The Spotify Play Page 21

  “That was amazing! Well done, Per,” Wells said in his thick South London accent, putting his arm around the Swede.

  “I’m gonna get fired,” Sundin said.

  The Brit laughed and promised that his friend would keep his job, as Wells would recall.

  “This is a discussion we need to have,” Wells said.

  The next day, Wells made sure that the event staff seated Sundin closer to the stage. The Swede felt relieved when he noticed the upgrade. Wells took the stage for a presentation about the state and future of the industry. One of his slides showed how sales via iTunes had plateaued, while streaming services from the likes of Spotify, Pandora, and Google had a revenue growth of around 80 percent annually. Streaming had succeeded in Europe, he said, arguing that it would soon pick up speed in the US.

  The European duo at Universal would be proven right. The following year, services such as Spotify would help the industry break its downward trend and return to growth, albeit in modest terms.

  Jimmy Iovine was another beneficiary of the trend. The following year, after the Apple acquisition of Beats, he had climbed to fifth place on the Billboard music-industry power rankings. In the 2016 edition of the list, Iovine shared third place with his Beats partner Trent Reznor, as well as Apple’s Eddy Cue and Robert Kondrk.

  With time, Spotify’s CEO began to make a mark on the Billboard rankings. At the time of Universal’s conference in Santa Monica, Daniel Ek held the number twenty-five slot. Over the following two years, he would climb into twentieth place, and then tenth. Then, in early 2017, Billboard crowned him king.

  Out of Control

  During the first six months of 2014, Spotify gained eleven million new free users, an increase of nearly 50 percent. Such strong growth would soon become a problem. As the proportion of non-paying listeners increased, so did Spotify’s payouts to the record industry, dealing a new financial blow to the still-unprofitable company.

  Daniel Ek, who had always been aggressively focused on user growth, had to act against his own instincts. In June of that year, he decided to hit the brakes. The CEO asked his Chief Revenue Officer, Jeff Levick, to send word through the Spotify ranks.

  “All market launches are off,” Jeff said over the phone to Axel Bard Bringéus, whose team had taken Spotify to nearly fifty countries over the previous two years. The team in charge of new markets was at an offsite conference on the island of Grinda in the Stockholm archipelago, plotting Spotify’s expansion across the globe.

  For about a year, they had been preparing to bring Spotify to Russia, and even hired a general manager based in Moscow. But several new laws in the country—including one that required internet service providers to store their data on Russian servers—had given the Spotify team pause. Then, in February of 2014, Russian troops invaded the Ukrainian peninsula of Crimea. Axel’s team dropped their plans to enter Russia, much to Martin Lorentzon’s relief. Spotify’s politically engaged co-founder still harbored a deep contempt for the Russian regime.

  However, that had not ruled out launches in other countries. When Jeff called the new-market team, its members had been debating where to go next. Their short list included Japan, South Korea, several countries in the Middle East, and a few additional European countries. But now all of their plans were put on ice.

  “We’re taking a break,” Jeff told Axel over the phone.

  Spotify’s free tier had become something of a liability. Every free user cost Spotify around one dollar per month in payouts to the record labels and publishing societies. That cost could be offset by advertising revenue. But, fresh from the extended battle to secure new mobile licenses, Spotify did not yet have a mobile advertising platform. That meant that the millions of new users discovering the music service also cost the company millions of dollars every month. This was the music industry’s way of ensuring that even if Spotify’s number of free users ballooned, they would keep getting paid.

  The growth was straining Spotify’s finances and its investors were asking a series of tough questions. In Daniel’s quarterly calls with shareholders, he was frequently pressed on when their growth in paying subscribers would begin to catch up with the surge in free users, a participant would recall.

  One especially critical investor was Barry McCarthy, who had recently joined the company’s board. Only a few months had passed since his company, Technology Crossover Ventures, invested in Spotify. Now, Daniel was failing to meet his own forecasts. From his base in California, the Netflix veteran made his dissatisfaction clear, two sources recalled.

