Right at the peak of the very bullish and bubbly market of 2007, I was affiliated with a large Scandinavian venture capital company. In early spring of that year, an old college friend pitched his new music startup to me. When visiting their office, I remember a couple of things from that first meeting. First, the coffee shop on the ground floor made great espressos. Second, they had a server rack with non-copy righted music in a closet filled with almost a dozen table fans to remove excess heat. Third, that it was a great idea, and for the next couple of months I was pushing hard to make the investment at an incredibly high valuation for a non-user, non-revenue startup.
The entrepreneurs were definitely on to something, but it was impossible for me to comprehend and convince my colleagues fully that the future of music was streaming access to an almost infinite music catalogue paid for by advertising, not purchasing individual songs or albums and downloading them to your laptop. We passed on the investment, and the company, Spotify, is today one of the most well respected music services with a global reach and a rapidly growing user base. By mid-2015 Spotify had 75 million users, of which 20 million were paying subscribers56, annual revenues north of US$2.5 billion57 and a unicorn valuation of more than US$8 billion.58
Spotify was founded in late 2006 by Daniel Ek, a young entrepreneur and music geek with a hacker background, and Martin Lorentzon, a highly successful entrepreneur who, the year before, had taken his first start-up public at a US$750 million valuation.
Initially, their idea was nothing more than to make money from advertising. All they needed was to find something to attract a large audience. Soon it dawned on them that the music industry was in really bad shape. Remember that this was in the mid 2000s with an already large, and rapidly growing, music piracy community, a place where all computer-literate music fans hung out. The music industry was in desperate need of a new business model, one that could withstand the coming deadly wave of digitization.
The scope for Spotify was clear from the beginning. Reinvent the music industry with inspiration from hacker culture and music piracy, but with a sustainable revenue model. Also, the goal was to create a streaming music service a lot better than existing peer-to-peer torrent based solutions out there. Speed was of the essence, and Ek and Lorentzon recruited the best programmers available. The first time I met the company they were just weeks from releasing the first beta version. The prototype was fast and slick, the concept was intriguing, and it was very clear that they were onto something.
The music industry was in desperate need of a new business model, one that could withstand the coming deadly wave of digitization.
Quite apart from the fact that the founders of Spotify were great visionary entrepreneurs with a total commitment to their cause, they also managed to get the technological timing right. Already in 2006 when Spotify was founded, they saw what was coming:
• a move from downloading to streaming
• the move from desktop to laptop to mobile
• algorithms to analyze and deliver better music recommendations
• cloud based storage of each individual music catalogue
Subscription is at the core of Spotify’s business model. Initially, the focus was only on advertising revenues, but after tough negotiations and great pressure from music labels, a paid premium version was introduced.
With giants like Apple and Google having entered the market in recent years, competition is fierce nowadays. Spotify has a large war chest (albeit smaller than its competition), and has forever changed the way we listen to, and pay for, music. Still, only time will tell whether the market position is sustainable in the long run.