Legal High – the rise and rise of Spotify

Spotify logoHailed as a potential saviour of the music industry, Daniel Ek's digital solution is devilishly simple: give them what they want.  NEE profiles the brains behind Spotify.


The International Federation of the Phonographic Industry (IFPI) estimate that 95% of all music downloads are illegal.  File sharing has been the music industry’s bête noire since the dawn of the internet.  The wayside is littered with start ups with good intentions that have failed to stem this negative flow.  Then along came Spotify… 


The company employs less than 100 people and has offices in Luxembourg, Stockholm, and headquarters in London – central to the heart of the company’s biggest consumer base.  Spotify’s co-founder and CEO is 26-year-old Swede Daniel Ek. 


“People are listening to more and more music by a bigger diversity of artists, which should be good for the music industry,” says Ek in his Mid- Atlantic matter of factness.  “But the only way to beat piracy is by creating a better product.”


The company’s USP is devastatingly simple: they offer free access to a huge library of music.  But unlike sharing sites that fell foul of the law like Kazaa and Napster, Spotify’s liberated approach is entirely legal and above board. 


The premise has proved palatable to 6 million users – half of which are in Britain – and creates over a billion streams a month for the 6.5 million tracks at their disposal.  Many billions more will surely follow now that Spotify has adapted itself as an app for the mobile market.


Spotify gives people what they want, when they want it, and where they want it.  But their altruism isn’t at odds with commerce.  The company is proving to be a highly marketable entity.  In fact, the FT recently valued this nascent music streaming company at £150 million, tipping it as ‘challenger to the dominance of iTunes’. 


Spotify’s backers are made up of venture capitalists and clued-in investors like Hong Kong tycoon Li Ka-shing – the world’s 12th richest man.  There also very strong rumours that the big four record companies also have taken a stake in the company.  Not bad going for a company whose marketing bill for the three years since launching amounts to less than £5,000… 


“We focused on managing people’s music,” Ek explains, “giving people access to that library and allowing them to share it easily with their friends.  That's the secret of Spotify.”


Rather than buying music, revenue is generated on Spotify’s free service through advertising which interrupts the music with commercial breaks. 


Alternatively – and here’s the killer app – you can opt for the have-it-all service without interruptions for a monthly fee of £9.99.  Even hardened illegal down loaders would agree that Spotify represents excellent value for money.


“There has been a massive shift from ownership to access, but people will pay for music if packaged correctly and it offers them something special. You have to make paying more attractive,” Ek says.


Indeed, the mobile initiative has boosted Spotify’s fee-paying subscribers to a double digit percentage of their users and is steadily rising, Ek says.  “So far the focus has been on building and scaling the service, but now we'll see Spotify and third parties building more and more interesting apps on top of Spotify.”


Daniel Ek

Daniel Ek

Good news travels fast, as they say – and Spotify’s transition from start-up to burgeoning household name has spread largely by word of mouth.  Even the heroically out-of-touch are now name-checking Spotify in an effort to appear hip.  Lord Mandelson, the UK government’s Business Secretary, is a perfect example.  He recently exemplified Spotify for their commercial innovation in the battle against piracy.


In fact, it seems that in Ek’s Swedish homeland, the process of reversing decline in people paying for music has already started.  In the wake of Pirate Bay’s law suit, Spotify has gathered one million users in Sweden – that’s one tenth of the population.


“Sweden is the home of Pirate Bay” Ek says [the founders of which were recently jailed for facilitating of illegal downloading].  “The Swedish market used to be one of the worst in Europe, now it's one of the best.  We account for 50% of all digital revenues there and it's grown by about 70% this year.”


Spotify’s service is currently only available from IP addresses assigned to providers in Sweden, Norway, Finland, the United Kingdom, France and Spain, but the company has it’s sights set on launching in the US in early 2010. 


However, dealing with an industry that has been  traditionally hostile to changes in their business model, negotiation is an arduous process, Ek admits.


“It took two and a half years to get the licensing done in Europe.  Now we're trying to take the same concept to the US, but we've proved that it is a viable model.  Everyone told me that we'd probably go and bang our heads against a wall, but I'm probably naive enough to think that I can make a difference.”


With the wind already in Spotify’s sails, it would probably be far more naive to bet against Ek succeeding…


Hard facts

Founded: 2006 by Daniel Ek and Martin Lorentzon
Location: Based in Europe with parent company in Luxemburg and headquarters in the UK and R&D in Stockholm
Goal: To help people to listen to whatever music they want, whenever they want, wherever they want.
Number of employees: 90
The name: A combination of spot and identify.
The service: Spotify is an online music service offering users the ability to stream music on demand using Spotify’s unique technology. Spotify will be marketed both as a premium monthly subscription service and a version which is free for consumers to use, and supported by advertising. Consumers will also have the option to purchase a day pass that gives access to Spotify without advertising.