The Making of Spotify

By: Eli Levi  |  May 13, 2022

By Eli Levi, Business Editor

Spotify is the largest music streaming platform with 365 million users globally. Many do not know, however, the origins of this platform. Before Spotify became the number one streaming platform, Napster had owned the online music market. Only after Napster failed was Spotify able to take its place with a new model allowing it to be where it is today.

Spotify in many ways is a byproduct of Napster, the original place to listen to music for free. After Napster failed there was a spot in the market for Spotify. After being involved in many startups and various projects some of which were in the music industry, Daniel Ek decided to found Spotify in Sweden with his friend Martin Lorentzon in 2006. At first, Spotify was launched only in Sweden as per the deal with the record labels. After success in Sweden, they rolled out to the United Kingdom and then slowly to the rest of Europe. Spotify was then able to raise a $50 million round from Wellington Partners and billionaire Hong Kong investor Li Ka-Shing.

Meanwhile, Facebook was looking to partner with a company in the music industry. This had been a lengthy process as Sean Parker, the founder of Napster, who was involved with Mark Zuckerberg and Facebook, continuously denied possible partnership opportunities that were presented. Parker became infatuated with Spotify and thought it was the future of the music industry and a perfect fit for Facebook. 

Gone were the days of organizing and downloading music, everything was completely streamlined and streamed. Parker sent an email to Ek praising Spotify and asking to be involved with the company and possibly integrate Spotify into the Facebook experience. Even though the Series B round, a stage of investment, was already closed at this point Ek reopened it and allowed the Founder’s Fund and Parker to be investors. This relationship with Facebook turned out to be very fruitful as Spotify was able to leverage it to expand its success and increase its virality. After a long wait the record labels finally agreed in 2011 to allow Spotify to expand into the U.S. By the end of September that year, Spotify had six million users of which over two million were paying subscribers. After their success, Spotify continued to raise many more investment rounds amounting to about 2.5 billion in raised capital.

Spotify then began to customize the in-app experience. Spotify started with a discover weekly playlist which was a way to discover new artists based on their listening habits. Release radar was the next personalized playlist released, intended for helping to track new releases from artists that the listener liked. The next step of personalization was a playlist based on all the data Spotify collected called the daily mix. Finally, one of the newer features is the yearly wrap up. This is when Spotify supplies the listener with all sorts of interesting stats about what they listened to over the past year, such as how many new artists they discovered, how many genres they listened to along with several top fives: their five most played songs, their top podcasts, and their top artists. All of these features, specifically the playlists, were major factors in keeping users engaged.

Spotify hired Barry McCarthy, the former CFO of Netflix, to be their CFO. Barry spearheaded the idea of Spotify doing a direct listing (DPO) instead of a traditional IPO, when a company goes public, allowing current shareholders to have some liquidity in the company if they wish. With a DPO no one is required to sell any shares, rather it gives the shareholders the option to sell should they choose to exercise it. When the DPO happened Ek still owned about 25% and Lorentzon 13%, which was a large portion of the company to own so late in the game especially after raising so much capital.

Spotify has changed the music industry forever. They were the first legitimate music streaming company to build a business model that succeeded for streaming music. They have continued to innovate and capture more and more of the streaming market and have become the largest streaming platform today.