It’s true to say, without a hint of hyperbole, that 25 year old Daniel Ek’s Spotify has taken the global music industry by storm, including Facebook’s Mark Zuckerberg. Even in markets it hasn’t launched in yet (including the US), Spotify is generating a lot of attention and is now valued at €170 million. Music lovers have discovered ways to circumvent regional limitations on the software and are already using the service heralded by some as the future of the music industry. And that suits the music industry just fine, especially since they’ve invested in it. At a Glasshouse event at the Royal College of Physicians in London last night, an assembled throng of the tech business community listened to Ek’s thoughts.
“Despite making every mistake in the book in my previous companies,” says Daniel Ek, “with Spotify things seem to be working out. It’s true that we underestimated how long it would take the labels to come in, though: we started the company in 2006, but didn’t launch a product until 2008 because it took so long to get the labels on board.”
Ek was interviewed by Virginia Eastman, former BBC business journalist and now Principal at executive search firm Heidrick & Struggles‘ London office. At one point she asked “So will you have the Beatles before iTunes?”.
“I don’t know. Hopefully!” said Ek.
It wasn’t a surprise to read one wag’s comments on Twitter earlier in the evening, who asked: “Can anyone confirm rumours Daniel Ek will be making an entrance dressed in white surrounded by hundreds of children?”: That’s how significant Spotify and Daniel Ek are right now.
So what lessons does this 25 year old CEO have to share with other start-ups? Eastman began by asking his advice about funding; specifically, whether going for Angel investment right away is a prudent course of action for small teams with great ideas.
“Yes,” says Ek. “Try to get Angels involved. Get someone in with a network, who can help you open doors. But remember that, ultimately, you’ll be doing the work yourself. There aren’t many people who can help with the actual work. Remember, too, that you have to live with them for the life of the company: be careful who you allow to invest. You should do as much due diligence on your investors as they do on you.”
Ek later focuses his advice into three main points. “First, get down and do the work. There will be a lot of sceptics, but if you believe in it, go for it.
“Second, be sensible about economics. If you write a forecast, you have to accept that it will not work out. I’ve never seen a single one that worked out. Be realistic about your burn rate. Concentrate on keeping your costs low and working out which information to pay attention to.
“Third, listen to smart people. With Twitter and other social networking tools, you can get a lot of advice from great people. I learn more from Twitter than any survey or discussion with a big company. Put your consumers in focus, and listen to what they’re actually saying, not what they tell you. Look behind the feedback into the stats and see how people are actually using the product.”
Ek looked satisfied with his answer; I suspect he’s given it a few times before. The discussion quickly moved on to Spotify itself. “What percentage of your users are premium subscribers?” asked Eastman.
“We don’t give out exact numbers. It’s not double digits yet, but we think we can get there. We’ve always realised that the vast majority will be free users, but as long as that’s on a big scale, that’s OK. The numbers work.
“In July, we accounted for 35% of digital music revenues in Sweden. We have a million users in Sweden, out of a population of only nine million. And that’s the key to success: scale. In any freemium model, if you’re getting double digits or higher, you’re doing well. We’ll get there. We’re already growing at 50% month-on-month, doubling our revenue every two months.
“Now, a lot of people doubt the model. I know that. And sure, comparing against CDs, it’s not a good model. But if you compare it against the number of illegal downloads, it’s pretty good, especially as we scale up to the bigger numbers.
“And it takes time for advertisers to wake up to the new medium, but they are waking up: we’re proving now that we’ll be around a while. A lot of advertisers are re-booking as they see our model working.”
“What will limit your growth?” asked Eastman. “Competition or regulation?”
“If there’s anything that should, it’s competition; a better product. If it’s regulation, then there’s something wrong.”
“Is iTunes a competitor?”
“No, not really. Our main competitor is piracy.”
“Do you think Spotify is capable of turning the tide against piracy?”
“Well, actually, yes. I think so: there have been a lot of surveys of user behaviour, post-Spotify. One point seems consistent throughout them: that 80% of Spotify users say they have stopped filesharing. And, for the majority, it hasn’t affected their spending.” If that’s true, it bodes very well.
Next, Eastman asked about the future of Spotify’s revenue streams: what proportion of revenue will come from subscriptions, and what proportion from advertising? And what did Ek think about the business models of the future?
“The majority for us will be subscriptions, perhaps 60% against 40% advertising. I believe in a freemium model, because information ultimately wants to be free.
“We need something new. The news and entertainment industries are in heavy decline, yet people want to consume more content than ever, and from a grater variety of sources.
“We need to be creative. It’s not about one business model any more. Some of the revenue will come from advertising, some from subscriptions, some from merchandising, some from one-off sales…”
“Making it easier for people to handle and share their music,” said Ek. “Particularly playlists. At the moment, there’s an ecosystem around Spotify, including sites like ShareMyPlaylists.com, but those sites are really just playlist aggregators. That’s not a concept we intend to replicate. We’re talking about real sharing and management tools.”
During audience Q&A the BBC’s Tim Weber asked two questions that many in the room have on their lips: when will Spotify be profitable? And what’s the exit strategy?
“I don’t find that first question very interesting,” says Ek. “In fact, we could have been cash-flow positive already if we wanted, but we chose to grow quicker, and we always will. Mark Zuckerberg made the same decision with Facebook. We’re in a fortunate position, because we have investors who believe in the product and are allowing us to pursue the vision. We believe in our goal and we believe we can execute it. I don’t really care about short term profitability.
“In terms of exit strategy, there have only ever been a few billion dollar exits. I want to build a company like SAP, a big company, run from Europe, and a standalone business. Our goal is to build a self-sufficient, European company. We hope that we can build a sustainable business that can live on its own.
And who knows. Maybe one day, it’ll be us acquiring interesting businesses.”