Spotify’s Daniel Ek On Streaming Royalties, Social Media & The Future [INTERVIEW]

This interview by Eliot Van Buskirk of Evolver.fm with Spotify CEO Daniel Ek originally appeared on GRAMMY.com. Ek is keynoting the GRAMMY Foundation’s Entertainment Law Initiative Luncheon & Scholarship Presentation today. For more information on the GRAMMY Foundation, visit vwww.grammyfoundation.org. The 54th Annual GRAMMY Awards airs live on Sunday, Feb. 12 on CBS. 

Ek: There’s a lot of interesting debate going on now about streaming, and I like that it’s become more about streaming, and not what’s free or not. But what I really want to talk about is the future.

We have this debate about where it is right now, but I still think streaming is really in its infancy, and I want to outline the future of what that looks like — what it will actually mean for the music industry. What would it mean for how to promote an act? Or for revenues?

We’re at a time now when more and more people are saying, “Hey, actually, this is working,” and we’ve got two-and-a-half million paying customers and that number is growing very, very quickly, and it keeps accelerating. Personally speaking, I am more bullish on the future of the music industry than ever before, and I think we’re kind of entering a golden age in music.

Evolver.fm: What will that golden age look like?

Ek: First, I think we’re talking about a world where, I believe, most of it will be access. There will be ownership as well. I think the total amount of revenues back to the industry is going to grow. We’ve paid over $200 million to rightsholders already, and it’s still in the early days. So for me, part of it is talking about the growth story of how we get the music industry back to where it used to be, and probably even past that.

The second part is, in a world where music is really about you listening to music and your friends discovering it from you, what does that mean about how we break acts and promote acts? Spotify, up until now, hasn’t really done a great job of helping that, but you’re going to see us doing more and more to break acts and try to really promote them as well. Looking at Spotify today and fast-forwarding three years to 2015: Where’s the music industry? Where’s Spotify, and what does this mean to a band, manager or label? I think it’s exciting times.

Creating a record is really about three core components. The first thing is creating the actual record. It used to be really expensive to do that and now, really, anyone can record a record, even [in] their own homes. The second piece is that it used to be really expensive distributing the record, and now with iTunes, Spotify and other services, distributing another digital copy basically doesn’t cost anything.

But the funny thing is, marketing used to be kind of simple in the old days. You used to be able to just put it on the radio or MTV, and it just worked. If it was a good song, the record started selling based on that. Today, the media landscape is much more fragmented. MTV’s not about music anymore, and radio is even hard[er] to break through. There are tons of radio channels, and most of them play stuff people already know.

So, marketing an act today is really, really, really expensive. If it went from being a broadcast medium of just getting it out there to everyone, to a social medium, where music is discovered through friends, what does that mean for the marketing of music? I think that’s [another] core component of getting this to work.

Evolver.fm: That’s a really good point. I guess we’re also seeing that with some of the audio ads within Spotify, which are clips of songs.

Ek: Hopefully, I’ll also be able to go into some interesting things we’ve seen [during my address], especially with Facebook, where there are acts like Foster The People who kind of blew up on the service, really, because friends started discovering [them] from other people. That’s a great story for us, to show, “Look, this works. People discovered it not just through radio, where they didn’t have much promotion, but because friends kept recommending and listening to it, so their friends, in turn, discovered it.”

Evolver.fm: Is that part of the decision to require a Facebook login on Spotify, because you see the social sharing as so important?

Ek: We look at the sharing of music as really, really important for our business. We’ve found that the more social our users are — i.e., they’re sharing music — the faster they grow their own music library. [And] the faster they grow their music library, the faster they become paying customers. That’s really the rationale for us — not really the marketing side, but we feel that the combination of [Facebook and Spotify] is a positive thing.

Evolver.fm: I remember when we first met in New York, years ago, and you said that you wanted to create a legal version of the sort of experience that people have in the P2P version. My favorite thing about Napster was searching for one rare band that I loved. If someone had that, then I trusted them, and knew that I was going to like anything else they had.

Ek: Yep.

Evolver.fm: It seems like you have succeeded in translating that to a legal music service, so congratulations on that.

Ek: Yes, we’ve done that. Right now, it’s skewed more toward your friends. What we want to make it skew toward is you discovering other people with great music taste as well.

Evolver.fm: Are there any misunderstandings about Spotify that you’d like to clear up?

