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

[0] Hey there, it's Stephen Doverner.

[1] Before we start today's episode, if you would like to see Freakonomics Radio live, we will be visiting California in May. Our San Francisco date is sold out, but there are still tickets available in Los Angeles on May 18th at the Ace Hotel Theater.

[2] We'll also be in Philadelphia on June 6th and London on September 7th.

[3] For tickets, go to Freakonomics .com slash live.

[4] Over the past year or two, we've done a couple special series of episodes.

[5] One was called How to Be Creative.

[6] The other was the secret life of a CEO.

[7] You wouldn't think those two themes would intersect all that often, but today they do in a rare conversation with this man. My name is Daniel Eck, and I'm the CEO and founder of Spotify.

[8] How does Daniel Eck define Spotify's mission?

[9] So the way I think about our mission is to inspire human creativity by enabling a million artists to be able to live off of their art and a billion people to be able to enjoy and be inspired by it.

[10] Spotify, if you don't know, is a sweet.

[11] Swedish music streaming service with roughly 100 million paid subscribers.

[12] Another 100 million plus listened free on an ad -supported model, but it's a subscribers that drive 90 % of the company's revenue.

[13] Eck co -founded the company in 2006, at age 23.

[14] It went public in 2018, and its market cap is now around $25 billion, billion, with a B. For a company that doesn't really make anything, other than making the connection between a beloved product, and people who want to consume that product.

[15] The Spotify story is a singular story about the sudden transformation of an old hidebound industry.

[16] It's also a story about digital piracy, bandwidth, and, of course, creativity.

[17] Oh, also, it's about the future of podcasting.

[18] In person, Daniel Eck is mild -mannered and unexcitable.

[19] He doesn't sound like an anarchist, but don't be fooled.

[20] I think we are in the process of creating a more fair and equal music industry than it's ever been in the past.

[21] Today on Freakonomics Radio, how Eck feels about running a company that's become so valuable?

[22] I'm actually very little focused on what a company's worth or isn't or if that's fair.

[23] How valuable is Spotify really?

[24] People always said, oh, Spotify's so amazing.

[25] And my response was always, well, it's not saving lives.

[26] And what Daniel Eck is listening to.

[27] these days.

[28] That's coming up right after this.

[29] From Stitcher and Dubner Productions, this is Freakonomics Radio, the podcast that explores the hidden side of everything.

[30] Here's your host, Stephen Dovner.

[31] Depending on your personal perspective, Spotify is either an idealized digital jukebox or, as radio heads, Tom York once put it, the last desperate fart of a dying corpse.

[32] York wasn't the only musician to hate on this.

[33] Spotify, especially in its earlier years.

[34] The Beatles and Pink Floyd famously kept their music off Spotify, as did some younger musicians.

[35] Superstar, Taylor Swift, abruptly pulling all of her albums from the streaming service Spotify just days after the release of her hot new album, 1989.

[36] Today, Taylor Swift, Pink Floyd, The Beatles, and Radiohead can all be heard on Spotify.

[37] The barriers that might have made Spotify seem impossible have mostly been leveled, primarily by one person, Daniel Eck.

[38] He grew up in a working -class neighborhood of Stockholm.

[39] These days, he spends about one week a month in New York, but he still lives in Stockholm.

[40] Yeah, and I have two very young kids, so one is just turned four, and one is about to turn six.

[41] You're in the middle of it, aren't you?

[42] I'm definitely in the middle of it.

[43] One constant throughout X -life has been music.

[44] So my grandfather was an opera singer, and my grandmother, she was an actress, but also jazz pianists.

[45] So in my family, like, learning music was like almost an essential.

[46] It was probably more important than you go into college or university at that level.

[47] And in Sweden, we have public music education.

[48] So it almost costs nothing to get, like, music education in Sweden.

[49] And so my cousin told me, he was way older than me, and it's like, you should learn how to play the guitar because that's how you get girls.

[50] and I was like four or five at the time and definitely didn't realize why that was a big thing but I really thought he was really cool so I was like okay well he must know something so I learned how to play the guitar and then about the same time I got my first computer and that was a seminal like inflection point because I had these two parallel interests that were both formed at a very very young age for a time Eck thought he might become a full -time musician but the other interest began to win out I think it was like 1996.

[51] I got broadband in it.

[52] It was like 10 megabits when you think about it today because like it took until maybe two, three years ago until the average person in the U .S. even had that.

[53] But I had it like in 1997.

[54] And that was just a Swedish thing.

[55] That was just a Swedish thing because the Swedes kind of said, look, we believe everyone should have broadband.

[56] That's going to be a big thing.

[57] And by the way, we'll subsidize your PC too.

[58] And it will cost $500 and you can get state -of -the -art PC.

[59] So I had this virtually new computer, which was subsidized by the government.

[60] I had this broadband that was subsidized by the government.

[61] And I went on the Internet, obviously, all the time.

[62] The problem was there wasn't really a lot to do on the Internet except reading stuff.

[63] So I read a lot of stuff.

[64] But it wasn't like the Internet had movies for streaming or music or any of that stuff.

[65] And on came Napster.

[66] And it was a pure epiphany for me because you can search for any kind of music in the world, and within like 10, 15 minutes, you could have the entire album and you can listen to it, which was amazing.

[67] Napster, which launched in 1999, became the most prominent peer -to -peer file sharing service.

