Season 2, Episode 6: Spotify’s Direct Listing

0:00 Did you read the mission statement on the Spotify's F one? No. So whereas last week, Dropbox's mission is to unleash the world's creative energy. Spotify's is to unlock the potential of human creativity. You definitely should get some digs in on them. It's an unrestrained hippie world out there.

0:25 Welcome to season two, episode six of Acquired, the podcast about technology, acquisitions, and IPOs. I'm Ben Gilbert, I'm David Rosenthal, and we are your hosts. Today we are covering a company making history. the week it makes history. Spotify and their direct listing, which

0:54 is not an IPO. But if it were an IPO This would be the largest IPO listing, whatever you want to call it. From Europe. Ever.

1:04 And the seventh biggest of all time, uh debuting at about roughly uh thirty billion dollar market cap. Wow. And tr and almost uh almost a billion uh a billion dollars worth of shares on the first day traded. Yeah, trading hands.

1:21 Big company. big shakeup in the industry over the last few years with the rise of streaming. Um and a a a big change to the way that uh the companies go public. So David, I'm excited to dig in and uh help uh understand myself exactly why they did a direct listing, what a direct listing is. And uh probably more importantly, excited to hear from you um more about the history of the company itself. Oh, there's always a story, Ben. Yeah.

1:50 All right, uh if you are new to the show, uh you should join us in our Slack at acquire.fm. Uh, there's over twelve hundred people talking about uh acquisitions, IPOs, uh tech news as it comes Um, and helping us do research for the show and and thanks to listeners who were uh throwing inter some interesting stuff about Spotify as David and I were researching. All right listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora.

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4:29 And just tell'em that Ben and David sent you. Well, David Before we dig in Uh I spent a bunch of time, I think, um, as the news started to trickle out that Spotify was doing a direct listing, not an IPO.

4:43 Um, you know, several months ago before they priced, before they had a date, before they had an F one, not an S one. Uh to announce. Oh oh the I didn't realize that the F one is because they were they were uh not a US based company. Not because of the direct listing, but because they are a uh Foreign issuer. Yep. Ah, that makes sense.

5:02 Before we dig in, some things that you need to know about what is a direct listing or a direct public offering, which is not an initial public offering. the the biggest difference is the company doesn't take any dilution. So if you're thinking about, you know, what does a company normally do in the IPO? They they there's two big reasons. One, they create liquidity for existing shareholders. So everybody who's got stock, um, sometime after that has the opportunity to to sell that stock and uh and and get some liquidity on that. The other is that the company actually creates new shares. So all the previous shares get diluted, but the company gets to raise money. So they sell the new shares that they've created, um, they they raise millions and millions of dollars to have money in their coffers. With a DPO A company doesn't take any dilution.

5:50 and they don't raise any money. So Spotify doesn't have a dollar more in the bank account yesterday from selling shares that they do uh Um that they do today. I guess that. Don't create any new shares. It's literally just uh Uh hey, anybody who is a current shareholder uh can now sell. There's no lock up

6:09 Um It's just it's it's theoretically less expensive of a process because you don't have to go do the whole road show and hire bankers and all that. um which we will get into also. Um, but one thing that was interesting that I that I was sort of thinking through is one disadvantage is that if you are a buyer of this stock you are actually you have to consider the fact that an insider, somebody who previously had information rights to the company or might be an employee of the company, is selling.

6:38 So you you actually have a counterparty who's probably more informed than you on every single transaction of of shares in these early days of trading. Yep. Fake you. On the other hand, you know

6:51 Spotify is a twelve year old company. Certainly the founders and employees, early investors, they want liquidity. Um, and also, you know, we'll also talk about this, but there's been a robust private market for Spotify shares for many years. Um trading has been. happening. There has. Well before we uh go into the history and facts, I found one fun bit of trivia. Um, David, there's a very famous company that did a DPO in the eighties that sort of popularized this. Do you know who it is?

