it wasn’t for Napster,” Eck confessed. The reason for the success of this service was that it was simpler and more convenient than torrents. However, it lacked one ingredient in its formula: legality. Unlike torrents, Napster had a vulnerable legal entity behind it – and in 2001 it was buried alive by lawsuits from Metallica and Dr. Dre, filed through the Recording Industry Association of America.

Because Eck and Laurentson were well versed in Internet services, they quickly figured out a way to make the music platform legal. The freemium model was supposed to pay back the rental rights and provide revenue to the rights holders. Users received the basic functionality (listening to music online) for free, but they were occasionally streamed advertising. A small monthly fee was charged for switching it off and for premium options (including track downloads).

On April 23, 2006, the entrepreneurs registered the domain name Spotify.com. Daniel later described the origin of the name as follows: “It was in my flat in Stockholm. Martin and I sat in different rooms and bickered for a long time, suggesting name suggestions. At one point, Martin shouted something I misheard – I thought it sounded like Spotify. I immediately learned that Google didn’t know such a word, and within minutes we registered a domain name. Later on, we were embarrassed to admit that the name came up like that, so we made it up as if it came from the words Spot and Identify.”

Laurentson stepped down as CEO of Tradedoubler for the new project. At the beginning he turned down offers from all potential investors because he was not happy with the terms; he took the expenses of the new company, including programmers’ salaries and office rent, upon himself. He managed to attract Ludwig Strigheus, the creator of one of the most popular torrent clients, μTorrent, to join the development team. Ek offered him the job, buying and then reselling his project. The first version of the Spotify architecture was created under Eck’s leadership in 2006.

“It’s too good to be true”

The next step, after setting up the company, recruiting a team and developing the service, was to sign agreements with music industry representatives. The fact that the project was from Sweden, a country that had attracted a lot of attention from music business sharks, since The Pirate Bay, which was bankrupting them, was based there, helped to arouse interest. On the other hand, the start-up had no experience or connections in the music field. Daniel’s young age did not inspire much confidence either. As a result, all the introductions and negotiations took more than 2 years.

The disappointing figures from their own financial statements helped them to win the hearts of the market leaders: in 1999, the world music sales exceeded $25 billion, but by 2006, thanks to the efforts of Internet pirates, they dropped to $19.4 billion (in 2008, they even lost close to $17 billion). When Martin and Daniel were shown a demo of Spotify to Per Sandin, head of Universal Music Sweden, his response was, “It’s too good to be true. In 2008, four major labels – Universal, Warner, Sony and EMI – gave the start-up the rights to their music for $5 million.

Spotify launched on October 7, 2008. The service was initially available in the UK, Germany, France, Italy, Spain, Finland, Norway and Sweden. Martin and Daniel made a good start: that same year, popular internet radio Last.fm switched to a paid subscription service, securing increased interest in Spotify.

The platform spent the first few months testing the load on hardware, meaning free accounts were not publicly available. A one-month subscription was available for €4.99 or three-month subscriptions for €9.99.

In February 2009, creating a free account was possible (previously, an invitation from a paid user was required). Such users were shown advertisements – and were limited to listening to music for 10 hours a month. Subsequently, the time limit was removed and low-cost paid access options were added – a discounted student rate and a family rate that could connect up to 6 people.

A compliment from Zuckerberg

In the first six months after its launch, Spotify gained over 1 million users. In the autumn of 2009, a mobile app for iOS and Android was released, further boosting its popularity. That was also when Sean Parker found out about the project. Recalling his acquaintance with Ack, he contacted the founders and invested $11.6 million in the start-up the following year. At the same time Parker told Mark Zuckerberg about the service. Zuckerberg posted on his Facebook page, “Spotify is so cool! – He wrote on his Facebook page, “Spotify is so cool!” and sparked even more interest from investors worldwide. In the spring of 2011, Milner’s DST Global foundation bought a 50 percent stake in the service for $50 million, valuing it at $1 billion. At that time it was already used by 6.67 million Europeans, 1 million of whom had premium accounts.

On July 14, 2011 was the launch of Spotify in the U.S.. There were 2 plans: $4.99 and $9.99 a month (the more expensive allows you to use the mobile app and download music for listening offline). Free to listen to music Americans initially could only for six months, and no more than 20 hours per month and only by invitation from the subscription owners. Along the way, Spotify distributed invitations in collaborations with major brands, from Coca-Cola to Reebok. The artificial appearance of a scarce offer helped fuel public excitement at launch, a trick that was later used when the service expanded into new geographic markets.

By 2013, Spotify was providing access to 20 million songs to 24 million people in 32 countries. The Swedish business media have reported valuations of $5.2 billion. Spotify’s success has spawned a number of similar services from major technology companies: Google Play Music in 2011 and Apple Music in 2015.

Spotify’s main rival was Apple. It had every opportunity to launch a similar music service first and take over the market when Eck and Laurentson first negotiated with music labels, but it was at odds with Steve Jobs’ vision. In 2006, he said, “People don’t want to rent music, nobody wants it.” As a result, Apple Music was one of the last to enter the market, emphasizing downloading songs rather than streaming. Apple outperformed almost all of its competitors (except for the Swedish service) thanks to its huge audience of users of its devices. By early 2019, its music platform had 60 million paid subscribers, while Spotify had 96 million.

The Swedish service’s main competitive advantage is that it was the first and, for a while, had the largest music library, with 40 million tracks (Apple and Google have about the same number today). Another component of its success is a sophisticated interface and recommendation system, the latter of which is the responsibility of Spotify. The latter is the responsibility of Spotify’s entire division, which employs several dozen people – from algorithmic engineers to music experts.

Service in the early 2010s learned to identify music preferences, without requiring users to make additional efforts in the form of likes and dislikes. In addition, the music in it never stopped on its own – it was enough to launch a favorite song right from the search, and after its completion, the service played as many similar songs as possible. With most competitors, the user in such a situation had to select the next song manually.

The company’s profits

Today, Spotify has 209 million monthly users in 79 countries. Although the service’s total audience is double the number of paid subscribers, they account for the bulk of revenue. In 2012, they accounted for 87% of revenue, with premium subscribers generating €374.6m and ad impressions generating just €55.5m. In 2018, the figures are up significantly: €4.7bn and €542m respectively.

The company retains up to 30% of revenues, with the remaining 70% distributed to rights holders. Spotify’s model has been so successful that in 2016, streaming services accounted for half the profits of the entire US music industry, and in 2017 that share rose to 65%.

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