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10 2016 | STORIES

 11 Spotify’s Daniel Ek invented a streaming service and subscription model that made people pay for music again. © Spotify

The man that saved the music industry

Spotify’s Daniel Ek is a modern-day tech entrepreneur par excellence. But unlike many of his contemporaries he came up with a business model that tamed the disruptive power of technology and has thus become the savior for a multi-billion industry.

Daniel was different early on. Raised by a single mom in a not too affluent neighborhood close to the Swedish capital of Stockholm he soon developed a passion for music and technology: “At the age of 5, I was given a guitar as a present and not very long after my first computer, a Commodore Super VIK”,  Daniel describes his first experiences with gaming and music during a fireside chat with the US-based site, PandoMonthly. Not long after, he was learning how to program code out of curiosity. There were only a limited number of games for his C64 and he had played them all to death. So he started making his own. “I’ve always done sort of impossible things,” Daniel explains his inner desire to do stuff that challenges him. Others included the programming of his own search engine: “It can’t be that hard,” he said to himself back then and adds today with a big grin on his face: “It turns out it‘s really, really hard.” 

WEBSITE ENTREPRENEUR AT 13
By the age of 13, young Daniel Ek was a computer nerd, spending hours and hours with binary code, until at some point, people started asking him to build homepages for their businesses. He charged $100 for the first one. He tried $200 for the next person. After a year had gone by, he was charging $5,000 a pop for websites. 

To handle all the new business he was getting, he had to hire employees. This was no easy feat for an underaged kid not allowed to vote, to drive a car or legally start a business. So with his charismatic personality, he ­bribed mathematically gifted kids in his class with video games and playstations, having them stay after school to train them to write code on the school’s computer. 

Soon he was spending all of his time building ­websites and running a system in school, that was based on other kids working for him and even doing his exams and homework. That led to Ek making his first big money. $50,000 a month at one point, he recalls, which his parents didn’t even notice, because they didn’t know the value of an original 1957 Fender Stratocaster guitar. Or the price tag of the huge server-structure entering the house, making it so warm, that wearing more than a t-shirt was nearly impossible. 

They eventually moved to a new house, so Ek could run his businesses out of their house. He’d hired a team of 25 by the time he was 18. But like all stories that sound too good to be true, this one had to come to an abrupt end. Because by this time, the Swedish IRS wanted its money back. A couple of hundred thousand Euros, to be exact. And Daniel was just one step away from filing private bankruptcy and dumping all of his employees. But along came the opening of the European M&A market, just after eBay bought Skype and Ek could sell four of his companies within a matter of months. He was able to settle his IRS debt and was still worth a million afterwards.  

»I realised that convenience quite often wins. 
It’s not that people don’t want to pay for music.«


- Daniel Ek

 

 

THE START OF SPOTIFY
But he still wasn't satisfied. “I realised that money isn’t everything for me. I started thinking, what would be so important to me, that I could invest my money and five years of my time into it. I wanted a project that I was super passionate about”, he tells ­journalist ­Sarah Lacy. That was the start of ­Spotify, a ­company ­fusing Ek’s two dearest passions – ­technology and ­music. ­Teaming up with co-founder, Martin Lorentzon, he now was facing a challenge so big that many wouldn’t even have dared to try it – to convince a multi-billion­ industry run by huge ­corporations that they ­needed a 25-­year-old to save it – by giving away their ­product for free! But the 2000s were a special time in ­Sweden. It was among the first countries to install broadband internet in nearly every home. Perhaps one of the reasons why this Northern ­European ­country was the hotspot for file sharing and piracy. And the whole world liked it. ­Meanwhile, this was having serious effects on the revenue system of the music industry. The worldwide revenue for the recording industry peaked in 1999 at $27 billion, according to the International Federation of the Phonographic Industry (IFPI). By 2008, it had plummeted to $14 billion. There had to be something done. At ­exactly the same time, Ek payed his first visits to the major labels, among them was Universal Music’s Swedish ­representative, Per Sundin. Sundin saw a demo of ­Spotify and laid out the case to his bosses in London.