[68] And by peer -to -peer file sharing service, I mean a piece of software that let a user, like Daniel Eck, 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 and copied it onto the their hard drive and shared it on Napster, all of a sudden, an infinite number of people could own it for free.

[69] One problem, this is an infringement of copyright and totally illegal, at least in most places.

[70] Sweden did not forbid the downloading of pirated content until 2005.

[71] The country became an international hub for illegal downloads and even gave rise to a political party, the pirate party, that one seats in the European Parliament.

[72] I asked Eck whether he had thought about the legality of music piracy.

[73] Yeah, I thought about it, but, you know, I was 14.

[74] It wasn't like, you know, it was a big thing.

[75] Yeah, and since it was so easy to access, and the alternative was for me to go out and buy a record with money I didn't have, it was like the only option.

[76] So it was kind of like this weird thing where, you know, you start off with something, and all of a sudden, you know, maybe I was wanted to listen to Metaq, and all of a sudden realized that this person also had King Crimson, which was like, oh, holy shit, I didn't know that Metallica was inspired by those guys and Led Zeppelin and, you know, Beatles and like all the seminal ones that I all of a sudden started listening to or Prague music or Jimmy Hendrix's entire discography.

[77] And so it brought me this weird sense of a very broad music education and quite eclectic taste, which in turn got me even further into music.

[78] I mean, I don't think I would have been that interested in music if it weren't for piracy, to be honest.

[79] Because, like, I come from a working class family, we couldn't afford all the records that I wanted.

[80] Napster became very large, very fast.

[81] You might have thought the music industry would see this growth as a natural expression of demand for their product and try to find a way to exploit that demand.

[82] But they didn't see it that way.

[83] They saw piracy as nothing but theft, and as the music industry began to go the way of many fading 20th century industries, they blamed their decline on piracy.

[84] A pair of economists wrote a research paper at the time, which found that illegal downloads, in fact, did almost nothing to affect music sales.

[85] They wrote, our estimates are inconsistent with claims that file sharing is the primary reason for the decline in music sales.

[86] The idea here was that the kind of people who illegally downloaded music weren't the kind of people who were going to pay $15 for a CD anyway.

[87] Daniel Eck certainly wasn't going to pay $15 for one CD.

[88] What he found ludicrous was that the only choice the music industry gave you was $15 for one CD versus $0 for all the music in the world.

[89] my view is that the music industry has always been excluding the vast majority of its potential and what do I mean by that well at the peak of the recorded music industry 2001 it was about a 200 million people who were participating in the economy who bought records so was it 200 million people who were listening to music no of course not that number was in the billions.

[90] So what the music industry did fairly well was they priced a product at a premium for an audience that was willing to pay for it, but it only captured a very, very small portion of the revenues.

[91] So what was obvious to me, as I started using Napster back in the day, it was just like, this is a way better product than going to a record store, like there ought to be a way where you can give consumers what they want and at the same time make it work for artists.

[92] 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?

[93] I definitely think so.

[94] I mean, in hindsight, they probably realized that it was the wrong thing, but they thought by shutting it down that they've contained the problem and didn't realize that it would just create seven new ones.

[95] The music industry did get Napster shut down, but had to keep playing whack -a -mole with a bunch of new pirated music services.

[96] If you think about piracy for music, what it really forced in this first incarnation was the unbundling of the album.

[97] Unbundling the album, that is, into single songs.

[98] So Apple then created a business of that by selling songs for $0 .99.

[99] Apple, by way of iTunes, introduced the world to legal music downloading.

[100] It had taken Apple a while, but they finally succeeded in negotiating the rights, with record labels.

[101] Daniel Eck, meanwhile, was having a lot of success himself.

[102] Yeah, yeah.

[103] I started, like, web design companies, web hosting companies, and a bunch of different companies.

[104] He actually started doing this work when he was 14.

[105] By the time he was 18, he had a couple dozen programmers working for him.

[106] He enrolled at the Royal Institute for Technology, but only lasted a couple months.

[107] Starting and selling internet companies was much more fun.

[108] Eck was a millionaire by the time he was 23, and he started living like one, a fancy apartment, nightclubs, a red Ferrari.

[109] All this left him flat and depressed.

[110] As he later tell Forbes magazine, I was deeply uncertain of who I was and who I wanted to be.

[111] I really thought I wanted to be a much cooler guy than I was.

[112] He moved into a cabin in the woods back near his family.

[113] He played guitar, meditated, and over time thought up the idea.

[114] for Spotify.

[115] It was very simple, really, an essentially infinite library of all the music in the world available instantaneously to anyone with an internet connection.

[116] How hard could that be?

[117] Eck and his co -founder, Martin Lawrenson, had two fundamental problems 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'd grown up on pirated music.

[118] There's many different pirates.

[119] I think we would put it.

[120] There's the pirates who just religiously feel like everything should be free.

[121] We were never that.

[122] Sean Parker definitely was never that either.

[123] Sean Parker, as in the co -founder of Napster.

[124] Parker later provided some venture capital to Spotify.

[125] There's the other group who just looks at it, like this is the kind of consumer experience that makes sense.

[126] And that's how the world will look at it.

[127] So then how professional of a pirate were you?

[128] Like what was the highest level of professionalism of piracy you ever accomplished?

[129] It was U -Torrent?

