#001 Daniel Ek: From the Projects to Scaling Spotify to $100 Billion+

**Wouter Teunissen** (0:00)
By going down to the basics and understanding every single bit of the stack, by understanding the protocol itself, Spotify created a peer-to-peer protocol that would actually understand exactly in which order parts of the song would arrive in. Because of that, we could not only figure out exactly when to begin things, but we could also start playback of the song way faster than anyone else because we realized there was a bunch of data that wasn't necessary. So we could reverse the shortfalls of the technology into advantages by going deep into the technology stack. This was not at all obvious, but it goes to the DNA of the founder, and I love technology for technology's sake. This solution made it cooler and more interesting, and because of that, we could recruit more talented people. That's a quote from Daniel Ek, co-founder of Spotify, talking about how Spotify was able to save the dying music industry by inventing a new way to experience music, namely streaming. In this podcast, I'm going to share with you 13 lessons and ideas in 30 minutes that I've learned from studying Daniel and Spotify over the last few months. Now, I want you to think back to the last time you walked around outside. It may even be right now. You're likely seeing people on their phones with headphones on or earbuds in, and these people are probably listening to music or listening to podcasts or listening to audio books. And those people were likely using Spotify. Every time I walk around my city and see a Spotify logo on a Barcelona football jersey or see someone using the Spotify app on their phone, I am just reminded about how amazing and insane this story is. I am a huge fan of Daniel Ek, or Don Jol Ek, as it should be pronounced. He went from being incredibly poor, being raised in the projects of Stockholm by a single mother, to building a multi-hundred billion dollar company in Spotify, which is now one of the most valuable businesses in Europe. I, like David Senra, truly believe that studying the greatest founders alive and dead is the best way to become a better business builder. And so selfishly, I want to cement these ideas from Daniel into my own subconscious, and I think the best way to do that is by trying to teach the ideas I've learned. So learn something, study it, and try to teach it. I think that's a great way to learn. So the first idea I want to share with you is something you just heard Daniel talking about. And that is the idea of technology for technology's sake. This idea is really just an expression of the culture at Spotify, which in turn is just an expression of the founder's DNA. Sidney Harmon says, The founder is the guardian of the company's soul. And someone else once described Apple as just being Steve Jobs with 10,000 lives. Culture is incredibly important for your business. Daniel says, you need to be intentional about the culture you're building. There are many different cultures that can be successful, but there are trade-offs with each cultural expression. And oftentimes today, what I see with younger entrepreneurs is that they're unintentional about what type of culture they are building. So they flip-flop between them. At one point in time, Spotify was a bit of a Frankenstein monster because we had some stuff from everyone instead of really leaning into our own culture. And here's an example of why culture is so important. For Spotify, the DNA of Daniel Loving Technology for Technology's sake helped Spotify invent, literally invent, a scalable way to stream music digitally for the first time ever in history. Now back in 2006, when the company was started, no one understood peer-to-peer technology very well. The only thing people knew about it is that it was the technology behind piracy sites like Napster or Pirate Bay. And these sites were literally killing the music industry, costing them billions of dollars a year. If you look at a chart from the music industry revenue every year, you'll see a very aggressive dip around this time, which is quite depressing. But Spotify, with its tech-curious founder-led DNA, looked closer at this technology and found the solution was actually to use peer-to-peer technology. And so that is not a super-intuitive thought, that part of the solution would be found within the problem. So what Spotify did was they combined this peer-to-peer technology, which was a very slow but simple and cheap way for people to share files from one computer to another. With server technology, we could share data much faster but which was also more expensive. And so by going full-stack and having this tech-curious DNA, Spotify could play the start of the song, which was unpredictable, using the servers so that they could start the song playback fast, and then the rest of the song, which was more predictable once it had started, they could use peer-to-peer technology for playback. And so this tech-curious DNA literally helps them invent a scalable way to consume music digitally for the first time ever. And importantly, it's the same curiosity, the same culture, the same DNA that saves Spotify years later. Because roughly seven years later, in 2013, mobile phone usage starts to outpace desktop usage worldwide. Now this is a problem because the peer-to-peer technology Spotify is using is becoming a liability because it becomes too expensive and intensive for the phones to be able to use. And so I want to combine this idea of technology for technology's sake with the idea that you should never be afraid to cannibalize yourself. Because by having this tech-curious DNA, you're more likely to avoid ruin. One of Steve Jobs' cardinal rules was to never be afraid to cannibalize yourself. He said, if you don't cannibalize yourself, someone else will. So even though an iPhone might cannibalize sales of an iPod or an iPad might cannibalize sales of a laptop, that did not deter him. And so by 2013, Spotify realizes that this early advantage they had has become a liability as the world is moving away from desktop to mobile. And even though Spotify realizes this, it's still a very hard switch to make. But by understanding the tech stack, it allows Daniel to make the decision for the team to move away from this peer-to-peer technology and migrate towards a cloud-based system in 2016 And they actually partner with Google Cloud, which, you know, that's again, a very ahead of the curve by sort of realizing that they can outsource the cloud infrastructure to another company. But you can see why this was such a painful decision. If you're an insanely fast growing company and you have to switch such a key part of the infrastructure, your complexity doesn't go up by two times. It goes up by more because you have to keep paying for your old system, which is still growing. Spotify literally spends millions of dollars on servers around this time, knowing that they're going to be out of use within a few months because of the transition. You're running an entirely new database system, so you double your costs as you transition there alone, and you're not able to do a lot else because your