When the history of the music industry in the Internet era is recounted, Daniel Ek will figure prominently. Ek, 33, is co-founder and chief executive of privately held Spotify, the Swedish music streaming company that helped to demolish once-dominant compact discs and largely muscled aside Internet downloads and web radio.
“Over the last 18 months, we have hit the proverbial tipping point where streaming music is clearly the future,” says Richard Greenfield, a media analyst at global brokerage BTIG Research in New York. Spotify, which is based in London with research and development in Stockholm, holds a big lead over its competitors. With 30 million subscribers paying as little as $9.99 a month for unlimited, ad-free access to millions of songs, it’s far ahead of Apple Music, a distant second with 11 million paying subscribers.
In a rare interview a year ago in Stockholm, Ek told online service This Week in Startups that Spotify collected $2 billion in annual revenue and kept 30 percent. (It has grown its paid-subscriber base by some 50 percent since then.) “The way you win in this fast-moving world is by being superfocused on solving one problem better than everybody else,” he said. “And by moving faster than everybody else.”
Spotify will have to keep sprinting to fend off heavyweight rivals that don’t depend on revenue from music streaming as their core business. Apple Music serves mainly as a vehicle to sell iPhones. Google uses music to draw more eyeballs to YouTube, its ever-growing Internet advertising income generator. And Amazon.com offers free music to customers who pay a yearly $99 fee for unlimited delivery of other goods and services.
This onslaught of competition is forcing Spotify to seek outside capital. Last July, Ek turned to Goldman Sachs Group to raise $526 million from a group of investors. In March, Spotify signed a $1 billion convertible debt deal, also placed by Goldman Sachs, with investors led by private equity giant TPG Capital and Dragoneer Investment Group, both based in San Francisco.
Under terms of the second deal, investors will be allowed to convert their loans into equity at a discount when and if an initial public offering takes place. Because the discount rises after a year, speculation has increased that Spotify will go public by 2017.
Raising capital may not be enough to keep Spotify ahead of competitors. In a blog this week, Ek and Spotify co-founder Martin Lorentzon complained that the Swedish government wasn’t doing enough to help start-ups like theirs grow. They warned that unless tax laws were changes to allow stock options and soaring housing costs were forced down, Spotify might move many of its more than 1,500 local jobs to the U.S. “This requires urgent action, otherwise Stockholm and Sweden will lose in global competition,” said the two founders, who cited several other Swedish high-tech start-ups that recently were acquired by U.S. firms and moved elsewhere.
Ek has been making money by inventing web-based tech products since he was 14. In 2006, at age 22, he sold his Internet advertising company, Advertigo, and briefly retired to his parents’ summer cabin in the Stockholm archipelago to mull over his next project. It turned out to be Spotify, which he and Lorentzon launched in 2008, using $10 million of their own capital. In his native Sweden, Ek initially marketed Spotify among schoolchildren to get their parents to try the service.
At first Ek was rebuffed in his efforts to gain streaming licenses from U.S. record companies. So he launched Spotify worldwide, returning to the American labels only after proving his business model abroad. Spotify still uses its original twin strategy of free streaming for listeners who accept ads and commercial-free streaming for paying subscribers. Its total audience exceeds 75 million.
Labels grumble that streaming isn’t nearly as lucrative as CDs used to be. CD sales, which reached $9.4 billion a year in the U.S. a decade ago, plummeted to only $1.5 billion in 2015. But streaming eliminates disc production and distribution costs. “The record labels complain that streaming is cutting into album sales,” says Anthony DiClemente, a media industry analyst with Nomura Securities in New York. “But they are earning a very high margin when they license to streaming because they are just selling rights to the music.”
Musicians have a more legitimate beef with streaming, which earns them only a fraction of the income they received from CDs and even downloads. Pop superstar Taylor Swift pulled her entire discography from Spotify in 2014. “I’m not willing to contribute my life’s work to an experiment I don’t feel fairly compensates” artists, she said in a statement.
Ek defends Spotify by pointing out that it distributes 70 percent of its revenue to the labels, which decide how much to compensate their artists. No matter how royalties are sliced, even stars must go on tour to make much, if not most, of their income. “Hit the Road Jack” might turn out to be the anthem of the Spotify generation of musicians.