Can a streaming service help rescue the music industry from meltdown? The Spotify co-founder thinks so
Daniel Ek, co-founder of Spotify
Overnight success takes a long time…
It’s been an interesting year within the music industry, with many insiders questioning whether Spotify’s model is a sustainable one. Meanwhile, it’s been amazing to see just how our users have taken Spotify to their hearts.
I first considered writing about the state of ad-supported music, and given that I care more than most about figuring out a revenue model that doesn’t devalue music, it probably wouldn’t praise wholeheartedly (as some may have expected it to do) the ad-supported space. Especially since Spotify’s business model is, and has been since launch, more about the mix of subscription and ad supported. The truth, however, is that I feel there’s a bigger point worth making.
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 30 per cent, 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.
It would obviously be wrong for me to compare Apple’s success with iTunes to Spotify. We are two very different companies in two different phases of a company’s cycle. I’m also very aware (and we are regularly reminded) of the digital music graveyard where many start-ups are to be found dead and buried. Yet whatever the business, big success takes years to build and there are very few counter examples.
So to make it very clear - we are in this for the long haul. We are committed to building a music service that works across different devices, enables you to share music socially and that gives you the ability to choose how you want to access music. We aren’t interested in just trying to hype the company and then “flipping it”. The media coverage that Spotify has received so far is because of the product. The product has been our core and our main marketing message, and perhaps now is the time to modify that message.
Someone asked me a while back, during a fireside chat, what was the biggest mistake I’ve made so far with Spotify? I can’t recall my answer, but I’ve since thought more about the question. I would say that the biggest mistake that I’ve made is that Spotify, unlike any of the other businesses I’ve been a part of, depends on our partners (artists, composers, labels etc.) and I haven’t always acted with this fact at the forefront of my mind.
If we’re asking the industry to change, we need to be transparent and honest about the end goal - especially since we’re asking everyone to make a huge leap of faith to an unknown place where you could potentially argue that the industry risks its most profitable customers. We haven’t been as open as we could have been up until now, and that’s been an oversight on my behalf.
So I thought during our one-year anniversary as a service that I would at least partly correct that by sharing our view on the future for Spotify and the music industry.
Starting with the product, I must admit that I’m (almost) always encouraged when I hear people complain about the service, because it means that people care. It is clear to me that our product is far from perfect and needs to evolve significantly, but the fact that people are giving it so much thought tells me that we are at least roughly headed in the right direction. Spotify shows a lot of promise, but it’s still a work in progress.
There are a couple of focus areas for us now in terms of developing the product. Besides better monetisation, those areas include better library handling, making Spotify socially capable as well as significantly improving our portability.
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 80 per cent of our users being unaware that they can actually buy music); plus our advertising revenues have now passed the millions of Euros per month mark.
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.
Because the music industry that I envisage is a business that has the potential of becoming a $40-50 billion industry and growing stronger than it ever has, I think that by increasing the streams to the trillions on a monthly basis that 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.
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 on to. 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.