The Spotify Story

I Heart Media, is a competitor to Spotify. But don't worry. I'm going to cover this topic just like I would any other, as objective as possible, and maybe with some bad jokes and puns. And I think this will also help lead into a discussion about the way consumer media has changed significantly over the last couple of decades. That might actually be a second episode that I'll focus on a little bit later. The story of Spotify is tied very close with its founders, uh mainly Daniel Eck but

also Martin Lawrenson. Those are two Swedish businessmen who set out to change how people access music, and while the service would launch in two thousand eight, the real story begins much earlier with Daniel Eck and initially in two

thousand two, but we're going to go even earlier than that. See, Daniel K was an enterprising kid, like super enterprising, and an interview and the event that was called a Pando Monthly in New York City back in two thousand twelve, he talked about how as a young teen and I'm talking about thirteen years old, fourteen years old, he started making money by creating websites for local businesses in Sweden.

He was interested in coding and he was getting into it and he started getting hired to make websites for for companies. And we're not talking about small amount of money. I mean his first job was about a hundred dollars, and then he went up to about two hundred dollars and it started going up from there. And according to K, at one point he was pulling down about fifty grand a month doing business. So imagine that being in high school and your side gig is pulling you down fifty

thousand dollars a month. Yikes. That was going pretty well until the Swedish tax Authority notified X that he owed the government a substantial amount of money to the tune of a couple hundred grand. X early fortune was pretty much wiped out, and he learned a valuable lesson about running a business, which is that you can't do it on the q T forever. Around two thousand two, X started thinking about the problem with digital music and piracy,

and it was definitely a big problem. Services like Napster, new Tela, and kaza had been home to huge databases of pirated music since the late nineteen nineties, or had facilitated music piracy since the ninet Since not all of them were really databases, they were more like peer to peer networks. More on that in a little bit. So governments around the world were responding by creating some pretty

draconian laws in an effort to curb online piracy. The governments were largely responding to big media companies that were putting a lot of pressure on elected officials to fix this problem. Everyone could see that the Internet was going to be an important component in all sorts of industries. Apple had already staked its own claim with iTunes in two thousand one, but there was a real concern that

piracy essentially translated into lost sales. Now to that point, I want to acknowledge that it's not as simple as that. If I walk into an old fashioned record store and I shoplift an album, we're talking like old vinyl albums, and I grab a copy of uh, Phil Collins Greatest Hits because I'm real bad, and I slip it under my my jacket and I and I step out the door. That's a clear loss for the shop owner of that

music shop, right, because I've taken one physical album. The shop owner has a limited number of physical copies that they have ordered from the record label, so they've spent a certain amount of money to get a certain number of copies of each title. I just took one of those. They can no longer sell that particular album, so they are out the cost they incurred when they ordered it. That's pretty clear, right, you can understand that's a direct loss.

But with digital media it's different. Maybe I never intended to buy a certain song. Maybe I kind of want that song, but I don't want it badly enough to actually spend my money on it. So I decide I'm just gonna pirate a copy. The original song, however, still exists. The original copy of the song still exists. I didn't take anything physical. Nothing is stopping a vendor from selling just as many copies as they would have even if

I hadn't taken anything. So for that reason, you can't really argue that stolen's songs directly translate into lost revenue in the digital market, because it could be that the people who downloaded songs illegally otherwise would have just never bought the music at all, so they may have just gone without. It's not a loss sale because it was never going to be a sale in the first place. Now,

I don't want this to be one sided. While the people downloading music for free, we're circumventing the legal route, and they were effectively stealing music, whether you could argue that it was causing direct harm or not. The music industry wasn't exactly making a good case for purchasing music legally. The music landscape was fractured, with some record labels signing with certain online stores, other record labels would sign with

other stores. Sometimes it was very piecemeal, where certain albums would be allowed and others wouldn't. And then there was the matter of digital rights management or d r m uh. This is a way of protecting digital property. Many companies

have been putting restrictive DRM on music files. It's meant to prevent you from being able to make an infinite number of copies of a digital file, because obviously that's a downside to the digital format, at least if you are in the business of selling stuff, Right, if the thing you create it can be replicated infinitely by anyone, then all you have to do is sell one of those, and then immediately you never sell another copy because people

just start copying them and then distributing them everywhere. So DRM was meant to be a counter to that. You're to prevent people from being able to copy indiscriminately in some way or another. But one of the nasty side effects of DRM is that it can impact the experience of legitimate customers. Right, So the purpose of DRM is to protect digital media so that people can't just steal it.

