Analysis

Spotify: Daniel Ek talks freemium, radio, Apple and more (interview)


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Spotify CEO Daniel Ek is sympathising with record label executives: even those who have cooled on his company’s freemium business model, and are pressuring him to change it.

“I want to understand them. The last decade has been very tough for the music industry. They had a market that went from $45bn down to $15bn overall, which is pretty tough,” Ek tells Music Ally.

Every time they’ve looked like they’re turning the corner, another change has started to happen. By the time they started to think downloads were growing, they started falling as well as physical sales.”

Because of streaming. And for artists and some labels alike, the argument that streaming will ultimately make the music industry much bigger remains a frustratingly long-term promise – whether you’re a label exec fretting about your next quarterly bonus, or a songwriter or performer wondering how to survive on a small royalty cheque.

Spotify continues to promise jam tomorrow, though. “Streaming will be so much larger than any of the other methods of listening to music. One very simple thing: we have about three to four billion smartphones today. I don’t see why at least half of those people wouldn’t want to listen to music predominantly through streaming in the future,” he says.

That’s two billion people that could be monetised – by free, by multiple subscription offerings. Some of them may even be a la carte customers. It’s an enormous audiences. And in the next couple of years, the one thing everyone agrees with is that the number of smartphones will grow… we could be somewhere between 3.5 billion and four billion people that will potentially listen to music.”

“That’s where I’m at. We probably have at least 10x growth left in this industry just in terms of size. and we are also looking at a macro-shift where advertising is moving online. We are only at the beginning of this transition.”

That’s one reason Ek is publicly welcoming competition from tech giants like Apple and Google – noting that Spotify paid out $300m to music rightsholders in the first quarter of 2015, and claiming that streaming is now showing it can more than make up for the decline in both physical and download sales.

“The growth has essentially been just Spotify. If we now get more players into this space, we can increase the growth even faster than we have,” he says.

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‘Music has always been constrained by the format it’s been on’

More on those competitors later. Music Ally’s interview with Ek takes place a few days after the company announced its latest new features at a press conference in New York: more personalisation through Spotify’s ‘Now’ homescreen and programmed playlists; a section for runners complete with original music designed to adapt to their pace; and the addition of podcasts and video to Spotify’s mobile app.

Part of the impetus for the latter came from Spotify “wondering why we weren’t doing better in the car” according to Ek. People were using Spotify in their cars – often by connecting their smartphones to their in-car entertainment systems – but “they were not listening as much as they were listening to radio, because they still wanted weather, news and other forms of audio”.

Ek portrays Spotify’s move into more radio-like features as the direct result of that, and suggests it was a small step to also start thinking about video. “Music has always been constrained by the format it’s been on. But for the first time now with the internet, it’s a format that’s audio, visual and interactive,” he says.

“When we were getting news and weather, why would that be audio-only? Why not also visual? But that’s how you should view this announcement: it’s about getting people to listen to more music, and having other forms of content being adjacent to that experience.”

Moving into video and other kinds of audio content means that Spotify’s rivals are no longer simply other streaming music services like Deezer, Rhapsody, Tidal and Rdio – even if Deezer is doing the non-music audio thing, while Tidal is making noises about exploring video beyond music. If anything Spotify’s big competitor now is Snapchat, which started with photo messaging but moved into shortform video with its Discover section.

“You’re right on the money there. The old-world paradigms we used to have are no longer true. When I think about music in the future, I don’t make a distinction between what’s radio, what used to be the music library and so on,” says Ek.

“It’s only going to be listening, and as that goes forward, this old notion of these different industries or different competitors will collapse and merge together. You’re seeing more clearly among all large internet companies, as we compete against other services for time more than anything else, we all have different approaches.”

“For Snapchat, messaging is the core, with the video experience on top of that. Facebook has made a very similar journey: most of the things I see on Facebook now are news articles and video clips. We’re seeing a bigger proliferation of media.”

‘Our ability to monetise is so much better than a Facebook or Snapchat’

Spotify competing with Snapchat – or even Facebook – for attention and time is a new way of looking at the company. It’s notable in this interview how Ek was unafraid to talk about the latter in competitive terms, despite their longstanding partnership for social features.

It comes through in his answer to a question about why people would choose to spend time with Spotify rather than those other apps. “First and foremost, we have huge amounts of engagement, and a very attractive demographic like Snapchat, but that’s pretty much where the similarities end,” he says.

