The Sound of Music II

In the 90’s, owning music was the only way to listen.

Walkman was a game changer, allowing people to listen to their cassettes and eventually, CDs, while on the move.

Portable music proved lucrative for Sony, and on Walkman’s 20th anniversary in 1999, Sony celebrated more than $37B in total Walkman sales since 1979.

The music industry expanded as well; growing from ~$15B in 1990 to ~$23.7B in 1999, adjusted for inflation.

Music revenue hit a crescendo in 1999, when CDs were in its prime.

Napster was founded in 1999 by Sean Parker and Shawn Fanning.

Shawn was in his college dorm ripping MP3 files from CDs and trading them online with other college students. After doing this for some time, he realized there was no frontend application to support this, and like a good computer science scholar, he decides to take on the initiative himself. He introduced it to Northeastern University in Boston. Napster was alive.

Shawn called Sean, a friend he made online. Sean had a few internet businesses that he started in high school that brought in ~$80,000 a year. He decided to forgo college and focus on getting his money up.

The Napster guys raised $50,000 from Shawn Fanning’s uncle and moved to Silicon Valley.

By offering free music illegally, Napster went viral in the teenage / young adult demographic from 1999-2001, before music labels and artists sued the company into oblivion, leaving investors scrambling to distance themselves from the face of music piracy.

Napster’s death left a power vacuum that other illegal sites filled during the early 2000s.

I remember learning about LimeWire from older relatives as a 4th grader.

The prospect of listening to music for free - when the legitimate alternative was paying $1-2 per song on iTunes - was worth possibly infecting the computer with a virus… At least in my pre-adolescent mind

LimeWire wasn’t the only Napster clone; sites like Kazaa, Bearshare, Madster, and FrostWire were players in the space.

Meanwhile, Daniel Ek was somewhere in Sweden contemplating retirement.

Ek was a serial tech entrepreneur who sold two of his companies in 2006. The acquisitions left him wealthy enough to retire at the age of 23.

Retirement lasted less than half a year.

A few months of not working on anything shook Ek from his slumber, and he got back in the lab, wrestling with ideas to bring to life.

He began to ruminate on a concept that he first thought of in 2002 while watching Napster’s rise.

Daniel believed the user experience of music was broken. iTunes was terrible, and pirating music was terrible as well. He felt there was a better way to consume music.

Music labels were hesitant to giving catalog licensing rights to Spotify. In fact, Spotify had to launch in Sweden because music labels were unwilling to give away the lucrative U.S. market. Spotify got rave reviews in Sweden and started expanding to other European territories.

Then Daniel Ek met with Mark Zuckerberg.

Mark Zuckerberg connected Ek to Sean Parker, the Napster founder and inspiration for streaming.

Sean Parker passed the torch to Daniel Ek.

Sean Parker:

• wrote a long email to Ek expressing his admiration

• invested $15M into Spotify’s Series C through Founder’s Fund

• laid out a roadmap for Spotify growth in the U.S. using Facebook’s platform

Sean setting up the Facebook partnership was a major inflection point in Spotify’s trajectory, allowing them to successfully launch in the U.S. a few years later.

Although Spotify’s U.S. launch was delayed from 2009 to 2011, the late release enabled a much better product to be released. A deal with music labels was finally in place. Facebook’s partnership gamified music consumption for Spotify users by bringing activity straight from Spotify to the Facebook feed, adding a social component to music listening.

From the Facebook partnership alone, Spotify brought in 1,000,000 new users from the U.S. By the end of 2012, the Spotify’s streaming party had 20,000,000 guests, and 5,000,000 paying customers.

Growth fueled institutional investor appetite and Ek built one of the largest startup war chests of his era.

2012: $100M from Goldman Sachs, Fidelity, Lakestar at a $3B valuation

2013: $250M from Technology Crossover Partners at a $5B valuation

2015: $526M from Goldman Sachs, TCV, GSV Capital at an $8B valuation

2016: $1B from TPG, Dragoneer, Goldman Sachs in a convertible debt financing

When it was all said and done, Spotify raised $2B+ as a private company.

