Startups.com
Mar 24, 2017 · 24 min read

Interviewed by Sarah Lacy // Also shared on Startups.co.

After almost two decades of decline, music industry revenues are finally starting to recover again and a lot of the credit goes to one guy: Spotify’s Daniel Ek. Ironically, Spotify was backed by the guy who helped enable all that piracy to begin with: Napster’s Sean Parker.

It was no small thing for the Recording Industry to learn to love Spotify… or any Internet music company for that matter. It was also no small thing for Ek to start Spotify with the stance of not wanting to “Disrupt” music labels — he wanted to help them.

It took Daniel Ek two years to get his first deals in Sweden, and another two years to launch in the US. He and his partner invested largely their own money until they showed traction, and likely would have never been funded otherwise.

But now, the RIAA salutes Spotify for building a product that makes people want to spend money on music again, as the new digital public enemy is YouTube.

Spotify hopes to join Pandora as the only two companies out of the digital music graveyard to become multi-billion dollar public companies that — at the end of the day– help the recording industry and musicians more than they hurt.

And Spotify — which sports a far larger private valuation than Pandora has on the public markets right now– hopes to have an easier time pleasing Wall Street.

But, while I’d heard the story about Ek and his partner putting in their own capital, I was never quite sure how he made the money to put into Spotify.

The story– as told to me in an on stage interview in 2013– was even stranger than I could have imagined.

Sarah Lacy: You and I both had this visceral memory of first seeing Napster.

I grew up in Memphis, Tennessee, which was not a particular tech hotbed. I vividly remember that week, I was super‑young in my career, and boyfriend and I both took off work. The injunction was coming down, and we had 12 hours to get as much music off of a shitty connection as we possibly could. It was like a gold rush. It reminds me of rioting footage, where you just see people like, “Oh, shit. The cops are coming. Let’s grab as many TVs as possible.”

I think that was probably one of the things that made me really pay attention to the Internet in a different way. So many entrepreneurs my age, like Napster ‑‑ not necessarily Netscape, but Napster ‑‑ was that seminal moment.

It was the moment when computers weren’t about academics. It was about pop culture. That was the moment when computers and Internet became our generation’s Rolling Stone, MTV. I’m curious how you first came across it, what you first downloaded, what that whole experience was like for you?

Daniel Ek: For me, I grew up with a single mom who was working in a childcare center, so we didn’t have a lot of money. I don’t even remember how I first discovered Napster. What I do remember, however, is I was actually not one of those people with a shitty connection.

The amazing thing with Sweden is we got fixed broadband, like 10 megabits, I think, in 1998. I’ve had it for years, or even more than a decade now. What was amazing about it is all of a sudden, you have this experience where you could search for any song in the world, and it got it.

Then, if the person had a fast connection, I browsed all the other stuff that that person had, which became like a filter for more things that I wanted to check out. I didn’t trust what my parents said about what was great music, or what other people that were adults thought about music. Weirdly enough, I trusted these total random strangers who had this one song that I was looking for. If they had a fast enough connection, I trusted that there was all this other great music that they also had. I had just ended up listening to all these amazing, amazing artists.

Weirdly enough, a lot of it is really old school stuff, like Led Zeppelin, the Beatles. I had my music education through Napster. I think that really shaped what kind of music I’m into at the moment as well, more so than anything else.

If you think about it today, people listen to more music now than ever before, and by a bigger diversity of artists. If we go back in time to the ’70s or the ’80s, we identified ourselves with a certain music taste.

Post‑Napster, we don’t. People aren’t just into hip‑hop. People aren’t just into rock music. The truth is, we’re probably into a bit of everything. I really think that Napster cemented that thing. Over long periods of time, that’s what got me into Spotify.

I do think that that’s something that inherently good for culture, and therefore, inherently good for people.

SL: Why do you think it’s so inherently good for culture?

DE: First and foremost, I’m one of those who believe music is something that really does good for people in general. If you start thinking about it, like if we’re sad, we often listen to a song. I, at least, feel a lot better after hearing it, or maybe even worse.

SL: Sometimes you want to wallow. Sometimes you just want to feel awful.

DE: Yeah, or if I’m pissed off at a label, or at someone, I listen to Rage Against the Machine, and all of a sudden, it’s like, “Yeah.”