[130] Was that the name of the company?

[131] Yeah, yeah.

[132] So actually, this is probably an unknown part of the story.

[133] I wasn't very much at all like a professional pirate.

[134] at the time as I was thinking about starting Spotify my co -founder who's not very technical said to me hey there's my friend who's asking me about this programmer and like he needs some advice and I was kind of dismissive about the whole idea and then he told me the name of this programmer and this guy was the founder of U -Torrent this guy was Ludwig Straggeis and U -Torrent was a piece of file -sharing software that was particularly useful for digital piracy.

[135] And he's kind of a legendary engineer, and I knew about him from, like, engineering circles as being like one of those person who wins a lot of competitions for being great engineers.

[136] And I was like, I have to meet this person.

[137] And he had started this thing, just as like a fun side project, and it was Utah and it was growing, like, very, very massively.

[138] And I was like, you know, we were actually trying to recruit him, to come to Spotify.

[139] And he was like, well, I got this thing.

[140] U -Torrent, I don't really know what to do with it.

[141] So we persuaded him to sell U -Torrent to us instead.

[142] And the whole idea from the beginning was actually to fold it because we didn't really care about it.

[143] And...

[144] Because by then you're saying you already had a vision of how to make the legit model work.

[145] Yeah, yeah, yeah, yeah.

[146] Spotify did install Straggeus as a top engineer at Spotify, and they didn't shut down U -Torrent, they sold it to BitTorrent, the huge peer -to -peer protocol.

[147] I asked Daniel Eck, which early task had been harder, building out Spotify's technology or persuading the record companies to let him stream their music?

[148] Well, I think it's hard at different stages.

[149] So first on, I think you need to have a really good idea of what it is that you're trying to solve.

[150] and in our case it wasn't necessarily the technology had a worth in and on itself it was more around like how do we solve a real problem and i think the the problem that we were 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 okay well you have to solve all the rights issues and like all of those different things, all encompasses in this one thing.

[151] So it was very clear to me that if we could deliver something that felt like you had all the world's music on your hard drive, it would likely be way better than piracy, which was the dominant force of music consumption at the time.

[152] From the outset, Spotify partnered with the record companies, first in Europe and eventually the U .S. What enticed the labels to participate?

[153] Actually, they would have been fools not bad.

[154] Remember, the music industry was in steep decline, thanks to changes in technology, economics, and consumer preferences.

[155] As Daniel Eck noted earlier, the industry's model had always been inefficient, charging relatively high prices to capture only the top layer of the listening market.

[156] Most people got most of their music on the radio, which was free.

[157] Now, before you start feeling too sorry for the record labels, let me say this.

[158] In the history of the creative arts and in the modern history of business generally, it would be hard to find an industry that was sleesier, more exploitative, and more deserving of its comeuppance than the music industry.

[159] Through means legal and illegal, from sham contracts and bribes to strong -arming and collusion, the industry had for decades stayed fat by making relatively skinny payments to the people who actually made the music, Their royalty statements were masterpieces of creative accounting.

[160] Yes, they did provide venture capital to thousands of musicians with no money, but on the rare occasion when one of those musicians recorded a smash hit, the label made sure to capture most of the profits.

[161] What about the industry's role in discovering new talent?

[162] That's a bit of a myth, like saying that publishers discover great authors or NFL coaches discover great quarterbacks.

[163] They mainly cherry -pick the talented people who've already worked their way up and then squeeze out as much juice as possible for their own use.

[164] Many industries exploit their labor force, but few had done so with as much vigor as the music industry.

[165] Now that they were starting to go under, Spotify was offering a lifeboat and a fairly luxurious one.

[166] 70 % of streaming revenues and an equity stake in the company.

[167] The big record labels, Sony, Universal, and Warner, were reportedly each given between 4 and 6 % of Spotify's shares with a consortium of independent labels getting another 1%.

[168] When Spotify went public in 2018, these stakes would be worth billions.

[169] The labels would also get to keep drawing down 70 % of Spotify's revenues and distributing it to their artists according to their own royalty formulas.

[170] correct so that 70 % flows then to the rights holders which are primarily still the three big music labels yep but in terms of the money flowing to the actual creators of the content that's complicated and i think problematic so can you talk about your views on that and how actually involved you are or can be or want to be yeah sure yeah it's music copyrights generally is probably one of the more complicated areas of both law just because of how copyright law is treated by society and then just like how it actually works and how it flows down.

[171] It's pretty complicated for a layperson to understand.

[172] But I think the best way to start is just taking two steps back.

[173] So the birth of the music industry, and if you think about the role that everyone had.

[174] A record company was both, it used to cost a lot of money to make music.

[175] So a record company could help you by paying for the studio, the studio engineers, all the people that helped you record your music.

[176] So that was like a pretty big value add.

[177] The next thing that ended up being a big problem was getting promoted onto, in the US it was thousands of different radio stations and internationally it was like multiplied by 10x.

[178] It was like a pretty big problem.

[179] It was like a pretty big thing.

[180] And then distribution ended up being very expensive.

[181] So while we have major record companies, it ended up being easier for them to aggregate around distribution.

[182] And that's how they were formed and that's how they grew to power.

[183] If you look at it right now, some of those things have obviously shifted.

[184] So the recording of music ends up becoming fairly sheep today in most instances because anyone can record if they have a laptop and a mic.