THE ELEMENTS TO SPOTIFY’S SUCCESS

“To get legislators on our side for a strict ban of piracy and sharing,” he explained, “we needed services for the kids.”

But it took a long time to convince the bosses. For more than two years, Ek and Lorentzon were ­battling with numerous music industry officials, because they didn’t want to compromise their idea of giving the music away free for people to share in a first step. In 2008 Universal, EMI Music, Sony, Warner, and Merlin – the company representing the independent music labels – each ­finally agreed to an experiment: They would give their entire catalogs to Spotify, which then entered seven ­European markets and began giving out invites to listen to 13 million songs, on demand, for free. A classic freemium strategy that involved giving music away for free, but with ads or ad-free with premium subscriptions priced at €9.99.

 11 Music-streaming: subscription-model wins © paysafecard

IMMEDIATE SUCCESS

Spotify found almost immediate success after its start in 2008. Within 18 months, it counted 7 million subscrib­ers in Europe, but it hit a roadblock when it tried to ­export the service to the US. It took Ek another three ­years to convince the American label officials, due to their scepticism regarding an advertising-supported model. But in the end, everything paid off. Spotify now has one of the most comprehensive music libraries in the world, with tens of millions of songs and ­agreements with all the major labels. In September of 2016, it had 40 million paying subscribers and a total of 100 million users. And it has payed several 100 ­million dollars to labels and artists. 


In fact, the revenue of the American music industry did rise by 8.1% to 3.4 billion for the first time since 1999 in the first quarter of this year. One reason for this is that the streaming market is becoming increasingly interesting for the big ­players, like ­Apple and Amazon. But Daniel Ek cornered this ­market first, and he’ll be a tough one to beat. 

paysafecard perspective

»Spotify uses paysafecard as an acquisition tool.«

Andreas Schober Head of New Business, paysafecard

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We had a talk with Andreas Schober, paysafecard’s Head of New Business, his views of the Spotify story and how other merchants could learn from Spotify’s advanced marketing ideas.

Spotify is one of paysafecard’s online partners. What strikes you most, when thinking about their success?
Probably, that they are very innovative in a lot of ways. Alongside their lead in development within their products they also have taught a lot in terms of acquiring new customers and with attracting new customers into their subscription model.

You worked with Spotify on a new approach. Tell us more about that.
Well the Spotify team is really thinking ahead in this respect. They started with using paysafecard as an acquisition tool and set up prepaid products for those customers that wanted to try out the premium services but were not yet likely to enter into a subscription model. ­Furthermore,  they started to set up promotions together and it worked really well. That fact led to a success story for both companies. Spotify found a way to attracta new customer segment, whereas we were able to prove our strength within subscription models and how we can help to create incremental ­revenue. Thus, Spotify and paysafecard is an ideal partnership. 

Do you think there are other segments besides music streaming, where this kind of partnership could work?
Basically, this approach works for all subscription models. There will always be a certain part of the market that is likely to use the service, but does not want to enter their credit card, or bank details, or doesn’t have any of these payment methods, like the younger generations. For those ­segments, we provide the perfect solution and companies like Spotify are more and more eager to use us to attract those customers. Therefore, setting up solutions together leads to a clear win-win situation for both partners.

Streaming has become a big market now and various other players are working on setting up a service. Any plans to work with other big names?
Of course! We are already working very successfully with other big partners, especially within the music streaming market, on a global basis. However, we also launched with some video streaming platforms and are in the development process for solutions with big streaming and broadcasting brands. People are increasingly choosing their cherries in what they listen to and what they watch. Of course, they want to pick their most suitable payment option, as well.

What are the next steps for paysafecard? What’s planned for 2017?
Well, what I can tell you so far is that we will intensify our awareness within the New Busin­ess segments, and find more and more partners to set up success stories such as Spotify. We will keep concentrating on international­isation and ­strengthen our brand’s image on a global level.

Do you want to get in touch with Andreas Schober? Please write an e-mail to: andreas.schober@paysafe.com 


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