The Spotify Play
How a Swedish startup negotiated with the major labels and won.
Summary
Sven Carlsson and Jonas Leijonhufvud, Swedish business journalists who covered the company for years, wrote this history of Spotify from its founding in 2006 through its public listing.
The business narrative covers Daniel Ek and Martin Lorentzon's founding, the technical problem of streaming music with low latency which the company solved with peer-to-peer distribution, and the licensing negotiations that were the actual barrier. The authors document the years of negotiation with the major labels, the equity stakes the labels received in exchange for licences, and the terms that determined Spotify's economics permanently: the labels take the substantial majority of revenue, which caps the gross margin the company can ever achieve.
They also cover the competition with Apple, which they treat as the central strategic conflict, including Apple's App Store terms and the launch of Apple Music; the entry into the American market and the deal with Facebook that drove early adoption there; the pursuit of podcasting as a category Spotify could own outright and thereby improve its margin; and the internal management and the tension between Swedish engineering culture and American commercial expectations. The book is well sourced from participants. Its account of the licensing terms and why they constrain the business permanently is the most useful material for an investor.
Key takeaways 7
- Music licensing terms give the labels the substantial majority of Spotify's revenue, which caps the company's gross margin permanently.
- Labels received equity in Spotify in exchange for licences, which made them beneficiaries of a company they also constrain.
- The technical problem of low-latency streaming was solved early, and licensing rather than technology was the actual barrier.
- Apple's control of the App Store and its own music service made it simultaneously Spotify's distribution channel and its competitor.
- Podcasting was pursued because content Spotify owns outright carries margins that licensed music never can.
- Early adoption in the United States was driven by a Facebook integration rather than by independent marketing.
- A business whose principal input is licensed from a small number of suppliers cannot expand its margin regardless of scale.
Who should read it
Investors and founders in content and subscription businesses who want a case study in how supplier concentration determines a company's permanent economics.
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