2014年10月24日 星期五

The Spotify effect

October 24, 2014 12:14 pm

The Spotify effect

How did Sweden – a nation of 10 million people – become the ‘streaming’ capital of the world and the crystal ball for the future of the music industry?
Mike McQuade illustration©Mike McQuade
on’t tell people what you do,” Per Sundin’s wife insisted as they went to a dinner party several years ago. Sundin wasn’t a banker, used-car salesman or weapons producer, but the head of a record label in Sweden. Back then, being a music industry boss in the Nordic country was a miserable job. Sales had more than halved between 2000 and 2008 as illegal downloading took over. Sundin, who has headed a record label since 1998, was known by international colleagues as the expert on The Pirate Bay, an infamous Swedish website used to illegally download the latest music and films.
Today Sundin, now head of Universal Music in Sweden, is that rarest of things: a happy music executive. No longer shunned by colleagues, he is the company expert on something more attractive: Spotify. “Sweden has gone from being worst in the class to the best in five years. We were so down the drain when Spotify came and presented their idea. Today, Spotify is the majority of the success we have,” he says.
Sundin’s happiness is mirrored by much of the music industry in Sweden. Music sales have increased by more than a quarter from their nadir in 2008 and Sweden has become one of the first countries in the world where streaming services – listening to music over the internet without owning it – make more money for the industry than CDs or downloads. Almost three-quarters of the SKr990m (£86m) made last year came from streaming.
Launched in Stockholm in 2008, Spotify has a library of more than 20 million songs that people can choose from. They either pay for the premium service to stream music without interruption or they listen for free but with adverts between songs. Sundin insists that Spotify – in which Universal and other big record labels have minority stakes – has saved the music industry, although the company itself remains lossmaking.
His office is strewn with memorabilia, from a picture of a “Born to Run”-era Bruce Springsteen to gold records of his latest star, the DJ Avicii. Sundin is dressed simply in a black sweater and jeans, his completely bald head glistening under the lights. “It was devastating,” he says, thinking back to those years. “People thought it was OK to steal with The Pirate Bay. It wasn’t nice going to international meetings. Was it close to killing the industry? Yes. Then Spotify came and it was better than illegal downloading. It was super-fast, almost everything was on it, and it was free.”
Spotify’s reach goes beyond its home base. It has more than 10 million paying subscribers and a total of 40 million active users in 58 countries. Many executives hope that streaming – including other services such as Deezer or Pandora’s internet radio – can demonstrate that record labels can still make money in the digital age. Apple seems to be making the same bet with its $3bn acquisition in May of Beats, a smaller streaming service and maker of headphones.
Jonathan Forster, Spotify’s managing director for the Nordics, argues: “We find ourselves being in this position where Sweden is a crystal ball for the new music industry. And that’s as relevant for what might happen next in the UK or US as it is here in Sweden.” But could this country of just 10 million inhabitants really offer a blueprint for the future of music?
If it does, people like Ash Pournouri will be the winners. The 32-year-old is manager and producer of Avicii, whose track “Wake Me Up” is the most streamed song yet on Spotify, with more than 200 million listens. His At Night Management company is based at one of Stockholm’s most prestigious waterfront addresses. The first-floor office is home to four recording studios of various sizes and a cinema room with an enormous screen. At its heart is a boardroom pimped out by Ralph Lauren almost entirely in black, from the wallpaper to the mixing bar. “I want to show people how successful we are. There is still life in the business, and still a lot of potential for people to make it,” says Pournouri, clad in a black jacket, denim shirt and skinny tie.
Pournouri is a fervent believer in Spotify. “I always thought it was the next thing,” he says while sipping a latte. “How do consumers want to consume music? If you mimic the behaviour as much as possible of illegal downloading and make it even easier and for a small payment, then you have the solution.”
Perhaps most appealing for him is what he calls Spotify’s “democratic” side. The more a song is streamed, the more an artist is paid. “Not only do you have a platform where you can reach the whole world but you have a way that you can be listened to a lot. It hasn’t been democratic before in any sense. People buy a CD even if they only like three songs. With iTunes you might like it this week but not next week. Spotify is more democratic – people listen to a good song over and over again,” he says.
Some artists, however, are less glowing. Thom Yorke, the singer of Radiohead, told a Mexican website that Spotify was “the last desperate fart of a dying corpse”. He added: “I feel like as musicians we need to fight the Spotify thing. I feel that in some ways what’s happening in the mainstream is the last gasp of the old industry.”
Spotify has responded to growing criticism by detailing how artists get paid. It pays out about 70 per cent of its revenues to record labels, who share the pot depending on how often their artists’ songs have been played. On average, that works out to between $0.006 and $0.0084 per stream. Or to put it another way: one million streams would give a label $6,000-$8,400.
Spotify chief executive Daniel Ek©Getty
Daniel Ek, the chief executive of Spotify, announces that a deal with Led Zeppelin has been agreed, December 2013
