« Freakonomics Radio

374. How Spotify Saved the Music Industry (But Not Necessarily Musicians)

2019-04-11 | 🔗

Daniel Ek, a 23-year-old Swede who grew up on pirated music, made the record labels an offer they couldn’t refuse: a legal platform to stream all the world’s music. Spotify reversed the labels’ fortunes, made Ek rich, and thrilled millions of music fans. But what has it done for all those musicians stuck in the long tail?

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For economics. Radio sponsored by bear progress is a human and mentioned. We look at our world and imagine how to make it better. It bear scientists developers working with farmers to help shape the future of agriculture like farms were crops and wildlife thrive together in new digital tools that allow farms to use less water, land and energy. It science for a better life from bear more about how there is shaping the future of agriculture. Visit crop science, dot, bear dot, com. Fr Economics. Radio sponsored by bear progress is a human and mentioned. We look at our world and imagine how to make it better. It bear scientists, developers working with farmers to help shape the future of agriculture like farms were crops and wildlife thrive together in new digital tools that allow farms to use less water, land and energy. It science for a better life from Bear
More about how there is shaping the future of agriculture visit crop science, dot bear dot com, either Stephen Debonair. Before we start today's episode, if you would like to see for economic trade, you alive, we will be visiting California in May, or San Francisco date sold out, but there are still tickets available in LOS Angeles and may Eighteenth S, hotel theatre will also be in Dell on June six in London on September, seventh for tickets, go to freak anaemic, dot com slashed live
Over the past year too, we ve done a couple. Special series of episodes. One was called how to be creative other was a secret life of a ceo. You think those two themes would intersect all that often, but today they do a rare conversation with this man. My name is Daniel ACT and I'm the ceo and founder of Spotify. How does Daniel define Spotify mission? The way I think about our mission is to inspire chiming creativity by enabling a million artist to be able to live off their art and a billion people to be able to enjoy and be inspired by Spotify. If you dont know, is the swedish music streaming service, with roughly a hundred million paid subscribers four hundred million plus free on an ad supported model, but it's a subscribers.
Dr Ninety percent of the company's revenue Ex cofounded the company in two thousand six reach. Twenty three went public two thousand eighteen. Its market cap is now around twenty five billion. Billion would be for a company that doesnt really make anything other than making the connection between a beloved product, people who want to consume that product, the Spotify story is a singular story about the sudden transformation of an old hidebound industry also story about digital piracy, bandwidth and, of course, creativity, o also, about the future of podcasting in person. Daniel egg is mine. Old, mannered and unacceptable, it doesn't sound like anarchist, but don't be fooled. I think we are in the process of creating a more fair equal music industry that has ever been in the past today, I must radio how accede
that running a company that's become so valuable. I am actually very little folks, on what a company's worth or isn't worth that's fair. How valuable is spot if I really people, always so all Spotify. So amazing, in my response, was always well: it's not saving lives and what Daniel Egg is listening to these days as coming up right after that, I'm happy friends, stature and Gunnar productions. This is pre economics, radio broadcasts and explores the inside of everything. Here's your home. Stephen definite
depending on your personal perspective. Spotify is either an idealized digital jukebox poor as ready heads Tom York once put it the last desperate for denying corpse. Europe- was the only musician the Hague on Spotify, especially in its earlier years. The Beatles in pink Lloyd famously kept their music off Spotify, as did some younger musicians, superstar Taylor, swift of roughly falling Oliver albums. Streaming service Spotify just days after them, he's ever hot new album nineteen. Eighty nine today Taylor, Swift, pink, Floyd, an radiohead- can all be heard on the spot. The barry- it might have made spot if I seem impossible that mostly been levelled primarily one person Daniel he granted in the working class neighbourhood of Stockholm
these days he spends about one week a month in New York, but he still lives in Stockholm. Yeah and I have very young kids? Some one is just turn for. One is about to turn six year in the middle of it are definitely in the middle of it. One constant throughout Ex life has been music, so my grandfather was an opera singer. And my grandmother. She was an actress but also Jas pianists, so in my family Like learning music was like almost an essential. It was probably more important. Then you go to College Shore University. At that level, and in Sweden we have public amused, education since almost cost nothing to get like music education in Sweden, and so my cousin told me He was way older mean is like you should learn how to play the guitar, because that's how you get Girls- and I was like four or five the time and definitely didn't realize why that was a big thing, but
really thought he was really cool south. I'm ok! Well, he must know something. So I learn how to play the guitar about the same time. I got my first computer and dad was a seminal like inflection. Because I had these two parallel interest that we're both formed at a very very young age for time thought he might become a full time musician, but the other interest began to win out. I think it was like one thousand nine hundred and ninety six. I got broadband in it. It was like ten megabits Do you think about it today because, like took untold, maybe two three years ago, until the average person in the? U S even had that, but I had a liking. Nine nine seven and that was swedish thing. That was just a swedish thing, because the Swedes connoisseur look. We leave. Everyone should have broadband us can be a big thing and by the way, will subsidized your pc to an annual costs of five hundred person you can get state of the art pc. So I add is like virtually
new computer, which was subsidized by the government. I have this broad band that was subsidized by the governments and I went on the internet. Obviously all the time the problem was, there wasn't really a lot to do on the internet except reading stuff So I read a lot of stuff, but it wasn't like the internet had movies for streaming or music were any of that stuff and on came Napster and it was a pure epiphany for me because you can search for any economy in the world and within like ten fifteen minutes, you could have the entire album and you can listen to it, which was amazing Napster which launch in ninety ninety nine became the most prominent peer to peer file sharing service and by peer to peer file sharing service. I mean