But when that same DRM makes it harder to listen to legitimately purchased music, the people who are actually buying the stuff feel as though they've been punished for buying it. Right. If you if you bought a song and it turns out you can't listen to the song the way you want to, despite the fact that you've spent money on it. You're not, you don't have an incentive to keep doing that, right,

You're You're You've got a bad experience. Meanwhile, pirates would spend some time and effort in order to strip files from the DRM, or rather DRM from the files, so that the versions that they would upload or allow to be downloaded from their machines would be DRM free. So you would actually have a better experience listening to the pirated music than if you were to purchase the legal stuff.

So as a consumer, you had two choices. Essentially, you could jump through some hoops and deal with a crappy listening experience with official music that you pay for and it's got DRM and everything, so it's got all this baggage attached to it, or you could pop on over to a piracy site or service and then download whatever

you want for free. Now, there always was a risk that you could also end up downloading some malware on top of the music files or whatever where it was you were after, but for many it seemed like it was worth the risk. So the whole thing was kind of a mess, and X thought there had to be a better way. There had to be some method to making music available digitally. That would remove the hurdles that the public would have to jump over to get to

what they wanted. And if he could crack that, if he could build a real business out of it, then he could stand to really make some money. And he was thinking, there's gotta be a way to make the experience seamless enough where the legal route is preferable to piracy. That's the secret. If you can make it just as easy or easier to buy music as it would be to steal it, then more people are going to buy it. And the reasoning was that a lot of people want

to actually spend money supporting the stuff they love. They just if you make it frustrating, they'll go around that, because who wants to deal with that kind of nonsense. Now, this was back in two thousand two, but would still be a few years before he would develop the idea further. In the meantime, he worked for a couple of companies, and he founded some other companies, including an online advertising firm called Advertigo, which he would later sell for a

big profit. In fact, he ended up founding and selling four companies in a relatively short time. This was right after the wake of eBay purchasing Skype. It kind of opened up the mergers and acquisitions market in Europe at that time. And by then he was a millionaire, and he was considering retiring at the ripe old age of twenty three years old, but instead he thought about that music challenge again, also millionaire by twenty three. Way to go, dude, man,

that that's some hustle right there. So Eck found a partner in Martin Lawrence n He was actually the guy who had acquired ad Vertigo from Daniel Eck, and that was ex advertising plat Form. The two began to brainstorm about making a legal music service that removed some of the barriers that other official stores had kind of been putting up. The reason that those barriers encouraged people to resort to piracy, and the music industry as a whole was hurting as and so something had to be done.

But if you just made it easier to get that music you wanted legally, they figured people would do it, just like I was saying earlier. So they created an office out of a three bedroom apartment that was above a coffee shop, and they began to work on their design. Their plan was to leverage peer to peer networks to deliver streaming music. So what exactly is a peer to peer network and how does it work. Some of you might be familiar with peer to peer. It's something that

was really big in the nineties. It's still quite big today. It's just not talked about as much. A lot of the conversation is shifted to cloud computing, but peer to peer is still a very important methodology. So here's a quick rundown. First, You've got a network of computers all right there. They're connected, perhaps over the Internet, but it's a it's a network within the Internet, it's not the

entire Internet. So each of those computers could be owned by a regular person like yourself, and each computer in that network is what we would call a peer. Each computer on the network is running special software, which is what makes them peers. It connects them, it creates this network among all the peers on that particular connection, and peers can share files with one another without having to

go through an intermediary server. So if I'm on the network and you're on the network, we could share files directly with one another. And typically the way this would work is that you would designate a special folder on your computer's hard drive to act as a share folder, and anything you would put in that share folder could be seen and copied by peers on the network, and the more peers who have copies of a file, the

faster downloads go. As your computer can pull from the best connection available across the network, you can get bits and pieces from different computers and just download a file much faster than if it were dependent upon a single source. So the more computers on a peer to peer network that are hosting a file, the faster those transfers will go. Now, there's nothing illegal about this method of file transfer. It's a great way to disseminate large files across a network.

