Streaming Music, Pre-Spotify

Before Daniel Ek founded Spotify, there were very few options for music lovers to hear all their favorite songs on a shoestring budget. For those who preferred to do it legally, traditional services like iTunes provided huge digital libraries of music for approximately the same price as buying it at your local record shop—99 cents a song. The other alternative was to illegally download music through the use of P2P software.

As illegal downloading ramped up, the RIAA and other organizations began a witch hunt against offenders, seeking damages of $100,000 or more for as little as a few songs. Everyone imaginable, from school kids to senior citizens, were dragged into court to answer for their crimes. Despite the RIAA’s best efforts, heavy-handed punishments and lawsuits weren’t enough to stop people from enjoying their music for free. Up until 2008, when the RIAA announced they would no longer sue individuals, over 35,000 people had been served a subpoena.

Of course, Spotify wasn’t the first digital streaming service for music. Napster was a true pioneer in those regards, but it came way before its time when the industry wasn’t ready for it yet. It was very same RIAA that sued individuals throughout the early 2000’s that brought an end to the now-infamous streaming service. From 1999 up until 2007, Napster paid out huge amounts of cash to those affected by the copyright violations until it was forced to file for bankruptcy.

A Phoenix Rises from the Ashes

On October 7, 2008, barely over a year after the death of Napster, Spotify launched its services. In the beginning, Spotify was completely free and invite-only in order to limit the number of initial users during the testing phase. In 2009, Spotify launched their services publicly in the UK before hitting the US a couple years later.

And the most ironic part? Napster’s very own co-founder, Sean Parker, was brought on board to help facilitate negotiations with major record labels.

So, what allowed Spotify to succeed where Napster failed horribly? As it turns out, bringing down Napster and taking consumers to court didn’t help the music industry one bit. Year after year, illegal downloading continued while both digital and physical sales of music continued to decline. Major record labels and other big players in the music industry realized that they need to change their strategy.

Rather than completely lose profits to illegal downloading, as Ek explained, record labels could at least regain a small percentage of that money by partnering with legitimate services like Spotify.

Ek made an offer that the music industry simply couldn’t refuse. And he did it at the perfect time. 

From Startup to IPO

Pitching an idea like Spotify to record label executives in the wake of Napster wasn’t an easy task. Especially with their former co-founder sitting at the table. It took several years of building relationships with Swedish record labels to launch the streaming service in Ek’s home country, and many more to gain traction in the U.S.

It was an uphill battle, to say the least.

The key to Ek’s success with Spotify was his ability to show, rather than tell, the earning potential for record labels. One by one, the biggest names in music began to join Spotify until “anyone who’s anyone” was on the service. They saw the proof in the pudding.

Just 7 years after launch, in order to insulate themselves from future legal arguments (such as the ones made against Napster), Spotify abandoned their original P2P model and completely changed their IT infrastructure to client/server. On top of the technical benefits, this strategic move helped them solidify their stance as a legitimate streaming service and not just the reincarnation of Napster.

With top names in the music industry on board, a proven business model, and a legally justifiable position, Spotify began to seek investment through various fundraising rounds from Venture Capital and Private Equity groups.

They also sought help from top consultants in the industry, such as Apogee Accelerator Group—who I’m extremely proud to represent.

Round after round, Spotify grew in size and strength, accumulating nearly 140 million active users and 60 million paid subscribers to its premium service.

On April 3, 2018, Spotify released their IPO on the NYSE, completely disrupting Wall Street and showing the world how far a streaming music service could go. Spotify went on to close its first trading day at a total valuation of $26.5 billion and $149 per share.

Key Observations

Spotify’s success wasn’t due solely to its business model but also to a variety of other factors, such as timing, strategic partnerships with record labels, and financial backing and guidance from VC & PE firms.

Although Napster reached commercial success in the late ’90s, it was met with harsh criticism and failed to gain support on an institutional level. By pitching their product from a different perspective, Spotify was able to build key relationships with partners and investors—something that Napster never could.

Because of these relationships, Spotify has taken their business from a small, local service in Sweden to a global phenomenon with 140 million active users and a listing on the New York Stock Exchange.

At Apogee Accelerator Group, we’ve helped founders like Daniel Ek grow their companies by providing:

  • Multi-stage investments from $5 million to $500 million.
  • Strategic relationships built on decades of accomplishments and success.
  • Mentorship from a specialized staff of seasoned professionals.
  • Services that help founders develop and scale their businesses at an accelerated rate. 

Want to join the ranks of Spotify and other successful startups in our portfolio? 

Check out our page to learn more.

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