a piece of software that let a user like Daniel EK, Download, music files directly from the hard drives of other Napster users all over the world, which meant that if one person bought a cd to onto their hard drive and shared a Napster Napster, all the sudden, an infinite number of people could own it for free one problem. This is an infringement of copyright and totally illegal, at least in most places, Sweden did not forbid the downloading of pirated content until two thousand and five, the country became an international hub for illegal downloads even gave rise to a political party. The pirate party that one seats in the European Parliament I asked act whether he had thought about the legality of music piracy, guys I thought about it. But you know I was fourteen- only was unlike you know, it was a big thing yakking and since
so easy to access and the alternative was for me to go out and buy a record with money at in the house it was like the only option so was gonna like, weird thing, where you know you start off with some and all the sudden you know, maybe I was wanted to listen to me elegant and all the sudden realised that this person also had a king crimson, which was like oh I didn't know that Metallica was inspired by those guys and an led Zepplin in You know Beatles and like all the seminal, once that I all I then start listening to or Prague, music or Jimi Hendrix entire discography, and so it brought me this week.
Sense of a very broad music education and quite eclectic tastes, which in turn got me even further into music. I mean, I don't think I would have been that interested in music if it weren't for piracy. To be honest because, like I come from a working class family, we couldn't afford all the wreckers that I wanted, Napster became very large, very fast. You might have thought the music industry would see this growth as an actual expression of demand for their product and try to find a way to exploit that demand, but they didn't see it that way they saw piracy as nothing theft and as the music industry began to go the way of many fading twentieth century industries. They blame their decline on piracy. A pair of economists wrote a research paper at the time.
Which found that illegal downloads, in fact it almost nothing to affect music sales, they wrote. Our estimates are inconsistent with claims file. Sharing is the primary we, for the decline in music sales. The idea here was that the kind of people illegally. Download music were the kind of people for gonna pay. Fifty now is for seedy anyway. Dangle ex certainly put it in a perfect in knowledge for one seat. If what he found ludicrous was at the only choice. The music industry you was fifteen dollars for one c d: verses, zero dollars for all the music in the world, My view is that meet the music, History has always been excluding the vast majority of its tension, and what do I mean by that wall? At the peak of the recorded music in three two thousand and one it was about
two hundred million people who are participating in the economy who bought records though it was a two hundred million people who are listening to music. No, of course not. That number was in the billions. So What what the music industry did fairly well was a price the products at a premium forth, an audience there was willing to pay for it, but it only captured a very, very small portion of the revenues. So what was These two me aside, ass, I started using Napster back in the day, was just This is a way better products then go into wreckage, store, like like their oughta, be away where you can give consumers what they want and at the same time make it work for artists. As you got to know the record labels over time. You know years after Napster started. Do you think they regretted not having partnered with Napster earlier?
I definitely think so. I mean in hindsight they probably realised that it was the wrong thing, but they thought by shutting down that they contain the problem, didn't realize but it was. A great deal has happened: new ones, the music industry did get Napster shut down, but had to keep welcome all with a bunch of new pirated music services, everything about piracy for music, what it really forced in this fight incarnation was the unbundling of the album on doing the album that is in two single songs. So Apple then created a business by selling songs for nine nine cents apple by way of Itunes introduced the world to legal music download.
It had taken apple awhile, but they finally succeeded in negotiating the rights with record labels. Daniel EK, meanwhile, was having a lot of success himself. Yeah yeah, I started like web design companies web hosting companies than a bunch of different companies. You actually started doing this work when he was fourteen by the time he was eighteen He had a couple dozen programmers working for him. He enrolled at the Royal Institute for Technology, but only lasted a couple months, starting selling. Internet companies was much more fun, Was a millionaire by the time he was twenty three Annie started living like one: a fancy apartment night clubs, red ferrari- all this left him flat and depressed, as he later tell
Forbes magazine, I was deeply uncertain, of who I was and who I wanted to be. I really thought I want to be a much cooler guy than I was moved into a cabin in the woods back nears family. He play guitar meditated in overtime, thought up the idea for Spotify, of whose very simple really essentially infinite library of all the music in the world available instantaneously to anyone with an internet connection. How hard could that be egg? In his co, founder Martin Lorenson had two fundamental problem. To solve? Building the technology to allow for the instantaneous streaming of music and persuading the rights holders of all the music in the world to go into business with a brand new company from Sweden, a country famous for its music piracy and headed by a man who had grown up on pirated music theres many different pirates? I think whoop put it like there's the pirates who,
Just religiously feel like everything should be free? We were never that John Parker definitely was never that either Sean Parker, as in the co founder of Napster Parker leader, provided some venture capital to Spotify. There's the other. Purple just looks at it like? This is the kind of consumer experience that makes sense and that's how the world will look at it. So then how how professional of a pirate were you at like what was the highest level of professionalism with pirates? In? U dot s, accomplish it was you tore? It was at the name of company yeah yeah, so actually this probably an unknown part of the story. I wasn't very much at all, like in professional, fired at the time ass. I was thinking starting Spotify. My co founder who's, not very technical, said to me, hey, there's that my friend who's asking me about this programmer in. Like me, you need some advice.
