Invest Like the Best with Patrick O'Shaughnessy - Daniel Ek – The Future of Audio - [Invest Like the Best, EP.147]

Episode Date: November 12, 2019

My guest this week is Daniel Ek, the founder and CEO of Spotify. In my conversations with Daniel, I’ve found him to be one of the most interesting and thoughtful business leaders in the world. You���ll see what I mean as you listen to our conversation. We talk about Spotify plenty, but what I so enjoy about Daniel is his way of thinking in systems and frameworks. He is committed to evolution, innovation, and growth for both himself and for Spotify and is on my shortlist of CEOs to emulate. This was one of my favorite conversations on the podcast, I hope you enjoy it.   For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag   Show Notes 1:21 – (first question) – Management lessons from a Dubai chocolate maker 4:54 – Trends shaping the business landscape today: globalization, automation, and digitation 7:51 – How he thinks about the vertical integration of his business and scale 10:37 – Are companies doing a good job adjusting to the changes in the global business landscape 14:44 – How does Spotify view scale moving forward 17:59 – What trends has he seen among creators as a result of the Spotify platform 20:32 – The community benefit that has been created by the platform 23:47 – Intimacy of audio 25:31 – Creating an environment that continues to spur innovation 29:12 – Star vs constellation business strategy 32:21 – Measuring network health 35:12 – Spotify Originals and what his competition in the video market is doing 39:36 – How podcasts play into the growth strategy 43:04 – How did he solve the problem of competing with free 47:21 – Is their strategy repeatable, going after fractured suppliers 49:02 – Role of the CEO in a startup 51:22 – Others who have taught him great business lessons 53:18 – Kindest thing anyone has done for Daniel   Learn More For more episodes go to InvestorFieldGuide.com/podcast.  Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on twitter at @patrick_oshag

Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shauncee Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions and the securities discussed in this podcast. My guest this week is Daniel Eck, the founder and CEO of Spotify. In my conversations with Daniel, I found him to be one of the most interesting and thoughtful business leaders in the world. You'll see what I mean as you listen to our conversation.

We talk about Spotify plenty, but what I so enjoy about Daniel is his way of thinking in systems. and frameworks. He is committed to evolution, innovation, and growth for both himself and for Spotify, and is on my short list of CEOs to emulate. This was one of my favorite conversations on the podcast. I hope you enjoy it. So Daniel, so when we were walking around the West Side Highway a couple months ago, I kept pulling my phone to take notes for topics because I knew we would be doing this one day. And one of my favorite stories that you told me was of a chocolate maker that you met, I think, in Dubai, and some management lessons that came from this gentleman. I'd love you to start by sharing that story and that lesson.

Yeah, sure. It's almost a little bit embarrassing. But yeah, I was on vacation in Dubai and obviously couldn't help myself. So I found myself at a dinner one night meeting this couple of this older man and he'd been golfing, I think. And so I asked him what he did and he was telling me the story. He actually didn't want to get into it, but then eventually kind of told me the story about how he was in the chocolate making business. And I'm really into business. So I ended up obviously asking him all these questions about what kind of chocolate. How does it work? Who do you sell to? What's your customer? Clires, yeah, pricing. Yeah, exactly. And long story short, we were talking about it for a while, and I couldn't help myself because he ran a business that I think was growing at like maybe 10% a year. It was widely profitable. And he clearly was enjoying life quite a lot. And he was mostly talking about how much he was golfing. And I kept on pushing him on sort of the boundaries. Why couldn't he grow 30% or why couldn't he grow 50%? And after a while, I think he had it with me, and he kind of just sat me down and said, hey, Daniel, I'm just going to tell you this. I live a very, very comfortable life.

And I do what I do because I can live the life that I want to live. But if I would have tried to grow at 30 or 50%, there would have been all these things that would have just started breaking. And that would have eventually meant that I couldn't hire, have the people that I have running my company. I'd have to hire new people to run my company, and I'd have to be a lot more involved. So I choose not to do that. If you choose to be involved in your business and want to replace your people and you want to build your business and be really involved, that's your thing. But that's not what I want to do.

And it kind of struck me in that moment because I think nowadays that growth is this really interesting. It's almost a function of a company. You can see very clearly, like you have to build all the processes. You have to build all the systems in anticipation of that growth because it's so hard for people to comprehend what exponential growth looks like or even see around corners and see where something three times the size of what it is today. What are some of the issues that you're going to run into at that point? And so it was probably one of the most important management

lessons I've ever learned because I realized that I would have to think differently about how I build my company on the basis of how quickly we were growing. Seeing around corners being the sort of critical idea, though, that growth is not free. It's hard and expensive. Yeah, totally. And it creates revenue growth maybe, but also more errors to be dealt with. Yeah, absolutely. And you kind of need to build a buffer into your system for that thing. And certainly if you're also kind of optimizing to keeping that, you're going to have to experiment a lot more. Spotify today is a company of 5,000 people and doing many billions of dollars every year. And if we're going to keep that growth rate, it's kind of like we need to find a billion or 2 billion of new dollars every single year.

And everyone knows that that's very hard from a standing start. So you have to create a culture of experimentation, and you have to find yourself to create a culture where that's okay. And we're taking risk and having a lot of failures, honestly, also is okay, too, if you want to experience that kind of growth. When we first talk, I think the deep passion we share is sort of the business landscape and how to build businesses. You talked about some key trends shaping things. I think it was globalization, automation, and digitization. So just lay that framework out a little bit for people as it pertains to businesses and building businesses. Well, I think overall, I would say those are probably the three strongest macro trend that we've seen in the last century.

