Business Matters: Why Spotify Bought The Echo Nest

Spotify's acquisition of the Echo Nest signals the growing importance of data in the music business as context becomes king in a world of virtually unlimited content.

The Swedish on-demand music streaming service has plenty of content, about 20 million tracks, and is adding 20,000 new tracks a day. And Spotify, which has raised $538 million in funding since its founding in 2006, according to CrunchBase, by purchasing Echo Nest (which itself raised more than $25 million in funding), puts investors on notice that the company is consolidating its data play while increasing assets and putting itself ahead of rivals in preparation for what many assume will be an eventual IPO.

But also implicit with the Echo Nest acquisition is that Spotify believes data can help grow its business by putting the right music in front of the right people at the right time.

"Music isn't just about providing a large catalog of songs, but about understanding the context in which people listen to music," Daniel Ek, Spotify's Chief Executive, said in an interview. "When you wake up, you will want to listen to different music than when you go running, for example. The way to understand what people will want to hear is with data."

Ek is not the only music executive who sees data as a key to unlocking new ways to deliver music with the eventual goal of creating new revenue streams through such things as better targetted advertising or personalized entertainment. Tribune Co. in December acquired Gracenote, Echo Nest's chief rival, for $170 million. Gracenote itself has forged partnership deals in recent months with Musicmetric and Next Big Sound to augment its data offerings. Warner Music Group signed a deal to get exclusive data from Shazam, following a similar move by 300 Entertainment to access Twitter information.

With data being a hot ticket, Spotify's acquisition of one of the biggest players on the field also serves to potentially augment the Swedish company's attractiveness in the eyes of potential investors in the event that Spotify goes public in an initial public offering.

But can data solve the industry's doldrums?

"Absolutely," said Mark Mulligan, a longtime digital music consultant. "But not yet."

The industry is already awash with data, Mulligan pointed out. But the ability to extract insight from the flood of information, which many people refer to as "big data," is still in its infancy, with companies such as the Echo Nest and Gracenote exploring the possibilities for music and entertainment. That's why, for example, music recommendations are not always spot on.

"Spotify has so much listener data of its own," Mulligan said. "What it's buying with the Echo Nest is the expertise and algorithms that can make sense of all that data."

For Spotify, the first order of business will be in its suggestions to listeners, Ek said.

"You will see the quality of our recommendations increase," he said. Ek added that The Echo Nest will incorporate recommended tracks into its playlisting tools so users won't have to search for and add each track individually to create playlists. Spotify will also use The Echo Nest to improve its social recommendations to more accurately connect likeminded listeners with similar tastes.

The two companies are also hoping to build out their offerings to developers of music apps, said Jim Luchese, The Echo Nest's Chief Executive. Many apps already incorporate Spotify to play music and The Echo Nest to make recommendations to their users, via the companies' free application programming interfaces, or API's. Spotify does this to expand its distribution footprint and acquire more listeners. The Echo Nest has used API's to attract potential new customers, as well as draw data from apps that use its API's.

"The idea of combining musical understanding through The Echo Nest with the music itself from Spotify will offer a ton of additional value for developers," Luchese said.