[185] Distribution also ends up becoming fairly cheap because you can just put your music on Spotify or Apple Music or any other service virtually free and get distributed.

[186] Now, the flip side of that is the problem of then getting heard ends up becoming harder than ever before.

[187] Because the supply is so much greater.

[188] Yeah, the supply is infinite.

[189] So in order to stand out, you have to do quite a lot more.

[190] and where we have been as an industry just a few years ago was that you couldn't rely on one income stream alone.

[191] So even if you felt like, okay, this is digital distribution or streaming and I kind of get that.

[192] The truth of the matter is radio, certainly here in the U .S. is still a massive, massive force.

[193] So you needed to do a lot of radio, both for promotion, but just generally distribution, and even how you then did royalty accounting and all those different things was like a massive thing.

[194] And then physical still matters.

[195] greatly, certainly in the middle of the country.

[196] So the value add by record companies is fairly great and is very important certainly as you're thinking about how to get this out.

[197] Now, I think the roles going forward is changing quite dramatically.

[198] So you're finding that like there are a lot more younger record companies coming out that are formed by maybe being specialist in a certain genre.

[199] They're now finding equal opportunities to get their music heard.

[200] So they're being distributed via indie labels or they may even go and distribute their record companies through one of the major record companies in order to get the support that they're getting.

[201] So the industry is really kind of changing.

[202] And we're obviously a huge part, not so much in the change, but just being a participant in that dialogue about where it's going.

[203] What is the role of a manager?

[204] what's the role of a label, what's the role of an agent, what's the role of a publisher?

[205] Because all of those roles are kind of right now moving along as the industry is becoming more and more digital.

[206] Right.

[207] But you, from what I gather, Spotify is little leverage or maybe even interest in once you turn over the royalty share in how they distribute it to their artists, correct?

[208] You have nothing to do with that, I assume.

[209] We have nothing to do with that.

[210] What we are trying to do, however, because this is such a dramatic shift.

[211] in an economic model for artists.

[212] One of the big things was just, how do we educate people about this?

[213] Because really, even the iTunes model was fairly simple, because I'm selling my goods and I'm getting X for it.

[214] We can argue what X should be, but it's really that.

[215] Here with streaming, it's like I'm getting a revenue share of something, and it's streaming, and it looks like it's a very small number per stream, but what is a million streams?

[216] million streams a lot?

[217] Is it a little?

[218] Is it, you know, how should I think about it?

[219] That ended up being a very, very big shift.

[220] Are you saying that independent artists are over time via Spotify gaining leverage in the revenue ecosystem or not really?

[221] Because, you know, the common complaint is this.

[222] Spotify is great for customers.

[223] Spotify has turned out to be a lifesaver for labels.

[224] Spotify has been great for Spotify and for you.

[225] And it's been great for some musicians, but then there are others who feel that they're worse off than they would have been.

[226] Now, every case is a little bit different, but to those who feel like great, I'm glad all music is available to everybody all the time, and I'm glad that everybody else is making out well.

[227] What do you say to those artists, or maybe what do you say to someone who's starting in music now, can it be a sustainable future for them?

[228] I think we are in the process of creating a more fair and equal music industry than it's ever been in the past.

[229] So I'll take an example, like back in 2000, 2001 at the very, very peak of the music industry, peak of CD, all of those different things.

[230] Our estimates is that there were about 20 to maybe 30 ,000 artists that could live on being recorded music artists.

[231] Now, they could be touring, they could be doing other things, and the number could be far greater than that.

[232] But there are only like 20 or 30 ,000 that could sustain themselves being that.

[233] And why?

[234] Well, because again, the distribution costs so much which ended up being that there's very few artists that could even get distributed to begin with.

[235] And because the cost 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 unknown artists.

[236] So in the world with streaming, what's really interesting is the alternative of a cost for you to listen to something new is virtually zero.

[237] It's just your time.

[238] And because of that, you do listen to a lot more music than you did before.

[239] And you listen to a bigger diversity of artists than you did before, which in turn then grows the music industry.

[240] You were saying there were 20 to 30 ,000 artists that could be supported.

[241] Do you know what the number is now?

[242] I don't know what the number is now, but it's far greater.

[243] Even on Spotify itself, it's far greater than that.

[244] The economist Alan Kruger taught for years at Princeton and worked in both the Clinton and Obama White Houses.

[245] He was also fascinated by the economics of the music industry.

[246] Kruger once gave a speech at the Rock and Roll Hall of Fame, comparing the music industry to the modern economy at large.

[247] In both cases, he argued, most of the earnings were going to fewer and fewer people at the top of the pyramid.

[248] It's what some people call a tournament model, where the winners get most, if not all, of the profits.

[249] Kruger died recently at age 58 by suicide.

[250] He left behind a book to be published soon called Rockonomics.

[251] In it, he writes that there are roughly 200 ,000 professional musicians in the U .S. today, accounting for 0 .13 % of all U .S. workers.

[252] That percent has stayed about the same since 1970.

[253] And what's the median annual income for these musicians?

[254] $20 ,000.

[255] The argument Daniel actually was.

[256] is making sounds good in theory that digital distribution should make it easier for lesser -known artists to find listeners and get paid.

[257] Remember how Eck defines the Spotify mission?

[258] To inspire human creativity by enabling a million artists to be able to live off of 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.