And it's playing out in different forms. Globalization's been kind of active now for probably the better part of five, six, seven decades. And it's becoming more and more global by the day. And obviously, we're sourcing goods and products from all over the world. and we're even getting knowledge to workers now through remote working from all over the world, et cetera. So it's been a macro trend that's been playing out. Digitization is probably four decades in, the better part. And the last one is obviously automation. And the automation part actually hasn't played in to the extent that most people would have even predicted maybe a few decades ago,

but it for sure will be there. And so the net effect of those three is that it creates these extreme polarization in business, where the big gets a lot bigger based on just being global now, but also being digital. But also that there are niches now that all of a sudden can be viable, they never could be viable in a much smaller marketplace and because they can be more efficient. The thing in the middle, however, ends up being completely evaporized. So it's really interesting when you now see the strand being played out, like you have to either play for being a niche, which could be incredibly profitable if you do it well, or you have to go for scale. And that scale has been completely redefined to a much larger scale than most people would

have ever imagined was even possible. So that's kind of my default assumption. And now I think when we talk about scale, then the question is, what are the sort of addressable problem? And when you think about that, then the question ends up, of course, being even the industries we perceived before get bundled in and new industries are formed on the basis of that because we were just talking before this conversation about how an industry which we would have perceived to be taxis a decade ago. Now is Uber, which is transportation, but it turned out transportation in itself is interesting, but we talked about food delivery through Uber Eats. And in China, by way of example, the food delivery part of that business now is larger than the transportation

side of the business. I don't know if it will be that way for the next decade, but it turns out that's even larger just in overall revenue and size than even the transportation side. So it's all these really fascinating trends. The job to be done for consumers, changes, and the businesses that are providing their sort of reason to being in all changes. How do you think about the similarities and differences between jobs to be done, so we could talk about the jobs being done by Spotify, the different parts of Spotify, and a market. So is your market audio? And then there's a lot of audio-related jobs to be done. Am I thinking about that the right way? How do you think about the vertical that you want to own so that you can scale

to the appropriate size? Yeah. Well, I think consumers have a lot of different jobs to be done. They could ask to be entertained. They could be asked to be taken from point A to point B. They could ask to be educated. And then there could be different markets if it turns out that it's hard for a single constituent to fulfill that job to be done. So by way of example, there are certain types of businesses that may not be able to scale by, for instance, being giving away for free, which was the early sort of first two decades of the Internet. And so they naturally didn't go on to the Internet until the later stages of commercialization, which is what we're seeing now. So there are sometimes restrictions on just the various constituent that sort of enables,

even if the job to be done is very similar, the markets may be different. The flip side of that argument is sometimes there may be perceived to be different jobs to be done earlier, but they actually turn out to be very similar once you consolidate the supply side of things. So in our case, I think if you'd ask people five years ago, they would have said, and it's probably maybe one of the largest points of arbitrage, by the way, still how we as Spotify view the market versus the rest is we don't think the job to be done is different at all between podcast and music. It is really the same thing. It's audio and people are

more than happy to have one service fulfilled that job to be done whether they want to be entertained, which they might want to be with music too or educated or all those different things. And almost everyone else in the space think of podcast as something distinctly different. And they use all sorts of weird way of describing why that's the case. Sort of like, well, you know, you actually want to speed up the podcast to have it 1.2 size. You would never do that for music. It's like, okay, well, I get that. I do that too.

But it doesn't mean that it has to be a different thing. We could solve that via software. And instead, it turns out a sub-functionist discovery. Well, if you're listening to music and we would all of a sudden also have you discover other things you may care about, that could be a great source of signal. and it could be a great way for you to learn about new shows. So, yeah, I think there are different reasons why markets and job to be done sometimes end up being very separate and bifurcated, but the internet, because of the trends that we talked about,

globalization, globalization, and automation completely changes both ends of those spectrums. Josh Wolf has a term for this, which is the megas and the minnows, which I really like, like the bifurcation of the scale winners and the niche players. And when we talked last, you were talking about sort of the propensity for people to just underestimate what true scale means. So even big established businesses that by any measure are successful businesses today, that they're probably under believing in what they can achieve from a scale perspective. And that's a big management mistake. So talk about how you think about that more generally, whether or not you think companies are doing a good job of anticipating this change.

and what you specifically are doing at Spotify to make sure you're a mega. We talk a lot about subscale. And I think one of the better examples of that recently, I was asked by companies to come and talk about the digital world and all that stuff. It's kind of funny. You still get asked to do that in 2019. But I find that there's so many people who believe that they are at scale because they used to be at scale in this old world.

