360°Sound spoke with Swedish tech journalist Sven Carlsson about his new book The Spotify Play: How CEO and Founder Daniel Ek Beat Apple, Google, and Amazon in the Race for Audio Dominance (out January 26 on Diversion Books). Carlsson and co-author Jonas Leijonhufvud conducted more than 70 interviews for the 304-page book, which chronicles Spotify’s rise from a small startup in Sweden to one of the world’s most popular music streaming services.
Although Spotify CEO and co-founder Daniel Ek declined to participate, Carlsson and Leijonhufvud were able to tell through their in-depth reporting a compelling, character-driven story that details how Spotify was able to beat Apple and other tech giants at their own game. Netflix is currently developing a scripted series inspired by the book.
This interview has been edited for length and clarity.
360°: Please start by explaining Spotify’s business model.
Sven Carlsson: It began basically as a free service. That was the whole idea. This was also a different time, the mid-2000s, when a lot of things on the Internet were free, and the really viral global services that were being produced were mostly free even in an area like music where there were a lot of complaints about copyright and piracy. [Founders] Daniel [Ek] and Martin [Loretzon] felt that the only way to compete in that environment was to offer something free. The revenue was going to come from ads. That’s Spotify’s original revenue source. Today, the lion’s share of the revenue, around 90%, comes from their subscriptions. That’s really quite a shift, and they’re trying to increase revenue, not least through podcasting. But it’s still overwhelmingly the subscriptions that are driving the business.
It’s when they started to prioritize subscribers as opposed to just the total user count that Spotify’s business model began to look convincing. That happened around 2014. You started seeing the results around 2016 and onwards. [The free tier] is what a lot of labels have opposed over the years and what a lot of competing services have been quite annoyed about. It’s not like you can use it for free for a few months. You can use it for free forever. That creates what the company would call a funnel situation where you have a wide opening at the top, where there’s as little friction as possible where you can attract as many users as possible. What Spotify is really trying to do is convert those free users into paid. That’s been their strategy. It allows them to grow. The free tier was the reason that Taylor Swift boycotted Spotify and the reason that so many other artists have done so over the years.
We did actually get to ask Daniel Ek one question for the book at a public event. We asked, ‘What do you think are the reasons for your company’s success?’ He gave two reasons. He said they started in the Nordic markets. That was basically the only way they were gonna get licenses in the beginning, to start in this corner of the world where the markets weren’t as big or as important to the labels on a global scale, but they were also rampant with piracy. Secondly, they were able to get the licenses for the free tier and to retain those licenses. Later on, to also introduce the free tier on the mobile phone by the time the smartphone became the primary way in which we consume music.
Reportedly over 70% of Spotify’s revenue goes to the labels and publishers. Has Spotify made a profit yet?
They have. They have a number of profitable quarters behind them, fewer than 10. I think they first reported a profit in 2019. I think they made a point of saying, ‘Now we’ve done it, and now we’re gonna reinvest in growth.’ That’s their only bet in a way. So much money goes to the labels and later to artists, composers, and songwriters that there’s not a lot there to make profits out of. They have been trying to reduce their dependence on it, which is really hard to do. That’s also controversial. We see that with their direct upload program that Spotify had trialed in 2019. Challenging the labels’ business model is something that will damage their relationship with their most important suppliers.
It could be podcasting. We don’t know. It’s early days. It looks like the bet is that it will be podcasting and that it might involve ad revenue. There are a few fundamental questions about Spotify’s business model that have lingered since the start basically, and they haven’t fully answered them.
Do the labels have a better deal than the artists?
That’s an unresolved question. A lot of people would claim that. If you zoom out, I think that Spotify has been great for users, great for the company itself and its shareholders. It’s revived the industry, for instance, the labels’ revenue curves. Spotify is the driving force there.
If you look at creators, artists, and songwriters, they are still claiming to not have gotten a fair share in this whole equation. I think that there is a parallel to be drawn between Spotify and Uber, for instance, where complaints are coming from the people who provide the service, the drivers. I think that that’s unresolved, and there’s obviously a lot of negotiations happening, but that’s a fundamental question. A lot of artists feel that they’re not better off than they were.