Spotify hired Barry McCarthy, former CFO for Netflix, as their CFO.

Barry led the charge on convincing executives to do a direct listing instead of an IPO.

What’s the difference between a direct listing and an IPO?

• In a direct listing, the company does not create any new shares or raise new money, it just becomes publicly traded. Theoretically less expensive of a process than an IPO.

Barry’s argument was that the company did not need an IPO to raise money since Spotify was so well capitalized. Also, an IPO would give 7% of the offering amount to investment banks in fees. Goldman, Morgan Stanley, and Allen & Co. got their hands on the direct listing regardless.

Spotify’s direct listing resulted in a $27B market cap after the first day of trading on April 3, 2018.

Today, $SPOT ( ▼ 1.24% ) is worth ~$100B on the stock market.

But the streaming market is running out of steam.

• streaming now accounts for 85% of music industry revenue

• over 600M people subscribe to music streaming services

• 67.3% of people listen to music using streaming services

• the average user listens to 20.7 hours a week

Music’s potential to be monetized has declined due to the instant access that Spotify and Apple Music provide.

According to Goldman Sachs, music revenue as a percentage of entertainment spend has been declining since the late 1990’s.

For the past few years, major labels have been looking for new cash flows.

The current hot topic is finding a way to squeeze more revenue out of “superfans”

Superfans are the top 15-20% of an artist’s listeners on Spotify, and they spend 80% more on music-related activities than the average fan. This includes buying concert tickets, vinyls, merchandise, etc. A study found that 1/3 vinyl buyers bought vinyls without a turntable - the buyers just wanted to support their favorite artist and get style points.

Earlier in January 2025, Spotify and UMG signed a new multi-year agreement that would bring Lucian Grainge’s “Streaming 2.0” vision to life.

Streaming 2.0 is exactly what it sounds like.

UMG and Spotify want to introduce a “Super Pro” subscription tier that would allow fans:

• early access to new music

• exclusive deluxe editions

• high resolution audio

• artist Q&A

• listening party invites

Spotify, Apple, and Amazon held talks with Ticketmaster owner Live Nation around pre-sale access for Super Pro tier subscribers but a deal has not yet been finalized, according to Live Nation CEO Michael Rapino.

Reports have suggested the subscription would cost $18 as opposed to current Premium prices of $12, meaning over the course of a year, Super Pro subscribers would pay $216 instead of $144.

Thought experiment: if 20% of Spotify’s 500M listeners are superfans, and 25% of superfans upgrade to Super Pro, that’s 25M listeners paying an incremental $72 a year, an additional $1.8B to Spotify’s top line. For context, this year Spotify is projecting $19.3B in revenue.

Maybe streaming 2.0 is the answer and unlocks a few billion dollars of revenue.

But that’s for another day

Until next time

AI at Work Poll

Headlines

• Goldman gives managers a choice: Dallas, Salt Lake City, or leave. Fortune

  • The bank is trying to send more managers to cities outside of New York as a part of “Project Voyage”

  • The push aims to drive down costs and tap emerging talent in growing cities

  • On an investor day in 2020, Goldman Sachs outlined plans to cut $1B in operating costs by shedding managers and moving employees to lower cost cities

• StubHub considers raising $1B in an IPO this year. PYMENTS 

• Neom is turning into a financial disaster for everyone but McKinsey. Techcrunch

• Dodgers break another record with Dave Roberts contract. FOS

• Hedge fund Millennium puts up an uncharacteristic loss in February. WSJ

→ Schedule a Call: Meet the team. Learn more about what we’re working on, give us feedback / ideas, say what’s up

→ Submit a Deal: Send us an interesting early stage deal to look at

→ Follow us on LinkedIn: Stay up to date on all things mainstreet.