Pando

Founder Psychology: Spotify's Daniel Ek

How one of the nicest CEOs in the history of the Valley created such an asshole of a company

By David Holmes , written on July 14, 2015

From The Music Desk

November 2012, Lower East Side Manhattan. 

We're about 20 minutes away from showtime when the man of the hour arrives.

Bald and stocky, he moves through the crowd to the green room looking much less slick than the fashionable techies who are representing New York's startup scene, this evening and every evening. He cordially greets the emcee and her team with soft, Scandinavian cadences.

As the newest edition to the Pando team, this was only my second-ever PandoMonthly. The first was a fireside chat with the brashly vulgar investor Chris Sacca, which gave me the false impression that everybody who's anybody in the new tech economy brought with them an oozing, ridiculous arrogance.

But even years later, after meeting CEOs and VCs of all different shapes and temperaments, no one came armed with as much gentle calm at the man about to take the stage that night. I didn't know chief executives of billion dollar companies could be that nice. I didn't know anybody could be that nice.

Judging by his demeanor, you might have expected the man to run a company like Etsy, amassing his fortune one macrame teddy bear at a time.

But no. This kind, graceful creature was none other than Daniel Ek. And the company he founded was -- and still is -- among the most hated startups in all of techdom: Spotify.

Major labels notwithstanding, Spotify has done more than any other company to ensure that unfairly low streaming royalties remain unfairly low. There's a mountain of evidence to suggest that, as long as the vast majority of streaming customers use free, ad-supported options like Spotify's, as opposed to paid subscriptions, music industry revenues will continue to tread water, with artists feeling the cash crunch most acutely. By some estimates, a customer who pays $9.99 a month for a streaming service is 26 times more valuable to the industry than a freeloader whose listening is supported by meager ad payments.

But Spotify bet early and bet big on free streaming, using its billion dollar war chest to scale as quickly as possible, like any good startup backed by Valley venture capital. And while most companies that adopt this "spend now, profit later" mentality only hurt themselves, Spotify's aggressive pursuit of Ek's vision enabled record labels to set some nasty precedents in its dealings with both tech platforms and artists.

Under this narrative, it wasn’t good design or savvy acquisitions or a Jobsian sense of purpose that made Spotify the leader among on-demand subscription streaming platforms. No, Spotify’s owes its success over better-designed competitors like Rdio and Deezer to one simple premise: Users will never pay for what they can get for free. And this hyper-focused emphasis on building traction at the direct expense of artists is what’s made Spotify a target for easy yet well-deserved criticism, from both creators and laypeople – even those who use the service. Radiohead’s Thom Yorke wasn’t joking around when he called Spotify, “the last desperate fart of a dying corpse." 

Over the weekend, whatever sympathy I still felt toward this “desperate fart” of a company was further eroded after Politico published a report on Spotify’s lobbying presence in Washington. The company is reportedly pushing a narrative that Apple Music, not Spotify, poses the most dangerous threat to fairness in the music industry – a not entirely dishonest argument, but one that’s enormously disingenuous, especially coming from Spotify. Unlike Spotify, Apple Music does not simply give away access to bulk of history's recorded music – music that cost blood, sweat, tears, and cash to produce. But if Apple's not going to offer a free tier, the company doesn't want anyone else to, either. Rumor has it that Apple has been pressuring labels to remove their catalogs from Spotify’s free offering, which would essentially wipe out three-fourths of Ek's user base. 

Enlisting the help of Congress and the FTC to fight Apple is an understandable act of self-preservation. But in many ways it's also a new low for Spotify. Apple’s tactics may be unfair to Spotify, but Spotify’s tactics are deeply unfair to a far more important constituency: Artists. And if Apple is punished for encouraging a climate where people actually spend money on music and artists actually get paid, I’d rather opt out of streaming music altogether than be complicit in such a grossly inequitable model.

But as I put the finishing gracenotes on my latest Spotify hate-fest, I couldn't help feeling like I'd been unfairly harsh toward Spotify. It's not as if I lacked confidence in the logic of my argument. It's only that my mind kept going back to that night in November two years ago.

How could this kind and caring Swede be responsible for introducing and perpetuating so much dysfunction and instability in the streaming music space? How could he sit back idly while his company exacerbated the already-considerable financial stress on creators in the questionable pursuit of whatever spoils might be left of the industry it helped break? Is Daniel Ek some kind of sociopath, affecting a soothing smile while he stabs you in the face?

Or is it possible that Ek is truly an idealist at heart? An idealist who thought, perhaps naively, that he could wrestle in the mud with some of the greediest media gatekeepers the world’s ever seen without getting dirty? 

I needed answers so I looked to the tapes.

In an effort to build a living history of the Valley's frothy venture boom, we film every PandoMonthly fireside chat and post them to the web. One might assume that, because the Daniel Ek interview was conducted two-and-a-half years ago, it’s become hopelessly dated. On the contrary, there’s a fascinating sense of dramatic irony to watching Ek describe with wide, sleep-deprived eyes his vision for the music industry -- one that, despite his best efforts and enthusiasm, hasn't played out like he had hoped.

A lot has changed since November of 2012: Streaming music decimated digital downloads faster than anyone expected; faster even than digital downloads decimated CDs. Apple finally put its 800-pound foot in the ring. Taylor Swift redefined what it means to be an “independent” artist. 

But the most ironic and sad twist of fate is the trajectory of Spotify in the years following that interview. Despite seeing its valuation double and its user base nearly quadruple, Spotify still makes no sense as a business. The company settled early on a model that’s predominantly supported by ads as opposed to consumer payments. But while the share of industry revenue from advertising has increased a bit over the years as a percentage of the whole, neither Spotify nor its shadow-twin in the Internet radio business, Pandora, have been able to prove that a profitable business can be built with this model. Spotify hasn’t just screwed artists by making its service free, it’s screwed itself. As a private company, its specific financials aren’t known to the public, but according to every indication, Spotify is not profitable and never has been.