SL: You obviously had this passion, Napster being this seminal thing for you. But you haven’t taken this attitude of, “Fuck you, labels.” that Napster did.

You’ve taken this at least outward‑facing attitude of, “We want to save the labels.” Clearly, music is important for culture. Back in the Napster days, did you think what you were doing was wrong?

DE: No. I didn’t understand it. In all honesty, I didn’t even understand it was illegal, because there wasn’t that kind of debate. I assumed at some point that the artist would get paid for what I did, so I thought it was fine. I also think, and over time what I’ve realized, convenience quite often wins.

It’s really the only point in time when the stolen product has been much, much, much better than the one you legally acquire. For me, it was a pretty big given why we ended up where we ended up in the music industry. That was the thing that we were trying to tackle with Spotify to even out the odds.

SL: In between that love affair with Napster and Spotify you worked on some other companies. I know that you and your partner put a lot of your own money into Spotify. How did you make the money to put into Spotify?

DE: The story is this. I started when I was 14 just by pure accident. By the time I was 14 I was a pretty skilled C++ programmer, I thought myself at least. Then I had learned myself HTML CGI programming, which was really big at the day. Local people asked me if I could help them do their home page. This was the big buzzword at the day. Everyone needed a home page.

In Sweden, at least, most of the firms that were doing it charged you like $50,000 to create a simple two‑page home page. I said, “Well, I’ll do it for 100 bucks,” just to see if I can get it. The person said, “Yeah, sure.” That was great. OK, I made the home page.

The next time the person came back or someone else came back and said, “Can you create a home page,” I said, “Yeah, sure, 200 bucks.” The person said yes. It kept evolving up until I was charging five grand per home page. At that point, I had so many people knocking at my door wanting me to create home page, and I was still in elementary school…

SL: So they’d be like, “Is Daniel home?”

DE: Sort of like that. My parents didn’t know who was calling. I even snuck out and bought a cell phone. I had like a secret business number that people could reach me on. I went to school, and I taught myself Photoshop because I figured, “It can’t be that hard to be a designer.”

What I realized was I’m not that good at design, but maybe I can teach people how to do Photoshop because it’s a tool. I taught the people in my elementary school that were really good at drawing and stuff. I taught them how to do this.

SL: Why did they go along with this at 14?

DE: I bribed them to. It was the simple way. It was actually funny, because what I realized was stuff was more valuable than cash. When you’re 14, you realize money is good but more effective is actually giving them stuff.

SL: Like what, leather jackets?

DE: iPods, cell phones, and things like that. Games were huge. “If you create this really fast, I’ll give you a PlayStation that you can play around with.” I often gave them my own stuff.

SL: I am picturing a 13‑year‑old Daniel Ek ‑‑ by the way, you’re still bald in this mental image ‑‑ going on the playground and opening a trench coat with games and cell phones and saying, “Want to learn Photoshop?”

DE: Yes, now you know my game. I was giving them some stuff. figured there has to be some correlation of people who were good at math and programming. I taught them how to program. I could even use the school’s equipment to do all this on. Basically, after school, I told my teachers I was educating others, but I was actually doing my own sort of child labor factory at the time.

SL: I think this would be illegal in the US.

DE: Probably. It probably was illegal in Sweden too. At some point, I was almost making $50,000 a month, not really knowing what I was going to do with all my money.

SL: When did your parents find out you were doing this?

DE: It took them a while. They started asking once the huge TVs started entering the house and all the video games. I started buying really expensive guitars and things like that. I don’t think there was many 13‑year‑olds that had a 1957 Fender Stratocaster in original condition and things like that, but I did.

SL: I want to hear that story. Were your parents like: “We need to sit down. Are you dealing drugs?” And you were like: “No, I just have an illegal ring of children building websites.”

DE: Exactly. They were getting a bit like, “I don’t really know what’s going on here,” so they started calling up all the teachers and saying, “What is he actually up to? What is he doing?” The teachers thought I was teaching people Photoshop and HTML, so they were like, “He’s educating all these other kids.” They really thought I was a responsible…

SL: A humanitarian.

DE: …yeah, a humanitarian. In Sweden, you have carpentry classes and things like that because you want to be well‑versed in everything. I bribed someone to do my carpentry classes and get all my work done. I bribed another guy to do all my exams when it came to Swedish classes.