It's efficient, and it removes the need for more hefty network servers. But it also allowed for people to share stuff illegally at a pretty alarming rate, at least alarming to media companies, and so selling the idea of a legal peer to peer network was a bit of an uphill battle. However, the actual implementation of a peer to peer network using Spotify service was a lot different from

the napsters and kazas of the piracy era. The plan wasn't to allow users to build up an enormous library of songs in their personal computers, which they then could help distribute across an ever widening network and thus sap the music industry of its revenue. Instead, the plan was to use peer to peer relationships to create a good

listening experience for users to sidestep another problem. That problem was if you wanted to create a centralized music on demand service, you'd be beholden to the Internet connections between your server, your giant music database, and all of your users. Now this wasn't as huge a problem in Sweden, which was a leading and still is a leading country when it comes to rolling out high speed broadband internet, but

it would make it difficult to scale Spotify globally. So let's say that you did go with this method, where you went with a centralized approach. You have your big music database that's sitting in a data center somewhere on your property. If a connection were bad between a user and this database, the user might have to wait for a long time for a song to buffer far enough along to start playing. That's irritating, or worse, the song's quality might suffer in the middle of the song, or

it might stop playing. That you know it might midplay through while the service tried to get the data from the server side to the user's device and restart the song. The peer to peer approach could help that. Now explain how it works in just a moment, But let's get back to the business side for a second. They met with a lot of resistance from record labels because they were going to have to get licensing agreements from those record labels in order to do this. But their arguments

were persuasive. It took a long time, but they were making some pretty sound arguments. They laid out the challenges that I mentioned earlier with the older model of music. They stayed in their case in terms of business plans, and they said, are the licensing fees and royalties would provide steady revenue to the record labels and presumably too artists more than that in a second, But it was

challenging to get the record labels to agree. It was also challenging to get investors on board because without the backing of the music industry, there was no business for Spotify. They had nothing to provide anybody, and many investors saw the idea as a bad bet, So Lawrenson would end up funding operations for a couple of years, just out

of out of pocket. Now, gradually record labels began to come around, and they sort of had to because the music industry revenues had peaked in nineteen ninety nine at twenty seven billion dollars. That's a lot of cheddar, as Ben Bolan would say, but that was the peak. It went to decline after that, sales started flagging. This wasn't just due to piracy, although to hear the music industry, they would argue vehemently that piracy was what took the

largest chunk out of their, uh, their revenue. I would say that there were a lot of different factors. But by a decade later, in two thousand and eight, the global industry was down to fourteen billion dollars. That's still a lot of money, but that's like half of what it was in nine and so it took Spotify about

two years from conception to launch. It was thought of in two thousand two, it was seriously started in two thousand six, and it was launched in two thousand eight, in October two thousand eight, uh and launched in just a few European countries at the time. It did get the backing of the four major music labels. That would be Warner Music, Sony, E and My Music and Universal. Now, when we come back, I'll talk more about how the service works and how it's evolved since two thousand and eight.

But first let's take a quick break. Okay, so let's talk about the Spotify service. To access Spotify, you first need to download the client software for whatever platforms you plan to use. Now, originally this was limited to desktop computers, so your first step was downloading some software to your machine and installing it. This would act as your interface, allowing you to search for songs on the service, but it also served as the peer to peer software to

make your machine part of the overall sharing network. This client can pull music stored on your computer into your Spotify library, assuming the music you have isn't stored in a protected M four P file. That's actually a little bit redundant because in four P stands were IMPEG four protected audio. Uh. This was a file extension that Apple's

fair Play digital rights management system used. The format restricted the devices that could play the associated audio file and limited to authorized devices only, So if an device was authorized to play the file, it could otherwise it could not. Spotify just to sidestep any problems, said we can't handle any of those types of files. However, if you did happen to have songs in that format, Spotify would look to see if it had a license for those tracks

on its service. So if you happen to have a track of an artist that was on Spotify, and that song was on Spotify, it would match the track with what was in your library and just go ahead and put that in your playlist. It's just you wouldn't be listening to the version that was on your computer. You would actually be listening to one that was on the Spotify service itself, and it would be a a non

uh M four P DRM version. All other songs, whether in Spotify's licensing agreements or not, would appear in your library, assuming you have DRM free versions on your computer. So even if you had a whole mess of songs in your computer's memory, if it was in its hard drive

that were not on Spotify. Let's say that you had all the Beatles albums, and Beatles was one of those groups that wasn't being carried by Spotify, it would show up in your library because you had them on your hard drive, but no one else would be able to listen to those using Spotify, you know, pulling it over the network. The format Spotify uses when streaming music is the Vorbis method of audio compression. Vorbis is an open source software project, and it uses the file extension dot

