The Illegal Rise of Spotify

[Music] big battle brewing in the music business Spotify is in full damage control mode these days as a growing Revolt of artists scrub their music from the streaming platform after hash delete Spotify went viral the musicians on Spotify get paid very little spotify's top podcaster breaking his silence if I P you off I'm sorry Prince Harry and Megan also expressing concerns to Spotify their podcast partner all of that causing a lot of controversy at Spotify that the company has bet the farm on podcast we started this company when I was 23 years old this is

Daniel e founder of spotify and in 2006 he was having a quarterlife crisis he knew that he should be incredibly happy he just retired in his 20s after selling his advertising business called advertigo making him a million in the process he was out partying most nights and he even bought himself a Ferrari yet within a few months he felt his life had lost all [Music] purpose you see Daniel had always been a workaholic at the age of just 13 he' started his first business whilst living at his parents house the business was making websites for

other people and he started off by charging $100 then the next client he charged $200 and by the age of 18 he was charging $55,000 per websites he recruited other kids from his school to help him by bribing them with video games and soon Daniel had a whole team working for him his parents were both impressed and concerned shortly after this Daniel applied for a job at Google but they said he needed a degree which he didn't have so instead he decided to start his own search engine although he quickly abandoned that idea when he

realized that competing with Google wasn't a wise move however Daniel would go on to try a bunch of different business ideas most of which never worked out but then in his early 20s he hit the jackpot he sold one of his businesses to a company called trade doubler for an estimated $1 million which brings us back to the whole quarter life crisis thing the novelty of doing nothing all day and partying all night was wearing off Daniel needed meaning in his life again he decided he wanted to use the money he' made from selling his

business to focus on an even bigger idea he wanted to revolutionize the music industry meanwhile around the same time as all this a service called Napster had become extremely popular which allowed people to easily share files with each other this meant people were sharing mp3 music files completely free and it wasn't long before the record companies Su Napster into Oblivion but the problem was countless similar applications then popped up like Kazar and lime wire along with sites like The Pirate Bay it was clear that now this peer-to-peer technology was out there the music industry wasn't

going to be able to stop online file sharing now Daniel e was a huge music fan himself and absolutely loved using these free file sharing services but he also realized that all of this was having a very negative impact on the music industry record sales were declining every single year so Daniel figured the solution was to create a new service that was even better than Napster but that allowed musicians and record labels to earn money from their music Daniel envisioned a platform where you could access all of the world's music instantly and that it would

be legal because it would be funded with ads and a percentage of the ad Revenue would go to the artists and thus the initial idea for Spotify was born Daniel was confident this was win-win a better experience for users and a way to save the music industry from the threat of piracy so he felt sure the record labels would be on board but spoiler alert the record labels were most definitely not on board in fact if Daniel had any idea how complicated and controversial things were going to get he'd have probably never started Spotify at

all Daniel teamed up with a friend of his called Martin who became spotify's co-founder and together they spent the summer of 2006 trying to recruit the best coders they could find they figured before going to record companies to try and negotiate licensing deals for the music rights they needed to create a great working prototype of their products so ironically even though the idea for Spotify was to help prevent piracy initially a Spotify team downloaded hundreds of thousands of songs illegally so they could work on developing Spotify and create a working prototype filled with music to

be fair it was kind of a chicken and egg problem they couldn't convince the music industry how well their product worked without actually building it but they couldn't build it without the music so they pirated millions of dollars of music for free that summer the team worked frantically to build the Spotify clients they work long days and nights at the office and when they finished work they'd often stay behind to play poker or foosball so that summer they became a bit of a family given they were spending almost all of their time together and within

a few months they created the first version of spotify and it was genuinely pretty brilliant it was Sleek professional and had a great search engine and playlist features there were Pages for artists and albums so everything was neatly organized and most crucially of all when you clicked on a song the music began playing almost instantly this was a big deal internet speeds were a lot slower back then but the team had designed it so that the music files essentially downloaded in small pieces whilst you were listening to the song which meant there was no waiting

for it to start so once they' built the platform they sent out beta invites to get some feedback from other people and everyone who used the service loved it Daniel was thrilled with the product too but he was also extremely stressed what he hadn't told his team was that negotiations with the record companies that legally use their music were not going well at all now the major record labels who dominate the music industry are known as The Big Three Sony Warner and Universal getting all three on board was crucial for spotify's Success So Daniel had

been flying all over the world for various meetings he explained the idea of free music funded by ads and that the record labels would be given a large percentage of all the ad revenue generated but as soon as the record labels heard the word free they lost interest sometimes they even got angry they hated the business model of making from ads instead of people actually buying the music they said they wanted a fixed price for every time a song was streamed for Spotify this could be disastrous because there was certainly no guarantee that advertising Revenue

would cover that but Daniel knew he had to do something as spotify's money was running out Daniel felt his anxiety increasing his heartbeat racing his team had built a great product yet it was starting to look like the business would be dead before they could even launch it but at the last minute they found a compromise Spotify would also add a paid version of their service for a fixed monthly fee they also agreed that the record labels and music Publishers would effectively get about 70% of all the revenue generated along with a big chunk of

