The past couple of weeks have brought a flurry of headlines about Spotify, beginning last week when it announced its acquisition of the Echo Nest for a reported $100 million and continuing with news this week of a $200 million credit line, leading many to speculate that its long-anticipated IPO is fast approaching.
At the Spotify House in Austin, a space that the company has painted its signature green, we met up with the man who could answer some questions these developments have raised: Ken Parks, Spotify's chief content officer and managing director in the U.S. It was probably for the better that, before starting our conversation, we decamped to a coffeeshop while Phantogram soundchecked before the House kicked off its first day of festivities.
Billboard: What do you do as chief content officer and managing director?
Ken Parks: I'm responsible for getting all the music into the service. That means chasing content providers in 55 countries, everyone who creates and licenses music. It's also artist services, artist outreach, making sure we are educating and fostering relationships with the people who really matter: the artists. It also includes telco partnerships, and I wear a second hat, which is the MD of our North American operation. On a day-to-day basis my focus is on the former, my role as chief content officer.
How would an IPO, if that happens, impact your job?
I have not thought about that. And the answer is, hopefully, not a bit. We would focus on bringing the best content experience to users and making sure that this model works for everybody. And I don't think that's impacted at all, whether we're a public company or privately held.
Facebook has gotten a lot of flak following their IPO because they then more aggressively monetized their News Feed. Couldn't the same thing happen to Spotify?
Of course we want to monetize, but the lion's share of what we make we actually share back. So to the extent that we're aggressively monetizing, that just means there's more money pumped back into the music economy, which had gotta be a good thing. But right now we're just focused on making the best service and growing as much as possible.
How are you approaching scaling? In Sweden and Norway the industry as a whole has seen growth almost directly attributable to streaming.
Well, we don't have to look at just those two countries. The BPI in the U.K. announced, two or three weeks ago, that that market, for the first time in years, had returned to growth, and that was due to the fact that streaming was really surging. It experienced over 40% growth last year. So everyone looks at key markets like that and says that that certainly points the way to the future.
It's really just a matter of penetrating middle America, make sure that we're addressing use cases like the 'lean back' experience. It's still infant days for this model. So what's it going to take? A lot of hard work, making sure we're providing the best lean-back experience, investing in data analysis... we bought a company recently, the Echo Nest, that's going to help us do that. One of the things that we have is vast amounts of data on how people are interacting with music. We need great analytics to make sure we're serving up a better and better experience all the time.
So all those things wrapped together -- partnerships can play a role, making sure we're on all the key platforms that we need to be including automobiles, and the home. Look there are no magic bullets to growing this kind of business. Our customer base is 7 billion people, so there's a ton of room for growth. We're in an industry that had one model for 100 years, that is not going to change overnight.
What's the penetration you have to achieve to have the same effect on the American music industry?
I don't think there's a magic number. A big percentage of [Sweden's Spotify customer] population pays for the service. It's hard to say when we reach that tipping point, and get a critical mass. But it's greater than we have today. We know individual users get invested in the service after spending a certain amount of time it. We know that if we can get a user to build just a handful of playlists, spend the time it takes to curate their own collections, that's a tipping point in terms of getting people invested enough that they will convert eventually. We're doing everything we can to make sure we're providing those 'magic moments' for every single user who first tries the service.
And what about subscriptions?
Our conversion is very good for a freemium business. It's pretty astounding, actually. 20-25% in some territories, on average it's north of 20%. That's a huge number. And if you look at the opportunity, everybody who is using video streaming sites, pirate sites or not buying music, if you aggregate all those people outside of the download economy, you're talking about tens, hundreds of millions of people. Just getting them onto our platform and getting 20% or more converted to subscribers, means in economic terms this industry is going to be much bigger than it ever was. We're not as big some popular services, most notably that video streaming service that a lot of kids use...
Rhymes with gootube...
If all of that streaming activity were happening on our platform, the music economy would be in a lot better shape than it is today. We announced last year that we had crossed the one billion dollar mark in terms of royalties paid back to the recorded music business.
In total, correct?
In total. And this other service announced the same thing... but they failed to note that they did that with probably nine or time times the user base that we have. I think that speaks volumes to how well we actually monetize our users. Because that's what we're interested in doing. We're interested in growing this business and not just profiting by taking something and not giving back a fair slice.
What shorcomings might the Echo Nest acquisition might address?
We recognize that we think a key differentiator will be how well we analyze consumer tastes, how well we understand those tastes. The winner in this space provides a service that speaks personally to each and every person using it, so in our case that's north of 30 million people. In our case we have to mine the data, so we can tell you what you're going to like before you know what you're going to like. It's really important that we do a better job. It's infant days in terms of us mining the petabytes of data that we have on our users. Our investment in Echo Nest and the amazing analytics and brain power that that company's going to bring is an acknowledgement that we're really committed to making this the best service, that you can get the right music for every mood and place and time that you're at.
A lot of people are confused by the majors' investments in Spotify, and how that works with respect to your relationship with them, royalty payouts and structure.
The precise ownership stake of the majors is a minority stake, it's not huge. It's a matter of public record, actually. It has been reported. There's a lot of speculation about it because it's a matter of public record -- you go to the registrar in Luxembourg.
Angela Watts, VP Global Communications for Spotify: It's also Merlin as well, it's not just the majors.
Ken Parks: Which is the collective of the indies. We're very proud that we've given them equal treatment so to speak, and parity.
Look, they make investments in a lot of companies. They're invested in Beats, for instance. We think it's great that we have their confidence, that they're invested. It's not a huge amount that it sort of affects our conversations with licensors in terms of rates and things like that. And again, in terms of the rates we're proud that we have a philosophy that we need to treat everyone equally.
Is the approach to royalty payouts the same across the board?
When Apple launched iTunes in 2003, their rate card was not the same for every label. Why? Because it's very difficult to do that with something new when you've got to negotiate with the record business. Every label's got a particular set of issues that they care about and they differ. The record industry is not a monolith. Over time got harmonized, and so it is with us. We don't want any artist who's signed to label x to feel cheated because they're getting paid less for exploitation on Spotify. What that artist's deal is with that label is a different matter. But in terms of how we treat those payouts? We feel they should be the same.
So Spotify isn't sending Phantogram a check.
We're not. But I think the payouts, from what we know, and we don't really know too much about individual contracts, but from what we know they're kind of all over the place. That also is not sustainable long term. Advantages shouldn't be gained on any side based on how smart your lawyer was. There probably shouldn't be these radical differences between payouts from Beggars Group for instance or label x. we don't think that's a great thing either.