Ek: I feel, to an extent, that we’re a victim of our own success. What I mean by that is, especially if you look at the media, Spotify is seen as this gigantic company, the size of [Apple's] iTunes, which is not really true. We’re really starting up here, and that’s how we feel about it. If you look at a country like the U.S., there’s sub-1 percent of the population that’s even using any legal streaming service. I think that sometimes people perceive us as being a lot larger than we are, and that’s an important point to make.

Spotify CEO Daniel Ek unveils the company's app strategy at a New York event (photo: Eliot Van Buskirk).

[Another] point I want to make is that this is a very, very different model than just selling a record. Everyone talks about volume, and what this means in terms of numbers, and I don’t think it’s comparable. In the world today, there are 500 million people listening to music online. Out of them, there’s only a very small portion who are avid iTunes customers, which we look at today as being the majority of the digital music ecosystem. So the way we’re approaching this is, we want to reach the 500 million people, of whom the vast majority aren’t really using iTunes.

I’d also like to address people who think they’ll gain sales by not being on Spotify. There’s not a shred of data to suggest that. In fact, all the information available points to streaming services helping to drive sales.

Album unit sales [were] up in the U.S. in 2011, the year Spotify launched, for the first time since 2004. More than a dozen albums which debuted at number one have been available on Spotify at launch.

Spotify users are the exact same people [who] used to listen to music every day on YouTube, whose entire music collection was pulled off BitTorrent sites. By offering them a compelling music service that allows them to discover hundreds of new artists, not just their favorites pulled from YouTube or [pirated], we’re seeing millions move back to listening to music legally after years of being left out in the cold.

They’re helping pay a ton of money back to the industry. You’re talking 10 million active users, 2.5 million subscribers — most of them paying $120 a year, which is double the amount of your average iTunes user.

Do you really want to hold back your album from people who are finally paying for music again? If you think that by doing so you’re getting them to buy your album on a CD, or as an album download, again, there’s absolutely no evidence to back that theory up. Your album’s getting shared en masse over BitTorrent, over YouTube. It’s there, right now — but you decide that it’s the paying, loyal music fans that should lose out. It makes no sense.

Another thing I want to mention: When someone creates a Spotify playlist, and they put an album or songs in there, they don’t just play them once. What actually happens is they keep repeatedly playing them. What I think is interesting, and what we do here, [is that] the sales cycle of that record is anywhere from four to 12 weeks in most typical cases. With Spotify, we keep seeing the effect up to 25, 35 [weeks], or even a year.

So when looking at the effect a certain record release has, one in the world of Spotify has to look not just at the first 12 weeks, but actually look at six months, and probably even a year after, because it keeps playing. And every time someone plays a song, we pay the music industry.

I think that is probably the biggest misunderstanding — everyone keeps comparing an apple to what’s actually not an apple, but hopefully a tastier fruit.

Evolver.fm: It seems like that would give musicians an incentive to make music that people want to listen to over and over again, which could be good culturally. It’s not just about making a splash.

Ek: Yeah! At Spotify, we really want you to democratically win as a musician. We want you to win because your music is the best music. And the only way you can win in the Spotify ecosystem, unless you buy advertising, is by friends recommending [you] to other friends. And they do so by listening to your music. They vote with their hands and feet. I think that’s a pretty great thing for an artist that’s creating great music.

What’s interesting to me, looking at the greatest acts of last year, is that many of those acts are acts that, five or 10 years ago, may not have even had a record deal, but they’ve grown — [like] one of my favorite bands, Mumford & Sons. I don’t know how much [they've] been growing on social [networks], but I can tell you, the reason why I discovered them was someone actually sent me a YouTube clip, and then I started searching for them on Spotify, and I discovered this fantastic band. I guess the point is that in the future, we’re getting more and more connected, all over the world, and hopefully that will mean that great music will prevail, because your friends will listen to it and share it with other friends.

Spotify can send music via Apple AirPlay to home stereos and other devices.

Evolver.fm: The two big areas for growth in digital music seem to be the car and the television. What can you tell us about Spotify’s strategy there?

Ek: Much like we believe a strength of the CD [was] being ubiquitous — that you can take a CD and put it in any player and just press play — that’s how easy we want it to be to play music with Spotify. As more and more devices are getting connected, the base of people who will want to listen to music with those devices will increase, and that’s something we’re hugely excited [about].

Evolver.fm: To switch gears for a second, I was very interested to cover what Spotify is doing with apps. You can build desktop apps on Spotify’s catalog, iOS apps and now you can build apps within the Spotify desktop client. How significant do you see that ecosystem? Is it going to be a major part of Spotify’s growth in the future?

