Building An Audio Company— The Story and Future of Spotify

Introduction

Some industries seem unmovable. When the incumbents have immense power over the industries and have established their way of life for decades, it seems inconceivable that anything can change. The music industry would appear to be one of them, with powerful music labels controlling the music master, distribution rights, and marketing of all of their artists songs. However, the story of Spotify is one that shows any incumbent— no matter how entrenched— can be disrupted. Started in Sweden in 2006, Spotify has grown to become the world’s more prominent music streaming platforms, with 600M+ users and valued at $60b+. This article will tell the story of how Spotify took inspiration from Napster, partnered with Facebook for distribution, and embraced cutting-edge technology to stay ahead of competitors.

The Origin Story

Before diving into the story of Spotify, we must first understand the landscape of the music industry at the turn of the 21st century. In the late 1990s, music was most popularly listened to through CDs and cassette players. Inventions like the Walkman allowed people to listen to music anywhere as long as they carried the physical device. This changed in 1999. Shawn Fanning and Sean Parker started Napster. By creating a frontend interface to share MP3 files of mostly music over the internet, Napster grew like wildfire and had over 80 million users at its peak. However, the music labels launched massive lawsuits against Napster and everyone involved, which resulted in a court-ordered shutdown of the company in 2001.

Despite its short 2-year lifespan, Napster changed the music industry forever. A lot more peer-to-peer sharing and piracy music companies like Limewire rose from Napster’s ashes. Although popular, those companies never gained much legitimacy since everyone knew that they would eventually suffer the same fate as Napster. In 2003, Apple introduced the iTunes Store. This gave users the option of downloading songs to their iPods for $0.99 per song instead of having to navigate the confusing, illegitimate, and virus-filled online piracy platforms. However, the music industry still faced many issues. For consumers, the iTunes fee quickly added up if they wanted to download many songs. For music labels, there are still a ton of platforms that sustained the plague of online piracy.

In 2006, two Swedish entrepreneurs, Daniel Ek and Martin Lorenzton, decided to tackle this massive problem. Daniel had been a serial entrepreneur. He started his first business designing websites for businesses at 13 and worked in senior roles for various B2C online companies after dropping out of college. Martin founded Tradedoubler, a large European marketplace that bought the advertising company that Daniel worked for in 2006, and became close with Daniel through the acquisition. In 2006, the pair teamed up and launched Spotify. Unlike Napster that fought music labels through guerrilla warfare, they decided to partner up with the music labels. Daniel and Martin proposed the idea of streaming. After 2 long years of negotiations and convincing, music labels finally granted them streaming rights in Sweden. With that, Spotify was launched.

The Growth Story

Spotify was first only available in Sweden due to constraints by the music labels. They offered an invitation-only trial and gained significant traction, with users lauding Spotify as the best music platform they’ve ever used. As the music labels gave Spotify more licensing rights, they expanded throughout more countries in Europe. In 2009, Daniel Ek met with Mark Zuckerberg in preparation for a launch to the US. Zuckerberg told Sean Parker (who at the time was actively involved in Facebook) about this meeting, and Sean got extremely excited. Sean had always dreamt about building a product similar to Spotify after Napster was shut down, and he had finally found someone revolutionizing the music industry.

Sean wrote a long email to Daniel, expressing his admiration for Spotify and offering to help in whatever way possible. Additionally, Sean laid out a roadmap for Spotify’s growth by implementing social and sharing features via Facebook (you can find the email here). Upon receiving the email, Daniel knew that he found a partner who had the same vision as him and was extremely excited to have Sean involved. As a show of good faith, Daniel opened up the closed Series-B round to let Founders Fund (led by Sean) invest $15M. From 2009 until 2011, Spotify continued to negotiate with record labels about entering the US and fostered their relationship with Facebook.

By the time Spotify launched in the US in 2011, it had already built up a lot of hype. In Europe, Spotify had around 6 million users, 1 million of whom were paid subscribers. In the US, media outlets like TechCrunch and Mashable talked extensively about Spotify, calling it “the best music app on the planet.” Hence, it is no surprise that when Spotify launched in the US on July 14, the number of listeners and subscribers exploded.

Furthermore, during the 2011 Facebook f8 developer’s conference, Mark Zuckerberg announced a major partnership with Spotify. Facebook figured out that music is inherently a social feature, and that Facebook users are interested in seeing what their friends are listening to. The partnership allowed users to publish what they are listening to on their Facebook timelines. Spotify was also a launch partner for Ticker, a feature that shows up on users’ news feed that shows what they are actively listening to. Facebook integrated a “play” button on the ticker that would direct users to Spotify to play whatever song they see instantly. As such, this served as a huge incentive for users to download Spotify and Facebook also saw an uptick in users’ interest in the music-sharing and real-time playing features.

The US launch was truly the turning point before Spotify reached parabolic growth. Just from the Facebook partnership, they gained 1M new users. By the end of 2012, their user base grew to 20M listeners, with 5M paying subscribers. From the private markets, Spotify would end up raising nearly $2.5B from the private markets and use that capital to become the #1 music streaming platform globally.

Embracing the Future

Despite its massive success, Spotify never became complacent. The company had always stayed at the forefront of innovation, which allowed it to develop a competitive edge over other music streaming players.

In 2014, Spotify acquired The Echo Nest, a music technology player that specialized in music personalization and discovery, for $100M. By using Echo Nest’s technology, Spotify vastly improved the capabilities of its radio, discovery, and mixes algorithm. Recognizing that AI / ML can significantly improve users’ experience on the platform and differentiate from competitors, Spotify invested aggressively in integrating AI into its music recommendations. From 2013 until 2017, Spotify acquired ~10 companies focused on content recommendation and personalization. Despite it being clearly ahead of competitors like Apple Music on music recommendation, Spotify is continuing to build upon its competitive edge by partnering with OpenAI in 2023 to create an AI-powered service called DI to improve personalization.

Looking towards the future, Daniel has expressed that Spotify is not just a music company— it is an audio company. A recent focus had been podcasts, a market that is growing rapidly at over 30% year over year. According to Forbes, Spotify is the leader in podcast listening platforms, with ~32% market share compared to Apple Podcasts’s ~27%. Spotify has been investing aggressively to become the leader in podcasts, such as its $250M exclusive deal with “The Joe Rogan Experience” and its $235M acquisition of Megaphone, a podcast hosting company. Recently, Spotify has also moved into the audiobook market. Seeing a success in long-form content, Spotify purchased the rights to more than 150k audiobooks with the hope of bringing on additional users and generating more revenue from existing ones.

Conclusion The story of Spotify is one of ambition and execution. Daniel and Martin took on the challenge of revamping the music industry by working with the powerful music labels. Throughout the journey, they figured out critical growth drivers like the Facebook partnership to bring their service directly to the phones of millions of users. The company never forgot about delivering best-in-class user experience, such as using AI for personalized recommendations and expanding its product portfolio to podcasts and audiobooks. The Spotify team clearly loves what they are building, as demonstrated by the never-ending innovations. The team is constantly thinking about how to improve their users’ experience, which is critical to their past growth and success. It will be exciting to see which markets Spotify takes on next and whether or not it can maintain its market-leader position.

Sources: MixDown Magazine, Growth Hackers, Acquired, Forbes, Spotify, PitchBook, TechCrunch