Brainstorm Tech video: Spotify's Daniel Ek on transforming digital music

July 21, 2011: 2:46 PM ET

Daniel Ek, CEO and co-founder of the online music service Spotify, sat down for a one-on-one with Fortune's Andy Serwer at the Brainstorm Tech conference in Aspen, Colo.

ANDY SERWER:  Hello, hello, hello.  Look at this, they're so generous, Daniel.  There's just water, water everywhere.

DANIEL EK:  It's great, I like it.

ANDY SERWER:  Excellent.

Please join me in welcoming Daniel Ek.  As you may know, Daniel is the founder and CEO of Spotify, which is very much a company of the moment.

But I have to say, Daniel, you know, it only seems like it would be a few months ago that it might be Tim Westergren from Pandora (P) would be the person of the moment.  Your business is changing really fast, a lot of differences between Pandora and Spotify; we'll get to that in a second.

But believe it or not, there are still some people out there who don't know what Spotify is.  So, could you elucidate, educate, and tell people what Spotify is all about?

DANIEL EK:  Sure.  So, basically Spotify is this application that you can download to your PC or Mac, and it works the way that when you've installed it, it is basically a search window and you can see all the latest music being released, and you can search for any songs, and you can play it within two seconds, and it's free.  And you can share it with your friends, and you can take it with you on your mobile device, but then you've got to be a paying subscriber.  So, it's really that simple.

ANDY SERWER:  So, you're Swedish, and Spotify has been primarily European.  It's coming to the United States, which we'll talk about a lot, I hope.

Talk about your background.  You must have numerous degrees in computer science, electrical engineering, all that kind of stuff, right?

DANIEL EK:  Not really.  I actually dropped out after like eight weeks in college.

ANDY SERWER:  We've seen that model before and it's worked in the United States, by the way.  (Laughter.)

DANIEL EK:  Right.  Well, you know, it's one of those, you know, I'm a geek at heart.  I got my first guitar when I was four, and I got my first computer when I was five, and I started programming when I was like eight or nine.

And I think the thing that's always fascinated me is really around making it easier, using technology to making people's lives easier or better.

And around Spotify I just think that I come from a land which is more known for Pirate Bay, Kazaa, all those inventions, and I just refuse to believe really that the music industry, while people are listening more to music now than ever before, that the music industry is in decline.  I just really believe that if we create the right product, which is better than piracy, that people will come.

ANDY SERWER:  But do the music companies think you are the savior or the enemy?

DANIEL EK:  Well, they licensed us, right, so we're here in the U.S.

ANDY SERWER:  Grudgingly, though?

DANIEL EK:  I wouldn't say grudgingly.  I think it's more it's a new model.   This model works very differently.  If you think about the history of music, it's really been around how you need to buy this record, you need to buy this album or you need to buy this song.

And what Spotify is saying is ownership is great but access is the future.  People just want to have access to all the world's music, people want to have -- you know, share a song, and that's the song that matters to them in this second.  They want to discover music through their friends, they want to -- if it's someone's birthday, they want to express it with a song, sending a song to someone.  And that's really something that people are prepared to pay for, whether it's by their time, watching advertisements or paying for music.

ANDY SERWER:  So, how does the model work, though, for you more specifically, and then also for the labels?

DANIEL EK:  Right.  So, the model really works in the way where every time someone plays a song, Spotify pays.  And we make our money really through three different revenue streams.  It's by advertisements that offset the cost.  So, you basically as a user spend your time watching the advertisement and interact with the advertisements.

Or you can become a subscriber, and you pay either $4.99, which means you get rid of all the advertisement in the clients, get a couple of other exclusive new releases exclusively and so on, and for $9.99 a month you can also take it with you, meaning you can put it on your iPhone or Android device, and you can download as many tracks as you want, and just go off and listen.

And the third model really is downloads.  We also offer people the choice to buy the tracks.

ANDY SERWER:  So, how much money do you get and how much money do the labels get?

DANIEL EK:  I think it's fair to say that the vast majority of all revenues goes to rights holders, and that's the way we want it as well.  We think that makes sense.  They're contributing the content; we're basically the platform.