And so there's, for instance, take clothing as a great example. In Sweden, we have this company called H&M that is kind of the pride of the nation, and it seemed as this juggernaut. And they have a very interesting model in that they're vertically integrated. So they historically have only produced their own clothes, and they own all the distribution, i.e. all the stores. They don't allow anyone to resell their stores. I believe, I'm not sure they would agree with me, but I believe that when you look at their business now, they're servicing sort of the brand, by the way, should say is clothes for everyone. It's not supposed to be high-end. It's not supposed to be, but it's like for the everyday shopper. And so I don't know the size of the everyday shopper market globally,

but I would presume it to be in the trillions. It's massive. And you have this company that while it's fairly large, it can't even address probably even 1% of that market. And so I would say that trying to own all distribution and have it vertically integrated and own the creation of what it is you're doing is not going to get you to scale. So if they ever asked me, which hasn't happened, but if they did, I would say you'd have to give up one or the other. So either you could focus on creation and creating the most amazing things that you can imagine, but you probably cannot anymore exclusively distribute this through your own

stores because it won't work. You may still have some sort of flagship stores and things like that, but you can't do that. Or the flip side is you have to bet everything on distribution. And if you do that, then it probably makes more sense to bring in other suppliers to help you do that. Ultimately, my view is if that even is a market, the everyday shopper in the future, which I have huge doubts that something like that would be a market. It probably will be a subset. But if that was a market, there's no doubt in my mind that the at-scale player eventually

would be at least north of 20% of that. And that's a market in the trillions. So that's hard to imagine what a company of that size would look like today. And it's hard to imagine even the environmental impact that single company would have on planet Earth. So there would be all sorts of things that would likely have to be very different for that company even to get to scale. So manufacturing practices would have to be very different. How you source, if it's cotton or synthetic cotton or whatever it might be, will be vastly different. But it's just one way of sort of imagining the size of the scale. And the flip side of that argument would be a company like Nike, which I think if their focus and their market is sports apparel, they may be the player that is at scale. And where having your own stores may work, because they are last time I checked about a third of that market, if they stay in that niche. The question is, is that the job to be done? Or is Adidas strategy of mixing streetwear?

and sports apparel, the real. The real market. Yeah, the real market. And now all of a sudden, you're subscale as Nike. Yeah, and who knows what the answer is. How do you think about this idea then as it pertains to the management and vision for Spotify? So I think a lot of people look at Spotify and say something like what you're saying about H&M, which is, oh, you did it, you won, 250 million people.

You're dominating everybody. I read the quarterly letter. The metrics versus competition look great. Great. Keep doing what you're doing. And I don't think that's your mindset. So how does this influence what you're doing? influence what you think about Spotify? Well, the way I look at Spotify is both the opportunity,

but frankly also the sort of long-term thing is we can't rest on our laurels. We believe our market that we're going after is audio. And that's going to be at least a billion, probably two or three billion people around the world that would want to consume some form of content like that on a daily or weekly basis. And if we're going to win that market, I think we'd have to be at least a third of that market. So we're talking, we probably have somewhere between 10, 15 X from where we are now of opportunity left. So we're still very early days in our journey. And that journey is probably a function of three big things, I would say. One is platforms. So it's easy for us to think about the platform worlds played out. But I think that there's three large modalities that people would

consume content in. Obviously, one is on the go. which is your cell phone, which is bleeding into all of these other use cases. Then you have in your home, which has gone through this amazing journey the past few years with Alexa and everything else. And then the last one, which frankly hasn't happened really yet, which is the next big battleground is people's cars. And we can argue about whether people will even own cars in the future or if this is kind of more of a service model that people will have being in people's Uber's or whatever

it might be. That's kind of hard to predict, but it's pretty obvious to. me that those are kind of the three platform wars. And then on top of that, you have the global landscape of some of the same dynamics that we've encountered in video where in America, for instance, a large Hispanic population, we have tons of contents from Mexico, et cetera. That's kind of cross-border. That's going to mean, what does that mean for producing contents? Will that grow in Mexico? Will it grow in Colombia? Will it grow in all these other places? Or we're seeing, for instance, a really interesting trend where some of our Mexican continent now actually resonates really

well in Spain out of all places. And sure, there's a language commonality, but I would have never kind of predicted that I would probably predict it earlier that it would transition within the Latin American continents before it went to Spain, but it seems like it's an easier gap between the two of them. So there's a lot more network effects there are at play than probably ever before. And then you have, again, sort of just the increasing digitization, not just of consumption, but even of creation, which obviously we're here talking and we might reach a lot of people in the end. Who knows? I hope so for you. I can assure you will. Yeah. And that's the amazing thing. When I ran a room. Cost nothing. Yeah. And just doing this. And so I think there's

that element too where the explosion of content, we're seeing the explosion of consumer behaviors being more pervasive in all places. And then the global. thing kind of permitting all of that as well. I love you mentioned earlier the idea that Uber created this new market, this new job for drivers that no one predicted because everyone would have invested in it had they been able to predict it. I'm curious what you've seen internally in terms of what sorts of strange things have popped out of the ecosystem that is Spotify as it pertains specifically to creators. So people making music, earning money on Spotify, et cetera. What has been most interesting to see and watch and emerge from the platform?

Well, for me, it's culture. This is the most amazing thing that we do is we get to see culture firsthand. We get to almost touch it when it's about to happen. So I'll give two examples. Five years ago, we knew already back then at Spotify that reggaeton would be a massive global thing. And at the time, it was sort of undoubtedly so that it started happening. But it was one of those things. We just knew it. We just didn't know when. today it's amazing that you have this thing where people are singing along to lyrics, they may not even understand. It would be a very small niche and it's become a global phenomenon. Or BTS, the Korean band where people are singing Korean lyrics sold out arenas in the US. And it's just fantastic to see those types of music becoming truly global in a way that I don't think it's ever been. And that's kind of breaking and shaping culture on a big stage.

but coming back to this sort of the mega versus the niches as well, the flip side is also true. So for instance, right now, if you look in like Brazil as an example, you're seeing a resurgence in gospel music. And so you have that, I don't know, but I don't expect it to be a big sort of getting the same kind of response to reggaeton. But it's going to be a massive niche. And it's going to be something that a lot of people listen to. and it's probably a genre I would have said would kind of slip into being an important but a very, very small niche. And it's now finding its home in a cross-cultural way.