  Daniel had no choice but to act resolutely. He pulled the plug on Spotify’s imminent launch in South Africa, where they already had a bundle deal in place with the local operator Vodaphone. His concern was that the mix of Spotify listeners in South Africa would skew heavily toward free users, putting even more pressure on the company’s finances. Daniel also instructed Gustav Söderström and his product team to build a mobile advertising platform so that Spotify could offset the costs of onboarding free users.

  For the first time, Daniel had to reconstruct how he thought of Spotify’s business. Since its commercial launch, he had conceived of Spotify as a fast-growing startup with a number of metrics signaling its strength—such as an increasing number of monthly active users, impressive user retention, and an ever-growing valuation. Now, the idea of Spotify as a paid subscription business using its free tier to convert new users into paying customers gained more prominence.

  Daniel began to concede that Spotify’s paid tier was the key not only to its longevity, but to its very survival. Growing the number of total users—Daniel’s primary focus since the beginning—was important, but it wasn’t enough to impress Wall Street. Daniel was becoming more pragmatic, mindful that a successful stock market float was the only way to fully satisfy his early investors.

  To make an impression on Wall Street, the paid side of Spotify’s business not only needed to grow, it needed to become a larger portion of Spotify’s overall user base. Paid subscribers accounted for around 90 percent of Spotify’s revenues and were the key to its future profitability. In addition, record labels, artists, and songwriters might start viewing Spotify not as a service giving away music for free, but as a tool to get more people to start paying for music.

  To attract more paying subscribers, Daniel had to make concessions. For instance, he ended Spotify’s three-year boycott of Apple’s in-app payments system. Listeners would now be able to upgrade to Spotify Premium directly through the App Store. They were, however, forced to pay a 30 percent higher subscription price, to compensate for Apple’s surcharge.

  In the spring of 2014, Spotify’s communications staff sent out a press release stating that the company had reached ten million paying subscribers. This was the first in a series of press releases that would signal subscription growth in the run-up to Spotify’s stock market listing.

  The record labels monitored the dispatches closely. They wanted to make sure the proportion of free tier users did not become too high. At times, Spotify would cook the numbers by downplaying the total number of users by around ten percent, several people would recall. That way, the paying subscribers appeared to make up a larger share of the total, keeping both investors and record labels happy.

  By September 2014, Gustav Söderström’s product team introduced video ads on Spotify’s mobile app. Within a few months, advertising revenues had begun to pick up, which partly offset the costs of Spotify’s free users.

  But, just as the clouds were beginning to dissipate, Daniel Ek was thrown into his company’s next crisis.

  Shake It Off

  In November 2014, Taylor Swift released her album 1989, with the Swedish hitmaker Max Martin as executive producer. The album sold 1.2 million copies in its first week, more than any other since The Eminem Show in 2002. The success had come without the help of Spotify, where listeners could see only a list of blacked-out tracks that were still unavailable for streaming. />
  “We are working on it and hope they will change their mind soon,” read a message from Spotify to users longing to hear Taylor Swift’s hit record.

  The Spotify content team had been in talks with Swift’s label, Big Machine Records, and her distributor, Universal, for months. Initially, her team had asked to make the album available only for Spotify’s paid listeners. As always, Spotify declined, refusing to differentiate the catalogue available on their free and paid services. That still seemed like a slippery slope that would lead to a much-weakened free service.

  As the album release neared, Big Machine Records—whose CEO, Scott Borchetta, was rumored to be selling the company—threatened to pull all of Taylor Swift’s music from Spotify. A week after the release of 1989, the label made good on their threat.

  The pop star, who had previously likened Spotify’s free tier to piracy, withdrew all her tracks. She opened up about her decision in interviews.

  “I think there should be an inherent value placed on art,” she would tell Time magazine.