[259] In 2006, the journalist Chris Anderson published an influential book called The Long Tail, why the future of business is selling less of more.

[260] Daniel Eck, in a 2010 interview, called The Long Tail his favorite book.

[261] But Alan Kruger's findings don't support The Long Tail promise.

[262] Social media and algorithm -driven recommendations, including Spotify's own playlists, seemed to magnify the bandwagon effect, whereby popular songs become even more popular by virtue of their popularity.

[263] In 2018, Spotify's most streamed artist was Drake, with 8 .2 billion streams.

[264] Assuming a typical streaming royalty rate of 0 .4 cents per play, it's nearly $33 million going to Drake's camp.

[265] But the pyramid is sharp, and things fall off really fast once you go beneath the top.

[266] Alan Kruger cites an industry survey, which found that just 28 % of artists earned money from storage.

[267] streaming in 2018, with the median amount just $100.

[268] So if you think about the streaming music revolution as a sort of tournament, let's think about how the various constituencies are making out.

[269] Spotify and Daniel Eck are doing very well, so are the company's original funders who got a huge return on their investment.

[270] The record labels have also been big winners.

[271] Not only did Spotify reinvigorate their industry, but it seems to have substantially improved their overall valuations.

[272] The Universal Music Group, for instance, which is currently for sale, has recently been valued at more than $30 billion.

[273] In 2013, its valuation was just $8 .4 billion.

[274] Other winners in the Spotify tournament are customers who get much more music than they used to get for much less money, and the most popular musicians are also winning big.

[275] one constituency that's not obviously sharing in the winnings, the long -tail artists, of which there are many.

[276] 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.

[277] Well, I mean, I don't want to, I'm actually very little focused on what a company is worth or isn't, or if that's fair.

[278] There's something called the Wall Street, which is really focused on that instead.

[279] I don't really focus on that.

[280] We at Spotify are interested in is how do we get a music industry which actually participates in all of the income streams?

[281] Coming up after the break, how that might actually happen, we'll be right back.

[282] Daniel Eck was a teenage entrepreneur, a millionaire in his early 20s, and now at 36, a billionaire, having built Spotify into a streaming juggernaut that is now worth more than the entire music industry was at the time of Spotify's founding.

[283] Spotify is in the news pretty much constantly these days, launching their service in India, filing an antitrust lawsuit in Europe against Apple.

[284] claiming that Apple's Apples' App Store is unfairly favoring its own Apple Music over Spotify?

[285] For Eck, the biggest challenge at the moment would seem to be figuring out a way to derive more value, more revenue, from the massive, sprawling ecosystem of recorded music, an ecosystem whose business evolution has been very slow.

[286] So, like, if you look at, say, the video industry, I say video and I really encompass the entire TV industry.

[287] movie industry all in video.

[288] What I find fascinating is it used to be a conversation where it started off only as paid.

[289] Then it added advertising as a component.

[290] And then there was a bunch of firms that were only focused on the advertising part of it.

[291] And then a bunch of firms that were only focused on the subscription income.

[292] So most notable, you had CBS on one end on the advertising end of the spectrum.

[293] You had HBO on the other end of the spectrum asking for subscription income.

[294] And then if you look at it today, the truth of the matter is CBS is about 50 -50.

[295] So it focuses as much on subscription income as it does in advertising.

[296] And HBO still is paid only, but you're as an industry, it's moving that both of these revenue models are equally important.

[297] And that's kind of my point with the music industry too.

[298] My point is like, what would happen to the music industry if you all of the sudden combined the power of advertising as a revenue model, the power of subscription as a revenue model, the power of Alacart on top of that as a revenue model.

[299] The three of them, on a base of the three billion people around the world, that are interested in music easily, just by virtue of looking at how much time people spent listening to music ought to be at least multiples greater than what the current music industry is and probably larger than the music industry's ever been.

[300] And you just added 1 .3 billion or so in India, yes?

[301] Potentially.

[302] You know, the Indian music market, what's fascinating to me is 90 % of that market is about Bollywood films.

[303] And they're throwing off music, and that's what's selling in India.

[304] Is it being well monetized still?

[305] I mean, people buy it, or I mean...

[306] It's not well monetized.

[307] But the music industry is essentially like a byproduct to the film industry, which for me tells a very interesting story that there's so much development left to do.

[308] What would happen if the ecosystem there was healthy?

[309] then people wouldn't think about making music just for movies.

[310] 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.

[311] And theoretically it may disincentivize some people from creating there.

[312] Maybe there's incentives to join even the middle of the long tail.

[313] There would be a step up, yeah?

[314] Yeah, well, I mean, it's virtually.

[315] non -existent.

[316] So it's in a much earlier development stage than the U .S. music economy.

[317] Let me ask you about consumer surplus, which is something economists love to talk about, those rare cases where you get something for much less than you'd be willing to pay.

[318] So Spotify is relatively super cheap, $10 a month for all the music I want.

[319] And that $10 would buy two -thirds of one downloaded album.

[320] So if you like music enough to buy two -thirds of one album per month and to get all the music in the world essentially for that same price is ridiculously cheap.

[321] So I'm curious to know two things.

[322] What do you know about willingness to pay more?

[323] And what do you know, if anything, about the disposable income that's now been captured by consumers by not having to spend more than $10 to consume the universe of music where that disposable income goes?