7:22 I do not know. So in nineteen eighty four, Ben Cohen and Jerry Greenfield needed funds for their ice cream business. Uh-huh. They advertised ownership stakes through local newspapers for ten dollars and fifty cents per share, uh, with a minimum number of twelve shar and their Vermont loyal fan based uh ended up funding Ben and Jerry's ice cream in a DPO for its first way of to first way to raise capital, raising only seven hundred and fifty thousand dollars from eighteen hundred ice cream loving Vermonters. Oh my goodness. Talk about an addictive product. I know. Addictive and viral, as we will As we will get into

8:04 That's right. And interesting to know, we'll come back to this later. They then did a five point eight million dollar IPO the following year. So they actually did issue new shares once they were they're public. So um Tuck that one away and uh Um let's dig in. All right. History and facts.

8:21 So, as probably a lot of people know, Spotify is a Swedish company or founded in in Sweden. Uh not Switzerland as the New York Stock Exchange learned this week, unfortunately. Sweden is a different country. For those who didn't see the news, uh there's a there's a chance that a a Swiss flag got raised at the New York Stock Exchange. Yeah, somebody um Somebody was in hot water. Uh we'll we'll come back to that at the end of the show. Uh but it was started in Sweden by uh two co-founders, Daniel Eck and Martin Lorenzen. Uh started in 2006. Uh Daniel Eck, the CEO, who's still the CEO, was kind of like a wonderkind of the Swedish tech scene. He started his first company when he was in school at age thirteen, hired all his classmates.

9:10 Lot of fun history, which we'll get into. Um But to really understand Spotify. You have to go even farther back. Uh and start with another company. that we've also discussed on this show a little bit. A uh interesting footnote of history.

9:27 Uh called Napster. And Yeah. Yeah. Who I mean uh Who who would have thought that uh the very thing that you know d that destroy the music industry and uh uh brought the The

9:44 record labels to their knees could possibly have a a hand in saving them. Well Uh unfortunately it was the record labels that brought Napster to its knees. Uh but as we shall see, there is a very direct and straight line. From Napster. to Spotify too today. So Napster, uh founded in nineteen ninety nine by the Seans.

10:06 Sean Fanning and Sean Parker. Uh Sean Parker is S E A N. Sean Fanning is S H A W N. And then also a third co-founder, uh, who doesn't get talked about as much, but his friend of the show, Jordan Ritter, uh, who's based in Seattle now. Um, and there's a really, really good internet history podcast episode with Jordan about the founding and early days of Napster, all the way through the lawsuits with the record labels and shutting down and the aftermath, uh highly recommend that. Uh if you want more detail than the couple minutes we're gonna spend here on Napster. Um go listen to that.

10:40 episode on over on IHP. Um So Sean. Fanning. Uh

10:46 started Napster originally. He was a college student at uh Northeastern University in Boston. Um, and he and his friends Uh well he was really into hacking computers. This was like the late nineties kind of end of ninety eight, beating in ninety-nine. Um Really into hacking, he was really active on IRC and in a bunch of communities and forums, um, sort of trading programs on the internet and um and especially on broadband. So these are the days most people at home had dial up, uh, but colleges all had broadband. And so, you know, having I was I was sorta on the tail end of this, but you know, I remember, you know, the biggest

11:25 uh attraction to going to college. You know, there was the education and all that, but there's getting broadband internet and then Stealing files on the uh the internet. Yeah, I remember evaluating colleges based on that. Like they thought it was the most ridiculous thing, but you know, nerdy kid going into computer science, uh I remember asking like on tour guides like what's the bandwidth in the dorms? I didn't know.

11:50 And it was the whole um Remember the Internet Two that was like a separate backbone that Only coll universities had that was like a faster private internet linking universities. Anyway. This all plays into Napster. So Sean is he's on active in all these online forums.

12:08 Uh, he's trading files, but the including MP threes, which people are ripping from CDs, you know, this is big this is the I Mac, you know, and all this is happening. Rip mix burn. Rip mix burn. I mean don't rip. Because that would be illegal. Uh yeah, don't burn. Use iTunes. By your music. Um So he realizes there's no good like front end to this stuff. So he's like, Okay, I'm well, I'm you know, I'm a C S major. I'm gonna I'm gonna start coding up a front end client um for trading files peer to peer on the internet. He decides to call it Napster.