And I was kind of dismissive about the whole idea. Then he told me the name of this programmer and this guy was the founder of you torrents. This guy was lewd vig strategies and new torrent was piece of file sharing software that was particularly useful for digital piracy and he's kind of a legendary engineer, and I knew about him from like engineer circles ass being like one of those person who wins a lot of competitions for being great engineer set out like I have to meet this person and He had started this thing. Just us like a fun side project and knew it was you torrent It was growing like very, very massive leave and house. Like you know, we were actually trying to recruit him to come Spotify, and he was a well. I got this thing
torn. I really know what to do with it, so we persuaded him to sell you torrent to us instead and the whole idea from the begin was actually two fold. It Sweden really care about it and because by then you're seniority and a vision of how to make the law model wrath, yeah yeah, yeah spot. If I did installs drug use as a top engineer at Spotify, they didn't shut down your torrent. They sold it to bit torrent the huge peer to peer protocol. I asked Daniel, which pearly task had been harder building out spot of ice technology. Persuading the record companies to let him stream their music? While I think it's hard at different stages, so, first on, I think you need to have a really good idea of like what it is that you are trying to solve and our case. It wasn't necessarily the technology had a worth in an honest,
it was more around like how do we solve a real problem? And I think that the problem that we trying to solve was it needs to feel like you have all your music on your hard drive. So, if you think about that, like That means instantaneous, so we probably have to solve that. It probably means also like all the world's music. Ok, all you have to solve all the rights issues and, like all those different things all encompassing in this one thing, so it was very clear to me that if we could deliver something, the felt like you had all the world's music on your hard drive he would likely be way better than piracy, which was the dominant force of music consumption at the time from the outset, Spotify partnered, with the record companies first in Europe and eventually the U S, what entice the labels to participate. Actually,
they would have been fools not to remember. The music industry was in steep decline thanks to changes in technology, economics and consumer preferences as Daniel. Noted earlier. The industry's model had always been inefficient. Charging relatively high prices to capture only the top layer of listening market, most people that most of their music on the radio, which is free now before you start feeling too sorry for the record Let me say this in the history of the creative arts and in the modern history of business generally. It would be hard to find and an industry that was sleaze you're, more exploitative and more deserving of its come up, and then the music industry means legal and illegal from sham country in bribes to strong, arming inclusion. The industry for decades stayed
by making relatively skinny payments to the people who actually made the music there. Royalty statements were made. You're pieces of creative accounting. Yes, they did provide venture capital. Two thousand of musicians with no money, but on the right. Occasion when, when those musicians recorded a smash, hit the level in short, a capture most of the profits. What about industries role in discovering new talent, it's a bit of a myth like saying that publishers, discover great authors or NFL coaches discover great quarterbacks, mainly cherry the talented people Verde work their way up and then squeeze out as much juice is possible for their own use, many industries exploit their labour force, but fuel. Done so much vigour as the music industry. Now
they were starting to go under, Spotify was offering a lifeboat and fairly luxurious one. Seventy percent of streaming revenues and an equity stake in the company, the big record Label- Sony, Universal and Warner were reportedly each given between four and six percent. Of Spotify shares with a consortium of independent labels getting another one percent when spot? If I went public in two thousand, eight teen, these stakes would be worth billions, the labels. Well, get to keep drawing down seventy percent of Spotify revenues and distributing it to their artists according to their own royalty formulas. Correct, so that seventy percent flows then to the rights holders, which are primarily still the three big musically pulls up, but in terms of the money flowing to the actual creators of the kind. That's complicated and, I think problematic, that can you talk about your views on that and how actually involved you or or can
your wannabe, yes sure, yeah, it's music copyrights generally It is probably one of the more complicated areas of both law, just because of how copyright laws traded by society, and then then like how it actually works and how flows down it's it's pretty complicated for lay person to understand, but I think the best way to start is just taken two steps back so the birth of the music industry, and if you think about the role that everyone had a record company was both a cost, a lot of money to make music. So I record company could help you by paying were the studio this studio engineers, all the people that help you recorded music. So that was like a pretty big value at the next thing that in being a big problem was getting promoted onto
in the U S was thousands of different radio stations and internationally was like multiplied by ten acts is like a pretty big thing and then, she beautician ended up being very expensive, so why we have major record companies ended up being a narrow being easier for them to aggregate around distribution and that's how they were form than that's how they grew to power. If you look at it right now, some of those things have obviously shifted so that the recordings of music ends up becoming fairly sheep today in most instances, because anyone can record if they have a laptop and MIKE distribution. Also and sub, becoming fairly sheep, because you can just put your music on the spot. A fire or apple music or any other service, virtually free and get distributed. Now the the flip side of that is the problem of than getting heard and sub becoming harder than ever before, because the supplies summit
Yeah the supplies infinite says. In order to stand out, you have to do quite a lot more and where we I've been as an industry just a few years ago was the you couldn't rely on one income stream alone. So, even if you fail like okay, this is digital distribution or streaming, and I kind of get that the truth of the matter is radio. Certainly, here in the US, is still a mess of massive force, so Eun do. You do. Do a lotta radio both for promotion budgets, general, the distribution and even how you then did royalty accounting like all those different things, was like a massive thing and then physical still matters greatly, certainly in the middle of the country so D, are you add by record? Companies is fairly great. It is Important, certainly ass. You thinking about how to get this out now. I think the rolls going forward is changing quite dramatically so you're fighting, now like there are a lot more younger record companies coming out that are, for.