SL: Basically everyone in the seventh grade was a varying level of your assistant.

DE: I quite quickly figured out the way of getting people to be incentivized.

SL: Something that would be harder with the labels, but we’ll get to that later.

DE: We’ll get to that later. I got to that position.

So, my parents called the teachers, and the teachers were like, “No, no, no, he’s a great. Straight‑A student.”

What they didn’t realize was I probably wouldn’t have been a straight‑A student, but I picked the right people carefully to do my homework and told them to make it seem like I did it, which worked pretty well. Once you’ve bought all the stuff, I started thinking about what else to do.

I started buying servers, because I figured that was kind of interesting and it would be fun to play around with a bunch of infrastructure as well.

SL: Was that because you wanted to just do bigger things?

DE: No, not really. I just thought it was cool to have a bunch of servers.

SL: Everyone does.

DE: It started by me having them in my wardrobe for the first part. It works really well, by the way, if you want to dry your clothes. If you have a couple of servers and hang in some wet clothes, it dries up in about 30 minutes. It’s pretty good.

I was building all these companies. We’re now past the year 2000. I built like an SEO‑SEM business because I learned from search that the way to make money was getting high up in search engines.

I’m probably 18 or 19 by now. I was still into search, so I wanted to create some sort of search. I was pretty much copying what Google was trying to do because I thought it was cool.

I built all these things and then one day I got a letter from the Swedish version of IRS, tax man, saying that I owe them a couple of hundred grand worth of taxes. I had no idea that I did, and I didn’t know how to pay for that. I actually thought I would go in personal bankruptcy.

SL: You were spending as much money as you were making? You weren’t socking money away?

DE: No, not at all. I was 19, 20, 21, and enjoying life. I also bought servers and hired programmers. I didn’t know what to do with them, but I figured we could have fun, interesting projects. I had probably 25, 30 employees doing projects that I thought were interesting.

SL: I assume you were out of your bedroom in your parents’ house by this point.

DE: Yeah. I got them to move, actually, so I could keep my…

SL: You took over the house.

DE: Yeah, I took over the house. I was running things there.

What I realized was I was almost going in personal bankruptcy. It was pretty tough. It was actually mostly tough, because I realized that I was going to have to lay people off.

I was thinking not so much about the fact that I didn’t know how to support myself, because my philosophy was I can always take a job, but it was painful that all these people might lose their livelihood. I was depressed there for a while, but in a series of luck, things changed in 2005.

I think the defining moment in Europe was when Skype sold to eBay. What happened was the market just opened up. Within really just six months, I sold four companies. I went from having virtually no money at all, not even knowing how I would support my own livelihood, to selling all the companies.

SL: How did that happen?

DE: I think it was the time when the market opened. People started looking much more, “We should acquire companies too because that’s what eBay did.” Within a couple of months really, I was going from personal bankruptcy to having a few million dollars in the bank. That was “fuck‑off” money for me. I was hoping I was going to reach that line of having a few million dollars in the bank when I was 30, but I reached it when I was 22. That was weird.

What then happened is I got really depressed. I was out partying for a while, trying to meet women.

I was not that successful, by the way. I thought everything would be much better with money, but it turns out that it gets you in the club but it doesn’t help you that much further. You still have to actually talk to someone. In the end, that was really disappointing.

I didn’t have much game. I’ll tell you that. The things that I thought I wanted, if you’re a geek growing up, all I wanted was really to be accepted and really to belong. What I realized was none of that money mattered.

It didn’t make me happier. In fact, it was kind of sad to think that the thing that I had strived for didn’t actually mean anything in the end. I started thinking about what truly mattered to me, and I realized that there were two things in my life that had always been really impressive, which were music and technology.

I started saying, “If I was going to spend five years of my life on just one thing, what would that be? What kind of environment would I want to create in order to do that?”

I came up basically with the fact that I wanted to have an environment where I could have fun. It shouldn’t feel like it was work. It should feel like it was fun. I wanted to have an environment where you could learn from other people. I wanted to have an environment where, even if it was a small way, that the problem was big enough that you had the potential impact of changing the entire world.

That’s what I set up. I said, “OK, that’s what it requires for me to focus five years of my life.” Then the fact that it was going to be music was obvious both for me and my cofounder. At the time, he had a company called Tradedoubler which had IPO‑ed by that time and just a couple of months before got a bid from AOL for, I think, $1.2 billion or something. It was a pretty big‑sized company.

