Beyond the Sound Barrier
A decade ago, Daniel Ek convinced record labels and artists to stream their songs on Spotify, reviving the flatlining music industry. Now, after amassing a $4.4 billion fortune, he’s moving the super-streamer past pop stars and personalities in a bid to own the world’s digital eardrums.
ADECADE AGO, Daniel Ek CONVINCED LABELS AND ARTISTS TO STREAM THEIR SONGS ON SPOTIFY, REVIVING THE FLATLINING MUSIC INDUSTRY. NOW, AFTER AMASSING A $4.4 BILLION FORTUNE, HE’S MOVING PAST POP STARS, OPENING HIS SUPER-STREAMER TO STORYTELLING, LIVE TALK AND A NEW BREED OF AUDIO CREATORS IN A BID TO OWN THE WORLD’S DIGITAL EARDRUMS.
It’slunchtime in late October, and 71 stories above Wall Street at 4 World Trade Center, Daniel Ek is strolling along the polished concrete floors of Spotify’s headquarters. He passes sleek sculptures of headphones crafted in neon-hued metal, couchlined luxury lounges for VIP advertising clients and soundproof podcast studios custom-built for the medium’s biggest stars, then enters a large cafeteria rigged with stage lighting for pop-up concerts.
The room is being prepped for dinner with Spotify’s board, which will include a surprise performance by Brothers Osborne—a hip country-rock duo whose hit song “Stay a Little Longer” has been streamed 180 million times on Ek’s music service. Spotify just reported third-quarter earnings, and Ek, a 38-year-old self-described introverted engineer who seldom gives interviews, is having a rare day in the spotlight.
The soft-spoken Swede, who has a shaved head and a beard, has been on the move since 5 a.m. hosting calls with financial analysts, sitting for a parade of interviews and leading a 200-employee town hall. “It was crazy, because it was the first in-person meeting we’ve done here in two years,” says Ek, decked out in black jeans, a black suede coat and patentleather sneakers. “It had a great, warm vibe. Everyone was hugging and applauding.”
There were billions of reasons to cheer. Earlier in the day, Spotify dropped blowout quarterly numbers, making a racket that reverberated across the worlds of Wall Street, music and media. Revenue hit $2.9 billion, a 27% jump from the same quarter last year. Ad sales climbed 75% to nearly $375 million. Active listeners grew just shy of 20% over the same time the previous year to more than 380 million. Ditto paid subscribers, who now top 170 million. Its stock, stuck on pause for most of 2021, popped 10%, adding $5 billion in value and pushing
Spotify’s market cap above $50 billion for the first time since the summer.
The company has come a long way since Ek reluctantly threw on a suit and tie—and threw back a few whiskies—to pose for the cover of the first Forbes 30 Under 30 issue ten years ago. Back then, in January 2012, Spotify had just 500 employees, $300 million in sales and a valuation of $2 billion. The service had been available in America for only six months. Today, Ek’s super-streamer plays in 184 countries, has 7,400 employees and $9.7 billion in annual sales. Spotify went public in 2018, and Ek— who in 2012 had a paper fortune of $300 million— is now worth $4.4 billion.
“Spotify was the force that transitioned hundreds of millions of users from piracy to paying customers,” says Sean Parker, who, as cofounder of Napster, was considered the Blackbeard of the music business before becoming Facebook’s first president and a Spotify investor. “It’s no exaggeration to say that Daniel saved the music industry.”
Record labels are certainly cashing in. When Spotify arrived in the U.S. in 2011, streaming was a $600 million business, accounting for 4% of the recording industry’s annual global revenue. In 2020, streaming services delivered $13.4 billion in sales, representing 62% of industry revenue. Last year, Spotify paid out $5 billion to rights holders, mostly the big labels, which passed along an estimated $500 million of that to recording artists. “Let’s be real,” Ek says. “I had no idea Spotify’s cultural and monetary impact would ever be this big.”
Now he wants to go even bigger. Let other media behemoths battle for eyeballs; Spotify is going after the world’s eardrums. “Everyone underestimates audio. It should be a multi-hundred-billion-dollar industry,” Ek says. “Audio is ours to win.”
Much of the audio world remains fragmented and shockingly analog. Radio, a 135-year-old technology, has proven more resilient than Keith Richards.
“IT’S NO EXAGGERATION TO SAY THAT DANIEL SAVED THE MUSIC INDUSTRY.”
Each day the old-school medium reaches an estimated 3 billion people, and each year it pulls in ad revenue topping $30 billion, according to advertising research firm WARC. “In the U.S. alone, twothirds of all audio ad spending still goes to terrestrial radio,” Ek says. “That’s a massive amount of revenue that needs to shift online.”