By maybe being specialist in a certain John, her there now finding equal opportunities to get their music heard. So there are being distributed likes via in labels or they even go and distribute the record companies through one of the major record companies in order to get the support that they are getting so the trees, really kind of changing and and where obviously, a huge part not so much in the changed by just being a participant in in that dialogue about where it's going. What is the role of a manager? What the role of a label was the role of an agent? What's the role of a publisher, because all those roles are kind of raw now moving along ass, the industry's becoming more more digital right, but you from what I gather Spotify his little leverage or maybe even interest in once. You turn over the royalty share in how they distribute
to their artist correct, you have nothing to do with it. I wouldn't which we have with nothing to do with that. What we are trying to do, however, because this is such a dramatic shift in an economic model for artists, one of the big things, which is: how do we educate people about this, because really even the Itunes model was fairly simple, because I'm selling my goods, and you know I'm getting x for it. We can argue what action but it's really dad here would stream It's like I'm getting a revenue share of something in it, screaming and it looks like it's a very small number per stream, but what a million stream sicilian streams. A lot is it a little is its you know. How should I think about that? being a very, very big. Are you saying that independent are overtime, vs, Spotify, gaining leverage in the
Revenue ecosystem are not really because you know the common complaint is. This. Spotify is great for customers. Re Spotify has turned out to be a lifesaver for labels. Spotify has been great for spot, a fine for you and it's been great for some musicians, but then there are others who feel that their worse off than they would have been now every cases little bit different, but to those who feel lake gray, I'm glad all music is available to everybody all the time and whether everybody else make an out well, what do you say- those artist or maybe what do you say to someone who starting in music now? Can it be a sustainable future for them I think we are in the process, getting a more fair and equal industry than has ever been in the past. So I'll. Take an example. Light back in two thousand two thousand and one at the very, very peak of the
is again to ST peak of C D. All of those different things are estimates is dead. There were about twenty two may be thirty thousand artistic live on being recorded music artists. Now they could be touring, they could be doing other things in the number can be far greater than that, but their only twenty or thirty thousand. It could sustain themselves being that a why? Well, because again, the distribution costs so much with which ended up being that there's very few artist that could even get distributed to begin with and because the the costs were fairly high for a person buying the music. You ended up going with what you knew and wouldn't take that much risk on non known artists. So in the world, streaming was really interesting. Is the alternative cost for you to listen to something? You is virtually zero? It's just your time and because of that year
do listen to a lot more music than you did before and lit listen to big a diversity of artists than you did. The form which turn them droesse, the music industry. You are saying they were twenty to thirty thousand artist could be supported. You know what the number is now I don't know but the number is now, but is far greater, even on spot, if itself is far greater than that, the economist Ellen Krueger taught for years at Princeton and worked in both the Clinton and Obama White House. It was also fast it is by the economics of the music industry. Krueger once gave a speech at the Rock and Roll Hall of Fame,
comparing the music industry to the modern economy. At large, both cases he argued most of the earnings were going to fewer and fewer people at the top of the pyramid is what some people call tournament model where the winners get most, if not all, of the profits Krueger died recently in age, fifty eight by suicide, he left behind a book to be published soon called rock economics in it. He rate said there are roughly two hundred thousand professional musicians in the. U S today, accounting for point. One thing percent of all. U S, workers! That per cent has stayed about the same since nineteen seventy and what's the median annual income for these musicians, twenty thousand dollars the argument, Daniel echoes making, sounds good and fair that digital distribution should make it easier for lesser known, artists to find listeners and get paid. Remember how ACT defines the Spotify mission to inspired,
men, creativity, by enabling a million artist to be able to live off their art? This was one of the great promises of the digital era that you wouldn't have to be a superstar to make a living. In two thousand and six, the journalist Chris Anderson, published an influential book called the long tail why the future of business is selling less of more Daniel ACT in two thousand and ten if you called the long tail his favorite book, but Alan Kroger's findings, dont support the long tail promise. Social media and algorithms putting Spotify own playlists seem to magnify the bandwagon effect, magnify the bandwagon effect whereby popular songs become even more popular by virtue of their popularity in two thousand eighteen Spotify, most streamed artist was Drake with eight point two billion streams, assuming a typical streaming royal
rate of point four cents per play, its nearly thirty three million dollars going to Drakes camp. But the pyramid is shark and things fall off really fast when she go beneath the top Alan Krueger Sites and industry survey, which found that just two, the eight percent of artists earned money from streaming in two thousand eighteen, with median amount just one hundred dollars? So, if you think about this- dreaming music revolution as a sort of tournament, let's think about how the various constituencies are making out Spotify and Daniel Act- are doing very well So are the companies original funders who got a huge return on their investment. The record labels of also big winners not only did Spotify reinvigorate their industry, but it seems to have said, actually improved their overall valuations. The universal music group, for instance, which is currently for sale.
