Peter Kafka

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Spotify’s Daniel Ek on Profits, Label Deals and Angry Musicians: “We’re Doing Really, Really Well”

Spotify’s big press event accomplished a few things today: It gave CEO Daniel Ek a chance to boast about growth, to show off new features designed to help users find new music and to make his case to musicians who think they’re getting shortchanged by his subscription service.

What Ek didn’t talk about: Any fundamental changes to the way the service operates — anyone can use it for free, and subscribers who pay $10 a month get extra features. And he didn’t mention any plans to change its marketing strategy, which to date has been largely dependent on word of mouth and a big boost from Facebook.

That’s because things are working well the way they are now, Ek said in an interview after the event. Equally important is his assertion that Spotify’s business model is sound, and that the company can succeed without big changes in the way the music business licenses its product.

If that claim pans out, it means Ek will have won where just about everyone else has failed. Here’s an edited transcript of our conversation:

Peter Kafka: Your event today was mostly about product changes. But you have to be a current Spotify user to appreciate the changes. How will the changes help you bring in new people?

Daniel Ek: I think the social part is really core to this. Social isn’t just about engaged people who are already on the platform. It’s also about sharing that music on other networks. So now I have all this great content, like the playlist Bruno Mars created, and I can repost that onto Twitter, on to Facebook. I believe that’s really great content that a lot of people will want to click on.

But I could already share songs and playlists on Twitter and Facebook from Spotify.

What we’re doing is removing friction. We’re making it a lot easier for people to do that. We’re making it a lot easier for people to find great content to share.

So if you make the product better it makes me more inclined to share really interesting stuff?

Yes. We’re creating a viral cycle, where new people are able to discover new content.

Since Spotify started it has been oriented around this idea of playlists, and sharing playlists. That made sense for some people, but not for a lot of other people, who were just trying to figure out how to listen to an album. Now you’re changing that — what took so long?

We look at what our users are doing. There were a lot of users who were perfectly happy with just playlists. What we realize now is that as we’re appealing to a much broader audience, we also have to support both. And we’ve been wrestling for quite a long time to figure out the balance, and we think we’ve finally done it.

Today was all about product stuff. No changes in the way the business operates, or the value proposition you’re offering. Will that change, and does it need to if you’re going to grow?

Would we ideally like a lower consumer price? Yeah. But at the same time, we’re doing really, really well as it is. And that’s reflected in our numbers.

Can you guys succeed as a business with the way your label deals are structured now? Pandora is struggling with the terms they have, and every other music service has failed to break through.

We’re incredibly happy with the structure and the terms that we have.

You don’t need the labels to change their rates for you to be profitable?

No, what we’re doing is we’re investing in growth. As I said earlier, we want to reach every single person on the face of this planet. And that means we’re going to forego profits, to keep investing in growing.

So if you stopped trying to grow now, you’d be profitable?

Yes.

A lot of today’s presentation seemed geared toward artists, some of whom have been vocal about the fact that they don’t think your model works for them. They think you guys make piles of money and they get pennies. How can you fix that?

By doing these kind of things. Telling the story, being honest about how much we’re paying back to rights holders.

But that’s part of the problem — you said you’ve paid $500 million back to rights holders, but most artists see very little of that. It goes to the labels.

I don’t know what kind of deals exist between the artists and the labels, and that’s a part of the controversy.

What is also fair to say is that Spotify is a young service. We’ve only been live in the U.S. for one year. And quite often it takes a year, or 18 months, for many artists to see their first checks from Spotify.

So there’s really this mismatch — people think, “there’s this big service out there called Spotify, and I haven’t gotten paid yet.” But the word is “yet” — not that they’re not going to get paid.

But some have gotten paid, and they’re complaining that the payout is tiny. And then they see that you’re worth $3 billion. Are you always going to have that kind of conflict?

I don’t think so. If we scaled up to a service the size of iTunes, the music industry would be two or three times the size it is today, in terms of revenue. We know that our fundamental model is sound. Now it’s just a perception problem. But more and more people are coming around.


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Just as the atom bomb was the weapon that was supposed to render war obsolete, the Internet seems like capitalism’s ultimate feat of self-destructive genius, an economic doomsday device rendering it impossible for anyone to ever make a profit off anything again. It’s especially hopeless for those whose work is easily digitized and accessed free of charge.

— Author Tim Kreider on not getting paid for one’s work