12:41 Um he releases the first version of it and it basically just takes off like wildfire. Uh first at North Eastern, uh, you know, a a college in Boston. This will we will revisit social apps uh on the internet. starting at colleges in Boston and taking off like Wildfire. Uh Spreads to lots of other colleges all around the country. Um

13:03 He brings on two folks. One is Jordan Ritter, who's also based in Boston. Uh he takes over back end programming. Um and another friend that he has from uh from the IRC internet relay chat community, a guy named Sean Parker. And Sean joins and he's basically kind of the business head of Napster. Um And and Parker was, you know, he was kind of like a hacker hustler guy. He had a whole bunch of internet businesses that he started in high school. He decided not to go to college. Um apparently he was making like eighty K a year.

13:36 While he was in high school just from Internet businesses. Um So they uh the three of them get going. They raise fifty thousand dollars from Fanning's uncle. And they move out to Silicon Valley. Uh and kind of the rest is history. Again, you can listen to the IHP podcast, but basically within a span of two years from ninety nine to two thousand one.

13:55 Napster goes from being like the killer app for broadband. I mean, this was the reason I pressured my parents to get broadband at my house when I was growing up. So I could use Napster, uh or use it better than than dial up. Um you know, they get sued by all the music labels, uh, and the company shuts down. and kind of flames out in a blaze of glory, uh all within about two year period. So

14:19 Well, the ashes of Napster kinda live on. It gets resurrected as Well no, but I mean I I'm I'm thinking about the time in my life where I was actually using like tr Napster Napster and I had a a zip disc that I would store my music on when I would download it and I would like you know, those are only a hundred megs so I'd like delete the old music that I didn't want any more so that I could get the new songs off Napster. But the uh Um I can't believe that was only a two year period. I know. It was crazy. Well, because the the labels sued Napster. Um They couldn't work out settlements. They sued they sued Napster. They sued

14:54 all of the individuals who are working at Napster, all the founders, all the investors, the LPs of all the venture funds, like they just went nuts. Oh my God. Um And and so quickly and what happens, you know, I remember this, I'm sure you do too, is Napster gets shut down, but then, you know, a million flowers bloom and it's placed. Because uh All this stuff. Uh'cause that leads to Skype. Um which also will influence Spotify, uh which we'll come back to.

15:20 Anyway. Sean Parker, though. Napster after all this has happened in two thousand one. But he doesn't you know, he does he's not one to rest on his laurels.

15:30 Uh he founds a company called Plaxo. Which we've also discussed on this show, out in Silicon Valley. They're all out uh in California now. Two thousand two starts Plaxo. uh gets backed by Sequoia, raises money um from Sequoia. I believe Mike Moritz is on the board. And uh Uh, but Sean's still a kid, um and he's running this now sort of enterprisey email um

15:54 you know, identity company. Um He ends up getting pushed out after the downturn in two thousand four. Sequoia and the other board members push him out of the company leads to a whole lot of animosity. ultimately leads to the infamous Facebook pajama pitch to Sequoia, uh that is covered in the social network, um, which we'll get to too. Uh so Parker's done it. And real briefly for anyone who doesn't uh

16:20 um who doesn't have the the time to go check that out. Basically uh Sean Parker swore that when he was getting involved with Facebook they would never go and and give Sequoia a piece of this and finally uh Mark Zuckerberg um is is persuaded to go and pitch Sequoia and shows up in his pajamas as a show of true respect. Yes. True to respect. Now infamous in Silicon Valley. Lure. Um So

16:49 Parker's pushed out of Plaxo. Uh Doesn't sit till for long again. Hm. Supposedly, his roommate at the time had

16:59 Is dating a girl who's a student at Stanford, an undergrad at Stanford. And Parker sees on her computer one day that A site called The Facebook.

17:09 dot com uh And this gets dramatized in in the movie The Social Network where where Parker is played by Justin Timberlake of all people. And uh and it's So good. the Stanford campus and then sees it uh on her computer the next morning. Uh supposedly it was actually his roommate's girlfriend, but Anyway, next thing you know, um

17:31 Parker basically hustles his way into meeting with Mark Zuckerberg and then Facebook co-founder Eduardo Savarin, uh, because Facebook is still back on the Harvard campus in Boston. Uh he goes to New York, he arranges a meeting with uh with the two of them. This is all documented in the social network, the company's a few months old. Uh, and he basically he talks his way into joining the company as Um And Parker has also become close with Peter Thiel at this point. Uh founders fund doesn't exist yet, but PayPal has already uh exited to eBay and Peter is now investing in the PayPal Mafia and other folks.