So, a fair way of thinking about it is the Apple model where Apple (AAPL) will give away 70 percent and keep 30 percent themselves.

ANDY SERWER:  And when did you start up in Europe?

DANIEL EK:  So, we started in my home country, Sweden, in October 2008, and then sort of quickly thereon launched in six other markets in February '09, and really from there it's sort of grown.  And now we're adding the eighth market last Thursday, which is the U.S.

ANDY SERWER:  And so you're in Europe basically and nowhere else, I mean, leaving the U.S. aside for a second, right?

DANIEL EK:  Right, seven markets in Europe.

ANDY SERWER:  Right.  And how many users do you have?

DANIEL EK:  We have 10 million users, and 1.6 million who are paying for the service.

ANDY SERWER:  Okay.  Oh, and here's an important question, what the heck does Spotify mean?  Anyone else wondered that or maybe everyone knows except for me?

DANIEL EK:  Well, it's kind of this toy with the words spot and identify.  We just think again this is about music discovery but social.  We think it is like what we focus obsessively on is really for the time when you start thinking about a song until you play it the shortest possible time.  And we noticed that actually if we can get people to play it within 200 milliseconds, the human brain actually doesn't even perceive that there's a latency.  The kind of feeling that we want to create is if you had iTunes but all the world's music on your hard drive.

ANDY SERWER:  But wait, what is the 200 millisecond delay mean?  What do you mean?  I'm sorry.

DANIEL EK:  Yeah, so basically one of the things about Spotify is really that it's super fast, right?  Everyone that uses it, if you create a service that's super fast, you get people to interact and consume a lot more on the service.

And what we focus on, on the back-end, on the technology side -- this is like one of our sort of secret recipes really -- is to get the time between when you start playing the song until you actually hear it in the shortest possible time.

ANDY SERWER:  But aren't you constrained just by the network and the device?  I mean, you can be perfect and my thing can suck.

DANIEL EK:  Sure.  That's like one possible constraint, but there's lots of things you can do to sort of work around it.  You can lower the bitrates, you can pre-cache the songs as one example.  All I'm saying is much like with other services speed really matters.

ANDY SERWER:  I think speed is -- I couldn't agree with you more, speed is really underestimated I think by some people, and I think it had a lot to do with Google's success.  I mean, they were just obsessed with that.

So, how many songs do you all have, and how many songs exist in the world?  What's the percentage?

DANIEL EK:  That's a good question.  I don't actually know.  We've got 15 million songs in our catalogue.

ANDY SERWER:  And you don't know if that's 20 percent, 80 percent, 40 percent, 90 percent?  That's interesting.

DANIEL EK:  I think it's fair to say, though, that it's probably the vast majority of all songs.  So, it's probably closer to 80 percent than it is to 20 percent.

But I will say, though, that there's new music being created all the time, and --

ANDY SERWER:  Right.  That would only -- of course, if someone records something and puts it on their -- you know, you're not including that.

DANIEL EK:  Yeah, sure.

ANDY SERWER:  This is music that has been recorded and licensed or something?

DANIEL EK:  Yeah, we license all the music, but our goal really is to have all the world's music.  We want all the African music, all the Asian music, all the South America music, pretty much all the music that's out there, because technology again makes such leaps, it's now cheaper and easier to produce music, which means that there's more music out there.  So, while there might have existed 20 million songs 10 years ago, who knows what the actual number is now?

ANDY SERWER:  And that would include classical music, jazz --

DANIEL EK:  Includes classical music, everything.

ANDY SERWER:  Right.

So, we kept hearing that Spotify was coming to America, coming to America.  I held my breath.  Then I had to breathe again.  It took a little while.  What was the delay?  Were the record companies more difficult in the U.S. than they were in Europe?  What was the story?

DANIEL EK:  Well, so I think this, talking again about the model, this is a very different model.  This is a model about access to music, not just selling units.  And I think that the music industry watches, of course, the world's largest music market more than it does, for instance, international territories.  And for us it was really a case of sort of proving that the model actually works.  And I think by now we're the fastest growing and the largest music service of our kind, I think that really kind of cemented a belief in the music industry that, hey, this might actually work, and that's what ultimately got us to cross over.

