The Story of Spotify 💚🎶

It’s 2022.

Spotify is in full damage control mode.

A growing revolt among artists, led by the viral hashtag #DeleteSpotify, has seen many musicians scrubbing their music from the platform.

Concerns about low payouts and controversial podcast content have brought the company into the spotlight.

Spotify is still losing money and has bet everything on Podcasts. Now, that’s not working either…

What’s next?

Before going into that, let’s rewind for a second and see how Spotify, a brainchild of Daniel Ek, emerged to revolutionize the music industry.

This is the Story of Spotify 💚

Daniel had always been a workaholic. At the age of just 13, he started his first business while living at his parents' house.

The business was making websites for other people. He started off by charging a hundred dollars, and by the age of 18, he was charging five thousand dollars per website.

He recruited other kids from his school to help him by bribing them with video games.

Shortly after this, Daniel applied for a job at Google, but they said he needed a degree, which he didn't have, so instead, he decided to start his own search engine.

However, he quickly abandoned that idea when he realized that competing with Google wasn't a wise move.

However, Daniel was going to try a bunch of different business ideas, most of which never worked out, but then, in his early 20s, he hit the jackpot.

He sold one of his businesses, Advertigo, to TradeDoubler for an estimated 1 million dollars.

Amazing right? Well…

Despite retiring in his twenties as a millionaire, Daniel felt his life had lost purpose.

He was partying every night and had bought a Ferrari, but none of it brought him fulfillment.

Daniel needed meaning in his life again.

He decided to use the money he'd made from selling his business to focus on an even bigger idea: revolutionizing the music industry 👇

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Meanwhile, a service called Napster had become extremely popular, which allowed people to easily share files with each other.

This meant people were sharing MP3 music files completely free, and it wasn't long before the record companies sued Napster into oblivion.

But the problem was countless similar applications then popped up, like Kazaa, Limewire or Pirate Bay.

It was clear that now this peer-to-peer technology was out there, the music industry wasn't going to be able to stop online file sharing.

Now, Daniel Ek was a huge music fan himself and absolutely loved using these free file-sharing services.

But he also realized that all of this was having a very negative impact on the music industry.

Daniel envisioned a platform where you could access all of the world's music instantly and that it would be legal because it would be funded with ads, and a percentage of the ad revenue would go to the artists.

Thus, the initial idea for Spotify was born.

Daniel was confident this was a win-win: a better user experience and a way to save the music industry from the threat of piracy.

He felt sure the record labels would be on board.

But spoiler alert: The record labels were most definitely not on board.

In fact, if Daniel had any idea how complicated and controversial things were going to get, he'd have probably never started Spotify at all ❌

Daniel teamed up with Martin Lorentzon, and they spent the summer of 2006 recruiting top coders to build Spotify.

They figured before going to record companies to try and negotiate licensing deals for the music rights, they needed to create a great working prototype of their product.

Ironically, even though the idea for Spotify was to help prevent piracy, they filled their prototype with illegally downloaded songs to create a compelling demo.

To be fair, it was kind of a chicken and egg problem; they couldn't convince the music industry how well their product worked without actually building it, but they couldn't build it without the music.

That summer, they worked tirelessly, often playing poker or foosball after long days of coding, and within a few months, they had a sleek, functional prototype.

It had a great search engine and playlist features. There were pages for artists and albums, so everything was neatly organized.

Most crucially, when you clicked on a song, the music began playing almost instantly.

This was a big deal because internet speeds were a lot slower back then, but the team had designed it so that the music files essentially downloaded in small pieces whilst you were listening to the song.

Once they'd built the platform, they sent out beta invites to get feedback from others, and everyone who used the service loved it.

However, convincing record labels to license their music was a massive challenge.

Now, the major record labels that dominate the music industry are known as the big three: Sony, Warner, and Universal.

He explained the idea of free music funded by ads, and the record labels would be given a large percentage of all the ad revenue generated, but as soon as the record labels heard the word "free" they lost interest.

They hated the business model of making money from ads instead of people actually buying the music. They said they wanted a fixed price for every time a song was streamed.

Running out of money and under immense stress, Daniel finally secured a compromise: Spotify would offer a paid version alongside the free one, giving labels about 70% of all revenue and a significant share of Spotify’s stock.

For Spotify, it was unclear if this was going to be a sustainable business model; they were only keeping 30% of the revenue.

Was that gonna be enough to cover all their costs?

But they really had no choice but to accept.

The good news was that Spotify now had the rights to use music in most of Europe.

Negotiations for other parts of the world, like the US, would drag on for several more years, but finally, in October 2008, Spotify officially launched.

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The team began the “big clean,” removing all pirated songs from the service. They believed their troubles with the music industry were over, but new challenges quickly emerged.

Labels frequently threatened to pull their licenses if Spotify didn't make the changes they wanted, like limiting features on the free tier to push more users to the paid version.

However, it wasn't just a record label; Spotify was also in constant battle with many individual artists who spoke out against the company, and some completely removed their music catalogs from Spotify.

The thing is, Spotify wasn't actually responsible for how much money individual artists earned; that was due to their private deals with the record companies.

But no matter how unhappy artists were, those who quit Spotify normally returned when they realized it was better to at least get some royalties rather than nothing at all because the reality was that streaming was here to stay.

Users seemed to love the service, and Spotify began growing incredibly quickly.

This growth only increased when Spotify struck deals with Facebook for integration and with broadband providers to bundle Spotify trials with internet subscriptions.

Also, Spotify had a clever marketing trick: when they expanded into new countries, they'd often require an invite to initially join, which created scarcity and hype around the launch - The same tactic Clubhouse used to grow rapidly in 2020

But the marketing worked, and by 2011, Spotify had a million paying subscribers.

However, there was still one big problem: Spotify wasn't actually profitable, and some were starting to question if it ever would be.

Sure, Spotify was clearly popular, but the bigger looming question was whether it was actually a viable business.

Competition was fierce as well, with Apple Music, Tidal, Google, Amazon, and YouTube Music entering the market.

Spotify retained its lead though, largely helped by its free ad-funded option.

They were actually losing money on this free tier as 90% of revenue came from paid subscriptions, but the free option was very efficient at bringing in new users who later converted to the monthly subscription.

But the overall problem was still clear: if all these streaming services offered basically the same music, what was Spotify's unique selling points?

And not just that, but what would happen if the record companies had a change of heart and pulled Spotify's licenses?

Spotify needed more leverage and differentiation.

So, in 2019, they invested heavily in podcasts, spending over a billion dollars on content deals, including exclusive agreements with high-profile creators like the Obamas and Joe Rogan.

They also focused on personalization, introducing features like Discover Weekly, Wrapped, and Release Radar in 2015. These features use machine learning to recommend new music tailored to each user.

This strategy not only enhanced user experience but also gave Spotify more control over what music was promoted.

This could literally control an artist's life with Spotify promoting or not promoting a certain artist as it likes.

Because of this, in 2017, Billboard named Daniel Ek as the most powerful person in the music business.

Ultimately, no matter what you think of Spotify, it's clear what a huge impact it's had.

When we think of the history of music, we can see the transition from vinyl to cassette tape to disk to MP3 player, and now to streaming.

Streaming has become the largest revenue source for the music industry, and so some would say Spotify really has succeeded in its initial goal of saving the music industry from piracy.

Others would say it's done more harm than good. Artists get less money, and Spotify now has a growing amount of control over who succeeds in the music industry and who doesn't.

Whether for better or worse, Spotify has undeniably reshaped the music landscape.

Thank you for taking the time to read the Story of Spotify.

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— Mehmet Karakus