18:09 Uh and Peter ends up leading the first True investment in Facebook. Buys ten percent of Facebook for Five hundred thousand dollars. Um

18:18 A Quite present move. Um And then the We all know what happens after that. Uh

18:24 But I think yeah, I think Facebook it I think it worked. Uh That'll be a a story actually that we have already told. You can go listen to our episode on the Facebook IPO. Uh but I think everyone knows what happened. Um but For Parker though.

18:39 In the next year, in two thousand five, um Yeah, remember, he's still super young. He's gotta be like I don't know, twenty four twenty five at this point. Um He has a party at his vacation home in California.

18:54 Ends up getting busted by the police, they find a bunch of drugs at the party, and as a result, he gets ousted from his role as president of Facebook. Again, all this is in the movie in the social network. Um So that was Sean Parker Sean Parker was born in seventy nine, so that would mean W all this is going down in what, two thousand five? So he's probably twenty six. Yeah.

19:17 Yeah. Somewhere between twenty five and twenty seven. Um So he's like the adult supervision at Facebook. Uh uh it's kind of a miracle that Facebook survived all this. because we'll get into some more stuff here. Um

19:33 So You know. Parker again doesn't sit still for very long. He joins up with Peter Thiel. um who had just at this point started Founders Fund, the V C firm that um Peter uh started uh and uh after the Facebook investment. Um Parker joins in two thousand six, but he still has music and Napster kinda on his mind.

19:54 And if you remember, um Facebook In the original early days. Facebook was actually the Trojan horse. to realize what supposedly was Mark Zuckerberg's true vision.

20:06 Wirehog. Which was Wirehog. Yeah, that's right. They were co developing it's a I think when they were When they were working on they were even doing this in California, I think after they had moved out. They were working on both Facebook, the social network, and Wirehog, the music sharing network, and were going to deploy Wirehog to everyone who had uh had signed up for Facebook to be sort of the the exactly, David, the Trojan horse, the way that you uh you bring P to P to the masses. Yep, exactly. And remember, Facebook was only at college's at this point in time. It wasn't open to the whole public. And um And so Wirehog was essentially Napster, uh two point oh. It was

20:44 file sharing, but mostly primarily music, uh and then and then video file sharing have become big at this point. Uh BitTorrent and other um applications were were were very popular. Um and so actually that pitch to Sequoia, the infamous pajama pitch, uh that Mark Zuckerberg on Facebook did. Supposedly they primarily pitched Wirehog, not Facebook.

21:07 Wow. But uh But Parker, you know, he's he's lived through all of this. He's been sued by the music industry, by all the labels, had Napster killed. He kinda says like look at us, like Now is not the time. Uh

21:23 W some day Wirehog, Napster, it'll all come back. But Um You know, the the industry has not changed enough. We're gonna get sued. the Facebook is working. Let's do that. Let's kill Wirehog. So supposedly Parker was the one responsible for either before or after he left. He stays really involved in the company even after he s stopped being president. Um he's the one who kills Wirehog within Facebook. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta.

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23:21 So you can get$1,000 off Vanta at vanta.com slash acquired. That's V-A-N-T-A.com slash acquired for a thousand dollars off. And just tell them. That Ben and David sent you. Alright, so chapter one. Sean Parker starts Napster and that gets brutally murdered by the

23:42 Music industry chapter two Facebook in its own success. becomes the dominant thing and there's there's uh no reason to focus on Wirehog there. Yep. Wither chapter three. So for chapter three

23:57 We come back. To Sweden. Now. And two Daniel Eck, uh the CEO of Spotify. So Daniel

24:04 As we said, he started his first uh company in nineteen ninety six, uh, at the age of thirteen. He was in school. Uh it was a website, um uh web developer for clients. Uh sort of like uh Um uh uh Tony Shay and uh the Zappos guys, uh when they moved out to California. Um yeah, man, that was that was the thing to do and uh

24:27 In high school. Like that was it you could make way more money than anybody else'cause it's this highly valued skill. It was y the work didn't have to be good. Like no there was no good I mean, there's no like m modern frameworks for doing any web development then. So you just throw something together and and adults are amazed that there are businesses on the internet. There's no square space at this point in time. No. Um So after a couple years. Daniel's making like fifty thousand dollars a month and has twenty five employees. He's still uh

24:59 Early teenager. Um He ends up he does go to college, briefly. He goes to the K T H Royal Institute of Technology, which is the top engineering school in Sweden. Um, but he drops out. Uh he wants to focus on on startups. Uh he joins one startup called Tridera and ends up getting acquired by eBay. Then he becomes the CTO of a virtual world uh game called Stardoll. Remember when virtual worlds were a big thing?