ANDY SERWER:  But was there a situation where the label said, this is okay in Europe but we don't want you to do that in the United States?

DANIEL EK:  I don't think it was that.  I think it was more around that they wanted us to prove that the model actually works at scale.  And they thought definitely the results in Europe were encouraging, but as we saw more and more -- and this is really about the balance between free and paid, right?

So, as they saw better and better results, and we've learned a lot, we've gotten a lot better in understanding our users, how they interact with our service.  For instance, we do know that if you've invested in building five playlists, you want to keep going with Spotify, you don't want to leave the service.  So, we're building tools now to get people to engage more and to build libraries faster.

And I think all those things resulted in people converting more, and us building a larger base, meaning also getting more advertising dollars, and therefore the music industry is seeing, hey, this is actually real money to us.  And that's what ultimately sort of got them to, hey, we should do this in the U.S. as well.

ANDY SERWER:  So, where are you headquartered and how many employees do you have?  Where are your U.S. offices?

DANIEL EK:  Right.  So, we are about 380 people in staff.  Half of them are based in Stockholm, in Sweden, where I'm from.  We also have a fairly big office in New York, which is our U.S. headquarters, where we're about 25 so far, but quickly growing now.  And London is also one of the sort of key offices.

ANDY SERWER:  Is the key line function of the company programming?

DANIEL EK:  A third of the company roughly is engineering.  And if you look at my background, I think I'm of the mindset really that engineering can solve a lot of business problems.  So, we'll keep sort of investing in doing new things, and I think ultimately we just want to focus on creating an even better service.

ANDY SERWER:  Well, here's a question I think that really is on a lot of people's minds.  Napster, Kazaa, Rhapsody, RGIO is coming out, you know, you're not the first one to try this, a lot of people have tried it, other people are trying it right now, other people are getting funding right now.  What makes you guys so good, different?  Why are you going to succeed versus everyone else who's failed?

DANIEL EK:  Right.  So, I think there's a couple of different things here.  First and foremost, I think that there's two mega trends ongoing.  I think one of them is definitely social, the other one is connected devices.  And if you look at how that sort of impacts our business, the main reason why people want to pay for Spotify is really portability, your way of actually saying, hey, I want to have all this music with me, I want to download all these playlists.

And the second one is social, because what we see with social is that when people interact with Spotify, the more music they share, the bigger library they build, and the bigger the value is really of having Spotify both on your computer but also on your phone.

So, I think it ultimately comes down to we want to make the simplest experience.  Simplicity is key.  We want to make it super fast.  This is about solving a problem, and the problem really is I want to access all the world's music.  The one that can do that the simplest, the fastest, and also the most social, meaning I can share this with my friend, I can discover music through my friend, that's the one that will win.

ANDY SERWER:  Speaking of social, I read that you guys were looking to establish or maybe you already do have a relationship with Facebook.

DANIEL EK:  So, we've been working with Facebook for probably the past two years, and we launched our integration with them probably a year, a year and a half ago.  And the way it works in the Spotify client is when you log in, we ask you to connect to Facebook, and you will see all your friends on the right-hand side that also have Spotify.  And if you click on them, you can see their entire music collection.

And I tried to connect with you actually, but --

ANDY SERWER:  What happened?

DANIEL EK:  I don't know.  Like it said something like bad music, and I couldn't get a hold of you.  (Laughter.)

ANDY SERWER:  Oh, dude, that's a sensitive issue with me, but go ahead.

Is that the best way -- what -- so as an American now, what is the best way to use Spotify, to get on?  Is it through Facebook or is it an app, is it a website, what's the best thing to do?

DANIEL EK:  So, the best thing to do is really go on our website, sign up, and we'll send you an invitation to use the service.  It's still invitation-based.  You need to get an invitation by us.  And when you come in, you're going to connect to Facebook and hopefully you will see some of your friends on the right-hand side.  And if you click on them, you can see their entire music collection.

And I really kind of want to spend 10 seconds just on that, because --

ANDY SERWER:  Right, of course, there were people right away saying privacy, oh, you know, blah, I don't want people to know that I liked Hendrix.  It's okay, right?