Has recently been valued at more than thirty billion dollars in two thousand. Thirteen. Its valuation was just eight point, four billion dollars, other winners in the spotlight. Tournament are customers who get much more music than they used to yet for much less money and the most popular musicians are also winning big one constituency. That's not obviously sharing in the winnings, the long tail artists of which there are many. So if you weren't you and you were looking at this revolution from the outside? What would you say about the fact that a company like Spotify, which doesn't produce content well starting to more but is essentially a friction. Remover and a distributor is worth more than the entire music industry, was you know about the time of its creation? While I mean I don't want to, I am actually very little focused on what it
companies worth Orison or, if that's fair, there there's something called a Wall Street. She's really focused on that. Instead, I am utterly focused on that. We at Spotify are interested in is how do we got a music industry which actually participates in all of the income streams coming up after the break. How that might actually happen will be right back. Requirements, radio sponsored by Paraday hidden in each cubic yard of air or thousands of I allergens You can't see them, but your surrounded your eyes each Stop you read them all day, but now relief is just one drop away today, once daily Release contains the number one prescribed allergy, it relief ingredient, one drop,
once a day works fast and lasts all day turn Europe. Did she allergy idea into a payday now available without a prescription everywhere? everybody, Antique Sumter and I'm an actress. And most recently you can see me on ABC mixed fish. I this is tie off and I'm the boss, a cabin hearts left out loud network, and we the host of the sugar, a sweet space where we are, she to indulge on topics we sometimes get left out of its face by four FAO Brown man. This is a place of community where we want you to feel lots of love, peace and laughed aloud. I was pregnant, someone those I oh when our hair, when I was in labour, I was like I was having a orgasm grow airs go now, some of you now somewhere baling. Maybe you ve not actually have an eye. This exists we space.
I would like us to see ourselves and be ourselves: get ready to open up top, laugh even cry with our sweet. Should a the ship is out now listen on stitches apple podcast, wherever you get your pat gas, Daniel was a teenage entrepreneur, a millionaire and early twenties. Now, at thirty six billion there having built Spotify into us, reading, juggernaut is now worth more than the entire music industry was at the time of Spotify founding spot. It is in the news pretty much constantly launching their service in India, filing and antitrust law suit in Europe against Apple claiming the apples APP store fairly favouring its own apple music over Spotify for ACT, the biggest challenge at the moment
would seem to be figuring out away to derive more value, more revenue from the massive sprawling ecosystem of recorded music and eco, system, whose business evolution has been very slow so like. If you look at this, they, the video industry A video, and I really encompass the entire tv industry, the movie industry of all in video. What a fine, fine donating it's like you used to be a com station, where it sorry off only as paid that it added advertising as components and then was a bunch of firms. There were only focus on the advertising, part of it and then the bunch of firms, though, only focused on two subscription incomes. Most notable he had CBS on one end on the advertising end of the spectrum you had HBO on the other end of this spectrum asking for subscription income and then, if you look at it, Dave? The truth of the matter is CBS is about fifty. Fifty soil
focuses ass much on subscription income as a dozen advertising and HBO was paid only but your your ass, an industry. It's it's moving both of these revenue. Models are equally important and that's kind of my point with the music industry to my point is like what happened to the music industry. If you all of this then combined the power of advertising The revenue model the power of subscription as a revenue model, the power of Alec heart on top of that as a revenue model, the three of them on a base of the three billion people around the world. That are Fourthly, the music easily, just by virtue of looking at how much time people spend listening to music oughta be at least multiple sky then, what the current music industry is and probably larger than the music industries ever been, and you just added one point. Three billion, or so in India. S potentially of the indian music market was fastened to me as ninety per
None of that market is about bollywood films, and in their throwing off music and that's what's selling in India. Is it being well monetize? Still I mean people buy it or I mean it's not well monetize, but the muse industries essentially like a by product of the film industry, which for me tells a very interesting stuff pray that there's so much development left to do what would happen if the ecosystem there was healthy than them wouldn't think about making music just for movies, so the India Spotify story could turn out to be exactly the opposite in a way of the American Spotify story, where some people feel like here. Small artists are getting. You know, the long tail is so skinny that you can't make a living. And theoretically, disincentives. Some people from creating there, maybe there's incentives to join even
the middle of the long tail there would be a step up here be out. While I mean it's virtually non existent, so it's in a much earlier development stage, then the? U S, music economy. Let me ask about consumer, surplus, which is something economists love to talk about those rare cases where you get something from much Less than you'd be willing to pay so Spotify is relatively super keep ten dollars a month for all the music I want and that ten dollars would by two thirds of one downloaded album. So if you like music enough to buy two thirds, one album per month and to get all the music in the world, essentially for that same prices, ridiculously cheap. So I'm curious no, two things. What do you know bout willingness to pay more, and what do you know if anything about the disposable income, that's I've been captured by consumers?