  Daniel Ek had been dealing with recurring artist boycotts since Bob Dylan left Spotify in 2009. In 2013, Radiohead’s frontman, Thom Yorke, removed some of his music from the service. He later fanned the flames of the conflict by calling Spotify “the last desperate fart from a dying corpse,” in one of the most unflattering descriptions of the mainstream music industry to date. The British pop-rock band Coldplay and the DJ Deadmau5 had also temporarily boycotted of Spotify, but Taylor Swift’s sudden departure was more impactful and more public than any previous conflict.

  Swift’s label, Big Machine Records, had a distribution deal with Universal Music. She proceeded to ask her fans to find her music through iTunes or two of Spotify’s competitors in the streaming space: Rhapsody or Jimmy Iovine’s Beats Music, which by this time was owned by Apple.

  “With Beats Music and Rhapsody you have to pay for a premium package in order to access my albums. And that places a perception of value on what I’ve created,” she said, echoing the feelings of many record-label executives in the US.

  Spotify’s deepest, and most memorable, public-relations crisis had arrived. About a week after Taylor Swift’s defection, Daniel responded with an impassioned entry on the company’s blog. He explained that unlike other free services—“from piracy to YouTube to Soundcloud”—Spotify paid artists and other rightsholders every time someone listened to a song. The Swede proceeded to offer a crash course in the business model of streaming. He emphasized that streaming paid artists over a long period of time, as opposed to an upfront fee when someone bought a CD or downloaded a song through iTunes. The Swede promised that his payouts to the industry would grow in tandem with his company.

  “Here’s the thing I really want artists to understand: Our interests are totally aligned with yours. Even if you don’t believe that’s our goal, look at our business,” he wrote, before taking a swipe at both Apple and Google with, “We don’t use music to drive sales of hardware or software.”

  The debate over Spotify’s royalty payments deeply frustrated Daniel. He was running a loss-making company that was bound to return the music industry to growth. More than 80 percent of every penny Spotify made was still going to record labels and music publishers. Yet he and Spotify were consistently being portrayed as a thoughtless tech company that did not have the best interests of artists and musicians at heart.

  Part of the problem, the Spotify top brass felt, was that it wasn’t up to them how record labels and publishing societies handled their payouts. Spotify had little to do with that part of the equation. It was up to each artist and songwriter to broker a deal they thought would be fair.

  “$2 billion and counting,” read the headline to Daniel’s blog post, a reference to the amount of royalties Spotify had paid out since it was founded.

  Soon, that figure had become central to Spotify’s messaging around this sensitive topic. In February 2015, one of us visited Jarla House to interview Jonathan Forster.

  The charismatic Brit, who was now serving as head of the Nordic markets, turned sour as soon as Taylor Swift came up during the interview. Pressed on the matter, Jonathan Forster repeated the same three words, over and over: “Two billion dollars.”

  A Billi

  Taylor Swift was not the only artist trying to renegotiate their position in the music-streaming landscape. One of many proposals landed in Ken Parks’s inbox toward the end of 2014.

  “Look at this shit,” Spotify’s content chief said as he showed a colleague the email.

  One of Jay-Z’s representatives had gotten in touch. In the email, the rapper offered to license his catalogue exclusively to Spotify for one billion dollars, the source would recall.

  There was no doubt that the streaming market had heated up. First Apple had acquired Beats, nearly making Dr. Dre a billionaire. And now everyone from Neil Young to Brooklyn’s most famous rapper was trying to find ways to capitalize on the new technology.

  Spotify’s leadership team was unfazed at the prospect of losing the rights to stream Jay-Z’s music. The analytics team had looked closely at the effects of Taylor Swift’s boycott. As far as they could tell, the pop star appeared to have caused a few hundred subscribers to leave—if that. It amounted to a round-off error, since Spotify now had around fifteen million paying users.

  Ken politely passed on the offer from Jay-Z’s people, but the rap star would soon make an even bolder move.