o g g or og for compressed audio files. So you often hear people talk about as Aga Vorbis, which sounds like a character from Game of Thrones. Now, actually it does trace its name to a fantasy series, but one that's a little more lighthearted than George R. R. Martin's epic Saga because the name Vorbius comes from Terry Pratchett's fantasy comedy series Discworld, a fantastic comedy fantasy series. If you've never read any of the Discworld books, I

highly recommend checking them out. But this name was specifically from the book Small Gods. Aug is also a name that shows up in Terry Pratchett's works, but that was just a coincidence. The uh the Age extension was not named after the Terry Pratchett character uh Nanny Ogg in the Discworld books. I've talked about audio compression before, but

here's a quick reminder. The purpose for compression is that audio files tend to be pretty large, and the larger the file size, the more time it takes to send over a network, and that time is experienced by the user as a lag between hitting the play button and hearing any sound, or in the form of having a song stop part way through while the data transfer continues in the background, or having the quality of the sound

drop in the middle of play through. So compression means you take these files and you make the file size is smaller and thus easier to transfer across a network. And there are two broadways to do this. There's lossless and lossy. Now, lossless compression means that you take a file, you squish it down, you compress it, and when you un squash it when you when you expand it back, you have the bit for bit identical file as the

pre compressed version. So you have song file A, you compress it into compressed format B, and when you take it back out of compression is back to song file A. Again, this is not easy to do, and typically you only reduce the file size by a relatively small amount. Some files can only be compressed down maybe five cent, which does not save you a whole lot of space, and you might be able to get down as much as

fifty with certain types of lossless compression. But if you're really looking at a high quality audio file and it's a large audio file, even the reduction is still still means you're dealing with a big file. It still might be too big for you to easily stream. Lossy compression can squish files down much smaller than lossless, but they do so at drumroll please a loss. Lossy compression ditches some of the data in the audio file during the

compression process. Now, ideally, the information the compression format ditches represents stuff that you wouldn't be able to notice anyway, because human hearing can only pick up a range of frequencies, and typically we describe it as the average human can hear between twenty hurts to twenty kill a hurts. Anything that is above or below that range is outside what

we could directly perceive. So if the audio file has any information about sounds beyond human hearing, then it might just sweep that stuff under the digital rug before compressing the rest. It might say, well, no one could hear this anyway, so there's no point in keeping it, and I'm just gonna not include that information. There are a lot of different rules for compression and different codex to follow different philosophies, but they're all based on the psychoacoustic

model of how we perceive sound. So if it determines that we would not have perceived that sound, it can go out out the door at the end of the day. If it's important, it's supposed to go into the compressed file, and if it's not, it doesn't. The question is who determines what exactly is important. That's what the different codex do. Moving on, so, Spotify chose the ag vorbis format because

it represented a great return on investments. Plus, being open source and in the public domain meant that the company could use the format without worrying about licensing issues, so there was no fear that one day they would turn around and encounter resistance from some vendor that had them over a barrel by holding onto a compression license in return for more money. That no one's gonna say to them, oh, well, I see that you're doing really well now, so we

want a bigger cut of the profits. Also, according to Kevin Goldsmith, who was the vice president of engineering at Spotify for several years. The ag vorbis format provided good audio quality relative to the bandwidth needed to stream the audio, so they just felt like they were getting the best results with it. The standard audio quality for Spotify's desktop

app is one sixty kilobits per second. Now, technically that refers to the audio files bit rate, or the number of bits used per unit of playback time to represent audio. Generally speaking, the higher that number, the better quality of audio you get. Essentially, you're saying you're using more information to to present that sound per unit of time. One sixty kill a bits per second is kind of in

the middle of audio quality for streaming. If you were to upgrade to premium Spotify UH and more on that later, the bit rate would be increased to three killabits per second,

so you would have higher quality audio files. The actual quality of the audio you would experience would be dependent not just on bit rate, but other stuff, sample rate and all that good stuff, plus the quality of the speakers you're using, So in some cases you might not really be able to tell the difference between hundred sixty

killabits per second and three killabits per second. If you had really low quality headphones, for example, you might listen to the exact same track and not be able to tell the difference between the good version and the bad version quote unquote, or the good version and the better version if you prefer, uh, if your headphones are are crappy. So it's dependent on lots of different things. Plus it's dependent upon our perception, which is not reliable all the time.

