Ek is on a mission to pry music from the pirates

Spotify founder and chief executive Daniel Ek tells Media Week how he plans to deliver advertiser value and revenue from his fledgling music business.

Daniel Ek, founder and chief executive, Spotify, at London's Paramount club
Daniel Ek, founder and chief executive, Spotify, at London's Paramount club

On the 31st floor of London's iconic Centre Point building, Daniel Ek leans perilously close to a very thin-looking window, with the might of London's creative and financial power laid out below him.

Unshaven and casually dressed, the founder of music streaming service Spotify cuts the figure of an archetypal digital entrepreneur.

But talk business with the young Swede - he's just 26 - and any idea that his relaxed demeanour is reflected in his approach to his new music start-up is quickly dispelled.

"Our focus is on increasing revenue and delivering value to advertisers," says Ek. "While we're trying to grow the business as quickly as we can, we're conscious about increasing revenue alongside the size of the user base."

Founded in 2006, Spotify finally launched in October last year as an invitation-only service in Sweden, Norway, Finland, France, Spain and the UK.

The service was opened up to everyone in February this year and has since clocked up more than 1.5 million users, approximately a third of them in the UK. About 40,000 new users join every day, of which 50 to 60% are from the UK.

Downloading the Spotify application - the "music management tool", as Ek describes it - gives users free, on-demand access to millions of tracks, enabling them to stream the music of their choice whenever they want. Revenue is generated through radio-style ads, played every 20 minutes or so, while digital display ads are delivered via the application.

A paid-for, ad-free service, differentiated by functionality and exclusive content, is in place, as is a tie-up with download store 7Digital. Deals with related businesses, for example ticket sales, are being discussed.

While it's not the first ad-funded music streaming service - a number have come and some, notably Spiral Frog, have gone - Spotify has captured the imagination of users and advertisers where predecessors perhaps failed. "The whole industry has been really supportive," says Ek. "But it took a lot of time to convince people we had a serious business plan."==

Spotify - a merger of the words "spot" and "identify" - was initially funded through personal investment. Ek made money through his start-up Advertigo, which he sold to Trade­Doubler in 2004, and his role as chief technical officer at Stardoll, while Spotify co-founder Martin Lorentzon was a founder of TradeDoubler.

Rapid expansion
Boosted by a second round of funding from Swedish venture capitalists Northzone and Creandum, Spotify now has offices in every territory where the application is available.

The company is investing heavily in its sales operation: it has more than 70 employees in Stock­holm and its UK office - led by sales director Jon Mitchell and newly appointed managing director Paul Brown - is expanding rapidly.

"When I walked in today, I had to be introduced to new staff - and I was here only two weeks ago," says Ek. "That's the difference between us and others. We have always invested in our own sales force as we believe we can sell this product better than other networks. It means we can charge better prices, but compensate by delivering better value."

Campaigns for the COI, VW, Sony-Ericsson, Xbox and a recent tie-in with Condé Nast for the launch of Wired magazine show agencies have been willing to test the service. But Spotify will need to accelerate sales volume if it is to deliver meaningful revenues to the labels and musicians it relies upon for its content.

With music consumption increasingly moving from ownership to access, breaking the hold the pirates and file-sharing sites have over the music business by creating products that wrestle digital music consumption into legal, revenue-generating environments is key to industry survival.

"You have to create a product that is better than the pirate sites," says Ek. "Remember that 95% of all music downloads are still illegal. If you can make money from that, the music business will be in a better position."

Figures from the International Federation of the Phonographic Industry put the value of the global digital music sector at $3.7bn in 2008, up 25% year on year. If that equates to just 5% of digital music's potential, the figures stack up.

Very enthusiastic
While Ek is naturally enthusiastic about the audience Spotify can deliver to advertisers, he is aware his fledgling service is not necessarily an easy sell.

"Are we digital or radio?" he muses. "Probably both. We've learned that what works best for advertisers is a combination of the two. We're looking at different things [behavioural and mood targeting], but we're at an early stage - agencies need to understand what they're buying."

In terms of product development, Spotify is concentrating on mobility, including iPhone and other platform applications, to allow users to take their music with them; social functionality, to make it easier to share and recommend music; and opening up the platform to third-party developers.

This last point is a key part of the strategy to build an "ecosystem" around Spotify, which Ek believes will help it fend off future competition.

With its sales operations expanding and agencies increasingly testing the water, Ek has given Spotify a real fighting chance.

"It has taken a bit longer than anticipated to get where we want to be, but we believe in Spotify more than ever," he says. "In the end, we will be judged by how much revenue we del­iver to artists. That will determine the long-term viability of what we do."

Founder and chief executive, Spotify
2005 Chief technical officer, Stardoll
2004 Chief executive and founder, Advertigo

Home Stockholm and increasingly London
Hobbies Football (AIK in Stockholm and Arsenal), sailing and playing the guitar
Desert island media Twitter, Facebook, Financial Times, Google News

EK on...
The UK: This is by far the most important market for us. The UK has the music industry and a good advertising industry, which is proactive in trying new things. We want to prove to advertisers and agencies what we can do.

Freemium: Theoretically, if you can make 10% of your users pay, you're really good, and we're striving to be really good. We're counting on the vast majority of our users being ad-supported. But the combination of the ad-funded and subscription businesses will bring in a significant amount of money.

Revenue: Depending on how popular a certain tune is, the labels get a bigger share of the revenue than they do for artists who don't get played. It's an equal and just system. If you get played more, you get a bigger share. But the payout is based on what we make.

Scale and targeting: We're already at the size - at least here in the UK - where we're a sizeable media property. In Sweden, we would probably qualify as the third-biggest radio station. I definitely believe we can do both - and that's going to be critical.