25:24 Yeah. I don't know about you, but I still spend uh most of my time in second life, David. Yeah. You might be just about the only person left who does that. Uh Then after that, he starts an online ad company called Edvertigo.

25:42 gets acquired by a company called Trade Doubler, which is also a Swedish company. Um That is sort of like the PayPal mafia or or I would We wave would say the Airbnb mafia uh of Sweden. Um And then after that, finally

25:58 Uh Trade Doubler will come back in a second, but after that finally Daniel becomes the CEO of a company called You torrent. Uh and U Torrent is a BitTorrent. Client.

26:09 Um so now BitTorrent is basically it's a it's a peer-to-peer file sharing protocol that is the spiritual successor to Um to Napster, to Kaza, to LimeWire, to sort of the first generation of file sharing companies. And BitTorrent. Is um Uh.

26:26 I don't know fully the technical details, but essentially it shards files, makes it a lot easier to transfer very large files between users. So people are using it for music, but now people are also using it for video, movies, television shows, and the like. Yeah, it has the major benefit of you being able to concurrently download multiple pieces of a file from different sources. So rather than David Me taking up, you know. the hogging the entire way to download that one file that you have, I can split it into a hundred pieces and and grab a hundred pieces concurrently from different people. So the more people that are hosting the file, the more people that um can can share to the network. Yep. The faster it all moves. And so this is U Torrents based in Sweden.

27:09 Uh later that year, this is two thousand six. uh after Daniel becomes the CEO, it ends up getting acquired by BitTorrent. Um And and this is like Piracy, you know, which started with Napster has now reached like a fever pitch. There's actually, I had forgotten about this. There's a political party

27:29 In Sweden. That is formed a legitimate political party called the Pirate Party. And their platform I do remember that. Their platform is like eliminating intellectual property rights. From the law.

27:43 Period. globally. And and like there are a lot of people that support this. Apparently in in the you know national elections at the time, they get about seven percent of all Votes. In the country. Uh

27:55 It's crazy. And so like, you know, everybody this is the music industry has been decimated at this point. Um, you know, people are worried that Netflix has transitioned into is starting the transition into video streaming. Uh people are worried, you know, BitTorrent's out there, people are pirating movies, you know, what's next? Basically there's no There's no hope insight for intellectual property on the internet. Um So has Apple ridden in on their

28:22 Their white knight horse yet. Oh yeah, totally. Ninety nine cent downloads. Ninety nine cent downloads. So iTunes, you know, is is hailed as the savor of the music industry. But Easy Beats Free, the classic Steve Jobs is um. Yep. But

28:36 iTunes is still uh and until the Beats acquisition, uh which we covered, it's still in the purchasing music paradigm. Uh where you're paying money. Yeah. Uh, and then you can play that file anywhere, but it's only one song or one album. Um, it's not like the best experience. And this is where Daniel. You actually can't play it anywhere. It's it's like

28:59 I mean until they switched to the DRM free for the dollar twenty nine instead of the ninety nine cent stuff, it was still restricted to five devices that had to be authorized in kind of a clue-y way. Um you literally had to transfer the MP three around because the the cloud hadn't really blossomed yet, and certainly not streaming, so you know they're they're If you think about uh sort of step functions to the user experience, I'd say you know that iTunes was like twenty percent better because I didn't have to go into shady parts of the internet to try and find this music that fell off the back of a truck. It was like right in my music player, which is great. But I'm not going to be able to And you knew it was the right song, you know, the two outright. It's like somebody like uh playing uh Uh playing something out of their computer speakers and then re-recording it onto a separate thing. So you have this weird like hiss in the background. It was great. Wild West. Wild West. Totally. But but it really wasn't, you know, it wasn't a whole step function better. It was, you know, easy, sure it beat free, but it wasn't a paradigm shift. It was still like