  Holy Grail

  In January 2015, the share price of a Swedish-Norwegian tech company rocketed upward. That Friday morning, an acquisition bid had been made public. The presumptive buyer was Jay-Z, real name Shawn Carter, who had changed his strategy. Instead of licensing his catalogue exclusively to someone else, he wanted to buy his own streaming service. The rapper-turned-mogul had fixated on Aspiro, the company behind the Swedish streaming provider WiMP. Its premium product was called Tidal.

  The forty-five-year-old had come a long way since he founded Roc-A-Fella Records in the mid-1990s and released his acclaimed debut album, Reasonable Doubt. By early 2015, his business interests ranged from French champagne to the basketball franchise the Brooklyn Nets, which had recently relocated to the Barclays Arena between Prospect Park and the Manhattan Bridge. Among rap stars, Jay-Z currently ranked as the world’s third richest.

  His company, Panther Bidco, had just offered $56 million for Aspiro. whose time as a credible challenger to Spotify was all but forgotten. The bid had already been accepted by the Norwegian media group Schibsted, which controlled a majority of Aspiro’s shares. But a few smaller owners would soon begin to resist.

  “We will recommend that our members turn down the bid,” said Sune Karlsson, whose shareholder association Aspiro Aktiekraft represented just over ten percent of the company.

  A group of elderly Swedish stock-market enthusiasts was suddenly in an unlikely staring contest with Jay-Z. But Project Panther Bidco, which was ultimately controlled by S. Carter Enterprises, did not blink. A week later, the acquisition was finalized. Aspiro would soon be known as Tidal.

  Family Business

  A couple of months later, Jay-Z and Beyoncé made their way to a glass-covered industrial building in Midtown Manhattan. Tidal was hosting a press conference where it would explain how it planned to change the music industry.

  “We are here to launch a platform which is owned by the artists,” Vania Schlogel, Chief Investment Officer at Jay-Z’s company Roc Nation, told the gathered journalists.

  She announced that Tidal would cost ten dollars per month, or double for those who wanted a type of high-fidelity sound that wasn’t offered by other streaming services. The service would contain video, exclusive content, and the ability to listen to music offline.

  “We will reinstate the value of the music. And what’s even more important: we will create a space that brings together artists and fans,” she said.

  Then, she introduced Tidal’s owners, who got up on stage one
by one.

  “Alicia Keys,” she said, as cheers began to spread through the audience.

  “Win Butler and Regine Chassagne from Arcade Fire.”

  “Beyoncé!”

  By now, the crowd was clapping wildly. Soon, sixteen shareholders stood side by side on stage. It was an A-list bunch: Usher, Rihanna, Nicki Minaj, Madonna, Jay-Z, Kanye West, J. Cole, Jack White, Daft Punk in their trademark robot helmets, Deadmau5, and the country singer Jason Aldean, another artist who had previously boycotted Spotify. Calvin Harris and Coldplay frontman Chris Martin had dialed in through video chat.

  Taylor Swift was not present for the event, but she had granted Tidal the right to stream her entire catalogue except for her new album, 1989.

  On stage, Jay-Z pointed out that the artists behind Tidal were icons who had succeeded because of their love for the music.

  “I believe this is one of the things which distinguishes us from a tech company that sells advertising or hardware,” he said.

  The launch drew massive media coverage and became a hot topic on both sides of the Atlantic. In the lead-up to the event, the musical heavyweights backing the company had draped their Twitter profiles in Tidal’s aqua color, tweeting about a turning point for the industry using the hashtag #TIDALforALL. In their world, success in the music business still hinged on close relations with influential artists. And in that department, they believed they could beat Spotify.

  Once again, forces within the industry had transformed a small streaming service into a contender. At Spotify’s offices in Stockholm and New York, staff nervously followed Tidal’s launch. As always, they felt confident in their own product. From their own testing, they knew that offering higher-quality audio did not impact listener behavior in a meaningful way. What worried them was that Spotify was going up against some of the most powerful names in the music industry.