But Spotify argues that to concentrate on the “per stream” maths is the wrong way of looking at things. In total, it has paid out $1bn in royalties to labels including $500m alone last year. It has also persuaded 10 million people to pay $120 a year for music. And it contrasts its fees with others: a “video-streaming service” (presumably YouTube) would pay out just $3,000 for one million listens while US terrestrial radio would hand over $41. Spotify has had some success – notable holdouts such as Led Zeppelin, Pink Floyd and Metallica have all signed up recently, leaving The Beatles as the main exception. But other bands, such as the Black Keys, refuse to release new music on to Spotify straightaway.
Per Herrey has known the heights of pop success, winning the Eurovision Song Contest in 1984 with “Diggi-Loo, Diggi-Ley”. He is now a lawyer for the Swedish musicians’ union and is preparing to sue several record labels over the royalties they pay from Spotify. He says the labels, not Spotify, are the villains. “They have stolen the rights of artists. It is betrayal from the record companies. They have snatched the rights and paid nothing to the artists. It’s ridiculous,” he says.
Herrey says the problem is that the artists do not even get the $0.006-$0.0084 per stream; instead they get between 6 and 10 per cent of that small sum. The rest goes to the record label in what he calls a hangover of the days when the label had to recoup the costs of distribution and pressing. Now those costs no longer exist, Herrey argues that labels should give artists a similar deal to radio, where royalties are split 50-50.
For years we didn’t know how you listened to a song: was it 10 times or 10,000?
- Ludvig Werner, head in Sweden of IFPI
Herrey says artists are afraid of speaking out. “I can’t even begin to tell you how many artists I’ve talked to. They are too scared. Sweden is a small market and they are afraid of burning their bridges. Artists are also extremely sensitive to not show their fans they are interested only in money. The winners therefore are the big companies.” He adds that he believes the major record labels offered their back catalogue to Spotify at a reduced rate in return for their shareholdings in the company. Spotify refuses to say how much the labels own but people close to the company say it is less than the 17 per cent or so they were reported to have five years ago.
What is certain is that Spotify is changing the economics of music. Ludvig Werner, the head in Sweden of IFPI, an organisation representing the record industry globally, says: “The music industry has never been so different from one country to another. For instance, 10,000 CD sales in Poland can make more money than being number one in Sweden.” He adds: “Under the old business model, you pre-paid for eternal listening. The downside was if you didn’t like it, if you damaged it. For 90 years, we didn’t know as a business how you listened to a song: was it 10 times or 10,000?”
Swedish DJ Avicii©Getty
Avicii, the Swedish star whose track ‘Wake Me Up’ is Spotify’s most streamed song ever, with more than 200 million listens
Per Sundin now has the answer in his hands. He flips open his MacBook Air and logs on to a website, Spotify Analytics. Within seconds, he has dialled up information on Avicii. The 24-year-old DJ has been played 129,694,407 times in the past 59 days. That works out at 2.2 million streams a day by 1.16 million different listeners. Sundin calls up some more statistics. A fifth of Avicii’s listeners were in the US, with 17 per cent in Sweden. Males accounted for 60 per cent and Sundin can also see a breakdown by age. “When I wake up every morning I log into this and see what happened yesterday. This is addictive. And this is money,” he says.
The power of the data has other effects as well. “The industry gets excited when you talk to them about this. We have an incredible amount of data about what is being played by whom and when,” says Spotify’s Jonathan Forster. Artists can plan tours by targeting cities where they have fans or see where they need to boost marketing. The company is already adding other services such as allowing artists to sell merchandise or concert tickets via Spotify or even send an email when a new song is out.
. . .
The company that is supposedly the future of the music industry is housed in a nondescript tower block north of Stockholm’s city centre. Get past Spotify’s reception and the offices finally begin to look like a typical start-up. Fridges stocked high with soft drinks, milk and even beer are dotted around, as are big comfortable chairs.
Piracy is effectively dead . . . Young people are paying €120 a year for music
- Spotify’s Jonathan Forster
Meeting rooms are all named after famous songs: “Summertime”, “Paranoid”, “Teen Spirit” and “Empire State”. Forster and I first meet in “Pretty Vacant” – named after the Sex Pistols song and complete with tartan wallpaper and pictures of birds and rabbits dressed as aristocrats. Forster is understandably bullish about the potential of Spotify for the industry. “Piracy is effectively dead in these markets for young people. Young people are paying €120 a year for music,” he says.
A few weeks later we meet again, this time in the Backstage room, plastered with posters of groups such as Led Zeppelin, Pearl Jam and Social Distortion. We talk about Spotify’s special status in Sweden, where as much as a third of the population is thought to belong to a streaming service, with most paying for the premium product. “There are certain things about Sweden that make it special. The sheer scale of The Pirate Bay, the fact that it’s Spotify’s home, the fact that Sweden has this ridiculous history of being successful in music,” he says. He could add government programmes that pushed fast broadband and home computers.
But he argues that Sweden is not “fundamentally different” from other countries. “It’s just it got off to a roaring start. It’s smaller and the network effects are fantastic. Because the industry is smaller here, they tend to be able to get things done more quickly.”
Others are more circumspect. Daniel Johansson is a music industry researcher at Linnaeus University who praises Spotify for being “the first service to meet the needs of people”. But he has several concerns. One is whether streaming is reaching saturation point already. Royalties grew very little in the second half of 2013 compared with previous years. And Johansson notes that, adjusted for inflation, music industry revenues were SKr255 per person in 2000, against just SKr103 per person last year.