Spotify stock for Spotify it was unclear if this was going to be a sustainable business model they were only keeping 30% of the revenue was that going to be enough to cover all their costs but they really had no choice but to accept the good news was that Spotify now had the right to use music in most of Europe negotiations for other parts of the world like the US would drag on several more years but finally in October 2008 Spotify officially launched the Spotify team then began a process called the big clean where they went

through and removed all the illegally pirated songs from their service at that moment Spotify must have believed their worries with the music industry were finally over but that was far from the case over the years the music industry would regularly threaten to pull spotify's licenses if they didn't make the changes they wanted like removing features from the free version of the app to make sure more people joined the paid version which was much more profitable for Spotify Engineers it was incredibly annoying to have to deliberately make their free product worse but the record companies held

so much power over them they had no choice another example was when the record companies heard about Spotify securing more funding from investors and so they tried to negotiate an even bigger cut of the money for themselves even though Spotify still wasn't even profitable however it wasn't just a record label Spotify would be in a constant battle with many individual artists spoke out against the company too and some completely pulled their music cataloges from Spotify including Metallica Pink Floyd The Beatles and Bob Dylan over the years several other musicians would come out to publicly criticize

Spotify for how much it paid artists Taylor Swift was a notable example who in 2014 stated that Spotify was devaluing music and withdrew all her songs from the app the thing is it wasn't actually down to spottify ify how much money individual artists got that was down to their own private deals with the record companies but it is true the artists were probably worse off the record labels at least owned shares in Spotify so they benefited from spotify's growth but artists themselves didn't they just saw Spotify as hurting the amount of sales their music was

getting the problems for artists were made even worse by the amount of fake streams happening where forers use streaming Farms to replay certain songs on repeat to increase their share of spotify's Revenue which takes money away from genuine artists it's estimated fake streams could be costing artists $300 million a year but because Spotify keep their 30% either way they initially didn't seem to do much to deal with this issue but no matter how unhappy artists were those who quit Spotify normally returned when they realized it was better to at least get some royalties rather than

nothing at all because the reality was that streaming was here to stay users seemed to love the service and SP sptify began growing incredibly quickly this growth only increased when Spotify made a deal with Facebook to integrate Spotify on their platform and then they did deals with Broadband providers to bundle in Spotify trials with their internet subscriptions causing sales to rise even further also Spotify had a clever marketing trick when they expanded into new countries they'd often require an invite to initially join which created scarcity and hype around the launch even though there were so

many invites that they weren't really Limited at all but the marketing worked and by 2011 Spotify had a million paying subscribers however there was still one big problem Spotify wasn't actually profitable and some were starting to question if it ever would be sure it was clear Spotify was popular but the biger looming question was whether Spotify was actually a viable [Music] business before we get to the next chapter I want to tell you about video sponsor n a new and different way to get healthy what I really like about n is that it helps you

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Game of Thrones quote winter is coming became widely used by Spotify employees because they knew a brutal war was just beginning as an Ever growing number of similar streaming services popped up the launch of Apple music was a particularly huge threat and it certainly didn't help that Apple held a lot of Leverage over Spotify for example Apple seemed to be deliberately making it very difficult and slow for Spotify to get updates of their app approved on the app store plus Apple takes a 30% cut of inapp purchase is meaning when someone upgraded their Spotify account

Apple was taking a huge chunk of the profit which is certainly not a deal when Apple was one of spotify's competitors but there were other contenders in the streaming Wars too like tidle who had strong ties to music artists and so several big artists started listing their music exclusively on tidle and then you had Tech giants like Google and Amazon getting into music streaming as well even YouTube launched YouTube music and yet despite the fierce competition Spotify retained their lead largely helped by their free ad funded option they were actually losing money on this free

tier as 90% of Revenue came from Paid subscriptions but the free option was very efficient at bringing in new users who later converted to the monthly subscription but the overall problem was still clear if all these streaming services offered basically the same music what were spotify's unique selling points and not just that but what happened if the record companies had a change of heart and pulled spotify's licenses Spotify needed more leverage and differentiation the good news for Spotify is that Daniel e had two solutions the bad news is that both of these would end up