He’s shaping Spotify into the go-to destination
for all digital sound: not just music but news, storytelling, live talk, audiobooks and education. He wants to provide the tools to empower audio creators to dream up entirely new categories with fresh soundscapes. All of which will be run through Spotify’s AI-powered algorithms to deliver an audio stream personalized to each listener. What TikTok, YouTube and Instagram have done for photos and video, Ek wants to do for sound.
“Having easy-to-use cameras in our hands has taken video production from esoteric to the mainstream. Audio should do the same,” says Mary Meeker, the founder of venture firm Bond and longtime author of the influential Internet Trends report. “The opportunity to evolve audio creation and interactivity for millions of people is significant.”
When the Swedish-born Spotify burst on the American scene in 2011, the music industry was a mess. Late to transition to digital music and bled dry by piracy and file-sharing sites like Napster, the recording business had fallen hard from the glory days of the late 1990s, when compact discs reigned supreme. In 2011, recorded-music revenue was near $15 billion, 40% less than the $24 billion in sales it logged ten years before.
Enter Ek. Raised in Stockholm’s rough Ragsved neighborhood, he had a natural talent for music and coding. In high school he made websites for local businesses, then dropped out of college during his first year to build a digital ad company he later sold to online marketer Tradedoubler for more than $1 million. Just 22, Ek bought a Ferrari and bottle service in flashy clubs before the rock-star life ultimately left him depressed. He retreated to a remote cabin to focus on fixing digital music. In 2006, he teamed up with Tradedoubler’s cofounder, Martin Lorentzon—now Spotify’s chairman, who’s worth $5.8 billion thanks to having bankrolled much of the streamer’s early days. The duo set out to build an ad-based music site with the ease of iTunes, the speed of Google, the sharing of Facebook and the massive music library of Napster—but legal.
The challenge was part technical, part contractual.
Ek obsessed over a design that seamlessly worked on desktops and the exploding smartphone market. His engineers created a clever distribution system using a combination of physical servers, cloud computing and peer-to-peer file sharing that let millions of people access tens of millions of songs simultaneously.
The lawyers proved tougher. Years of rampant internet-based piracy had left record labels paranoid about giving up rights, especially to a free, ad-based service. After Spotify debuted in Europe,
Ek negotiated for more than three years to get the rights he needed to launch in the U.S. “Daniel could have entered America much sooner by signing a bad deal that would have destroyed the company,” Parker says. “He had the iron will to resist labels and artists trying to take advantage of the company.”
That iron will alchemized Spotify into a gold mine—for both its early investors and the music industry as a whole, whose companies now trade near historic highs. Warner Music Group is up 50% over the past 12 months, with a market cap of $20 billion. Universal, which recently spun off from media titan Vivendi, is worth nearly $50 billion.
Most shocking of all, Spotify has kept its lead even as a trio of trillion-dollar titans—Apple, Alphabet and Amazon—launched competitive products. “Apple’s big comeback [in the early 2000s] was centered around the iPod—they built their whole brand around music,” Parker says. “Few thought Spotify would survive with iTunes preinstalled on billions of iPhones and Macs.” Of course, Apple remains a potent player in the space, with an estimated 70 million subscribers in 2020 (YouTube Music has around 50 million, Amazon Music 55 million). But the big three are far behind Spotify’s 170 million paying customers. And Apple and Amazon don’t offer a free, ad-based option. Spotify does, and it attracts an additional 220 million users. “Before, ad-supported music was just the on-ramp to subscriptions,” says Richard Greenfield, a partner at media research shop LightShed Partners. “Now it’s big business by itself, and Spotify has no competition.”
The company got a head start thanks to its easy-to-use, playanywhere product, shareable playlists (there are now some 4 billion) and having been the first to offer a streaming model that customers preferred over either paid downloads or piracy. It proved sticky, too: Once listeners built libraries, they had few incentives to switch to a different service. Extreme focus and a clear mission also helped. “The best people in audio come to Spotify because we’re the best at it. Over at Apple, music is priority No. 27,” Ek says. “If you want to build a selfdriving car, don’t come to us.”
Although Spotify has become music’s new Mecca, its stock has sputtered. Over the last 12 months, shares are up 4%—vastly underperforming the S&P 500 and Nasdaq’s more than 30% gains. Investors hate its CD-thin margins and the leverage the major labels hold over it. Because Spotify doesn’t own the music it streams, as much as 70% of every revenue dollar goes to rights holders (who then, depending on contracts, pay the artists). Spotify has never swung an annual profit. Last year its losses tripled to $713 million. “I focus on cash flow. It’s positive, and we’re not dependent on investors to fund us,” Ek says with a shrug. “We aren’t profitable yet because we keep investing. We want to keep growing because there is such a big prize at the end of the tunnel.” He’s betting big on podcasts to get to the light.