Spotify logo
Active users in 58 countries
Revenue from streaming in Sweden in 2013
Royalties paid to record labels
Paying subscribers
His doubts go deeper. He estimates the lossmaking Spotify may need to grow from 10 million to 35-40 million paying subscribers to become viable and profitable. “There is a long way to go for these businesses. I don’t think the growth will happen as fast as people think.”
Then there is the competition. Spotify has done well by bundling its offer with telecoms operators, first in Sweden with Telia (it has announced a similar deal in the US with Sprint). But it has mostly faced rivals with relatively little financial muscle such as France’s Deezer. Johansson says it could be a different story if Apple converts iTunes into a streaming service. “If iTunes does that, there will be a lot of people that have left iTunes to go to Spotify that will come back because they have an iPad or iPhone,” he says, adding that a company such as Netflix could even add music to film streaming.
Equally, it is uncertain to what extent Sweden can serve as a model. Three things made 2009 a crucial year for music in Sweden. First, there was the criminal trial of the men behind The Pirate Bay. All were eventually found guilty of infringing copyright law. Then came an anti-piracy law based on an EU directive. The day after its introduction internet traffic in Sweden dropped by 40 per cent, says IFPI’s Werner. Third, there was the rapid rise of Spotify, which used an invite-only system to create a buzz in Sweden.
Johansson says: “What we have seen since 2008-2009 in Sweden is kind of exceptional. The market was perfect for Spotify to dominate. I’m pretty sure that will change in the coming years. It’s seldom that the first player on the market is the one that succeeds. Just think of AltaVista and Google.”
. . .
But for now, at least, Spotify has shaken up the Swedish music scene. In 2008, CD sales were SKr685m; now they are SKr230m. Streaming last year brought in SKr705m (£60.4m). The industry might only be 60 per cent of the size it was in 2000 but it is profitable and healthy. “Streaming music, spearheaded by Spotify, did change and, in some ways, save the music industry. This year they will invest in talent again,” says Werner.
The company is now thought to be eyeing an IPO, even if it remains lossmaking. Spotify sold equity valuing itself at $4bn last year and also secured a $200m credit facility in a move many interpreted as a prelude to a flotation. Its success in Sweden is likely to play a big role in its pitch to be the future of the music industry.
Gustav Söderström, Spotify’s chief product officer, has seen much of the change up close. He remembers the Swedish equivalent of the Grammys four years ago as the worst ever – virtually no media coverage and in a cheap location. The week before we met, this year’s awards were a glitzy, televised ceremony held in Stockholm.
Spotify recently rolled out a big redesign of its app and Söderström says, “Sweden is to some extent a testing ground.” But he adds: “We also try to test things globally because there are cultural differences. Everybody here has Spotify, fast broadband.”
He remains cautious on whether Spotify will conquer the industry. “It’s a pretty good concept for what the future could be,” Söderström says. “But it’s dangerous to build for a future that might not be. It’s dangerous to get stuck in your own bubble.”
Richard Milne is the FT’s Nordic correspondent
Illustration by Mike McQuade
Photographs: Getty