And then you look at something like Connie West making a whole album, which is basically a gospel album. And it's pretty cool. So there's lots of those kind of things that you're seeing based on people's creativity. And I struggle with this. We have this debate internally a lot about whether the machines will take over everything. I'm more in the camp of, I think the last job to be done by a machine is creativity. And so having that as the sort of final frontier for humanity is kind of one of those things that

keeps me going. We've talked before about creator platforms and how powerful those things are, toolkits basically for, in your case, audio creators. There's also this element of community. So I want to talk about discovery, which I sort of think is a separate topic from community. I'll tell you a lovely little story from my life. Spotify. So my kids' school has a family that it's supporting. And instead of creating some sort of charity or something, the person behind this said that what he wants the families of the school to do is

on the same night, on the same Friday night every year, the whole family sits around the table and plays board games as a game night. And with the game night, he created a playlist on Spotify called the Niblock Party playlist. And it's a public playlist and you load it and you listen to it. and you have this kind of interesting thought about this shared consciousness that's happening around this event this night. It's a lovely thing. And there's something about music and audio. People talk about podcasts in a way that it's the thing to talk about. It's so interesting to me. And so you have this ancillary community benefit from this shared platform, which I think is so neat. Well, it is really interesting what you're mentioning. So I definitely think music has that impact on people,

but even audio in itself, I wonder if it's just the fidelity of things. I'll give you an example. I was incredibly lucky we did this offsite at Abbey Road Studios with my team. And I accidentally ran into Giles Martin. He was in the process of remastering the white album. So he's like, hey, do you want to come and listen? And I'm like, yes, I'll do that. And he took me up into this, I think it was like a mixing room. And it was just above Studio 2 in Abbey Road Studios.

So Studio 2, for those of you that may not know, it's a very large studio. So it's like a big kind of almost a white canvas. And it turned out to be the place where Beatles recorded most of the white album. And it was pretty amazing because we were sitting there and we were not actually just listening to the music. But the way this remastering works is you have to take all the original tapes and you add and layer the bits and pieces. It's a very tedious process going back on all the retakes, every single aspects of them and adding them in order to restore this thing. It's not just sort of digitally raising one frequency and then lowering down something else. It's really like cut and copy lots and lots and lots of things.

So as part of that process, you heard in between of the takes, John and Paul talking to each other. And I really, really wish that some of that commentary could someday be made public. But I had this super weird feeling because we were obviously listening to this in studio monitors. and it was like if they were in the room and if I was in the room as they were recording the wide album and it was this insane feeling. I believe that that is the fidelity that audio has and how close it is to reality

versus when we look at, say, a film, we know it's a filter. We know it's not reality. It doesn't feel real. And that's part of the charm, by the way, with the medium too, is that we know it's a bit of a fantasy. But when you're talking to someone like, and I are talking right now, I suspect most people will kind of feel like they're in the room

with us. It's a remarkable observation. It makes me think of one of Joel Spolsky's strategy letters about commoditizing your compliments where you want things that are compliments to your product to get cheaper and cheaper. People, then demand goes up for your product. And I can't help but think about AirPods and headphones and the complete ubiquity of those things that you can hear crazy. You just said it just right. When I'm running with AirPods in, it sounds like I'm in the room with people. And so the fidelity aspect of it, the intimacy of audio is very unique, even relative to video, because it's the closest to the actual experience of what it would be like in person. It is. And it's a very different thing than reading the exact same thing that someone could

write down. And it's a very different thing than seeing it, too. So it's like a fascinating medium, I feel like it's going to be hard to predict where it lends itself the best. I think it's kind of obvious to me that obviously music, it does really well. Educational content you can imagine in a lot of different vectors, audio might be super good for, but you can also imagine some cases where if someone has to show you something in order to make sense, then audio may not be the perfect form factor for it. I think we're still early in kind of experimenting with the format of audio. And the exciting thing for me is when you think about where we are on that journey, not just Spotify, but just the overall thing.

Podcasts is literally RSS. And you think about RSS was pre, if we make the analogy to the tax-based web, that's pre-Facebook, that's pre-U-W, that's pre-U-Tube, that's pretty all the things that we today take for granted. And so there's no doubt in my mind that we're going to go through a very similar journey

where even the concept of what is a podcast and what is audio will become reimagined. This is sort of a companion question for the whole discussion, around scale. But if I think about my own use of Spotify, in many ways, I'd be happy if it hadn't changed since I first started using it. I built playlist and I listened to my playlist. But I started kind of watching my behavior, knowing that we were going to be chatting soon. And what I realized is that almost zero percent of my time on Spotify, which is daily,

is spent on that original function. It's podcast. It's the discovery. It's the playlist that I can subscribe to that morph and change and you get excited when something new shows up on one of them. And it begs the question, what is your philosophy on creating an environment for innovation within the business so that you're not just, even if you've got something great, a job to be done that's complete, that you can keep trying new things in an economical fashion to be able to grow into that kind of scale. How do you foster that internally? Well, I think a lot of that is, first and foremost, I think it's about a culture for allowing

failures because you can't have a culture of experimentation if you don't allow for failures to happen. And that does itself really well in some cultures. But if you take a company like Apple, I think it does itself incredibly poorly, but for very obvious reasons. So Apple used to release products when it was hardware maybe once every two years on a product cycle. And so you can imagine then shipping that product, then having to take that back is incredibly costly and so on. So you don't want a lot of mistakes. You're optimizing for something and you need to make that decision very early on in the planning cycle of exactly where you're going. going to put in there and what things you're going to leave out. And even though I think in the end,

it changes a little bit based on what works, doesn't work, I think it remains relatively stable. And the flip side, obviously, if you're a service company and you're constantly developing that, you can react based on the feedback. And so in our case, there's then about finding mechanics that works really well within your culture in order to allow for that experimentation. In our case, we do hack weeks like many of the companies. But unlike maybe most is we don't force people to go in one direction or another, but we give them helpful context and guidance for things we're interested in as senior leaders.