We said, “Look, this is what we want to do,” and took our own money. No one wanted to bet on a music company. We knew that we had to bootstrap the company with our own money, and we ended up doing that for close to almost two and a half years before we could actually launch the service.

SL: That two and a half years, was that largely spent trying to get your first European deals?

DE: Yeah.

SL: Unlike Napster and frankly unlike a lot of the companies that we see coming out of the Valley waving the disruption flag, your tactic wasn’t, “I’m going to change the laws by breaking all of them. I’m going to break this industry and bring it to its knees until they need me.” It was you wanted to work within it, right?

DE: Yeah. The way I looked at it was the problem that we had before was exactly that we tried to disrupt it without the industry’s participation. I wanted to do something where in the end the artists, the labels, and everyone in the ecosystem was a part of the development.

I didn’t know much about licensing, but I thought that can’t be too hard because there are all these illegal options out there. Surely they must be ready to embrace a legal option. It turned out that they were, but it took two and a half years to get them to that point.

SL: People in the Valley always struggle with that same issue. Mark Pincus talked about the same thing with Tribe where he thought, “The newspapers have no other choice but to embrace us!”

Sean Parker said their view with Napster was they’ll go them and say, “Look what we have. If you close us down, it will shatter into a million little pieces and they’ll have to come up with a legal solution.”

Over and over again, people seem to make the assumption that these people are going to be logical. What was the range of attitudes you heard from the labels towards this, and how did you get some of them over that hump?

DE: The problem is they’ve heard too many sunshine stories in the past of, “Look, we’re going to disrupt your entire industry, and you’re going to be in a much better place,” but no one has been able to tell them what that better place means. Does that mean that the industry is going to grow? How would it grow? What are the steps there?

There’s been a healthy amount of skepticism from any content company. They want to dip their toe in the water and then start moving more and more stuff over there rather than the approach of just jumping.

It was incredibly frustrating because, as an end‑user, you see it so clearly. Of course it should work this way.

The music industry is a funny place.I don’t know a single space that have had so many talented entrepreneurs give a go at it.

You’ve had obviously Sean Parker and Shawn Fanning doing Napster. You’ve had Niklas Zennstrom and Janus Friis who then went on to do Skype and did Kazaa. You’ve had Mark Zuckerberg. Most people don’t know that at the early days of Facebook, what Mark really did. It wasn’t a sure bet that he was going to do the Facebook. He also wanted to do Wirehog, which was this file sharing service for music.

There’s been a lot of really, really talented entrepreneurs. The iMeem guys, the MySpace guys. There’s been a whole ton of them who tried to do music.

I think the problem is over time, the technology entrepreneurs that have tried to do it have been a bit too disruptive. One has to show them the path to get there, more than [just saying], “OK, it’s this way.”

They’re not going to bet their lives on that. The artists aren’t going to bet their lives on that either if you can’t show them the path to get there.

SL: As you’re describing this, I’m thinking about how entrepreneurs raise money. It’s always this thing of like, “OK, just go build something. You’ll figure it out later. Go build something. You’ll figure it out later.” I feel like that was a lot of these guys’ pitch to the labels.

“We’ve just got to give it all away, and then we’ll figure it out.” It’s that Silicon Valley mentality. Part of it is because no one exactly knows. It’s a very hard thing to track how discovery leads to sales. How were you able to build out this argument before the company was even launched?

DE: It was incredibly tough, and that’s why it eventually took two and a half years to convince people to do it. In the end there were a healthy number of arguments that I think certain people bought.

There’s something that we did that I don’t think many people know, which is that we actually took a good bunch of our own money in the end, and said, “Oh well, we believe in this so much that we’re going to put our own money in there.” If you yourself are putting your money in, your balls on the table kind of thing.

Every argument that they had, we countered with, “Well, what if we do this?” Eventually we gave them enough reasons, and they stopped having any counter arguments, because we simply just took care of it argument by argument.

SL: Why did they keep meeting with you?

DE: That’s a really good question. I learned something in one of the prior businesses that I was working on: I was literally sleeping outside an office for about two months in order to get the meeting that I wanted.

SL: Like in a van?