All right. While Spotify relied on DRM free Music to pull into the music library, the format Spotify uses to stream includes DRM, so that's also something to remember. In addition to the songs that you've already got stored on your device, you can search the Spotify service for specific tracks. So these would be things that you don't own that are on your hard drive, and Spotify has an agreement with whatever entity holds the right for that music, the

track should pop right up. So let's say you play on a track that you want to hear. You you have decided you want to hear S O B by Nathaniel Rateliff in the Night Sweats, which is a phenomenal song.

You don't have that song in your hard drive, though, so you open up Spotify and you type it in and you see that it's available there, Spotify serves up a streaming version of the song to you, and rather than serve it to you from a central server, it consults the network of Spotify users and it finds copies of the song on those peers, those users whose devices are currently connected to the network, and it sends the

file to you streaming. By relying on this network, this helps ensure that you get an uninterrupted experience played at a decent sound quality. And while you're listening to the music, Spotify is actually storing the song in a memory cash on your computer, and that serves two purposes. First, because Spotify is staying a little ahead of you in your listening experience, you're listening to music that's stored on your device's memory, not pouring directly in from the Spotify feed.

So as long as the data going into your memory is outpacing the playback speed, you won't have any interruptions. So, in other words, they're filling up the bucket faster than you can empty the bucket. But more importantly for Spotify operations, those songs that are stored in the cash memory of your device stay there so they can be used in

the peer to peer sharing. I was talking about So the next time someone else in the network wants to listen to S O B, Spotify might be in part relying on your computer because you happen to have listened to that song earlier, and it happens to be stored in your cash, so your device helps keep Spotify's service going. Sometimes the cash material might cause some other issues on

your device. If you've got an awful lot of stuff on there, maybe you don't have a lot of space on your device, and you might notice that things aren't running as smoothly as they normally do. So Spotify allows users to go into their settings and see where offline songs are stored. This would be the cash that they rely upon. You can then go to that folder and delete the files in that folder to clear out the cash. That's just for the desktop version. For iPhones, it's a

little bit more of a pain. Spotify advises iPhone users to reinstall the Spotify app. You know, essentially you're taking it off your phone and putting it back on again, which will clear out the apps cash, but it will also log you out of your account, so you have to log back in. You have to re sink any offline music you have stored on your phone with your account, you have to reactivate any preferred settings you might want on there, So that's kind of a hassle. On Android devices,

it's a little bit better. You can go into your library, mean you choose settings, select other in the options, and then delete cash and save data. It's not exactly straightforward, but it's perhaps a little bit better than having to reinstall the whole app. Now, I'm not surprised that it's a bit of a headache to clear out the cash because Spotify's operation depends upon this peer to peer infrastructure, and the songs in your cash are what help ensure

a smooth experience for people in the network. So your device is effectively working for Spotify, which is why they probably don't make it super easy for you to clear that cash. Your device is effectively working for Spotify. Now, I've got a lot more to say about Spotify, but before I get into that, let's take another quick break to thank our sponsor. Okay, So Spotify launches in two thousand eight in Europe and uses this peer to peer

technology to help deliver high speed streaming to users. The company had managed to make some deals with enough record labels to create a compelling but by no means universal music service, and it rolled out operations gradually, originally relying on an invitation only approach to adding listeners so as to guarantee a good experience and not get overwhelmed. Riyal the gate Plus they had two tiers of users. They

had free users and premium users. The free users were the only ones that had to be invitation only if you wanted to pay for the service. They as many people could join as possible for that. They didn't want to limit that at all. Understandably, that's not snark, that's just I mean, that's just makes sense. Uh. The invitation served another purpose because it also gave the service and air of exclusivity. Nothing makes people want to try something out more than being told there's a limit to the

number of users who will be accepted. And we saw the same thing when Google Plus launched. Each user would have five invites they could extend to other people, So finding someone on the service who hadn't already dedicated all five invites became a bit of a common pastime. You would look for your friends and say, hey, do any of you have an invite to Spotify? And like I said, the service did have two tiers. The free tier was

supported by advertising still is supported by advertising. Um it has had a limitation on the number of hours that users could stream music per month, and the service also placed limits on the number of times you could listen to any particular track over a given amount of time, and those were really Spotify is way of of bowing to the music and the street to get these negotiations

to work out. So if you listen to Spotify on the service, uh, you'd get a commercial between every few songs, and if you try to mute the audio on commercials, it would just pause the ad, so really you're just putting off the inevitable. The desktop application would likewise display ads over the user interface, so you could get both audio and visual ads to generate revenue for Spotify, and

occasionally video ads playing as well. In addition, Spotify introduced a premium tier, so for a monthly fee which has changed a few times over the years, but for a certain amount per month, you could get unlimited access to the music that was available over Spotify. There were no monthly restrictions on use. You weren't capped at a certain number of hours and you also had no ads with premium.