[324] I'm date on that?

[325] Well, I mean, you know, obviously we agree.

[326] We think $10 a month is very, very sheep in an amazing proposition.

[327] But the amount of people who wake up in a morning thinking, hey, I want to like pay $10 a month for music isn't as great as most people would believe.

[328] And we believe that that is because not only did piracy exist 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.

[329] 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 bootlegs and videos, and you can listen to that entirely for free.

[330] That's what we're competing against.

[331] So in order to do that, you can imagine that it's a free product versus one that's $10 a month.

[332] That's a pretty big stretch, certainly since all of these other things may have other things like convenience in the case of radio, it works in your car, works in all of those different things.

[333] And then, you know, in the case of YouTube, it's just like it's everything.

[334] It's even greater than what Spotify's libraries.

[335] So that's where we're kind of from a competitive set wrestling with.

[336] Now, obviously, as cars get more and more connected, I do think streaming services is way better user proposition.

[337] Although I did wonder, with autonomous vehicles theoretically coming maybe relatively soon, it does strike me that listening to music in a car is a perfect complementary activity because you need to drive, you need to keep your eyes on the road, but your ears are free.

[338] 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 interactive.

[339] Right.

[340] I mean, you may be right.

[341] I don't know.

[342] I think that what's really interesting, however, is the countercultural force right now, from people looking into their phones is all of these well -being things like both, I think Google and Apple release screen time, which is supposed to restrict your screen time.

[343] And we have the Alexis in your home, which, you know, is another device which you're not supposed to look at, which I think are all kind of great countercultural reactions to this, like watching a screen, which we wouldn't probably have imagined just a few years ago.

[344] Do you have those kind of aspirations for Spotify to get into health and wellness and handholding of various sorts?

[345] Not directly.

[346] To the extent that we do something like that, we're already very, very big in terms of meditational music, wellness music, sleep, you know, pink noise, white noise, everything on the spectrum.

[347] And now with podcasts, obviously, on the service too, there's a lot of people who are focused on those things, which I'm very excited about.

[348] Spotify has been streaming podcasts for years, but it made news recently by spending a few hundred million dollars to acquire two podcast production companies, Gimlet and Parcast, and a firm called Anchor that's primarily a podcast technology platform.

[349] Correct, correct.

[350] So that really changes things in a number of ways because you have been successful not being a content creator or a producer too much.

[351] Right.

[352] So I guess the first question is why, and then the second question is how will it unfurl.

[353] Right.

[354] Well, in the future, I don't think people will make a choice whether they're subscribing to a music service.

[355] We think that they're making a choice whether they will have an audio service of their choice.

[356] And so it wasn't like this well thought out master plan.

[357] Hey, we need an adjacent business and we don't know which one it is.

[358] It wasn't like that at all.

[359] What actually happened because Spotify is a platform was we started seeing, in my home country, Sweden actually, we started seeing record companies buying podcasts and uploading them to the platform as another revenue opportunity for them to grow.

[360] And it resonated really well with listeners.

[361] And that was like the first step.

[362] And then in Germany, record companies there had massive amounts of rights to audiobooks, which I wasn't aware of.

[363] And they started uploading that to the service.

[364] And very, very quickly, we went from, like, no listening to that.

[365] And now we're probably not the second biggest audio book service in Germany.

[366] And this is without our involvement.

[367] You know, this just happened by proxy of us being a platform.

[368] So we started seeing it resonating really well into people's lives.

[369] And they thought of Spotify not just as a music service, but as a service where they can find audio.

[370] And it played 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 your cars or whatever, as just another source where you could play your audio.

[371] But why do you want to go to the trouble to pay a couple hundred million to buy a firm that's creating it when almost everybody making podcasts would probably willingly have their content on Spotify?

[372] Yeah.

[373] Well, the reason why is really twofold.

[374] So one is I think that the format of podcasts were still very, very early on into what it will be.

[375] You know, if you really think about it, like for most people, there's all of these basic things for creators that haven't been solved.

[376] Like, how well am I doing?

[377] It's not that easy to find out.

[378] How am I monetizing this show and the value for advertisers is just not that easy to find out?

[379] And thirdly, what are people saying about my show?

[380] Like feedback.

[381] those are like three very elemental thing that if you think about almost all other formats if you're a journalist today in writing in text there's there's ways to solve all three of them we can argue what you're describing does exist to some degree on on apple podcasts which i realize Spotify is a complicated relationship with but that's also like spotify it's a closed ecosystem it's not part of the web quite so if apple podcast data existed in a non closed environment, would that have been enough for Spotify to not need to buy its own firm?

[382] Probably.

[383] I mean, in the end, I mean, it's all about solving needs, right, that creators or consumers are having.

[384] That's like what we're focused on.

[385] And if someone had solved that need, then obviously there would be less of a reason for us to do anything about it.

[386] And, you know, the same thing.

[387] If there was massive amounts of audiobook services in Germany, I'm sure we wouldn't have been successful.