by not having to spend more than ten dollars to consume the universe of music where that dispose income goes and cares. If you have any data that law I mean, I obviously we agree. We think ten dollars a month very, very shipowner and amazing proposition, but the amount of people who wake up in the morning? Thinking hey, I want like pay ten dollars a month for music, isn't ass great ass. Most people would belief and we believe that that is because Not only did piracy exists in a big way just a few years ago, but there are all of these. Other sources where you can access music very cheaply, mostly free so you can go on radio and listen to it, but you can also go on Youtube and you can find the entire archive of music, including all the
flexing videos and you can listen to that entirely for free, that's war were competing against. So in order to do that, you can imagine, then it's a free product, verses, one, this ten dollars a month. A pretty big stretch? Certainly, since all of these other things may have Things like convenience in the case of radio works in your car, like works in all those different things, and then you know in the case of future bits, just like its everything is even greater than one spot defies libraries, so that's war were kind of from a competitive sets wrestling with now army. Lee S, car skidmore more connected. I do think streaming. Services way better user proposition, although I did wonder with autonomous vehicles theoretically coming may be relatively soon right. It does strike me that listening to music in a car is a perfect complimentary activity, because you need to drive to keep your eyes on the robot, your ears are free. I do wonder with autonomous vehicles whether it may actually be
harmful to streaming music, because now my eyes are free to do something that might be more interact right. I mean you may be right I don't know, I think, that's what's really. Thing, however, is that counter a cultural force right now from people looking into their phones is all of these well being thing slake both, I think Google an apple release screen time, which is supposed to restrict your screen time. An end we have the Alexis in your home, which we know is another device which are not support? That look at which I think are all kind of great counter cultural reactions to this like what a screen which we wooden probably have imagined just a few years ago. Do you have those kind of aspirations for Spotify to get in the health and wellness and handholding of various sorts not directly to the ECB? that we do something like that were already very, very big in terms of many
asian or music. What wellness music sleep, amino pink noise, white is everything on the spectrum and now with podcast, obviously on the service to there's a lot of people who are focused on those things which are very good, about a spot if I has been streaming podcast for years, but it made news recently by spending a few hundred million dollars to acquire to pod, cast production companies, Gimlet Parkhurst and a firm called anchor. That's primarily a pot cast technology platform create great so that really just things in a number ways, because you have been successful not being a content, creed or producer too much rice? So I guess first question: is Why, then? The second question is: how will it unfurl read what in the future, I dont think people will make a choice, whether There are subscribing to music service. We think that
you're making a choice whether they will have an audio service of their choice, and so it so like this well thought out master plan. They were when we need an adjacent business, and we now know which one it ass. It was I thought all what actually happened because Spotify a platform was we started seeing in my home country, Sweden. Actually we started seeing record companies buying, podcast and and uploading them to deploy as another revenue opportunity for them to grow in Iraq, oh really well with listeners and those like the first step and then in Germany record companies, there had massive amounts of rights to audio books, which I wasn't aware of it. They start up learning that now to the service. And very very quickly, we went from like no listening to
and now we're probably not the biggest the second biggest audio books service in Germany an end. This is without our involvements, mete out. This just happened by proxy, thus being a platform. So, we started seeing it resonating really well into people's lives and the thought of Spotify, not just. Ass, a music service, but as a service where they can find audio and really well into our strategy of ubiquity, I e being on all of these different devices in your home, whether it's the Alexis or tv screens or in new cars or whatever, as just another? her source, where you could play your audio. But why do you want to go to the trouble to pay a couple hundred in two by a firm, that's creating it when almost everybody making podcast would probably willingly have their content on Spotify YAP. Why
the reason. Why is really twofold? Some one is, I think that the format of podcast we're still very very early on into what it will be. You know if you really think about it like for most people there. There's all of these basic things are for creators that haven't been solved like how I want my doing it's not that easy to find out How am I monetizing the show and the value for advertisers just not that easy to find out? And and thirdly, what are people saying about my show like feedback? Those early? be very elemental thing that if you think about almost all other formats, if your journalists today in writing and text, there's there's ways to solve all three of them. We can already what you're describing does exist to some degree on an apple podcast, which I realized specifies a complicated relationship with, but that's also like Spotify, it's a closed ecosystem. It's not part of the web. Quaid
so, if Apple podcast data existed in a non closed environment, that have been enough for Spotify do not need to by its own firm probably I mean in the end, I mean it's all about solving needs red on the creators or consumers are having that's like what were focused on in and if some one had solved that need, then obviously there will be. I see no reason for us to do anything about it and the same thing. If there was master amounts of audio books services in Germany, I'm sure we have been successful, can you talk about Spotify customer data? What do you have and what do you do with it? well what we do with it now is very tightly regulated because were originally a european company and in Europe I believe, five or six years ago there was a new initiative called GDP. Are that that official,