causing a lot of [Music] controversy number one is that around 2019 Spotify began investing heavily in podcasts they spent well over a billion dollars to acquire content including exclusive deals with Obama DC Comics and Joe Rogan they also put the podcasting platform anchor for around $100 million the idea was simple Spotify wanted to start owning content itself this not only meant that Spotify would have some exclusive content people couldn't get anywhere else but it also meant that Spotify would pay out less Revenue to record companies and musicians if users spent more time listening to podcasts

on their App instead but then the second solution for Spotify to differentiate itself from competitors and gain more leverage over the record labels was that Spotify began focusing much more on our bring a personalized Music Experience initially the main purpose of Spotify was making it easy to find the music you want that you already know but increasingly Spotify shifted its focus to personalization and discovering new tracks which is where it started investing heavily in machine learning in 2015 they released discover weekly a personalized playlist that updates each week with music recommendations tailed to each user

this proved to be incredibly popular so Spotify then went on to introduce multiple other personalized playlists like release radar for new music but here's the thing by controlling the playlists Spotify suddenly had a lot more power and they subtly began to move listeners slightly away from music owned by the major labels and towards songs that were less expensive for them to license the personalized recommendation algorithms were biased towards music that was cheaper for Spotify to license or music which they kept a higher percent of the revenue share things got even more controversial when music business

worldwide published a list of 50 unknown artists whose music was trending on some of spotify's biggest playlists altogether the tracks have been streamed over 500 million times but here's the problem the artists weren't real you'd search their name and they had no social media or online presence just a few songs on Spotify with huge amounts of streams articles started popping up about Spotify having fake artists it only later came clear Spotify had licensed music from epidemic sound who sell access to a huge library of royalty-free music it's a service commonly used by YouTubers in fact

I use it myself but by Spotify adding these tracks to playlists and clearly artificially boosting their prominence on the Spotify app it meant Spotify would have to pay less money to the record labels and musicians some people strongly condemn this as they said Spotify was taking away spots in playlists from genuine artists who had earned the right to be there and D looting their streaming revenues even further plus the whole thing was made even shadier by the fact that one of spotify's early investors also owned part of epidemic sound but this report Spotify want to

take this even further with some articles suggesting Spotify could soon replace real artists with AI music basically the idea is that hit songs will be able to be created through artificial intelligence which for Spotify would be another way to own the rights to the music themselves so they didn't have to pay artists so much and thus massively increase their profit margins by sprinkling some AI music into their popular playlists but the whole point here is that since over a third of the music listen to on Spotify is now coming from spotify's own recommendations and playlists

they suddenly have a lot of influence over the music industry if they decided to Kickstart a certain new unknown artist career they could literally catapult them to success immediately by adding their songs to certain playlists and on the flip side they can suppress the reach of other artists for example they started reducing the reach of songs containing hate speech and essentially shadowban certain artists from their playlists who had been involved in controversies such as AR Kelly we know about this because Spotify made it public but most of the time we have no idea who Spotify

are artificially promoting or reducing the exposure of so it may not seem like it at first glance but Spotify has changed drastically from when it first began Daniel originally wanted to build a Free Library of Music funded by ads but now Daniel describes the company as a technology-driven layer between fans and artists he sees it as a two-sided marketplace where Spotify gain revenue from both listeners and artists themselves listeners pay for access to music artists pay to reach Their audience for example labels are now paying Spotify for inclusion in playlists and paying more money for

higher rankings in those playlists Spotify are also allowing musicians to promote their merch and ticket sales through Spotify basically Spotify move from being just a distributor of music to a platform that controls the music in fact in 2017 billboard named Daniel EG as the most powerful person in the music business of course even though Spotify have regained some leverage that doesn't mean spotify's problems are over check it out spotify's acquisition of Joe Rogan's podcast has already created several different backlashes firstly artists got angry that Spotify were paying $100 million for a podcast despite the fact

they received just fractions of a set for each stream of their music then some people got angry that Spotify was censoring Joe's podcast when Spotify took down several episodes from his back catalog but then other people got angry when Spotify didn't take down certain episodes of Joe's podcast that they said were antiva causing yet more artists to pull their music from the platform basically people on all sides were angry but ultimately no matter what you think of Spotify it's clear what a huge impact it's had when we think of the history of music we can

see the transition from Vinyl to cassette tape to disc to MP3 player and now to streaming streaming has become the largest revenue source for the music industry and so some would say Spotify really has succeeded in its initial goal of saving the music industry from piracy then again others would say it's done more harm than good artists get less money and Spotify now have a growing amount of control over who succeeds in the music industry and who doesn't what's really interesting though is spotify's new goal of becoming a central online hub for podcasts was actually

tried almost two decades ago by a little company called Odio which went on to become Twitter to see the crazy full story of what happened there just click this video right here I'll see you there cheers [Music]