Premium users could also listen to Spotify offline. Obviously, that service would rely on the music stored on the device you're using, and you would get an unlimited number of skips of songs. If something was playing and you didn't care to listen to it, you could skip it, and then if you didn't like the next six songs, you could skip those as well, and you'd never run out of the skips. Oh and you would also get that higher bit rate for your audio files that kill abits

per second. That was another benefit for the premium use. Still is another benefit I keep saying was, but this is still a thing. The company posted a four point four million dollar loss in two thousand and eight, But then it's kind of hard to imagine a scenario where that wouldn't have happened. The company had to deal with startup costs, all those music licensing fees, had to pay

for operations, and had to pay out royalties. Spotify says they pay out seventy of their revenue and royalties to different music companies music labels, and it had only just gotten started. And it's also the sort of business that really generates serious revenue after its scales up. It actually is kind of a money losing venture on till it gets to a certain size, but turns out that the loss was just the first in a long series of annual losses. Spotify was starting to get investors, but it

wasn't turning a profit. In fact, it wouldn't officially turn a profitable quarter until February two thousand nineteen, so for more than a decade Spotify lost money, though in one quarter in two thousand eighteen, it appeared profitable, but that was because of a one time tax benefit that Spotify received due to its stake in another music streaming service called ten Cent Music Entertainment Group out of China. Now that story gets a bit weird and complex, but it

boils down to this. Ten Cent was going to hold an I p O in the United States. It was going to go public in the US, which meant as part of that process, it had to declare the company's value in an effort of going public. That also meant that Spotify had to re evaluate the value of its in sment Intencent. Because Spotify owned a percentage of stocks in the company, they had to reevaluate how much those stocks were actually worth instead of what was believed to

be worth. That then led to Spotify being eligible for a big tax benefit, and that technically put them in the black in two thousand and eighteen for one quarter. But that sort of thing is obviously not replicable. It's not sustainable. It's no way to run a business. You know, you can't count on that happening every quarter or so.

The transition to profitability in early two thousand nineteen is more of a good sign for the company, and it's also interesting because it's a company that's valued at billions of dollars despite having operated at a financial loss for nearly all of its existence. It's another way of reminding

me that business is crazy. That you can run a business that is losing money year after year after year, and yet the value of your company that is not making money is going up and up and up to a point where you know, eventually one of two things needs to happen. Either your company needs to start making money so that all of that investment in that company is justified, or everything falls apart and everybody loses their shirt and a lot of people are out of jobs.

I obviously prefer option A to option B. But it still blows my mind that companies like Spotify. Spotify is not alone in this Twitter is another great example. But companies like Spotify could operate for so long without making money and uh and yet still see the value of the company on the rise. It's crazy anyway. Jumping back

to two thousand nine for a second. In February two nine, Spotify drop the requirement for invitations and launched registrations in the UK, so if you wanted a free Spotify account, you could sign up. If you were in Europe and no specifically in the UK, you could sign up for a free account right off the bat. It also launched the Spotify Mobile service. It was pretty primitive in the early incarnation, but it did expand its offerings to mobile

phone users. I think this is a good time to mention it was sort of a serendipitous issue of timing for Spotify to launch in two thousand and eight because Apple had introduced the iPhone in two thousand seven, and Apple had effectively opened up the gates for an era of consumer smartphones, because up to that point, smartphones had largely been reserved for executives and for bleeding edge early adopters and no one else. The smartphone revolution really created

a market for services like Spotify. People like having a portable music source. But Spotify executives would even admit later on. Daniel Eck admitted later on that the company was a little late to create a truly robust mobile app, that they were a little late to the game on that one. They still managed to capitalize on it, but they probably

should have moved earlier than they did. However, even that early limited mobile service was a big hit, so much so that Spotify would actually close down those open registrations in the UK went back to the invitation only model back in September of two thousand nine, so users could opt for the premium service without the need for an invitation. Yet again and again, it makes sense Spotify wasn't going to say no, we're gonna limit the number of people