he became alarmed sometime April? May, I believe, last year and obviously compliant without and what it simply says, is that all the data that we have around as a customer, you need to be able to ask us for it and we need to deliver it back to you you need to have an opportunity for it getting needed by us and what are your ability? demonetized that data, though, to third parties, while our bill it's monetize. It is obviously based on the contract that we have with our users so obvious things like that, would be what kind of genre music? Are you listening to? What's your age? What's your demographics and those are things dad producers can target against, and power Do you monetize that currently, meaning like
If we do monetize it. Yes, if you do monetize, how well do you and yet we we monetize. Some of those aspect, of course, like in any normal at platform, is very important, though, to note that we're not selling any customer data, that's what I'm asking are that suits others ads on the spot. Five, yes, I'm out you'd be fools not to forget those till. He asked me for east, on their demographic, gathers listening tendencies, of course, but you do have a lot of data that would be valuable to third parties. Oh yeah, massive amounts spent, not even just like for other advertisers, be you can imagine even for the music industry there's tons of data about like how their songs are performing or other people songs might be performing that could inform them about what they're doing we ve taken this sounds that we don't monetize the data itself at all. We nice Zelda data or the. I think it's an important one for us. Dad used should be able to rely on us. Not might my fundamental view is it's their data like? If we can you
the data in order to make the spot of experience better. Then all good and great- and I think many users would say yeah- without, but because now of GDP, which I do think is the right step. We can argue that, like was it the right implementation of it and all those things, but I do think it's great for customers that there's something like Jd Pr there, and you can delete today. You can also say opt out of specific things that we are gathering about using Hey. I don't want you to know extra y yeah. I've read that you operate your life in a series of sort of have your commitment, some know how finite or real that is, but if it is real, right. Where are you now in the five year cycle and what happens next is not always been five years by the way. So when I started the company was a five year commitment because being twenty three at the time having started
lots of different companies before I really wanted to see what would happen if I plied myself to one thing in only one thing and do it for a meaningful amount of time. How far I could get on that problem and the long I could imagine, spending on anything was five years that's how it ends up being five years and then, when the five years passed, I was twenty eight Sosa wall when thirty so is like a two year, increments and now I said to myself, you know just before going public last year. You know. Is this what I want to do and what would happen if I made a ten year commitment which felt pretty dancing, unlike what is it that we would have to do? What? What does the company have to look like for me to be essential, to do this for another ten year? Well, what what
my role have to look like in order for me to be addressed at a key component. How interested you can remain, and I mean it needs to be kind of constantly challenging to tat that roughly so I mean to be honest, because otherwise, if you don't have the passion and you don't feel like you're a growing and challenging yourself. Some one else were probably a much better job. So where are you right now, I'm in year. To now of a ten year commitment, so what did you see in the future? Spotify that you thought was gonna be, so amazingly, excitingly challenging for ten years, long, there's really too thanks! So the first and more important, this like really from the inception of Spotify. Do you The assumption was that we would see the user. A problem I like get people. To listen in a much better way and then they'll constantly back the music industry, the core sums
was that the music industry would take care of all the other things, how people get sign, how they get heard, and I realized that that it happened so, where largely doing business the same way as we were doing Ten years ago, there's been some evolution, of that, but I want to work with the Again she was never disruptor. That's like the big misunderstanding about me. Like I've I've. Give the record companies are important and will be important in the future, but we We can be the r and d arm for the music industry that we can develop better tools and technology too loud to be more efficient and thereby creating more and better solutions for them and for Can you give an example of how the efficiency happens? Well, one of the hardest problems right now for an artist is to get hurt. One of the biggest platforms to be heard at would be Spotify right, so
today, the primary tool that aid an artist has to get heard on Spotify. Besides putting the music on there is getting own by one of our editors so weird way like while we want to do four ties: music. We ve gotta become gatekeepers as well, so the question is: can we develop tools that enables artists to promote their music more efficiently, just by themselves? platform, and that could be in the form of being able to talk to their existing super fans there on the platform it could be in the form of better promotional tools for record companies in how they pay. Music and get the music out there Spock by having become the gatekeeper, whether inadvertently or not, is an important point. The song the Spotify adds to one of playlists, we'll get many more streams and one dozen and streams
translate into money for the rights holders so having that power is important, especially from a profit maximizing perspective, if If I were primarily concerned with profit maximizing, it might promote content that is cheaper for Spotify to stream its content. They produce themselves more, just content there, with a lower payment rate than others. It may not sound like a big difference to pay a rights holder, point four cents per stream versus point three sense. But if you talking, hundreds of millions were billions of streams. It adds up what do you listen to these days, a music? I yes well, both saw me wise. I've been really really interested in african music lately, so particularly like West, Frickin, dance hall music has been like something that has been pretty cool. We launched in South Africa a year ago, saw all of those playlist like starred would like public up in there
