Spotify: Eating Google’s Lunch and Loving It; CEO Daniel Ek says music recommendations and discovery are as important as a massive song vault

August 6, 2013, 8:14 p.m. ET

Spotify: Eating Google’s Lunch and Loving It

JOHANNES LEDEL and JOHN STOLL

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STOCKHOLM—As music lovers turn to cheap streaming services to access songs, some of the most prominent names in tech are crowding in for a piece of the pie. One of the biggest streaming-music sites, Spotify AB, now boasts 20 million songs and 24 million users, a quarter of whom pay about $10 a month for extra features, such as listening on mobile devices. The Swedish company’s revenue more than doubled to €434.7 million ($576.4 million) in 2012, but its loss widened to €58.7 million. A recent fundraising round valued Spotify at $3 billion, but Daniel Ek, the company’s 30-year-old chief executive and co-founder, doesn’t see bigger as better. He believes that music recommendations and discovery are as important as a massive song vault, and has enlisted 200 human curators to organize music for a new browsing feature.

Meanwhile, rights holders are making sharp arguments against Spotify and its competitors, contending the streaming services pay artists less than traditional music purchases or Apple Inc.’s AAPL -0.20% iTunes. Radiohead’s Thom Yorke recently pulled some of his music, and other major acts, such as Led Zeppelin—one of Mr. Ek’s favorites—are nowhere to be found on the streaming service.

In a recent interview with The Wall Street Journal at his Stockholm office, Mr. Ek discussed Spotify’s plan to combat losses and new competition. Edited excerpts:

WSJ: You’re making lots of money, but you’re operating at a loss. How long can that continue?

Mr. Ek: The focus hasn’t really been about when we’re going to show profitability. I think a lot of people just look at the financials and say: ‘Oh wow, losses, that’s really, really bad.’ That’s not at all how we see it, we see that we’ve actually now proved our business model.

The difference between what we pay out in royalties and what we actually take in in revenue is increasing, which is positive. [And] we believe that fundamentally this is a huge market. Who on this planet doesn’t like music? What we find is as [users] try out Spotify, above 20% actually decide that they want to pay for the service, which is astounding.

WSJ: Are you worried about the streaming services coming from Apple or Google GOOG +0.23% Inc.?

Mr. Ek: Apple has done a lot of things—they’ve included scan and match, they’ve started doing some streaming on their albums, they’ve started doing iTunes radio. Microsoft MSFT +2.58%actually has mimicked our model. It’s a free service bundled to every Windows 8 computer that you can buy.

Everyone has had music services for a good while, so Microsoft has theirs, and they’ve had it for two years, and when that was supposed to launch, everyone said, ‘that’s going to kill Spotify,’ but we’re doing better than ever. Google actually has had a music service also for years.

WSJ: You’ve had a unique relationship with Google, sharing office space in New York and hiring a lot of their people. How does the relationship work?

Mr. Ek: You know, it’s called ‘coopetition.’ I’m actually banned at the Google office because we’ve hired so many of their people. They had enough when I was recruiting an employee in their cafeteria while eating their lunch free.

WSJ: Why do you think competitors haven’t put you out of business?

Mr. Ek: We are a company focused on just doing one thing—making the best music experience. A lot of our competitors tend to focus on ‘how do I build an ecosystem,’ [so] they view music as a feature, rather than a product.

ITunes is really [designed] to give you apps. It’s not to give you music, that’s a side benefit. With Google, it’s like ‘oh, we need something with music because Apple has something with music,’ and with Microsoft, I’m not even sure what their rationale is for doing it.

WSJ: Now that more revenue is coming from subscriptions, can you pressure labels to lower licensing fees?

Mr. Ek: We’re now the second-largest revenue generator for them in the world after iTunes. So of course we have a lot more to say.

The biggest hurdle is that the music industry is still built on licensing deal by deal, and that doesn’t really work in this Internet world where a song made here in Sweden might be shared with someone in Ukraine.

WSJ: Were you surprised by artists accusing you of unfair payouts?

Mr. Ek: I’m not surprised, but I’m saddened by it.

[The move from physical music to digital] is the single-biggest shift in the industry since the invention of the recording. We’re selling access, not ownership; that’s something very, very different. And, you know, the focus of the artist ought to be how you maximize the number of streams, because that, in turn, will be better long-term for you.

But that’s hard for people to understand: All they see is millions of streams, and they see, you know, not millions of dollars in the end, but thousands of dollars, and they think that a million streams is comparable to a million downloads, which it obviously isn’t.

Sure, you’re going to stream that Rihanna song five or 10 times, but you’re also going to listen to David Bowie’s entire back catalog, which you might not have gone out and purchased. Those are two very, very different behaviors.

WSJ: What are the prospects for a Spotify public offering?

Mr. Ek: We have investors, and obviously, at some point in time, they want to get their money back…If we think that that goal is better aligned by going public, sure we’ll contemplate it, but it’s not something that I spend any waking time thinking about.

WSJ: Are you an acquisition target for a Google, Facebook Inc. or Microsoft?

Mr. Ek: I hope not. If we ever have to sell to someone, we would do it because we think it’s easier to execute our vision with someone else than doing it alone. But I don’t want to sell the company.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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