who want to give us money. Meanwhile, Spotify was dealing with some of the other issues that tech companies have had to face throughout their own histories, like data security being a big one. In March two thousand nine, Spotify representatives announced that the security team at the company had detected a security flaw in the Spotify service, which could have meant that someone had gained unauthorized access to private account information for people who had registered before December nineteen,

two thousand eight. Whether anyone had actually done that was unknown, but it was technically possible. Spotify patched that vulnerability. Also in two thousand nine, a guy named Mark Zuckerberg you've heard of it um, posted on a little platform that he had co founded called Facebook that he thought Spotify was quote so good end quote kind of like sweet Caroline, and that was an early hint of things to come

in the United States. Would take a couple of years to come to fruition, but Facebook and Spotify would be BFFs at that point. Spotify also introduced a music purchase option in some markets in two thousand nine, which meant users in those markets could buy music tracks right off Spotify and use Spotify like an online music store similar

to iTunes. That feature would stick around until early two thousand thirteen, and Spotify then discontinued it, but for a while that was another revenue source was acting as a

servant online retailer. In January, Spotify had another headache to deal with the anti virus software Semantic identified Spotify as a trojan horse form of malware, which seems pretty harsh to me, but you can kind of understand it because since it used this peer to peer relationship, it meant that there was a lot of stuff going on in the background and that could look suspicious to an anti virus software if they thought, oh, it looks like some

program is trying to gain administrative access or some sort of backdoor access to a computer. So it was proactively blocking Spotify from working. So users with semantic antivirus software found their Spotify programs were being nullified. So that was a big pain for a lot of people for at least a short while until it was all patched out. Two thousand eleven was when Spotify was finally able to enter the US market, So it launched in two thousand

and eight. People over here in the U S had heard about it, but no one was able to actually access it without using you know, VPNs or some other method to get around the that their computers were. In the US. It taken more time for the company to

negotiate with music labels. Um they had to you know, every time they want to move into a new market, they have to renegotiate with music labels because the music labels want to be able to dictate how their music is sold in any given market, and the US is a particularly big market, so it took a lot of negotiations. Spotify said it has paid billions of dollars in royalty fees over the years that there have been some other

stories that kind of raise questions about this. So, for example, one famous story that tends to get quoted all over the place, and I think it dates all the way back to two thousand nine, is that Lady Gaga's track poker Face had hit a few million streams early in Spotify's history, and yet generated only one hundred sixty seven dollars in revenues, hundred sixty seven thousand, just one sixty seven and a hundred bucks plus sixty seven more bucks,

and that's it. Spotify doesn't have a stock per play royalty rate, but I've seen estimates of per play a track earning point zero zero six dollars, so point six cents to point zero zero eight four dollars or point zero eight four or point eight four cents, I should say, so not even a full penny per play, So you got to rack up a lot of plays to earn a dollar, let alone a hundred sixty seven. Now, that has led some artists to complain about Spotify, saying that

this company is benefiting unfairly from the artist's work. And you can see where they're coming from. If they're saying, millions of people are listening to my music and I got a hundred bucks for it, that does seem to be pretty unfair. But then Spotify kept operating at a loss. The company itself wasn't making an enormous amount of money, and according to Spotify again, they were giving the vast majority of their revenues back as royalty payments to record labels.

So maybe you could argue the record labels had some responsibility for this, since they were so vehement in their negotiations with Spotify, But I think overall, it really just points out what a complicated industry, the entertainment industry is in general. So Spotify partnered with Facebook for the United States rollout, and US users could download Spotify on their computers and uh they could create an account using their

Facebook login information and automatically connect Spotify to Facebook. That helped drive adoption in the US. It also lead to some controversy. There was a two thousand eighteen piece in The New York Times, a report that found Facebook had some pretty liberal data sharing agreements with various partners, including Spotify, and that those agreements gave companies extensive access to user data and that included thing Spotify, Netflix, and the Royal