30:04 uh the same way that I'm uh all the d same downsides of transferring an MP three around, um, but with the new downsides where it also costs money. Remember Organizing your iTunes file library. I want my life back. I want all those hours back. I

30:19 meticulously cared about this. I like I for a while tried to get some of those software uh uh some of the programs I think uh something about a brain, like brain uh sound brains or something that would go through and like help you by recognizing the audio signature and filling it in, but even that was wrong and I'm like so obnoxious and meticulous about keeping that stuff uh accurate that like I

30:42 I have I've spent weeks, like cumulative weeks of my life. I think this was probably Like the biggest um you know, wound inflicted on our generation was that like, you know, all this productive potentially productive time that we could have been spending playing video games, you know, which we were doing the rest of the time, we were organizing our iTunes file like that. I thought I was gonna have that with me for life. Like I remember, you know, you look at your dad's record collection or you know, my n my parents also have this like Rich CD collection, and I'm like, this is the way, like this is my music collection that I'm gonna carry with me forever. And I remember I mean we're I'm jumping a little bit ahead, but I remember this moment a few years ago where like I got a new computer and

31:23 And I didn't transfer my iTunes library over. I just like have it on an external hard drive somewhere around my house. And it was like this painful, incredible illustration of sunk cost fallacy where I I just I like um um like mourning the fact that there's these hundreds and hundreds of gigabytes that I'm just not not bringing with me into the next chapter of my life. And and and did anything bad happen from it? Like no. I I I have access to basically I I think all of that music except for sort of some

31:54 Um you know, live stuff here and there and some covers and all that, but like Y you know, I hadn't I hadn't opened iTunes and listened to any of that in years. Yeah. Yeah.

32:04 So this is really The insight that's the same. Daniel Eck has which is which is Two pronged. It's that the user experience for music is

32:15 Not just that the industry is broken, but the user experience is broken. And iTunes is not great. For all the reasons we talked about. But Piracy.

32:24 isn't great either. Uh, you know, BitTorrent and all the spiritual successors of of Napster. Um You still have the same problem. You gotta manage the files. You don't know what you're getting. Uh it's really it feels like, you know All of this feels like technology that's not like productized. And so he has the vision that There's a better way. Uh there's actually A better way to

32:48 Consume music. That is better than pirating, better than iTunes, and that is what becomes Spotify. So he decides, you know, yeah, the music industry's hard, but I'm just gonna go for it. He teams up with Martin Lorenzen, uh, his co-founder, who was one of the Trade Doubler co-founders. Remember, Trade Doubler had acquired um had acquired Daniel's last company before he joined U Torrent. Um

33:12 They fund the company themselves, they figure they can raise venture capital. Uh, and you know, they'll do some deals with record labels. Get launched. They have this this new You know. New paradigm for consuming music. Of course, everybody's gonna see how much better it is.

33:27 And it turns out it's Quite a slog to get the record labels on board. Um shocking. So this was two thousand six when they start the company. Apparently the name Spotify comes from they're in Daniel's apartment. They're brainstorming names for the company. They're sitting in different rooms and they're shouting back and forth and uh With the suggestions, Martin shouts something.

33:48 Uh and Daniel mishears it as Spotify and uh immediately Googles it, realizes that the domain name is available. And thus. Spotify. I love these stories. I know. Like of of how these things come to be. They later they later try and justify it as like well it's a mashup of spot and identify. But No, that's that's not what happened. It's like it's like uh Pierre Midiar when asked at an all hands meeting after the eBay IPO, what does eBay stand for? He was like, Well, I was kinda

34:18 I've been trying to tell people that it's like electronic bay. But I just thought eBay sounded cool. Totally. Um So they build uh they build the product, uh, they're working with the labels, um, but it takes, as I said, forever. Um to get any deals done and the labels in particular don't want to go anywhere near giving the rights to streaming

34:44 Uh two. the US. Um so it's actually really fortunate that the company starts in Sweden because eventually after basically two years they're able to convince the record labels to let them experiment with this new paradigm of streaming. Uh remember, Netflix is already around at this point. Like the model is proven.