Here's where the strategy is going, giving them a ton of context in that. And it would be awesome to see crater expressions on various things. That's top of mind for us now. We have no idea what that looks like, but we're kind of like interested in. and experimentation. And even that context, I find, like finding the right level of context to give people ends up producing vastly different returns. So we just finalized one of those hack weeks. And a lot of what we end up coming up with may never see the light of day and maybe various things that ends up happening. But one of the things that it turned out that people ended up doing

in this hack week was they figured, why aren't we using podcasts ourselves internally? And so they built the feature and functionality now where if we post podcasts internally, we can just segment them so that they're only available to Spotify employees. And it's already massively impacting it. So we do some of our strategy talks available for people inside of the client. And obviously, the second question that ended up coming, this couldn't be only useful for Spotify. Shouldn't we just build out this feature and functionality? How would we build a thing? Because you can imagine our corporation, there's a lot of people within your company that may have Spotify and they may go to the gym. I listen to most of my podcast when going to the gym, for instance. So I don't know

if we're actually going to build this out, but I know for internal use, it's already live and it's something that we're going to do. But it would have been impossible for me to even imagine that would have been, it's kind of obvious in hindsight, but it wasn't one of those things that I even expected to see coming out of this hack week that we just finalized. You've got so many companies that now are kind of in one of these markets or verticals and rolling out a lot of different iterations on their core principle audio. We've talked about the examples for you. You mentioned this interesting analogy before of a star versus a constellation business strategy. Can you describe what that means? And since there's so many big important companies that have to make this decision,

how you think about deciding between the two. So the star and the constellation, it wasn't coined by me. I actually forget who coined it, but it was this basic premise about should you break up your app and should you have multiple apps versus just building in more features into your kind of main app. And I think there was generally by the developer community in the world, a lot of excitement around breaking things up into multiple apps. The reality is we've seen very few examples where that's worked. The exceptions are the large platforms, Apple, Google, to an extent, maybe even Facebook, even though I would argue Instagram and WhatsApp were acquired companies and didn't start internally as separate jobs to be done.

But Messenger for sure would be that. And I think even groups would qualify in that bucket of separate apps that are very successful. So we debated that a lot. And there was a lot of internal discussion and a lot of our engineers. And it's not an easy thing because on the one hand, you have these macro stats that tells you that people now on average download one new app per year, getting distribution on something new is insanely hard in this day and age, especially if you're looking at consumer propositions. It's very hard. The flip side is obviously the examples that we all know of that

have become successful. And so in our case, I think we cited on the end where you do have a very different constituent than your core constituents. And when the job to be done is materially different than the one you're providing, then it may make sense to break it up into a constellation. So in the case of Spotify, the two maybe more obvious examples for us is we just launched just a few days ago, Spotify kids, where the job to be done, even if it's listening to content, it may seem very different. So many modalities are so different when it comes to kids. You don't want the same sign-up flow as you have in a normal version. You don't want it probably to be available for free so that it has advertising towards kids in it.

We actually don't want to gather any sensitive data, obviously, about it. You don't want kids, in our case, you can choose an avatar, but you can't upload a picture or do any of that stuff. You can even change the color of how it looks like. There's all the ways to customizing it, but maybe the most important thing is, obviously it's a 100% curated experience. We don't let anything into our kids' product that isn't vetted by our editors.

So the job to be done on multiple dimensions, even if it's listening content, ended up being so vastly different because of this constituent. The other example, obviously, is Spotify for artists where it's an artist's constituent, so it's not even about necessarily consuming content, but it's about how they market their content, present their content, and edit tools and all of those things. So that's like an example of the start. With your scale, I'm curious in each of these,

how much you think about network health, you've built a massive network, how do you know if it's healthy and what are the key things that you measure? Because what you measure tends to be the things that everyone then improves. So how do you choose what to measure for health of the overall network? It's incredibly hard, I would say just in general, but the larger you become, the more, important it is to move away from averages and start looking at distinctly different segments instead. And ideally, you shouldn't even do that. You should just have truly personalized twin sets and like experiment on twins within a universe. But to make it sort of more addressable, I think you can kind of work with segments fairly well. And so on our scale that we are today, the reality is we don't

have one user. We have many, many different users with very different needs and using our product very differently too. And flip side is we also have many different artists that are working with us. And some have labels, some don't, some are so big that they're almost entities in their own ride. So they have huge team of hundreds of people around them that help do whatever they're doing and make that work. And so health will be defined as slightly different things for all of those different ones. But if to the extent you can find a commonality between them, it becomes powerful to galvanize. around it. So in our case, I think the way I would phrase it for a user perspective and user health is we know that discovery is one of the core benefits that we provide to people. And so if we can get