One of the better parts of our platform is that our ability to monetise is so much better than a Facebook or a Snapchat. That’s a huge part of the reason we’ve been so successful with content providers: people are very excited about subscription, which is something Snapchat and Facebook don’t offer.”

Spotify monetising better than Facebook? Spotify’s revenues were $1.1bn in 2014, while the social network’s were $12.5bn, so it’s a bit early to talk about a rivalry on that front. A few days after the interview, though, Ek is quoted in another interview saying “The only case where we would be interested in selling the company is if someone would offer the possibility of a larger platform”.

Could talking up Spotify as a competitor to Facebook as well as a partner be, a bit, about a longer-term game to position Spotify as an acquisition for the social network? We may be reading too much into it, though.

Another small tone thing we picked up from Spotify’s New York press conference was the company’s decision to talk about new artists: country singer-songwriter Sam Hunt had “found more than 6m listeners on Spotify”, while a band called MisterWives had found 8m listeners”. Quantifying their success in terms of listeners rather than total streams was a deliberate choice.

“We’re moving in general away from viewing streams as… it’s a hard metric for people to understand. It seems great in aggregate, but frankly you’ve seen many times on YouTube and other services, where someone says they have 100m streams, 300m streams. Is that a lot? It’s really hard to say,” says Ek.

“When you’re talking about an artist’s audience, and in particular the weekly audience that they have, it becomes so much easier for someone to visualise the impact they’re having. Weekly listeners is a pretty awesome way to understand the impact of Spotify.”

It’s also, surely, designed to take some of the pressure off Spotify when people apply its average per-stream payouts to artists’ total streams to judge the service by how much money they’re earning.

Talking more about “listeners” seems strategic: encouraging people to think about streaming as an audience-builder – whether that’s about suggesting streaming can be the engine for other off-Spotify income for artists, or by providing stats (backed up by analytics) that they can take to radio stations, promoters and others to prove their popularity.

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‘In the future, people will listen to more music from a bigger variety of artists’

Spotify is also pitching hard on its ability to increase those weekly audiences by seeding songs in its programmed playlists, which have become even more prominent on its service after the recent changes.

These playlists are an increasingly powerful way to expose new artists to hundreds of thousands of listeners at a time: and mainstream listeners too: the kind who’ll switch on Spotify and listen to an “Afternoon Acoustic” playlist.

We heard a lot about the role Sean Parker’s Hipster International playlist played in helping Lorde break worldwide, but what’s more important to understand about Spotify in 2015 is that it’s been quietly developing that idea into a systematic process for seeding tracks in its in-house playlists, often in partnership with their label.

A recent presentation by Spotify’s Will Hope at The Great Escape hammered the point home, with Hozier the current case study showing how Spotify’s playlists can work. “We’re getting better and better at giving upcoming artists exposure on the service, and creating tools to give those new artists a way to market themselves. It goes back to the mission of Spotify, and why we started this company,” says Ek.

“In the future, people will listen to more music from a bigger variety of artists, and I fundamentally think that is a great thing for culture and society. And if we build the revenue model around freemium, the music industry will be much larger than it’s ever been before, more artists will be able to make a living by being artists, and more people will listen in turn, and we will have this wheel where we explore better culture in the world.”

That’s Spotify’s pitch to musicians and labels alike about the importance of Spotify Now, which (so it claims) puts those playlists in front of the right listeners at the right time of day / mood / context, using the company’s big-data reserves on listener habits.

“We think this is a win-win. The user gets a better experience, and it gives us more ability to bring forward new artists,” says Ek, who promises there is more to come.

“There’s plenty more in the pipeline: some projects we started 2-3 years ago that will probably become live, and people will be ‘Holy shit! This is really interesting’. We have a whole backlog of things we want to do to improve the experience for our users.”

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‘We’re the most aligned with the music industry’

Spotify certainly isn’t the only company focusing on these challenges, with Apple’s imminent (at the time of writing) relaunch of Beats Music eagerly awaited as potentially the strongest competition yet for Spotify. Meanwhile, Google continues to ease into this market too through Google Play Music All Access and the still-beta YouTube Music Key.

Spotify may have 60m active users, but can it compete against these wealthy tech giants? Ek is talking up his company’s prospects, as you’d expect.