A lot of people take offense when Ek says that releasing an album every few years isn’t gonna work for you. Those sorts of comments annoy the artist community in a big way. I think there’s room for not just streaming companies to compete but also for a different type of music scene and experience, which might be based on downloads, physical sales, vinyl, maybe direct donations to artists. I think Spotify is sort of looking like the main global commercial channel in the future. Perhaps in the future, it will be at the forefront of digital radio, but it’s not a solution that pleases everybody.
You write in the book that “Spotify was like a foreign vermin threatening to invade Apple’s walled garden.” Tell us a little about how Steve Jobs felt about Spotify and Apple’s efforts to thwart the service.
Apple was Goliath in this story. [Apple] created the first sort of commercially viable digital music consumption model after two years of grueling declining sales due to piracy. iTunes was it. It was the incumbent. Apple is obviously still an incumbent in many ways, but not anymore within music. So, it was obvious that that was the goal – to beat Apple. One of my favorite scenes [in the book] is when Daniel, according to our sources, is in Los Angeles in 2010, before Spotify had entered the U.S. and the only way the company is going to survive and be viable without losing all of the investors’ money is by entering the U.S. and growing fast. They need to get in and they haven’t yet. Daniel is reportedly at a meeting with MySpace executives. This was a different time [laughs]. MySpace was trying to fend off Facebook at this point, trying to reinvent itself with a focus on music.
There is a tentative discussion between the companies about maybe [MySpace] acquiring Spotify. There was interest on MySpace’s side in doing that. This is at a time when Spotify was still a European startup and a small company. At one point, Daniel turns to the room and says, ‘Look, if you’re gonna help kill iTunes, let’s keep talking. Otherwise, I’m not interested.’
That was really the sort of driving force. We’ve tried to report as much as we can about the conflict of Apple and Steve Jobs’s role in this, and it was really fun to find that out, and I think [the book] makes things clear. At this point, Spotify is around twice as big as iTunes. Obviously, music is only a small part of Apple’s whole offering, but it is quite interesting to see how a focused player can really challenge a dominant one within a field.
Did Spotify save the music industry?
I think that that’s largely accurate, ‘industry’ being the key term. It didn’t necessarily upend the industry but it has revived it. It has also inherited a lot of the structures that people may have been unhappy with even before in terms of artist equity and how the industry deals with artists. I think it did save the industry; it didn’t necessarily save musicians and artists.
Streaming is a really important revenue source. But the power dynamics are not a whole lot different, and that’s probably because there’s such a dominance of large record labels that have troves of the music that people want to hear. I think the pushback you get from people around the Spotify camp is, ‘Well, it’s not us. Artists not being paid enough is not our problem.’ We’re paying more than we should to the industry, they feel. We’re barely making a profit. It’s up to the artists and labels to figure out a fair deal on their end, and that’s a valid point.
But I also think that when you’re so closely associated with the industry for such a long time and you amass the power that Spotify has in the industry, it’s going to rub off on you. I understand why some people might place some of the blame on Spotify, too. Because it’s sort of an inherent part of the structure, and it has a lot of power to change the situation. I do understand when Spotify supporters want to disassociate it from the problem in the industry. I think with power comes responsibility, and they could probably affect some of those situations and change them if they wanted to.
What do you think needs to happen for the artists to have a better deal?
I don’t know. One thing we’ve heard in our reporting is the claim that the industry or the record labels are only playing defense. They’re only trying to fend off threats and defend their revenues without sort of being on the front foot playing offense, trying to find new opportunities. I think that largely has worked. If you look at Warner Music, for instance, they were sold for a few billion dollars in 2012. I don’t know what their market cap is today, but it’s well above that. The labels have hugely benefited from the streaming wave and probably will continue to. Their valuations have kept rising. To an extent, their strategy has worked.
But there’s also a situation in which you look at not necessarily Spotify but a player like TikTok, where music is a core part of that platform. People in the industry say, ‘What happens when TikTok starts to sign artists directly because then the talent scouting is done by AI?’ The interactions on the platform will decide which are the really promising songs and artists. What happens if that starts to become the way in which music is discovered? It really sort of already is. That could be a threat to labels.
The partnership with Spotify has been really fruitful, but that does not necessarily protect the labels going forward either. There are threats to Spotify as well from companies whose services are built more on interaction and are social media companies. That said, thus far, Spotify has been able to withstand most challenges really, even from Apple, Amazon, and Google. We’ll have to see how long they can retain the crown here.