to you to discover one new item of content that you absolutely love, that you're like, holy shit, this is amazing every single month. We're pretty sure you will remain a user or customer with us for a very, very long time. And when you think about that, it's like, oh, so you have to present something new. Well, we could do that, but we could also rediscover things to you that meant something to you 10 years ago. That may even be more powerful, but that depends. If you're 18, nostalgia may not be something that you want to relive from when you were 8 years old. If you're in your 30s and trying to relive something in your 18s, maybe that's something you want to do, late teens. So there's very different ways of how to think about that. And then on the artist side,

for us as a goal, and we even put it in our mission statements, our goal and our mission as a company is to make it so that more than a million people can live off of their art. And it kind of ties back into this kind of creativity being the last frontier kind of statement too. I think a lot of people in the future will not be doing the things that they're doing today. So we want to provide a future option where they can spend that being creative and go to the core. of who they are as individuals and expressing themselves and hopefully make a living doing so. Can you say what you've learned about, so I want to talk about Spotify originals. If we have time, hopefully you could tell the really fascinating story about why incorporating

where you did in Europe was a competitive advantage dealing with the labels there. But obviously your relationship with your suppliers is a critical part of your history and your business. And the direction of the streaming world has been completely towards originals as a way of getting people on the platform and entertaining them. So what are your thoughts on Spotify originals? And what, if anything, have you learned from watching video, which is ahead in this idea? So the first thing I want to do is actually want to kind of up-level the conversation

to one end because I think there are, when people think about originals, they immediately draw the distinction of, oh, so Spotify could just do what Netflix is doing. And surely, we should have all the music and made it exclusive. And I think it's so easy to kind of steal mechanics. And I say steal, I really mean borrow mechanics from people and copy them and think that it will work within your system. The reality is it almost never does. And I feel it is because we take the mechanic without understanding the online system. And if you agree with that, and that can be true about cultural things in a company too,

it's like unless you understand the system, you can't just take one of the concepts out of it and think it'll, work the same way in your company, if your company has a totally different type of customer and a total different background story, et cetera, et cetera. But applying that now to original, so let's start with music. In music, we do not believe original content or being our own label is a viable strategy. And it's not for the reason that most people think, which is, hey, you are just worried about competing with your suppliers and all that stuff. No, actually, the primary reason why we're not doing it is because it doesn't make sense for the artists. And it doesn't make sense for the artist because if you think about the reality of most artists today,

the vast majority of their income is derived from touring, 80% or so. And so if that's your business, then your core thing that you would want to do is you want to spread your music as wide as possible so that you can create new fans that want to come and see your shows. So that's the first thing of just understanding the economic alignment with what the artists want to do. The second thing is because of how copyright laws are built, music specifically has a compulsory element, which means there are a lot of players out there, radio stations, et cetera, that don't need to license every bit of piece of content. They can rely on these statutory licenses and therefore use content.

So even if we wanted to have content exclusively, we couldn't prohibit radio stations or even YouTube for that matter to have that same piece of content as well. And so the value of exclusivities just isn't very high in music. And then thirdly, we would compete with our suppliers, which I generally don't think is a great idea. So there's three very strong reasons why we don't want to pursue it and why we think it's a bad idea. And then on the flip side in audio, you're really dealing with an evolving ecosystem of a lot of different type of creators, by the way. On the one end of the spectrum, you have one of the most popular podcasts at this point is the Daily. I'm pretty sure, even though theoretically you can create an exclusive news show on something like Spotify, I'm not sure that's the right thing, because the news in itself deserve to be spread.

And the people that have equity in strong brands and news, I believe, are the best people to be focused on that. So there it probably doesn't make sense. But there are a lot of pieces of content like mystery dramas or even scripted content that may make really. really, really good, both financial sense for it to be exclusives because the value of both having it on our platform may attract new customers to the platform, but then also for the show it itself. It just means that we are going to be able to put a lot more marketing behind it and make the show bigger than it would have ever meant because of our audience that we have that may resonate with that particular show. So the strategy there is it does make sense.

And for the creators who create that content, this pretty much is their business. This is what they're doing. So they'd be happy probably to give up some extra reach in order to maximize the monetization and being able to live off of their art the way they're doing today. Basically what you said is reason by first principles, not by analogy. And one example, and who knows, maybe I'll be proven wrong because it'll work. But in the podcast vertical, there's this company Luminary that raised all this money, I think 100 million plus of venture money to just do the Netflix of podcast.

I mean, that's what it is. And from what I can tell, it's not working. which is fascinating because I would have guessed that it would work, that if you get enough really high profile acts, it would work. But the problem is the high profile ones that they're getting don't want to give up their reach and their main show. So they're creating a secondary show for Luminary. And it's not driving the demand they thought it would. So how do you think about podcasts in all this as an engine and driver of growth and whether or not it fits into the original strategy? Well, when you build a new platform, the reality is there's a shick in an egg.

You're constantly going to have to play that where if you're 1% of the market and you're asking someone to give up 99% of the market, that's going to be a tough sell, no matter what the economics are, because you probably can't make up the economics. So when you look at a new platform, that's typically what they end up being challenged about. The second thing that I think is really interesting is when you think about new media platforms, every single successful media platform has been built off of the back of existing content, even though they're most known for their own things today. So HBO, great example, taking films. putting him on linear cable, but it was an existing library.