DE: No, like literally sleeping outside of the office.

SL: Like a homeless person?

DE: Yeah, like a homeless person. I just believe that you win a lot by being super passionate and have a lot of persistence. I always ended the conversation, we could have been screaming at each other, and I always said, “So are we meeting next week again?”

There’s something disarming about that whole approach. I was just always there.

SL: You must have been so annoying.

DE: Oh yeah, I was really annoying.

SL: I bet you would call and the receptionist would be like, “It’s that Ek guy again.”

DE: Yep, that was me. Look, when the person refused to meet me, I just went and met someone else. I usually joke and say, “Look, I met everyone from the janitor to the CEO,” but it’s probably true.

SL: Two and a half years, you finally get the deals. Do you think had you launched in the United States, you ever would have gotten that far? Were the European rights easier to get as an experiment?

DE: Yeah. A lot of our success came from the fact that we started in Europe. Most of the media companies are really driven out of the US, which means that there’s a lot more attention to the homegrown markets. It also means, if you’re working in media, that the check sizes you have to write is a lot bigger.

Starting it out in Sweden, no one really cared about that market. It was seen as a Mickey Mouse market. “There’s huge piracy. Who cares what happens there. These guys can try it out and see what happens.” We started there and expanded from there up until the point where we convinced them that going to the States was a good thing.

That took another two years.

We were naive. We actually figured that like, “OK, it took us two years to get the licenses so surely it can’t take that long to get them as an extension for the US,” especially as we were willing to pay a lot of money to get there too.

We actually were super close for a number of different times. If you want to do a deal with a major label, it’s probably around 10 people who do the deals in total. There aren’t a whole lot of people. You’re really dealing with the same people.

We, obviously, knew the people we were dealing with at the time. I think that was part of the reason why I also was naive. I figured if I convinced them once, surely it can’t be that hard convincing them for another market.

Somewhere along that line we went from being under the radar and just another deal to being the thing that everyone talked about. The perception changed. During the first deals, we were just one out of many, many other companies that they did deals with, then we became one of the deals that attracted the most attention.

We went in with a model of saying, “Hey, we think you’re going to give away your music for free, and then we’re going to convert them later on.” I think that had a huge amount of impact on some pretty big partners of the labels like Apple, like Google, like Amazon and many, many others.

The decision process wasn’t anymore just a budget decision. It was a political decision, and it was a decision about, “Are we comfortable letting these guys in? What happens to our iTunes business? What happens to our CD business? Maybe we’ll have a deal with one of the carriers. Are they going to be willing to do a deal if we let Spotify in.” It became a lot more complicated. For a number of times, we got it up until last signature, and then it fell through.

When it comes to digital music, eventually, you have to lead by your conviction of the product. What ended up happening with a lot of these Valley companies is, ultimately, either they compromised on economic terms, which meant that they eventually had to compromise all the product, or they straightaway compromised on the product, and thereby didn’t fully do the product they wanted to do.

In our case, we just refused to do that, because there was no point in doing something that we didn’t believe in, and that also meant that it took us 2.5 years to launch. It took us another two years to reach the US.

It wouldn’t have been that hard to launch in the US, if all we wanted to do was a subscription service or all we wanted to do was another download service. We wanted to launch a product that the user felt was free, that meant that they could share tracks with their friends, that meant that they could try out the full experience before they decided to later convert.

That’s the real reason why it took so much time, because we could have done something a lot simpler.

We’ve said to everyone [who invested in us], “This is a company that’s either going to fly or it’s going to crash and burn. It’s not going to be an OK one.” Funnily enough, when it comes to VCs, they kind of like those businesses more than they like the middle ones. I think if you’re clear about that, there’s a greater chance that you’ll either get funded or that they will shy away. The ones that shy away, you’ll know already from the start.

SL: We talked a good deal about the difference between Spotify and Napster, in terms of approach. I’m interested in talk about the difference between you and Sean Parker, one of Napster’s founders and your investors. You guys have, obviously, been sort of cosmically linked between these companies. I’m sure it was somewhat surreal when he contacted you about investing. First of all, tell us about that.

DE: By now, I think the email he sent me is fairly public. You can probably Google it. It somehow ended up on Forbes home page, I think.