Almost all internet companies are competing against both Apple and Google in some vertical. That’s pretty normal. Yes, they have a lot of money, but what’s interesting about the world of the internet is that money doesn’t really translate into a very natural success. People tend to attribute a lot more value to that than it actually has,” he says.

“Dropbox is still doing very well despite Apple’s iCloud or Google Drive or Microsoft’s SkyDrive. Evernote is doing very well despite Notes existing on every iPhone. And our success is that this is our business: we don’t really do anything else other than selling music, so we’re the most aligned with the music industry.”

“We don’t have the search box that we’re making money from, or the hardware that we’re making money from. Spotify is now 1,600 people, and the only thing we’re doing, really, is this. Apple has tens of thousands of people doing all of this other stuff.”

There’s a valid question about whether that’s an advantage. In 2014, Spotify recorded an operating loss of €162.3m, while its recently-leaked contract with major label Sony Music shed new light on the economics of its business. Yet Apple and Google can suck up those costs thanks to their hardware and search businesses respectively.

“Yes, obviously it’s easier if they want to absorb the costs into other places. But we believe in the business model of Spotify, and believe that ultimately we’ll become profitable at some point. The reason why we’re not now is that we keep investing in growth,” says Ek.

“If we think there’s 10x potential yet to be unlocked, why wouldn’t we invest in that growth rather than optimise for short-term profitability? That was one of the problems the early leaders in this space like Rhapsody had: they stopped investing before this was really beginning to play out. We think this is a huge, gigantic opportunity, and we’re really only in the beginnings of this change.”

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‘The debate has been very black and white, and in truth, it’s more grey’

Can Spotify carry its key licensors and shareholders through that change with its current strategy? Recent months have seen pressure from all sides on the company’s freemium business model, from UMG boss Lucian Grainge through to Taylor Swift training their sights on free, ad-supported, on-demand music as undesirable.

Shortly after Swift removed her music from Spotify, Ek wrote a blog post setting out his defence, claiming that the service’s free tier was crucial in generating paying subscribers.

The message hasn’t been received in some quarters though: witness Sony Music boss Doug Morris’ Midem comments in which he praised Spotify’s growth in Sweden while criticising ad-supported streaming as harmful for the industry – even though Spotify would argue that its ad-supported tier is exactly what helped it get so many subscribers in Sweden.

Can freemium survive in the on-demand streaming world? “It’s no secret that there’s been a lot of debate. In any industry which is in a massive transition, those kinds of debates occur, so I don’t think it’s surprising. And suppliers always want to get paid more, which is also not very surprising,” says Ek.

“One very simple view from me: the debate has been very black and white, and in truth, it’s more grey. What I mean by black and white is when people say ‘we don’t want any free’. Is that them saying radio shouldn’t exist? There should be no method through which people can listen to music for free? No: they want more paid than it is free.”

“That is also true for Spotify. We make a lot more money if people are paid subscribers. We want the same thing: we are aligned with the industry there. The question is how you do that, and manage that transition [from free to paid] in the best possible way.”

Which brings us back to that pitch from Spotify that it can become the new radio – not just in terms of programmed playlists for mainstream listeners, but also in terms of redirecting a big chunk of that industry’s dollars back to the music industry.

“The entire recorded music industry has somewhere between $14bn and $15bn in trade-sales value. Now look at the radio industry, which in the US alone is around $16bn in revenue – and that is predominantly music – and globally is about $80bn – four times the size of the music industry,” says Ek.

“It’s a situation where that $16bn in just the US alone is larger than the global music market: a phenomenal thing when you look forward, because the Spotify model, unlike radio in the US, actually pays rightsholders.”

That may be changing – US radio royalties, we mean – if a variety of rightsholders and pressure groups have their way. But Ek clearly wants the music industry to stop thinking (so much) about Spotify cannibalising sales, and start thinking more about it gobbling up a bigger share of radio revenues.

“If we’re able to transition the traditional radio behaviour online, you’re looking at a music industry that’s much larger than it’s ever been. If you do that, and also add subscription to the mix, especially at Spotify’s conversion rate you’d be looking at a music industry that would be $100bn to $160bn in size,” he says.

“That’s the key argument that I think gets lost here. As I said, the debate here is about how we manage the short-term transition. I’m 100% sure there will be free music in the future, and that it makes sense for musicians and the music industry.”

Stuart Dredge

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