DANIEL EK:  Well, you know, the funniest thing we noticed is actually that the most -- in general people are kind of comfortable sharing their music.  It has two exceptions, though, Lady Gaga and Britney Spears.  People don't want to --

ANDY SERWER:  Huh, you caught me.

DANIEL EK:  Yes.  (Laughter.)  I think that's why I got --

ANDY SERWER:  That was the thing.  Yeah, right, okay, all right, yeah, yeah.

DANIEL EK:  And we allow people to really sort of granularly decide what they want to share and don't.

So, I do think that while we really want to encourage people to share music, we definitely allow people to kind of say, hey, I don't want to sort of share my private wedding list or something like that.

But I will say, though, that back in the day I was lucky enough to get broadband in 1998, and in 1999 I had 10 megabits at my home, which is like more than what most U.S. homes have today.  And that's when I kind of got really hooked on Napster.

And the most interesting part of Napster really was the fact that when I started downloading music, I could discover all these people, and I right-clicked on them and I said browse this person's collection, and I got everything else that they had.  And that got me on Led Zeppelin, it got me on all these bands who I probably wouldn't have heard about otherwise.  And that's exactly the kind of feeling we want to now recreate but make it even simpler.

ANDY SERWER:  But if you guys are -- you guys are very ambitious.  I mean, you said you want to have, what, 50 million U.S. users within a year?  First of all, that's big.  Second of all, how are you going to do this invitation thing?  Why are you doing this invitation thing?

DANIEL EK:  Right.  So, the invitation thing first and foremost is not something that we'll have for all eternity.  It's really our way of making sure that we can provide a good quality service as we're scaling up.

We were truly overwhelmed by the reception we got as we launched, and I can only say that we're very happy that we chose the invitation only path, because otherwise our service would have crumbled just from the sheer amount of people that are wanting to get access to the service.

ANDY SERWER:  So, can Spotify thrive and Pandora thrive at the same time?

DANIEL EK:  Yeah, we definitely believe so.  I think it's complementary.  If you think in the old world you definitely had radio and you had the record stores.  In the new world, in the digital world you have services like Pandora, which is clearly radio, and with Spotify all we really care about is we want to manage your music, we want to hold your music collection.

ANDY SERWER:  But if you win, Daniel, who loses?

DANIEL EK:  I don't think that there's really anyone that loses.  What we're really focused on here is creating a win-win.  We just believe that in a world where people consume more music now than ever before, from a big diversity of artists, that's really, really positive.  But at the same time, the music industry is really shrinking; an artist now can't make a living out of music.

We want to grow the pie.  We believe that there's an enormous amount of people who want to enjoy music, and they are willing to pay for it.  Whether it's with their time or if it's with their paying for the service on their mobile devices, it's kind of irrelevant.    We just believe that the pie is so big, and ultimately that's where we want to go.

ANDY SERWER:  I want to throw it open to questions.  Is there anyone out there who wants to ask a question of Daniel?  Dana?

QUESTION:  Thanks.  Dana Suttle with Graycroft Partners.

So, is the service in the U.S. identical to Europe?  Did you get all the same rights from the labels, and will the pricing be the same?

DANIEL EK:  Yeah, the service is identical.  It might be a few thousand tracks here and there that are different, but that's mostly due to the way the catalogue licensing rights work.  But we got all four major labels, and we got probably 25,000 other labels to sign up.  So, we've got a pretty big catalogue.

ANDY SERWER:  Some other questions up here or around there.

QUESTION:  Hi.  Arty Levy with Bloomberg News.

The challenge for Pandora has been profitability, because the vast majority -- well, such a significant portion of their revenue goes to the labels.  What's the difference in your path to profitability, and do you get there more quickly?

ANDY SERWER:  Are you profitable now?

DANIEL EK:  So, we don't really focus on profitability, we're focused on growth.

But to kind of answer your questions, we do a lot of things very differently than a service like Pandora.  To name one, for instance, our distribution, actually distributing this music is done by peer-to-peer, which means that our cost of actually distributing this is much lower.