And he took, I don't know if it took a decade or two before they started introducing their own original programming. Netflix was sort of DVD rentals. And it took a decade or so before they started introducing their own originals, almost by necessity more so than because it was this brilliant strategy, because it was getting more and more expensive for them to license, the content that they needed. And so I think that's an important part two. we're in this phase with podcasting where we were able to come at a place in time where we were able to use a ton

and build an amazing library of now over 500,000 podcasts on the service. Many of them are not exclusive on Spotify. And the primary reason why we want exclusivities on the platform is obviously because we feel like it will help grow the overall platform and therefore benefit all the creators on the platform. And so I think about this road as a pretty natural evolution when you go back to understanding the needs of all the constituents and the segment that they operate. It's kind of like a similar analogy to the talk that we had before about the job to be done. And so I think the largest question right now in the podcast world is how valuable is that job to be done? And what is the optimal way of monetizing that job to be done?

So you could see a scenario where currently, for instance, in almost all instances, the consumer expectation is that podcasts are free and therefore will be ad-funded. So when you look at something like Luminary, part of the problem was they were going very quickly and by also charging for something that in the mind of a consumer, it's something that I get for free. So you have to build a ton of things behind it in order to change that expectation set, which I think is very difficult to do. We didn't go about it that way.

basically said, look, if you're an existing spot of a user, free your page, you can just use it. If you're a new one, you can sign up for our free tier and you can have podcasts. That's not a different value proposition than what people who listen to podcasts are normally used to. That's going to be the hardest thing to figure out is the value equation over time. From a business standpoint, so I think last time we talked about Napster and Kazah, I remember Kazah so distinctly, the joy of downloading these things is flooding yourself with new music. But you mentioned free, which is an important word. word. So you are competing with free. So talk about the question of how do I compete with free?

Like what's better than free and how you solved that problem in the early days of Spotify? If you think about it from the aspect of the early days, so just kind of the level set, because I think that we take a lot of things for granted that just a few years prior didn't look anything like it. And so we were living in a world where, and certainly where I come from in Sweden, we had at the time right around when we were launching, we had something called a pirate party winning 10% of all votes in one of the elections. And you had the prime minister of Sweden saying, it was totally okay if you wanted to copy music for your own use

and ignore a copyright, basically. It was a pretty bizarre time to live in, but that was the kind of expectation that these record companies or movie companies that were just overly egregious on protecting their profits and et cetera. So those were the days in time. But the reality is the consumer job to be done,

the friction point from A to B, was pretty horrible experience. You had to go on one of these services. You had to find a person had a fast enough connection to download from, and that could be a problem. You could get what virus with it.

You didn't know if you were actually getting the right thing you were going for, and it could take 30 to 40 minutes before you got it. And so what we came to the market with was a much simpler proposition. It was free like piracy, but it was legal

because we licensed all the content. I would say these days, it may not have been the biggest selling points to consumers. But I think the single biggest selling point to consumer was we went about it by creating this very much about starting from the end and reason backward how you get there. So it was very clear from the beginning to me that the magic experience would be, what if you had all the world's music on your hard drive?

That's the feeling we wanted to invoke. How do we create an experience that's like that? But if you do that and it would feel like you have all the world's music on your hard drive, this pre-smartphone, it would be a much better experience than any piracy. And everyone from the founding team were like, yeah, we can totally buy that. And then from there on, you start dealing with all these things. Streaming on the internet didn't really exist. There was kind of a hard problem to solve.

I read this book on psychology that told me that it takes about 200 milliseconds before people to perceive latency at all. And it turned out that it took about 500 milliseconds for us to start a stream. And so we had to work with that dynamic. And so I realized on the design end of things that if I got the progress indicator to move even before we played something back, you would perceive it like it was instant even though it wasn't. So there's all these small tricks you can play on your brain to really create a very different outcome, what that was. And so when people tried it in the early days, it was like mind blowing the experience compared to all the alternatives at the time because you had all. the world's music on your hard drive and it really felt that way. That was a very strong proposition

and that's ultimately by building that product we were able to convince the music industry to let us try it. Originally I wanted this released in the world and they kind of said no. So I managed to persuade the Swedish side to launch in my home country and I was kind of lucky because they ended up taking a market where they really had nothing to lose. I think they declined by 60 or 70% the whole market in piracy. So they didn't have much to lose. And I basically, I remember, we guaranteed them basically a year's worth of revenue. So it kind of was a win-win for them to do this. I'm not sure none of them actually thought this would work, but they kind of figured they had nothing to lose by letting it try it. And then you use the evidence from that experiment with Swedish labels

to sell or close the more significant labels in the U.S. and elsewhere. Yeah, 100%. The U.S. labels weren't even satisfied with the Swedish experiment. We had to launch in the UK and many other markets and it was actually three years post-launching that we eventually launched in the U.S. And we launched it, I don't know, 11 or 12 other countries by that time. Do you think it's a repeatable business strategy to identify weakened suppliers? Maybe that's the wrong word to use, but fragmented and or less profitable suppliers to gain a foothold and then sort of deliberately march your way up the chain of bigger and more profitable suppliers? Yeah, well, look, I mean, I think the key thing I'm trying to convey is to think very, very clearly about who it is you're addressing and not go too big too early, but actually be incredibly focused on who your customer is and who your supplier is.