What was interesting about it is that you had a person who I greatly admired for what he built, and probably who spent more time than me even contemplating and thinking about how digital music was supposed to be consumed. I got this really, really long email, and I read it. I didn’t agree with all the comments, so I wrote back a fairly lengthy response, and I got a 12-page response back.

I was like, “Holy, shit. I’m not a big emailer.” It turned out that I was in New York just a week after. Sean was here, too, and we ended up meeting up. It’s one of those surreal things, where you just know when you meet someone that this is a person who’s been thinking exactly the same thing as you, who’s been spending so much time thinking and pondering about this idea.

Anyone that has met Sean knows that when he gets in the zone, it could be an hour, or it could be 36 hours later. You just don’t know.

We were sitting there, and I was expecting 30 minutes, because that was what his assistant told me at the time. We ended up sitting for six hours, and there were people sitting outside and waiting on him and things like that, but he just ended up in the zone.

I remember leaving exhausted, but also really inspired. He has something that’s really different in how he approaches ideas and how he thinks about it. And he thinks much bigger than most people. For me, coming from Sweden, it was probably one of the first times I’d ever met a person with that kind of mindset.

You always leave thinking about the world in a slightly different way after you’ve met him.

At the same time, he’s also very erratic. Meaning if you say that you’re going to meet at 12:00, you might end up meeting at 2:00 AM in the morning instead. You just never know. You might end up leaving 6:00 AM in the morning, despite thinking that you were going to meet at noon. That obviously rubs people the wrong way.

SL: That’s difficult in a board member or an investor.

DE: Oh, yeah. He’s also really hard to reach, which means that it also can be super frustrating, because people assume that he’s not reliable, just by virtue of not conforming to things such as keeping deadlines, or showing up on time, like most normal people do.

It can literally be a 12 hour window. I’ve actually tried to figure out whether there’s a certain just offset on his clock.

SL: The Sean Parker time zone?

DE: Exactly, whether he’s just always on a certain time zone. It turns out that’s not the case, either. I figured for a while that he was always up at 5:00 AM. I figured, “OK, well, 5:00 AM Eastern time. OK, I’m going to remember that.”

It turns out that he’s up 5:00 AM London time, as well as 5:00 AM Australian time. It’s just something that’s always a bit off. I still haven’t figured out what the time zone is. I think that can be really off‑putting.

He’s also extremely direct in conversations. We have arguments about things, and people think that we hate each other, or that we fight just because we’re arguing about a nuance in a product, or that this thing should be that way, or not that way.

What he’s really trying to do is he’s trying to get you to think differently. I think, again, the strength that he has is he’s truly a brilliant guy.

If you’re an operator of a company, and people depend on you, and the input you have, you can’t show up 12 hours late. It doesn’t function if you’re also going to act as a role model.

SL: He’s a great spotter of talent.

DE: I think you’re right. I just think there’s something unique about Sean. He’s just really good at spotting founders.

SL: Last thing, you guys are in this interesting business where it’s like you work for four and a half years to finally get to launch in the US. You’re not done with the labels. These things expire. You have to continually re‑up them. You have to continually renegotiate them.

Pandora still struggles with this, and they’re one of the only ones that’s made it out to the public markets. Do you find yourself in a situation where you’re somewhere in the middle of being the labels’ perhaps best hope but also the labels’ bitch for the rest of your career?

DE: No, that’s not the case. We just fundamentally don’t look at it like that. We fundamentally believe that one of our skill sets that we have is being able to understand the content and being able to understand their perspective. We didn’t have it when we started, but I think we built that. I think we built those types of relationships.

While it’s been frustrating getting to that point, I understand their perspective and view, and I think they respect and understand our point of view too. Most technology companies have very agitated relationships to content companies, but I don’t think we have that. That’s one of the core strengths of Spotify.

It’s not about that we need to pay them more per user. It’s really about the perspective that the record industry over the last decade have gone from a $45 billion industry to less than $15 billion. That means that they really want to find the growth drivers again for their business.

The most important thing we can do to get them to support us even more is by providing them with another path and to show them that the evolution of the Internet ‑‑ and they’re getting it ‑‑ but the evolution of the Internet isn’t just going to marginalize or stabilize their business but it’s actually going to long‑term grow their business as well.

I believe that because there are a half a billion people that currently listen to music online right now. The vast, vast, vast majority, don’t pay for it.

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