I say it’s a little sad because, as I re-watched Ek speak in 2012 it became clear that his motivations were always pure. If his loyalties appear poorly aligned with creators, that’s only because Ek truly has the interests of consumers at heart.

“People listen to more music today than ever before,” Ek said, describing a golden age of music, at least as far as consumers are concerned. This glorious cultural moment was first sparked by Napster, Ek said, which made millions of songs, each one its own important cultural artifact, available to anyone with an Internet connection. Fans no longer required ample amounts of disposable income to build a rich and massive music collection. Gone were the days when teenagers, the demographic to whom music matters most, drained their part-time paychecks every two weeks on just a handful of expensive CDs or vinyl records. In a post-Napster world, listeners no longer required enormous financial resources or massive stores of patience to expose themselves to the full spectrum of musical genres. A fan who, in another era, might never dare to dabble beyond the musical purview of parents, friends, and older siblings, can today search for meaning in heavy metal, hip-hop, Tropicalia, polka and every infinite shade in-between.

I’m no mind reader, but to watch Ek talk excitedly about first discovering Napster is to know what drives him as CEO; and it's not the pursuit of profits at all costs.

His aim to preserving and expanding the easy – and free -- availability of these rich cultural experiences by any legal means necessary. And unlike startup CEOs who insist that their social networking site or sharing economy platform is saving the world one micro-aggression or uninsured driver at a time, Ek has every right to claim that Spotify improves the lives of its users.

“It’s inherently good for culture and, therefore, inherently good for people,” he said.

Ek’s aim was and has always been to emulate Napster’s open and virtually endless sea of music -- but to do it legally and to compensate rights holders. That's why Spotify had to include a free option.

And the model just might have worked, had it not been for one major snag:

The astounding greed of major record labels.

Ek explained on stage how he spent hours every morning camped outside the offices of record label executives, armed with proposals and pitchdecks designed to convince these old media dinosaurs that the future was streaming.

But labels had heard a similar pitch before, delivered a few years earlier by a guy named Jobs. And the consensus among the majors was that, when they negotiated with Apple to sell their catalogs through iTunes, record executives gave up too much, as their desperation and existential fear of piracy got the best of them. That wouldn't happen again. Spotify's recently-leaked secret contract with Sony Music is proof of that. Simply put, Spotify got hosed.

Still sore at Steve Jobs over iTunes -- even though he saved their ungrateful souls from a little extinction level event known as Napster -- big record companies made sure to exploit Spotify’s massive war chest of venture cash by demanding big advances upfront for access to their catalogs. Meanwhile, labels took home almost twice as much revenue than Spotify from each stream. Even less of this revenue was passed onto creators.

If Ek wanted to create a legal version of Napster, he succeeded in at least one sense: Both Spotify and Napster are free platforms that give away millions of songs without offering sufficient compensation to artists. In the end, however, Ek's blind loyalty to his own vision enabled record labels to milk as much money from both Spotify and creators as humanly possible. 

Spotify didn’t complain – there was always a hot venture check around the corner to subsidize its losses. And to add insult to injury, labels now had a scapegoat in Spotify onto which they could deflect complaints from disgruntled musicians over piss-poor royalty checks.

As Spotify continues to tread water while lining the wallets of record labels, in comes Apple – a company with the financial resources and cultural cachet to not be taken advantage of by labels. Whether it learned from Spotify’s experience or whether it knew all along, offering millions of songs for free is a recipe for disaster – both for the platform and the creators. That’s why its looking to monetize not through record label advances or paltry advertising dollars, but from the consumers themselves. Not only will this theoretically create more revenue for all industry stakeholders, but it will also re-introduce a much healthier paradigm to music consumption. Life is so much simpler when the people using your product are the same people paying for it.

In a sense, Ek achieved his goal of launching a “legal Napster” almost too well. Like Napster, Spotify was an enormous boon to consumers but this came at the expense of creators. And like Napster, the good times couldn’t last forever. Apple ultimately reined in the chaos Napster introduced into the system by launching the iTunes Store. Now, with its new streaming service, Apple may do the same thing to Spotify which, despite being technically “legal,” created a system that was just as chaotic and unsustainable as Napster did. And while it’s a little disconcerting to see Apple muscle Ek's passion project out of the picture, the new paid streaming model proposed by Apple is simply far more sustainable – especially for artists – than Spotify’s.

As for Ek, his story is all too familiar in Silicon Valley. There wasn’t a shred of evilness at the heart of Ek’s ambitions. He simply wanted to build a platform that he would’ve loved as a young music obsessive growing up in Sweden. But the net effect of his efforts turned out to enormously negative for creators – and, quite frankly, for Spotify as a business – not because of any ill intentions on the part of Spotify, but because Ek’s idealistic vision was tainted by the evilness of the record label partners the company relied on to survive.

As it stands, I can only imagine three plausible ways that Spotify's story ends: Ek could stay the course while continuing to hemorrhage money in unfair labels deals, in the hopes that an advertising-based streaming model becomes viable before Spotify runs out of money. Or he could follow Apple’s lead and eliminate free streaming. Of course, that would leave little to differentiate Spotify from Apple, and if it comes down to a spending war with Apple, we know how that will end. Or he can sell the company – though the chances of a attractive acquisition seem to be fading fast.

In any case, the Spotify hate train shows no sign of slowing down any time soon. But while the Valley is full of asshole founders, I don't believe Ek is one of them.

He's simply an enormously nice guy who launched a real asshole of a company.

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