[388] can you talk about Spotify customer data what do you have and what do you do with it and well what we do do with it now is very tightly regulated because we're originally a European company and in Europe I believe five or six years ago there was a new initiative called GDPR that that officially became a law sometime April May I believe last year and obviously we're compliant that and what it basically says is that all the data that we have around you 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 deleted by us and what are your abilities to monetize that data though to third parties well our ability to 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 of music are you listening to what's your age or what's your demographics and those are things that advertisers can target against right and how well do you monetize that currently you mean like if we do monetize it yes if you do monetize it how well do you yeah we we monetize some of those um aspect of course like any normal ad platform it's very important though to note that we're not selling any customer data that's what i'm asking are there so so there's ads on the spotify platform you'd be fools not to target those to listeners based on their demographics and their listening tendencies.

[389] Of course.

[390] But you do have a lot of data that would be valuable to third parties.

[391] Oh, yeah, massive amounts.

[392] But not even just like for other advertisers, but you can imagine even for the music industry, there's tons of data about like how their songs are performing or other people's songs might be performing that could inform them about what they're doing.

[393] We've taken the stands that we don't monetize the data itself at all.

[394] We don't sell the data.

[395] Well, I think it's an important one for us that users should be able to rely on us, not...

[396] My fundamental view is it's their data.

[397] Like, if we can use the data in order to make the Spotify experience better, then all good and great.

[398] And I think many users would say, yeah, I agree with that.

[399] But because now of the GDPR, which I do think is the right step, we can argue about, like, was it the right implementation of it and all those things?

[400] But I do think it's great for customers that there's something like GDPR.

[401] DPR there.

[402] And you can delete the data.

[403] You can also say opt out of specific things that we are gathering about you and saying, hey, I don't want you to know X or Y. I've read that you operate your life in a series of sort of five -year commitments.

[404] I don't know how finite or real that is, but if it is real, where are you now in the five -year cycle and what happens next?

[405] It's not always been five years, by the way.

[406] So when I started the company, it was a five -year commitment because Because being 23 at the time, having started lots of different companies before, I really wanted to see what would happen if I applied myself to one thing and only one thing and do it for a meaningful amount of time, how far I could get on that problem.

[407] And the longest I could imagine spending on anything was five years.

[408] So that's how it ended up being five years.

[409] And then when the five years passed, I was 28.

[410] So I said, well, when 30s, there was like a two -year increment.

[411] And now I said to myself, you know, just before going public last year, you know, is this what I want to do?

[412] And what would happen if I made a 10 -year commitment, which felt pretty daunting?

[413] And like, what is it that we would have to do?

[414] What does the company have to look like for me to be interested to do this for another 10 -year?

[415] What would my role have to look like in order for me to be interested?

[416] Is that a key component, how interested you could?

[417] can remain and I mean it needs to be kind of constantly challenging to you yeah definitely so I mean to be honest because otherwise if you don't have that passion and you don't feel like you're growing and challenging yourself someone else will probably do a much better job so where are you right now I'm in year two now of a 10 year commitment so what did you see in the future of Spotify that you thought was going to be so amazingly excitingly challenging for 10 years Well, there's really two things.

[418] So the first and more important one is, like, really from the inception of Spotify, the assumption was that we would solve the user a problem, i. like get people to listen in a much better way, and then they'll contribute back to the music industry.

[419] The core assumption was that the music industry would take care of all the other things, how people get signed, how they get heard.

[420] And I realized that that just didn't happen.

[421] So we're largely doing business the same way, as we were doing 10 years ago, there's been some evolution of that.

[422] But I want to work with the music industry.

[423] I was never a disruptor.

[424] That's like the big misunderstanding about me. I believe that record companies are important and will be important in the future, but we believe we can be the R &D arm for the music industry, that we can develop better tools and technology to allow them to be more efficient and thereby creating more better solutions for them and for artists.

[425] Can you give an example of how, the efficiency happens?

[426] Well, one of the hardest problems right now for an artist is to get heard.

[427] One of the biggest platforms to be heard at would be Spotify, right?

[428] So today, the primary tool that an artist has to get heard on Spotify besides putting the music on there is getting known by one of our editors.

[429] So in a weird way, like while we want to democratize music, we've kind of become gatekeepers as well.

[430] So the question is, can we develop tools that enables artists to promote their music more efficiently just by themselves on the platform?

[431] And that could be in the form of being able to talk to their existing super fans that are on the platform.

[432] It could be in the form of better promotional tools for record companies in how they pitch music and get the music out there.

[433] Spotify having become a gatekeeper, whether inadvertently or not, is an important point.

[434] A song that Spotify adds to one of its playlists will get many more streams than one that doesn't.

[435] And streams translate into money for the rights holders.

[436] So having that power is important, especially from a profit maximizing perspective.

[437] If Spotify were primarily concerned with profit maximizing, it might promote content that is cheaper for Spotify to stream.

[438] Maybe it's content they produce themselves.

[439] or just content that comes with a lower payment rate than others.

[440] It may not sound like a big difference to pay a rights holder 0 .4 cents per stream versus 0 .3 cents, but if you're talking hundreds of millions or billions of streams, it adds up.

[441] What do you listen to these days?

[442] Music -wise or podcast?

[443] Well, both.

[444] So, music -wise, I've been really, really interested in African music lately.

[445] So particularly, like, West African dance hall.

[446] music has been like something that's been pretty cool.

[447] We launched in South Africa a year ago so all of those playlists like started bubbling up and there's been a lot of really cool.