then you know a lot of really cool must be so cool to launch a new place as a means for you guys to discover what the music, oh yeah for sure and there's like a lot of things that you just don't even know about. So that's like been four made. The biggest thing of the last year has been really interesting and then on the pot cast side. I you know. Is it such a fastening form, can meet like there's there's. Obviously, people who can listen to meet up Crimetown or whatever it might be just to get him to Tain, for me, is more like the educational part of it. So you could be a freak makes is one call invest like the best, that's quite interesting and thoughtful about investments in how you do that. I do listen to quite a lot of history. Podcast as well just get an hour uninterrupted about subjects like there's? No other format that goes to the same depths as I find that podcasting does. Are there still hold,
in the spot, if I music library, that you really want to fix, there are, but obviously, by now the holes tat we are probably more regional holes than the fact of like the big was Garth books being and probably the most now example right now, but most It is really bouts of all the music getting the archives up. Some am very proud that we did that deal with BBC a few years ago, where were now bringing the entire archive onto streaming same with Georgia, I found the german equivalence as well, so would you ever consider in a case like a Garth, Brooks? I'm sure, you're gonna say no to this, because it would be illegal. But would you ever consider saying, look we're Spotify we're just gonna put the music there and then he will see how well it does and then the first check gets written. And then that will bring him to the table in a in a proper way. We would you, or did you ever, do that no
never done that, it cannot goes against the ethos of what is were trying to do again when we started that was like the modus operandi like there was all he's a sort of terrorism. In a way we have a lot of these services where people just upload it at all all the music and then they figured out the problem later on. That was never the approach that we talked, and why was it I mean? Do you consider yourself a particularly ethical persons at the way, swedish business is tough, because you know to be fair, uber How much did that they would go into cities where they knew that local authorities wouldn't allow them to operate bread MA. Am I like to say there were more ethical than other people just felt like the right thing to do, and I believe that the problem for the music industry with the past had been the just the fact that it always felt like It was people who wanted to disrupt the existing music industry. I dont believe
The music industry has to be disrupted. I believe it has to be evolved, so we like to work with them as partners on. That's always been our approach. There isn't music on Spotify that the copyright owner haven't authorized us. So, we like to work with them as partners on that's always been our approach. There is, in doing this. Now, let's just pretend Spotify really had work that either the technology the rights gathering had proved impossible. You'd be dead. What now and where, if I weren't doing this, I would probably do something in health care and his kind like it's is revelation. If you ask me ten years ago, Odin have said that, but right now it's like a cat so that realisation, because people always say while Spotify. So amazing in my response was always well. It's not saving life's, but it's good. And so a few years ago I was thinking to myself
lay. Why am I not to save lives, and what would I do if I did that, and I think in our talks about this technology currents- and I think in health care? A lot of those technology currents are starting to play out, and it's not just about the sort of digital part of these things. It's just a dance then in the biotech overall crisper, proactive medicine like it? It s going to be the next decade to day it's, I think, we're fundamentally moving from a place where we will look at doctors or the way we treated people like it's almost witchcraft the decades from now, and so we will snow. A lot more and that's fascinating. To think about the implications, that will have economically, because I believe in the end means we can spend a lot less of our GDP on on health care and, as a consequence, hopefully treat a lot more people
so the I'm really interested in that part and what's gonna happen and that space do think you will do that. I mean in eight years, at the end of this ten year, quote commitment you'll, be only forty four ram. Do you think he will try something radically different for you, like I hope so my interests like I love music. It's been passion since, like really since the beginning of my life and that will always be a passion and always be something that I'll do in some shape or form. But you know we're here. Very, very short period of time on earth, and I feel a tremendous amount of responsibility having I think it's insane that I'm thirty I see or sold in and having passed much fortunate has I feel like I need to do more than one I'm doing too. Leave the world a better place than what I answered
If you want to learn more about Spotify, including how a team of swedish social scientists tried to reverse engineer it to see how the platform really works took out. A new book called spot, a fight, air down inside the Black box of streaming music. Meanwhile, coming up next time on Freakonomics Radio, sometimes a banana, is just a banana, but even just a banana is really something Basically there, a hundred and thirty five countries, the grow bananas and it's the fourth most important crop after rice, wheat and corn in the beginning. They were luxury item. They were very expensive today. The very very popular banana is under attack. It's one of the most spectacular plant disease epidemics.
In history, if you know you're banana history, you know this happened before. Can the banana be saved again its next time and for economics radio, We can say to you is produced by Sticker W productions. This episode was produced by met Fresco or staff also includes Allison. Craig low Gregg Ribbon, Harry Huggins, Zactly Pinky met Hickey incur remains our theme. Song is mister, which, by the hitchhikers all the other music, was composed by Luis Gara. You can subscribe if we radio on Apple POD or where every get your pockets, the entire archives. Bilbil stitched up or at for economics, dot com where we also publish transcripts, show notes and more do you want to hear entire for economics. Radio archive ad free plus a bonus episodes go to sticker premium, dot com, slash economics. We can also be found wanting,
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Transcript generated on 2020-04-03.