Spotify

Spotify

Spotting the gap


Founders: Daniel Ek and Martin Lorentzon


Age of founders: 25 and 39


Backgrounds: Formerly head of social network Stardoll and music sharing site UTorrent; and founder of internet marketing company TradeDoubler


Founded in: 2008, Sweden


Headquarters: London, UK


Business type: Music streaming




T



he launch of Spotify in 2008 altered the face of the music industry for ever. The recent online consumer shift, with its many negative effects – the demise of record stores, and increase in music piracy – has perhaps found a saviour in this new business model. Before Spotify came along, millions of people were downloading music from pirate sites, breaking the law and denying record labels the remuneration they deserved; Spotify offered its users an alternative way to access the music theylove, which stays within the law and compensates those who bring the material into being.



While some still see Spotify as part of the threat to the music industry, and not the solution to its problems, there can be little doubt about its commercial impact. Since its launch in October 2008, Spotify has garnered more than 10 million active users, and three million paying subscribers. An alliance has been forged with Facebook, opening the door to hundreds of millions of new fans. And it seems that Spotify is now on the verge of cracking America – a feat many of the biggest artists on its roster have failed to achieve.


Experience is everything


It was always likely that Daniel Ek would make his money from computers. Having received his first machine aged five, the Swedish prodigy began programming when he was just 8 years old, and built his own web development business at 14, undercutting local design firms by training his school friends to build web pages for him. At one stage Daniel, running the operation from his school computer lab, was making around £10,000 a month.


The young entrepreneur eventually sold this first business in 2002, aged 19, and, after flirting with an engineering course at Sweden's Royal Institute of Technology, decided to plough the profits back into business. In 2005 Daniel set up Advertigo, an advertising agency that caused a stir in the online community with its ability to decipher websites and target ads accordingly. Then, just a few months later, he was invited by Index Ventures to take control of Stardoll, a new social network for fashion-conscious teenage girls. Harnessing his experience of programming cost-effective websites, Daniel laid the foundations of a network that would eventually reach an audience of 100 million.


By now, the Swede was big news on the tech scene, and about to embark on a new adventure that would shape his future success. In 2006 he was invited to take charge of a company – UTorrent – that was the world's biggest file-sharing site at the time. UTorrent allowed users to download their favourite songs for free, using a peer-to-peer (P2P) network – basically a giant swap shop, which copies music files from one user's hard drive and pastes it onto another. UTorrent was the intermediary, and didn't actually store any music itself. This meant it could handle a huge amount of traffic, without having to pay for the storage space – an advantage Daniel would seek to recreate when he launched Spotify a few years later.


Meanwhile Martin Lorentzon was carving his own niche in the tech space. After studying at Gothenburg University, Martin began experimenting with the newly invented internet, and in 1996 moved to San Francisco to join the marketing team at Alta Vista, at that time a promising start-up and later one the most popular search engines in the world. After a short spell in this hugely stimulating environment, Martin took significant roles in Swedish telecom operator Telia and Cell Venture, a venture capital firm specialising in internet start-up investments.


In February 1999, at the age of 30, Martin launched TradeDoubler, a digital company designed to help small companies get traffic from other sites. The service was an instant hit; clients loved the fact that they could now track their campaigns down to the tiniest detail, and only had to pay for successful results. Soon, TradeDoubler was active in 15 countries. By 2007, it was achieving an annual revenue of

282 million (£234 million).


A meeting of minds


In late 2005, Martin moved from Germany back to Sweden, and met Daniel a few weeks later. Martin was particularly impressed by Daniel's businesses, and soon agreed to pay $1 million (£730,000) to incorporate Advertigo into the TradeDoubler network. But he was also impressed by Daniel's nous and creativity, so he proposed that they start a new business together.


In late 2006 Daniel gave him a week's ultimatum: leave TradeDoubler and put a million euros aside for the new start-up. Remarkably, Martin did just that – before the idea for Spotify was even on the table.





Martin's approach was ideally timed. Daniel recalls that, having been so successful so young, he was becoming disillusioned. In fact he even contemplated abandoning business altogether and becoming a professional musician. But on a new project with Martin, he felt he could do something equally creative. The pair became fast friends, and they were committed to going into business together; but Daniel had doubts that Martin would actually take the plunge and leave his safety net at TradeDoubler. So, in late 2006 Daniel gave him a week's ultimatum: leave TradeDoubler and put a million euros aside for the new start-up. Remarkably, Martin did just that, before the idea for Spotify was even on the table.


For a while, in between gangster film marathons, they tossed around ideas, rough visions for new tech companies. One of their favourite topics was music. During their brainstorming sessions they regularly listened to music, through Daniel's media HTPC machine (a computer capable of playing songs and movies) and really weren't impressed with its usability. Daniel recalls in an interview with news blog Mashable, 'I think that's why we got stuck on the idea of Spotify.'


The idea that took shape was also influenced by the state of the music industry at the time. Speaking at LeWeb 2011, Daniel explained: 'Sweden was known for piracy. We had [the illegal music sites] Kazaar and The Pirate Bay ... because there was ubiquitous broadband and it was super-fast, consumption existed before the services did. That meant that the pirate networks were the pioneers ... the innovators.'


'The vision was like: "what if you had iTunes, but you had all the world's music in it?"'