But I also believe that we're really kind of growing the paid model, and we've got a bunch of subscribers who are paying us $10 a month, which, of course, brings in quite a lot of revenue to the company.

ANDY SERWER:  And the reason why you're able to focus on growth and not profitability is because you have a lot -- a rich roster of venture investors, right?  Can you just tick those off very quickly?  It's pretty impressive.

DANIEL EK:  Well, sure.  We've got a lot of impressive people who have invested in the company.  We've got Sean Parker in Founder's Fund, we've got DST, we've got Accel, we've got Kleiner Perkins, we've got Li Ka-shing, a lot of people.  But ultimately these are very smart people, and they wouldn't have invested unless they really thought that there was a good business behind it.

ANDY SERWER:  A question here.

QUESTION:  Hi.  Brandon Griggs from CNN.com.

You're in eight markets now.  I'm just wondering why haven't you gone to more, and what are your plans for rolling out to other countries?

DANIEL EK:  Sure.  So, first and foremost, launching a new market for us is a quite time-consuming process.  We invest in building local ad sales force in every market we go into.  And we really want to make sure that we kind of understand the market before tackling anything else.  Truthfully, most of our effort has really been in kind of pushing for the U.S. and preparing for the U.S. as well.

ANDY SERWER:  Are you freaked out about Apple and Google (GOOG)?

DANIEL EK:  I'm not -- no, I'm not freaked out about it.

ANDY SERWER:  Are you concerned?  I mean, how are they going to compete with you?

DANIEL EK:  If I knew that, that would be quite amazing.  (Laughter.)

Well, you know, I will say this, though.  Apple is an amazing Google, Google likewise, and I think ultimately we just focus on music and we really try and innovate in music.  And I think ultimately companies that do one thing and try and do it really well often succeed much better than companies that try doing 50 things at once.

ANDY SERWER:  Understood.

A question here?

QUESTION:  Hello.  It's Rick Martin with Wired Magazine.

What does the development of Spotify and services like it mean for artists?  And if I'm a garage band in Seattle, how can I take advantage of your service to build my own brand?

DANIEL EK:  Right.  So, there's a couple of different things here which matter.  So, the first thing is because Spotify is a social service, if you're a band on Spotify, you really benefit from using social channels.  If you have a big Twitter following, you should really start sharing songs, you should build playlists, you should really sort of actively promote your music, because it's all about if you can get people to share that music, you'll get a bigger following.

Long term our ambition really is to provide data.  I think a lot of what we're doing is really also about we see real time data trends.  We see what people are doing in London or Manchester or Denver or LA and New York, and we see immediately whether a song is taking off or not, and we can even know what your audience is; is it 18 to 25 year olds, is it females, is it males.  And these are things you as an artist or a band or a label can start using to be better at --

ANDY SERWER:  It informs you.

DANIEL EK:  Yeah, exactly, and be better at promoting your music.

ANDY SERWER:  Miguel?

QUESTION:  Miguel Helft with Fortune.

Andy just alluded to this a little bit, but you talked about win-win, nobody loses.  What about iTunes?  I'm still sort of taking my CDs, putting them into my computer, getting them onto my iTunes library.  Do I need that anymore?  Is iTunes necessary?

DANIEL EK:  Well, I think iTunes is a service that we probably are more like than most others.  So, you can definitely do all those things with Spotify, too.

But I think what we're trying to create a win-win for really is the artist and the users.  That's what we're mainly focused on.  And I think that there are some services that will be complementary to what we do and some will probably kind of go more in the same direction that we're in.  And ultimately, of course, we want to win and we want to be the biggest service.

ANDY SERWER:  Okay, I think we're out of time, Daniel.  That was really, really interesting.  I mean, I knew about Spotify, but now I think I know a whole lot more.  I think like a lot of people in this room I'm going to be really, really fascinated to see what happens over the next two years with your company.  And it's ambitious, it sounds really cool, and gee, I hope you let me use it.  (Laughter.)

DANIEL EK:  Of course, of course.

ANDY SERWER:  I'm a little concerned about -- anyway, please join me in thanking Daniel.  Daniel, that was awesome. (Applause.)

Posted in: ,
Join the Conversation
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.