[448] It must be so cool to launch in a new place as it means for you guys to discover what's 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 for me the biggest thing over that last year that's been really interesting and then on the podcast side it's such a fascinating format to me like there's obviously people who can listen to you know crime town or whatever it may be just to get entertained for me it's more like the educational part of it so it could be um a free economics there's one called invest like the best that's quite interesting and thoughtful about um like investments and how you do that i do listen to um quite a lot of um history podcast as well just to get an hour uninterrupted about a subject like there's no other format that goes to the same depth as I find that podcasting does.

[449] Are there still holes in the Spotify music library that you really want to fix?

[450] There are, but obviously by now the holes that we have are probably more regional holes than the fact of like the big ones, Garth Brooks being probably the most known example right now.

[451] But most of it is really about, you know, old music getting the archives up.

[452] So I'm very proud that we did a deal with the BBC a few years ago where we're now bringing the entire archive onto streaming.

[453] Same with Deutsche Grammophone, the German equivalents as well.

[454] Would you ever consider in a case like Garth Brooks, I mean, I'm sure you're going to say no to this because it would be illegal.

[455] But would you ever consider saying, look, we're Spotify.

[456] We're just going to put the music there.

[457] And then he will see how well it does.

[458] And then the first check gets written.

[459] Right.

[460] And then that will bring him to the table in a proper way.

[461] Would you or did you ever do that?

[462] No, we've never done that.

[463] It kind of goes against the ethos of what it is we're trying to do.

[464] I mean, again, when we started, that was like the modus operandi.

[465] Like there was all these...

[466] A sort of terrorism in a way, yeah.

[467] Yeah.

[468] A lot of these services where people just uploaded all the music and then they figured out the problem later on.

[469] That was never the approach that we took.

[470] And why was that?

[471] I mean, do you consider yourself a particularly...

[472] ethical persons, that the way Swedish business is done?

[473] Because, you know, to be fair, Uber pretty much did that.

[474] They would go into cities where they knew that local authorities wouldn't allow them to operate.

[475] Right.

[476] Well, I don't like to say that we're more ethical than other people.

[477] It just felt like the right thing to do.

[478] And I believed that the problem for the music industry with the past had been just that fact that it always felt like it was people who wanted to disrupt the existing music industry.

[479] I don't.

[480] believe that the music industry has to be disrupted.

[481] I believe it has to be evolved.

[482] So we like to work with them as partners.

[483] That's always been our approach.

[484] There isn't music on Spotify that the copyright owner haven't authorized us.

[485] I have one last question.

[486] If you weren't doing this now, let's just pretend Spotify really hadn't worked, that either the technology or the rights gathering had proved impossible.

[487] You'd be doing what now and where?

[488] If I weren't doing this, I would probably do something in health care.

[489] And it's kind of like, it's a weird revelation.

[490] If you asked me 10 years ago, I wouldn't have said that.

[491] But right now it's like, I came to that realization because, you know, people always said, oh, Spotify's so amazing.

[492] And my response was always, well, it's not saving lives, but it's good.

[493] And so a few years ago, I was thinking to myself, like, why am I not the saving lives?

[494] And what would I do if I did that?

[495] And I think, you know, I talked about these technology currents, and I think in health care, a lot of those technology currents are starting to play out.

[496] And it's not just about the sort of digital part of these things.

[497] It's just the advancement in biotech, overall, CRISPR, proactive medicine.

[498] Like, it's going to be the next decade or two decades.

[499] 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 two decades from now.

[500] And so we will just know a lot more, and that's fascinating to think about the implications that that will have economically, because I believe in the end it means that we can spend a lot less of our GDP on health care, and as a consequence, hopefully treat a lot more people.

[501] So, yeah, I'm really interested in that part and what's going to happen in that space.

[502] Do you think you will do that?

[503] I mean, in eight years, at the end of this 10 -year, quote, commitment, you'll be only 44.

[504] Right.

[505] Do you think you will try something radically different for you like that?

[506] I hope so.

[507] My interests, like, I love music.

[508] It's been a passion since, like, really since the beginning of my life.

[509] And that will always be a passion and always be something that I'll do in some shape or form.

[510] But, you know, we're here a very, very short period of time on Earth.

[511] And I feel a tremendous amount of responsibility.

[512] having, you know, I think it's insane that I'm 30 plus years old and having had as much fortune as I've had.

[513] So I feel like I need to do a lot more than what I'm doing to leave the world a better place than what I entered it.

[514] 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, check out a new book called Spotify Teardown inside the black box of streaming music.

[515] Meanwhile, coming up next time on Freakonomics Radio, sometimes a banana is just a banana, but even just a banana is really something.

[516] Basically, there are 135 countries to grow bananas, and it's the fourth most important crop after rice, wheat, and corn.

[517] In the beginning, they were a luxury item.

[518] They were very, Today, the very, very popular banana is under attack.

[519] It's one of the most spectacular plant disease epidemics in history.

[520] If you know your banana history, you know this happened before.

[521] Can the banana be saved again?

[522] That's next time on Freakonomics Radio.

[523] Freakonomics Radio is produced by Stitcher and Dubner Productions.

[524] This episode was produced by Matt Frasica.

[525] Our staff also includes Alison Craiglo, Greg Rippen.

[526] Harry Huggins, Zach Lipinski, Matt Hickey, and Corinne Wallace.

[527] Our theme song is Mr. Fortune by The Hitchhikers.

[528] All the other music was composed by Luis Gera.

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