It’s been a hard day’s night, says Spotify co-founder on elusive overnight success

9 Oct 2009

While it may seem like an overnight success to many, online music-streaming service Spotify is still in search of a business plan that will allow it to better support the music industry in the face of a recession, one of the co-founders of the service has admitted.

Spotify, which is used by 5 million people worldwide, is a music-streaming site that is available on the internet, as well as on iPhone and Android phones.

Daniel Ek, former CTO of Stardoll, founded the company with Martin Lorentzon, co-founder of TradeDoubler, in Stockholm. The headquarters are located in London and R&D takes place in Stockholm.

Spotify marks first anniversary

Marking the first anniversary of Spotify, Ek said in his blog that Spotify is not the overnight success people would think. Thanking the support it has received from record companies, music publishers, collecting societies, managers and artists, Ek said Spotify still has a journey ahead and still needs to come up with a better monetisation platform.

Ek asked users and partners to be patient – the music industry still has the potential to be a US$40-billion marketplace if it continues to wrest music lovers away from piracy platforms and to more legitimate services with social media at their hearts.

“Spotify has a long way to go but this continued support from the music industry in the face of a recession and rampant piracy has made the difference, and I feel that we are set up to succeed with this kind of willingness to innovate and try new things from the music industry…together we can do even better things.”

A respectful revenue model

Spotify’s business model to date has been subscription and ad-supported and Ek said it was tough trying to figure out a revenue model that doesn’t devalue music.

“The notion of overnight success is very misleading, and actually rather harmful, to any hope for long-term and sustainable growth in this industry. Yet this is unfortunately something the music industry as a whole is particularly good at, expecting business models to be proven within months of inception.

“The truth is that even the most successful digital business to date, iTunes, missed its revenue targets in its first year by 30pc, and label executives were far from convinced that this was the future. And we of course know how that story turned out, with iTunes and the hardware being the defacto digital-music business of today.”

Ek said Spotify was in this for the long haul, and has no interest in hyping the company and then “flipping it”.

Spotify a work-in-progress

Ek said Spotify is still a work-in-progress and far from developed. What is key going forward is better monetisation and better library handling, making Spotify socially capable and more optimised for mobile devices.

“In terms of monetisation, we’ve admittedly not made it easy for our users to buy music. That’s an area we need to improve, but at the same time I want to come back to the point I made earlier that the notion of overnight success is misleading, we’re only at the beginning of our journey and I’m dedicated to moving even faster than we have already.

“We are far from satisfied with where we are now, but at the same time it is important to realise that even though we are only a year-old service we have already passed some milestones that separate us from most digital-music services.

“We are probably Europe’s biggest-paid subscription service, with hundreds of thousands of paying users; we are one of the biggest affiliates to music downloads (despite 80pc of our users unaware that they can actually buy music); plus our advertising revenues have now passed the millions-of-euros per month mark,” Ek said.

User and partner support counts

“However, none of this matters unless we can continue to enjoy the support of our users and partners. So we ask you all to have patience because we know we’ve yet to figure out the differentiation between free and paid, and we know we need to make it easier for our users to pay for the music that they love and so dearly want to enjoy. We are working tirelessly, though, to improve Spotify and to make it the platform we know the music industry needs,” Ek added.

“Because the music industry that I envisage is a business that has the potential of becoming a US$40 billion-$50-billion industry and growing stronger than it ever has, I think that by increasing the streams to the trillions on a monthly basis we can take big chunks of people and move them from illegal file-sharing services to legal services.

“However, for that to happen, the industry needs to think outside of the box and realise that the new business model in music is a mix between ad-supported music, downloads, subscriptions, merchandising and ticketing, where the user comes first and where the key to monetisation comes from portability and packaging access rights,” said Ek.

Revenue per user

“I believe this is something that most people in the industry can agree to, but it can’t happen if the industry continues to enforce the per-play fees it has tried so hard to hold onto. The new model is about figuring out how to increase the revenue per user (RPU) between the different models – not squeeze as much as possible out of every single transaction. And that is how we can grow the overall business and work to protect a business that is in decline.

“Overnight success takes a long time. To quote Daft Punk – ‘Work it harder, make it better, do it faster, makes us stronger, more than ever, hour after hour, our work is never over,’ ” Ek concluded.

By John Kennedy

Photo: Some 5 million people around the world use Spotify, an online music-streaming service.

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years