Peter Kafka

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Spotify’s Daniel Ek on Competition, Controversy and Crossing Over Into the Mainstream

(Photo by Jason DeCrow/Spotify)

Jason DeCrow/Spotify

Spotify has more than 24 million users, and it has converted more than six million of them into paying subscribers. The biggest selling point for the music service: If you pay up, you can listen to us on the go.

Now that has changed: Spotify is rolling out a free mobile option, too. It’s a move that will make the service more competitive with rivals like Pandora, which has been free on phones for years. And it will increase the size of Spotify’s conversion funnel — “The more music you listen to, the more likely you are to pay,” CEO Daniel Ek said, more than once, at a press event today.

Ek hosted a similar event in New York a year ago, and afterward we talked for a bit about the state of his business and his strategy for expansion. So what has changed since then? I got to ask him today; here’s an edited version of our conversation:

Peter Kafka: You guys had a press conference a year ago that was primarily about changes to your product, but you didn’t really change your marketing strategy. Is today’s announcement more of a product change or a marketing change?

Daniel Ek: It’s a bit of both. There’s been some really big use cases that we’ve been locked out of for most consumers. One of them is social. If you think about a truly social mobile product, it has to work. You can’t just have it for people who are paying. You need to have it so I can send it to a friend, and say, “Hey, check out this playlist.” That hasn’t worked. You can look at that as a marketing thing as well, of course, because it will sign up new users. But primarily we think it’s a product thing that makes Spotify better.

Is this something you’ve always wanted to do, or is it something you have to do now because you need to grow faster?

It’s something we’ve always wanted to do. The more music you listen to, the more likely you are to pay.

Last year you announced six million paying subs. I know that number is bigger now, but when will you share new numbers?

I think we’ll probably announce numbers every now and then, when it makes sense.

When we talked last year there was a Spotify vs. artist debate, and that debate hasn’t gone away. Do you feel like you’ve made progress in making your case to musicians?

I think so. There’s certainly controversy. This is the single biggest change to how music’s been enjoyed since the record business started. It’s pretty obvious to us that this is something that is problematic. It’s something that’s lacked a lot of transparency. So with the announcement we did last week, we’re really trying to say, “Look, here’s the facts. Here’s everything that we do.” It’s something that we should have done a long time ago. And that’s our fault for not doing that.

Fundamentally, I think the biggest single problem is they’re comparing this like an apples-to-apples thing — that one stream equals one download. But it isn’t.

I still think that an issue for you is that whatever amount an artist is getting from you, it’s not replacing their old income stream. And meanwhile they see that you’re now worth $4 billion, and you’ve built a business with their music.

We’re paying out 70 percent of all the money. I think keeping 30 percent is fair on our end. I truly do believe that as this gets to scale, the whole music industry will be larger. When we get to 40 million subs, that will be as large as the iTunes revenue stream.

Whatever your current subscriber numbers are, you’re still not mainstream in the U.S. and in some other markets. How do you plan to break through?

It’s a big question. I think what we announced here today is a huge step in that direction. And we’re now actually doing marketing. We didn’t have the resources to do that just a few years before. I think you’ll see a lot more from us in the next couple months.

You’re now going to be competing more directly than ever with Pandora, and earlier this year Apple launched its radio product. And next year you’ll see more competition from Beats, and most likely a new YouTube subscription, too. How do you see the market?

Streaming is just in its infancy. So more competition means more awareness for the sector, which I think is pretty good. And when people say there’s more competition, they forget that when we entered the marketplace, there was actually more competition.

There was competition, but it didn’t really have scale.

I’d argue differently. Myspace was still pretty strong. Imeem had 40, 50 million users. You had Microsoft with the Zune — you can laugh about it, but that was a pretty big company in the space.

But now you’re competing with people that are taking this more seriously. Beats is going to make a real push. You’ll be up against more companies with more resources.

Sure, they’re taking it more seriously. A lot of that is because we’ve proved that you can actually make this a business. Ultimately we’re going to win because we’re going to make it a better experience. I don’t think there’s a magic formula. We’re not just trying to be a little better than the competition. Our strategy is making the best product. We have the most data about what people actually are doing, and we’re utilizing that data to inform the decisions we make about the product.

We’ve gone from a product org that was just 60, 70 people, to 600 people. We are a product-led company, and we think we’re ultimately going to win with a better product.

Last year you said that if you weren’t expanding, you would have a profitable business. Is that still the case?

Yes.

And again, do you think that at some point you’ll go back to the music labels and say, “Look, now that we’re really big, we should get better rates”?

If you look at the history of retailers and suppliers, that’s always been the case — you’re always negotiating over price. That said, we’ve got a 70/30 split, and I think we’re in a pretty good place. This is not a problem of margin. This is a volume game.


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