And kind of it's the wedge thing. You get the wedge in and then you widen it over time. It's served us incredibly well. But it's also one of the things that I probably spend the most amount of time. doing even today is I look at a ton of data and not aggregated data that most people think. I'm actually the worst person before our earnings call. I have to read whatever we ended up doing in the quarter. But if you'd ask me on the latest cohort data from a certain market or something, I'd be all in on that. Because I find the really, really interesting things is, especially as

we've gone to these abstract levels of hundreds and millions of users, it's really hard to see what's actually going on under the hood. So it's really powerful, whether it is a market or whether it's the demographic or among a base of suppliers just to see what's happening there. What are the drivers? What are the puts and calls? What is the asymmetry that you're able to drive from that? We're all looking at the same data sets, most of us. But the interesting things is what happens one or two clicks below that data sets. That's where the real value is. In the time that you've been running the business, what has evolved most about what you view the role of the CEO as being from start to finish? Well, we have this concept of missions at Spotify. And it's basically,

I think of them, it's typically two years at Spotify. So every two years, even if your title may be the same, even technically you may have the same amount of people reporting to you or if you're still an individual contributor, that may still be true, but your job changes. And that's a function of the growth that we started the conversation about. If you're growing 30% a year, after a number of years, you're just a vastly different company. It's exponential growth. And so we instituted that a long, long time ago. So I think I'm on job six or seven at Spotify. And obviously, my first job, you were kind of the product designer, product manager, like the handyman who got all the furniture together, all that stuff. You kind of have to do everything. Then you quickly sort of end up

becoming almost the HR person because that's typically the first function in a company that you actually end up not hiring at the time when you should. So that's the one advice for all startup guys is like really think about that early way earlier than I did. And then it kind of evolves. Maybe you become even the finance person for a while because you're trying to raise money and then you kind of have to learn how to do that, et cetera. I think at the level where we're at now of 5,000 people, the reality is you can't be in the weed on a lot of things. I would say Spotify runs perfectly well without me for the most part. But what I am is I am the pace setter.

I am the person who whenever we kind of start resting on laurels, I start saying we need to pick up the pace. And it was actually funny because I'm kind of into cars. And so I was driving with this guy and he was reciting this Finnish rally driver who the basic gist of the story is if the person on the other end ended up being shit scared, they were driving down the road and it's like, well, there's no point in driving unless you're not driving fast enough unless you're shit scared. And I kind of feel the same way about the journey of a company. It needs to be on the verge of uncomfortable because otherwise you're probably not

pushing yourself hard enough. That's my job is to get us to that zone, but obviously not stretch us too far. And that's a hard balance to figure out. We started with a lesson from a chocolate maker in Dubai. I'd love to end with anyone else that comes to mind that has taught you a great business lesson whether that's another CEO that you've spent time with and learned from. I'm always interested in who the CEOs that I respect, what other CEOs they respect. So any closing thoughts on that sort of thing? There's a lot. I think the most fortunate thing for me is the fact that we are in this kind of industry technology

where it's got such a strong ethos of paying it forward. So the amount of people that I can give a call and ask for advice when it comes to different things is simply astounding. So Mark Zuckerberg throughout the years has been very helpful to me. You've had people like Brian Chesky who brings the perspective of a design ethos, which is a very different mindset from mine, almost coming at it from an engineering perspective and just how he comes at problems is absolutely fascinating to me. More recently, my board has just been amazing. Many of them have been or still are operators.

You have people like Pan Mastri Warrior, who was the former CTO of Cisco. running 30,000 engineers. Here's the problem you're going to run into integrating cultures. She did M&A and strategy at Cisco before 2. So it's fascinating talking to her. It's fascinating talking to Heidi O'Neill, who's the president of Nike Direct on the transition they're making and how that's relative to what we're sort of dealing with. There are no new problems.

Yeah. Well, we're all going through variations of them. And to be able to, I don't feel like most of the advice I'm getting is direct. I could directly translate them to what I'm going through, but I feel like it's bringing me to that level where I'm thinking differently about the problem to begin with. And I think that's the most valuable thing is getting really diverse perspectives on how you could approach problems. So my closing question for everybody is to ask for the kindest thing that anyone's ever done for you. Good thing I prepared for this one. I think the kindest thing that anyone ever did for me is

It's probably one of the toughest things and the kindest things at the same time. So growing up, I actually come from a music family. And my grandfather was an opera singer. For him, one of the biggest things was that I learned music properly. And unlike what many people may think, I actually wasn't that motivated in doing it. And he was like the old school of classically trained. You needed to do that. You needed to read, do all that stuff.

And it was incredibly tedious. I spent hours and hours per day doing it. And I had to struggle for a few years, really, really struggle. And I hated it. I didn't enjoy it at all. And then for some reason, I just passed a bump where I got over that initial hardship of learning that thing. And I started enjoying it. And then as I got into my teens, I got into rock music and really played in bands and started

enjoying it for real in a massive way. And for me, music has been that left brain and right brain thing. and it's a lot more almost mathematical than most people realize it's got more formulas and more patterns than most people. It's taught me a ton. But the most important lesson I think it taught me is that don't be afraid of the struggle. It would have been so easy for him to kind of give in and say, well, he clearly doesn't enjoy this. But I've learned so much now about putting myself in situations where I don't know anything at all and just endure it for a period of time. Because I know, that I'll come to that hump where I'm going to start enjoying it. I don't know how long it will

take and it's going to be very uncomfortable in meantime. But he taught me that and that was super valuable. I have a friend that says strain is everything. You should embrace the strain. Yeah. And basically the same idea that that is the signpost of growth. Yeah. It is a fascinating closing answer. So thank you so much for this. I feel like I can do this for 10 hours at a time with you. Hopefully we'll do that again at some point in the future and we'll see you soon. All right. Awesome. Thank you. Hey, everyone. Patrick here again. To find more episodes of InvestorField Guide.com forward slash podcast.

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