Bank of Canada the ability to read private messages between users. Yikes, So why would they do that? Why would they give these companies the ability? Well, the thought was, at least for Spotify, that users could send updates on what they were listening to to their friends on Facebook. Through this messaging service, you could essentially say, Oh, I'm listening to Lady Gaga and my buddy Shay really loves Lady Gaga, so I'm going to remind Shay. Hey, hey, listen, I'm

listening to Lady Gaga right now. Check it out and send her a message. Uh. This, by the way, was a messaging service that predated Facebook Messenger, the current version of Messenger that Facebook uses. But in order to do this, in order to activate this ability, Facebook had to grant some access to the messaging service to Spotify, so it wasn't necessarily intentionally awful, but it doesn't take a lot of imagination to conjure up how a system could be

really badly abused in this way. But the idea was sort of similar to giving up the rights to a work so that it can be displayed on a on a cloud service. Right if you if you create a document on Google Docs, you give up some of the rights of that document. But it's not meant to transfer the intellectual property over to Google. Rather, it's to give Google their permission to show you that document no matter what computer you're using, because otherwise Google would effectively be

circumventing those rules for intellectual property. That was the same idea with this, but you can see how it was not particularly well thought out. In two thousand eighteen, Spotify became the world's most valuable music company after its public listing on the New York Stock Exchange, which pushed the company to a valuation of twenty five billion dollars. And keep in mind that at that point the company had

still yet to turn a profit. Unbelievable. Now these days, Spotify has around nineties six million paid subscribers, many more use the free option, and in early two thousand nineteen, Spotify made another big move by acquiring Gimlet Media and a company called Anchor, both of which are big players in the podcast world. Anchor is a company that creates tools for podcasters to build, monetize, and publish podcasts, and

gimblet Media is a startup podcast network. Spotify plans to use those acquisitions to build out original programming on their platform, and the company estimates that in the future, non music media will account for twenty of all streaming on Spotify, and the company wouldn't have to dole out royalties to the music industry for podcast streams, so that reduces costs for that particular part of its business. As of this recording, Spotify plans to spend another half billion dollars on podcasting

in twenty nineteen. Serious business. It remains to be seen how this will impact the podcasting industry as a whole, which obviously I am very interested in since I'm in that industry, But there's potential for some pretty big shake ups coming down the line. There are a lot of questions about how Spotify will handle its in house podcasts versus those from outside the company, as well as how

it will handle ads that will play within podcasts. Any show that Spotify produces, they can probably monetize it any which way. For shows that they carry that are produced from outside Spotify, that's a little more tricky. Right, Like the shows I produce, we have ad breaks. I'm sure

you've noticed them. Obviously, we would want those ad breaks preserved if we were to have our shows on other platforms like Spotify, which we do, and that's important because if they were stripped out, then we wouldn't be able to monetize those episodes, and somebody else will be making money off of our content, and it wouldn't be It wouldn't make our advertisers happy, it wouldn't make us happy.

So it's it's a delicate thing. Presumably Spotify will preserve that they are currently preserving the ads from out of network podcasts, and then there are the Spotify exclusives that listeners will only be able to listen to if they happen to use Spotify service, and all of this, I'm

sure is going to get hashed out over time. On one last thing, just before I finished the notes for this particular episode, some more news broke that Spotify is bringing an antitrust lawsuit against Apple in the European Union.

The main charge that they are bringing is that Apple's policy is to take a thirty cut of app revenue and that this is specifically harmful to streaming services that compete against Apple, saying, well, if you take that cut for us to operate on your platform, then and considering how much revenue we have to spend for our our royalties and everything, Uh, it actually costs us money to work on your on your system. So what you're doing is you are discouraging other companies to compete with you

on that space. So this is anti competitive and thus uh indicative of a monopoly. So that's where the charge is. Obviously, that's going to take some time to to suss out over in the EU, So I'm sure I'm gonna have to do a follow up at some point. There's a lot more to talk about, but I'm going to save

that for another show. I also plan on doing an episode that's sort of more philosophical, touching on some of the ideas I've talked about here about how our consumption of media has changed in my lifetime, how that has changed significantly, and what that has meant over the different eras of of media consumption. That I have seen, because it is a really interesting journey and it had as shape not just the technology we use, but the way we use it. So look for that episode in the

near future. It'll probably be me being a contankerous old man saying in my day when we listen to podcasts, we had to do it uphill both ways, four ft deep in snow, or something along those lines. In the meantime, if you have any suggestions for future episodes of tech Stuff, why not write me. The address is tech Stuff at how stuff works dot com, or you can pop on over to our website that's tech Stuff podcast dot com.

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appreciate it. And I will talk to you again really soon for more on this, and thousands of other topics. Is it how stuff works? Dot com, m