News Column

Spotify Fine-tunes Finding Tunes

Feb 21, 2013

Jefferson Graham

When you've just turned 30, are worth $300 million and are the co-founder of the biggest thing to happen to music since Apple's iTunes, well, you can afford to splurge.

Daniel Ek, CEO of Spotify music-subscription service, has a passion for collecting guitars. He has 42 of them back home in Sweden (his favorite: a rare 1959 Fender Stratocaster), and he says he never travels without one.

In an interview at the tony Petit Ermitage hotel here, he has his publicist fetch his latest -- an $850 SoloEtte "traveling guitar" by Wright Guitars of Oregon. "I love to noodle around," he says, playing a few chords.

Ek's done more than just noodle in online music. He's been more successful at advancing the notion of subscribing to a celestial jukebox than anyone before. While music-subscription services Rhapsody, the legal Napster and MOG (soon to relaunch as Daisy) all pre-date Spotify, Ek has 5 million paying customers -- (five times Rhapsody's base) -- and 20 million active members who use the ad-supported free version. (Spotify charges $5 monthly for ad-free listening on a PC or $10 for mobile access.)

His twist on rivals was emphasizing the social aspects of music -- showing what your friends are listening to via Facebook. Others had tried to do that but not as successfully.

Now, he wants to take the social aspect of discovering new music to the next level by not only showing you what your pals are listening to, but also what your favorite artists listen to.

With a library of 20 million songs, it can be overwhelming for Spotify subscribers to figure out what to play. "The biggest feedback we get from users is, 'What if I don't know what to listen to?'" says Ek. At the same time, "When we sat down with artists, it was, 'How can we get heard?'"

The solution -- "Discover and Follow" -- was announced in December but has rolled out so gradually that it will finally be in all user accounts by the end of the month.

Beyond just seeing who your friends like, you can follow via the new Discover tab the musical tastes of your favorite artists and music "influencers."

It shows you, for instance, that Justin Bieber listens to Michael Jackson, Rhianna, Jackson 5 and Frank Ocean, or that Maroon 5 digs Al Green, Beck and the Black Keys. Followers of bands will get alerts and updates whenever they release new recorded music.

Inspired by Napster

Ek's inspiration for Spotify was the original Napster, which illegally offered a database of the world's music for anyone with a computer to tap into.

Napster "changed my life," Ek says. "You could search for any band, and there it was. It allowed me to listen to all this music that I never knew existed."

The music labels persuaded courts to shut Napster down, then watched in horror as CD sales dropped 50% in the last decade anyway. Some $13.7 billion worth of CDs and other packaged music products sold in 2012, compared with $4.9 billion for digital downloads and subscriptions worldwide, according to researcher Strategy Analytics.

By 2017, the firm sees CDs falling to $9.5 billion, while digital grows to $6.7 billion.

A computer whiz since his teen years, Ek was a multimillionaire by age 23. He created code for a Swedish online ad network and got paid $2 million for his efforts. He decided to follow his passion to create a music start-up with Martin Lorentzon, whose Sweden-based TradeDoubler online ad firm acquired Ek's Advertigo in 2006.

Ek was all of 24 when he began knocking on record-label doors with a seemingly nutty idea: Give him access to their music and let him offer it for free, like Napster did. The twist: He'd offer advertising support.

"At the time, they thought I was crazy," Ek says.

EMI was the first label to sign on, and Sony, Warner and Universal quickly joined in.

The service started slowly, focusing on Sweden and then Europe. Facebook was such an important early partner that Spotify housed several of its engineers at Facebook headquarters in Menlo Park, Calif.

Spotify was "front and center to millions of Facebook users who could see what their friends were listening to in real time," says Ted Cohen, managing director of Tag Strategic, music industry consultants. It was "the first real instance of social-based recommendation" and got Spotify to consumers in a way that Rhapsody, MOG and other services hadn't, he adds.

There was also a tech innovation: When music fans clicked play to hear a free song on Spotify (via Facebook), the first 15 seconds were streamed at a lower bit rate, so that it would play immediately, instead of waiting for "buffering." The bit rate was improved once the song continued. "Spotify sacrificed quality for immediacy," Cohen says. "It paid off."

Before Spotify, early music services such as Rhapsody focused on listening via the computer. In the iPod and then smartphone era, Rhapsody and the revived, legal Napster struggled to satisfy consumers who wanted to play their subscription songs on mobile devices. Rights issues for the most part prevented easy access, but they've long since been resolved. (Napster was later acquired by Best Buy, then went to Rhapsody. It's now defunct.)

Instead of focusing on listening on the PC, Spotify's main focus from day one has been on the smartphone as its primary audience.

Clearly, the strategy worked. It took seven quarters for Spotify to reach a million paying users, while it took Rhapsody 11 years to get there, notes British-based analyst and blogger Mark Mulligan.

But the disparity between Spotify and digital music's biggest gun -- Apple -- is quite wide.

Apple has 450 million customers who use iTunes. At some point, it is expected to answer the growing popularity of music-subscription services -- whether that be with a twist on Pandora's and Slacker's ad-supported personalized radio, or a straight music-subscription service, like Spotify and Rhapsody.

"Apple is having a delicate dance with rights holders right now," says Mulligan. "They account for so much of the digital music market, if they do a music service, and they get it wrong, they could kill their download business."

Meanwhile, the biggest gripe from musicians as digital music has shifted from CD to downloads is that they aren't reaping the benefits. That's changing, says Ek. Spotify has paid $500 million in royalties in its five years of existence and is growing so fast that it will pay $500 million just this year.

"I can't say the money from digital is meaningful at this point," says legendary music industry manager Irving Azoff (The Eagles, Van Halen). "There's money there, but the digital side is still lagging."

However, he believes subscription music, led by Spotify, will bring the industry back. "It will make recorded music healthy again."

A huge impact

Spotify is already making a huge impact on the charts with its one-two punch of digital downloads and music streaming. One of the biggest hits of 2013 is Macklemore and Ryan Lewis' Thrift Shop, which has been No. 1 on Billboard for four weeks.

The duo aren't signed to a major label and have credited their success to No. 1 status on iTunes (where they sold more than 1 million digital singles) and Spotify. Grammy darling Mumford & Sons also picked up early audiences online. Their debut album saw 8 million streams on Spotify.

Meanwhile, Spotify is in 17 countries and will add at least another 17 this year, says Ek.

Mulligan says Spotify needs to expand fast, because only a tiny portion of high-end consumers are willing to commit to $120 yearly for music.

"Less than $5 (a month) would be mass market," he says.

Wall Street doesn't share Mulligan's concern. The latest round of financing -- $100 million from a variety of firms, including Goldman Sachs, Accel and Kleiner Perkins Caufield & Byers -- valued the company at a cool $3 billion, according to PrivCo, a website that tracks private companies.

Ek had no comment and won't say when the firm will be profitable.

Meanwhile, Ek spends his days traveling the globe, spending one to two weeks at home and the rest of the time in New York (where Spotify has an office), Los Angeles, San Francisco, Asia and Latin America.

"I get to meet really interesting people," he says. But there is a drawback -- some 2,000 e-mails daily. "If you write to me and it takes a day for me to write back, don't take it personally," he says.

If you really want to reach him, send a text.





Source: (c) Copyright 2013 USA TODAY, a division of Gannett Co. Inc.


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