team now has to learn to use two systems whilst they're keeping up with growth. But this DNA that Daniel has helps them know that this is the right move. I'm reminded of a tweet I saw recently from Naval, the founder of AngelList. By the way, you should buy the book, The Almanack of Naval by Eric Jorgensen. It's such a great book. I'll link it below. But Naval replies to a tweet that roughly says the following. It says, Company A makes the things Company B uses to make the things that Company C uses to make the things that Nvidia uses. So Company A is the foundation. And Naval basically replies saying, No, that's wrong. Whichever part of the stack is least replaceable is actually the most foundational. And a market-based way to approximate the least replaceable part would be by highest margin. And that is not Company A. That is Nvidia. And I think this applies to Spotify here too. It's that tech-curious culture that allows them to see actually what originally was key for the customer in terms of us owning our own service and using this combined peer-to-peer technology no longer is the most fundamental foundational thing. And that brings me to the second idea from Daniel Ek and Spotify, which is you need to work backwards from the customer experience. If you don't know what is important to the customer experience and you literally do everything, then you're saying your most valuable time, your employees' time, your engineers' time, should be spent on things like infrastructure. And if that is key, then great, do that, but understand the trade-off if it isn't. And early on, we can see this because working backwards from the customer experience, Spotify knew they had to create a free, legal, and fast music player. Paid competitor services were fast at the time, but inaccessible, and piracy was free, but could take minutes and minutes to download a song. So Spotify identifies the psychotomy and focuses heavily on it. And Daniel says, I read in this book that the human brain takes about 200 milliseconds to perceive anything, like at all. So I said to the engineering team, we got to get this down to 200 milliseconds. And at the time, this was 2006, that was considered crazy. And so working backwards from the customer experience means Daniel knew what things to compromise on and what things not to compromise on. He knew that getting free, fast, legal music was key for Spotify to work. But how easy would it have been during the first two years, it took them to get their first licenses, or for the next three years, it takes them to get the US licenses to quit or to not push for a free ad-supported streaming agreement. You have to work backwards from the customer experience and be unrelenting in that final vision. At the end of the day, Daniel often quotes Martin Lawdenson, his co-founder, saying, the value of a company is the sum of the problems you solve. And so literally, the only thing that matters is solving the problems for your customer. And so that tech curious DNA, combined with working backwards from the customer experience, helps Spotify identify what and when certain technologies are important to focus on or not to focus on when it comes to solving their customer problems. Again, that's the only thing that matters. Now, yes, you should work backwards from the ideal customer experience, even if that isn't physically possible yet. I think that's a key part, right? Even if that isn't physically possible yet. And that's what Spotify does in the early days. But as your company grows and matures, you would be an idiot not to also leverage your own user data to try to understand what behavior your customers are doing or trying to do that is missing from your service. So really, this is the idea of leveraging your own user data and how to do that. So Spotify early on notices that in Germany, the record labels were uploading audio books to Spotify. Now, at the time, the experience of listening to an audio book on Spotify was horrible. The UI wasn't designed for it. It was not a pleasant experience. But nevertheless, some audio books were entering the top 100 songs of Germany, and these are obviously not songs. And so that's a very strong signal that both the labels wanted to add audio books to Spotify to earn more money and get more distribution, and that the users want to access audio books on Spotify as well. Now, similarly, Spotify has a lot of these internal annual hackathons, or at least I think annual. And they kept noticing engineers hacking RSS feeds with their favorite podcasts and pulling these feeds into their Spotify players. That's another sort of key user behavior. And now, Spotify obviously has podcasts. It's maybe even how you're listening to this right now. And so this idea of working backwards from the customer experience, the ideal customer experience, I want to point out is really a company-wide effort. You need to be looking outside of just the medium with which your technology or service is being delivered to customers, because you need to try to deeply understand what your customers care about. And Daniel did that early on by saying Spotify was in the moments business, streaming music for special moments in your life. And then again in 2019, where he has this press release and this announcement where he says Spotify would become an audio first company, not streaming or music first, but an audio first company. It's interesting, the more I read about the history of Spotify and how many times they have a ton of near-death experiences, there's I think one thing that's consistent through and through, and that is the idea that you must have an opinion on the future, even if that's flexible. So in 2006, Daniel believes there should be a free legal music streaming service, and that it will happen and that it needs to be free if there's any hope of solving piracy. So why shouldn't that be Spotify? But then the actual way of getting to that vision, you can figure that out as you go along. So being rigid in your strategic vision and having a strong foundational belief in why you're going that specific direction, but then simultaneously being flexible in your tactical decisions to get there, I think that's really key. It's kind of like the famous quote from hockey player Wayne Gretzky, where he says, you need to skate to where the puck is going. Well, that's impossible to do if you don't have a fundamental belief or where the puck actually is going. And so this is how Daniel summarizes that point. He says, what I often tell other entrepreneurs is the fact that people doubt you in the beginning. Yes, you need to pay attention to that and hear what valid concerns they might have. But a bunch of those concerns is that they are just not used to the concept. And so you need to understand that a lot of the concerns people might have is because they don't have the same belief as you on where the puck is going. They don't understand the concept. What is streaming? That sounds impossible and strange. No, I want to own my music. I don't want to rent it. Free music? That's impossible. Free music is why the music industry is losing billions of dollars every year. Are you crazy? Etc, etc, etc.