Afluke was the spark of Spotify’s podcast epiphany. In 2017, Ek noticed something odd out of Germany, one of the company’s top markets. Music labels, to maximize streams, had
begun uploading audiobooks. Spotify was built for threeminute songs, not 30-minute chapters. The user experience was terrible. Fast-forwarding and rewinding were tricky. Chapters would be shuffled out of order. Nonetheless, some titles cracked the charts next to the latest pop hits. “It showed we had permission to go outside of music,” Ek says.
Podcasts, long dominated by Apple, seemed ripe for a shakeup. “It was still download-based. Advertising and discovery were clunky. You couldn’t play the podcast easily in your car or on your smart speakers,” Ek says. “We realized everything we built for music could be adapted to podcasts.”
That segment started small and was initially a flop. Most people saw Spotify strictly as a music company. Then Ek went big. “I told our team we were publicly committing $1 billion to podcasting. They told me the entire market isn’t worth a billion. I said, ‘Well, it will be,’ ” Ek says with a laugh. “The number was significant enough that it was scary for us, which is important. I wasn’t betting the entire company on it, but it was meaningful enough that everyone, including us, had to take it seriously.”
Spotify, a hardcore tech business, was now diving headfirst into content. Ek hired Dawn Ostroff, a TV veteran who had helmed the UPN and CW networks in the early 2000s and, later, Condé Nast Entertainment, to amass a sweeping array of shows and build an advertising machine to monetize it. In 2019, Spotify paid $194 million for prestige podcast network Gimlet Media, $55 million for true-crime studio Parcast and $190 million for Bill Simmons’ sports-and-culture network, the Ringer. For tools, Spotify dropped $154 million on Anchor, which makes software for recording shows, and another $236 million to buy Megaphone, an ad network.
In 2021, Spotify generated buzz by signing a widely reported $60 million licensing deal for Alex Cooper’s Call Her Daddy and $100 million for The Joe Rogan Experience—the latter podcasting’s most popular, and polarizing, show. (Spotify declined to comment on the deal prices.) Next came partnerships with A-listers including Barack and Michelle Obama, Prince Harry and Meghan Markle, Kim Kardashian and filmmaker Ava DuVernay. “It was a multitiered strategy,” Ostroff says. “We had to build a catalog of as many podcasts as possible, attract established podcast stars and go after top talent who could lend their craft to the medium.”
In February, Spotify launched its advertising network, enabling brands to serve targeted ads to listeners of its more than 3 million shows. While Apple has been notoriously stingy about sharing data, Spotify is going in the opposite direction, providing a bundle of analytic tools to help brands and creators measure the effectiveness of campaigns and offer clear info on audiences.
Podcasters love it. “To borrow an NCAA metaphor, [before Spotify] we were an independent university trying to compete with the big boys in the SEC,” Bill Simmons says. “We’re now doing twice as many shows as before, and the quality and diversity of our shows is incredible.”
Spotify’s trove of data is a powerful perk. “It gives us unbelievable insight and advantage,” Simmons says. “It shows us moves we should be making and things we’re not doing right.” When Simmons’ fantasy-football podcast initially underperformed, data revealed that its competitors attracted strong followings by launching episodes well before the NFL season began. Simmons debuted the program earlier, and listener numbers soared. Lydia Polgreen, Gimlet Media’s boss, used Spotify’s metrics to develop true-crime programs that mixed the tabloid drama audiences craved with Gimlet’s brand of high-quality storytelling. (Video giants Netflix and Amazon Prime have long mined data to spot promising plots and stars for series and films.)
Next up? New revenue models for creators to better interact with—and make money off—their fans. Spotify’s “free” and “paid” tiers will remain, but Ek is adding more options that will let creators charge for exclusive content, early access and interactive experiences. The basic idea isn’t radically different from other membership sites like Patreon— or OnlyFans—but it’s tailored specifically to audio. A recent deal with Shopify will let artists sell tickets and merchandise on their Spotify pages. Whatever the model, Spotify will likely get a piece of each sale—a fresh revenue stream it won’t have to share with record labels and publishers.
With Spotify’s podcasts hitting all the right notes, Ek has turned to other formats. In November, he bought audiobook network Findaway to take on Audible, the Amazon-owned market leader. He’s also rolling out video podcasts.
This summer, Spotify launched its live-content product Greenroom as an answer to Clubhouse, a live-talk app that became a surprise hit during the pandemic. Bill Simmons initially thought Ek was chasing a fad. “Daniel made a smart case. He said we’re the best at audio. This might be a thing—or it might not. But we must do it, make the best version of it and see if it works.”
Ek is a tinkerer, an improver of improvements, rather than a tech visionary with a fixed master plan. “I don’t have Steve Jobs’ crisp view of the future,” he says, standing in his mic-filled podcast studio. “But I have a direction. If we’re moving fast enough, I know we’ll eventually get there.”
“LET’S BE REAL—I HAD NO IDEA SPOTIFY’S CULTURAL AND MONETARY IMPACT WOULD BE THIS BIG.”