Ek: Yeah, we definitely do believe that. There are multiple ways one can look at this, but what we’re trying to primarily address is that when it comes to music, we’ve got 15 or 16 million tracks. I don’t even know what the exact number is, but there’s an endless amount of music. You could listen your whole life to the Spotify catalog and you probably wouldn’t get through a third of it.

What’s needed on top of that is curated experiences. Part of that curated experience is people building playlists and sharing those playlists with their friends. But another part is trusted sources — people who tend to be really, really good at music. There are things you can [offer] with music that aren’t Spotify’s core [competencies], like lyrics, ticketing and other things.

We felt that the Internet really was silent, and that music was missing. We wanted to create a platform to allow people to interact with music, whether that’s providing curation, or providing more interesting experiences, or even using that to give you other venues, such as ticketing and merchandising. We think all of those things are super exciting, but they’re not our core competency.

We might have 100 or 150 engineers, and that’s great, but already now, with the Spotify platform, we’ve got thousands of engineers working on creating more interesting music experiences. And that’s ultimately really good for the music industry, because there are more avenues now to listen to music and interact with music. Ultimately, that’s going to make more people care about music and pay for it again.

Spotify runs on the iPad and many other devices (photo courtesy of Flickr/Andreas Blixt).

Evolver.fm: We’ve talked a little bit about the royalty payouts. Some people have said from time to time that the payouts are too low, and others point out that with hundreds of millions of dollars changing hands, how can that be low? A few artists are deciding not to have releases on Spotify, so I guess one conclusion to draw would be that it’s too difficult to do freemium streaming — to pay what seem like very high royalties in one sense, but, on a per-artist level, some people say it’s not very much. How do you see this playing out?

Ek: As I said, a lot of people try to compare an apple to another fruit, and as I started out saying, we look at it as us being in our infancy. We haven’t even started, really. We’re still a really young company. So, ultimately, our view is that the royalty checks we’re paying out now — of course we’re happy that there’s progress being made, but it’s still only in its early days, and it will keep growing.

Last year was a great testament to that, [when], in May, we hit a million paying customers and at the end of that year, we were at two-and-a-half million. That’s a significant increase in customers who are paying 100 bucks a year. And Spotify keeps growing at that pace, if not faster. So I think the royalty checks, as they’re combined, will definitely grow.

But I also want to kind of caution people. We get a lot of media attention. People think we’re actively seeking that media attention, and in most instances, we’re not. People just like the product so much that they like to write about it. I find this when I meet artists. They actually think we’re a lot larger than we are. I say, “Look, we’re not, really. We’re roughly 10 million users in countries where, in total, there are 600 million people. And out of them, at least 250 million are listening to music online, so we’re actually a very small part of this right now.”

I want to add that my home country, Sweden, where Spotify has grown to scale — if you look at the artists now, the vast majority of the artists are getting between 50 and 60 percent of all their income from Spotify. And I think that’s what’s going to happen when this model gets to scale. And the music industry [in Sweden] is growing.

Evolver.fm: The latest thing with Spotify and Facebook is this ability to listen to the same thing at the same time, which I think is a fantastic feature. It makes music not only something between a person, an MP3 player and a pair of headphones. Over the long term, is this going to become a mainstream activity, or is it just for people like me who use the latest stuff and get a kick out of it?

Ek: Our approach is that we don’t know. With that said, we think music is the most social thing there is, and we think people want to interact with music. The background on that feature is that it was actually built by Facebook, which we think is cool. One of the engineers there showed it to me one time when I came to visit, and he was like, “What do you think about this?” I said, “This is awesome, you should just release it.”

The coolest thing is that he could build that feature because Spotify is a platform, so he could interact with our APIs, create it, and put it on the [Facebook] service. We didn’t actually interact that much to get this done, but it was one of the things that the Facebook folks were really passionate about, and I think — I hope, and I believe — that there will be 10 other projects similar to this around the Web right now, where people build cool, interesting experiences.

Two weeks ago, someone [who] created the Spotify app Soundrop released their own iOS app. So now, all of a sudden, I have a room where I’m walking around and people talk about music, where they vote for which track will come next. It’s kind of a social radio. And that was built by two guys in Oslo. I guess the answer is that we don’t know what will work or not, but we’re thrilled that people want to innovate around it.

Evolver.fm: So, do you still find time to play guitar?

Ek: (Laughs) I do! I actually bought a travel guitar, and that guitar is really cool. You can actually fold the guitar, and you can plug headphones into it, but it’s acoustic, or semi-acoustic. So I do — more, actually, than I did last year.