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Music

Backstage with streaming giant Spotify

Spotify has revolutionized the way people listen to music, but hasn't yet quelled all its critics. DW visits the streaming service's headquarters in Stockholm for a rare glimpse behind the digital curtain.

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The washed-out grey office block hardly seems befitting to house the sort of global Internet startup that makes daily headlines. But, as with the flimsy A4 sheet of paper that so temporarily bares the company's distinctive green insignia on the street-level entrance, perceptions can be frustratingly deceiving.

Such was the case when a little Swedish website went live back in October 2008. Very few people heralded this a landmark moment. Indeed, after a decade of turbulence and now finally enjoying some stability brought by steady iTunes revenue, many music industry pundits reckoned (or at least quietly prayed) that these Swedish upstarts would simply disappear, like Napster and Pressplay before them.

Having recently celebrated five years in business, there is now little doubt that Spotify - and music streaming in general - is here to stay. The MP3 can join the CD and cassette in retirement as Apple readies for iTunes' succession to iRadio.

Skepticism from Germany

"Streaming was inevitable; it was only a matter of time," Spotify's Generation Manager for Europe Jonathan Forster tells DW. A genial Newcastle upon Tyne lad, equally at home talking pints and proxies, Forster was one of founder and CEO Daniel Ek's first draft picks seven years ago.

Jonathan Forster, Copyright: Spotify

Jonathan Forster has been with Spotify since the beginning

"Dan's bet was, looking at the way that people are consuming media, are governments really going to throw people off the Internet when it's being used to provision so many services?" says Forster. "Looking at the size of the ad industry, (…) if you could monetize the pirate listening with advertising it would be bigger than the music industry."

The first thing Ek and co-founder Martin Lorentzon learned was that the record labels weren't as turned on by the idea as they were. Having first approached them in 2006, it would take two long years before the labels reluctantly handed over the keys to the vault and allowed Spotify to launch in a number of limited European markets with a "see how it goes" approach.

Germany was added as the company's 13th market in March 2012, and Forster says it has been difficult to seduce. Germany has been skeptical of the fanfare surrounding Spotify on the one hand, but was also already well acquainted with other streaming and digital distribution services, such as Berlin-based pioneers SoundCloud.

Chance for independent music

"Streaming is not such a new service to me," explains Raik Hölzel, founder of Berlin-based indie label Kitty-Yo. At its peak, the label employed a staff of 17 and was selling hundreds of thousands of albums worldwide from artists like Peaches, Chilly Gonzales and Maximilian Hecker.

Hölzel has managed to stay afloat through two decades of extreme industry turbulence that saw Kitty-Yo downsize to just two employees. Now a digital-only label, Hölzel says that, while a welcome addition to the landscape, the Spotify model still needs to be fine-tuned if it is to work for artists.

Spotify's headquarters in Stockholm, Copyright: DW / J. Tompkin

The Spotify office is what you'd expect from a young, modern startup

"I think we, the artists and the labels, still don't get paid as much as we should get paid, and as much as Spotify and the other services could pay - but the service itself is great," he says. "It's a great chance for independent music especially to survive, to get known, to make money with it. I think we all just have to negotiate the payment models and the prices a little bit."

Islands in the stream

Although regularly seen keeping company with billionaire acquaintances like Mark Zuckerberg and Sean Parker (a major Spotify investor), Daniel Ek isn't your typical Internet millionaire. He's confident but understated, driven but measured. Having started his first company at 14, Ek was a jaded multimillionaire by his early 20s, unfulfilled by his Ferrari and frustrated with his place in the universe. After taking a break to ponder life's big questions, he emerged in 2006 with the formula for what would become Spotify: "Think it, built it, ship it, tweak it."

The company's first landmark victory was the resurrection of Sweden's recorded music industry. Sweden is home to The Pirate Bay, the world's largest clearinghouse of peer-to-peer BitTorrent file sharing, and boasts one of the fastest Internet connections in the world as well as nearly ubiquitous computer ownership. All that contributed to the fact that by 2008, Sweden's recorded music industry was all but decimated by illegal downloading.

However, following Spotify's launch in October 2008, the Swedish government trounced The Pirate Bay in the courts and then signed off on a Europe-wide anti-piracy policy. Whether white knights or accidental heroes, Spotify were nonetheless in the right place at the right time.

Pinball machine at the Spotify headquarters in Stockholm showing co-founder Martin Lorentzon's top score, Copyright: DW / J. Tompkin

Co-founder Martin Lorentzon holds this top score

Sensing the changing winds, the labels signed up - with more than just their music. Reports suggest Sony, Universal and Warner collectively own an 18-percent stake in the private company.

"We've got over a thousand people working on a digital music problem and that's probably more than anyone else in the whole world, so we've got to have some self-belief," says Forster, sipping his coffee.

Size does matter

Self-belief is at the epicenter of Spotify's philosophy. Taking up four floors in downtown Stockholm, the office has the frisky get-up you'd expect of a cutting-edge startup, but without the brazenness. There's the usual video gaming room (apparently Ek reigns as FIFA champion), a Metallica pinball machine (Lorentzon holds the record score), and otherwise the sonorous drone of fingers punching keyboards.

Around 450 unfazed 20-somethings quietly crunch obscure analytic data - like how Spanish streaming nosedives around siesta time at 1:00 pm, while in Finland consumption goes into overdrive when the saunas close at 11:00 pm. They curate playlists for every conceivable scenario, from homework mood-setting soundtracks to the hottest yodeling rappers you've never heard of.

But one crucial question remains unanswered: Can artists earn a respectable crust from the new business model? Traditional digital skeptics Metallica say yes. Digital distribution pioneer Thom Yorke from bands Radiohead and Atoms for peace has openly said no.

Forster says Spotify had paid the music industry one billion dollars by the end of 2013, but more users will inevitably mean more money for everyone. So what's the magic tipping point where streaming royalties supplement lost revenue from CDs and legal downloads? Forster remains vague, but repeatedly references Facebook's one billion users.

Thom Yorke, right, and Ed O'Brien, left, of Radiohead, Copyright: AP

Thom Yorke (right) of Radiohead is one of Spotify's prominent critics

However, with only 24 million users in 32 territories, that hallowed figure is still a distant apparition for Spotify.

Critics in high places

There are some who see Spotify's business model as fatally flawed, including streaming competitor Pandora's CFO Mike Herring. Maybe it is another sign of Ek's cautious Swedish business nous that he chose to set up Spotify's HQ next door to a church.

"It's always been hard to make a huge living doing the thing you love," Forster says, admitting that user numbers remain frustratingly low. "It's tricky. We don't have all the answers. It's never been that easy for artists; I think there's a myth that it is. We often say in the start-up world the best entrepreneurs are the ones that didn't give up."

Raik Hölzel is also one of those that never gave up. Kitty-Yo turns 20 this year and is currently enjoying its best financial statements on record. Streaming accounts for one quarter of its revenue, with the rest comprised of paid downloads and licensing royalties. While Hölzel is adamant that there is a great deal to be resolved regarding the streaming model, he says there's no turning back.

"I am not willing to turn the wheel back," he concludes. "Of course there were very good things and cool things that happened 20 years ago, but I think the future is brighter. There are some very cool things ahead of us."

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