35:04 Um, but only in Sweden. They won't let'em do it in any other companies. Um So finally Uh finally in October two thousand eight, so almost two years after they start the company, they launch in Sweden. with free accounts available by invitation to everyone. So they use the invitation, you know, growth hacking uh uh method for free accounts. Uh but if you want to pay to subscribe, um, anybody can come in and pay to subscribe. So it's like you gotta be part of the club to get in for free, but you can bypass the line if you pay ten euros a month to subscribe.

35:36 That's a great It's so interesting.'Cause it does I mean it hits that critical mass where if you're using a viral invite system like that it's not hard to find someone with fifty invites to Gmail anymore. Okay. But at the beginning it's so coveted if you care about being on it and that social I mean, that's it's so clearly not gonna be a long term revenue strategy, but it's like, hey, if people will pay for this now, we may as well do it. Great way to start. Great way to start.

35:59 Um Shortly thereafter, in February two thousand nine, um, they launch in the UK. Uh and then they slowly kinda roll out in Europe after that. Um

36:12 But it's it's really working. And it's growing. As a personal uh aside here, I did an uh summer internship um with Exact Target's UK subsidiary in two th summer of two thousand nine. And I remember reading all this articles in TechCrunch in 08 and 09 about Spotify and what a disruptive innovative thing this was, and sitting in my dorm room in Ohio State being like I have I feel so disconnected. Like I you know, I'm I'm here manually curating my iTunes library and like I keep hearing about the streaming music thing. And it was like the most awesome experience to go and and do that internship in London and get to use Spotify But then when I came back in what a September of of two thousand nine to get plunged into the dark ages, back into the US again. It was this really weird experience. Yeah, totally. Well

37:00 So summer two thousand nine, this is when Sean Parker comes back into the story, rises from the dead yet again, or rides back in from the sunset, uh, on his horse. Uh so Spotify is growing across Europe. Uh, their labels are slowly letting them Go into more and more countries. Um

37:19 And towards the end of the summer, they end up raising fifty million dollars uh in what was their series B at that point, uh, from Wellington Partners, the hedge fund, and Lee Cashing, the um uh the well the uh Hong Kong based uh Hong Kong or Taiwan, I believe Hong Kong based uh billionaire. Um But Sean Parker so at at some point Uh at some point Daniel comes to Silicon Valley, comes to the US, and he meets with Mark Zuckerberg and Facebook, and apparently Sean Parker's

37:50 There too. This is it. This is Napster. Two point oh. This is the way to do it.

37:57 And um But they've just closed this round, this fifty million dollar round. Sean at this time had joined up with Peter Thiel as a as a partner at Founders Fund. And So Sean writes Daniel this email.

38:11 And we'll link to it. I believe he hadn't met him because in this email he says I look forward to meeting you in person. I really liked this, but I look forward to meeting you. I see all these th anyway. Uh so maybe it was that Daniel met with Zuck and Zuck told Uh Sean Parker about it. Uh

38:28 Sean Parker goes crazy. Totally falls in love with it. And so he writes this email, which is Online on the internet, published for posterity. We'll link to it. It's amazing. Um And so I'm just gonna I'm just gonna quote liberally from this email here. It starts off with You know, I've been playing around with Spotify.

38:49 You've built an amazing experience. As you saw, Zuck really likes it too. I've been trying to get him to understand your model for a while now, but I think he just needed to see it for himself. Facebook has been in partnership discussions with various companies to fully integrate music download with the Facebook profile. Most of these deals would have resulted in the wrong user experience, and I've done my best to stop them where they didn't make sense. Remember, uh Parker has no formal involvement with Facebook at this point in time. Uh in particular, there's no way that iTunes could enable the right experience on Facebook.

39:23 And uh and and he continues, he says, Ever since Napster, I've dreamt of building a product similar to Spotify. What's clear Oh good. Go for it. What's clear is that the labels never quite understood the way people really consume, share, consume, share, and experience digital music. And they couldn't admit to themselves that this behavior pattern wasn't changing anytime soon. Uh, rather they'd have to change their the way they did business, essentially, to make it work. Uh And these are so clearly two kindred spirits, like the way that Sean Parker thinks about music and the way that Daniel Eck thinks about music, like it is uh you are when you read this thing, you're sort of reading the future product roadmap for Spotify as laid out by Sean Parker, which I'm sure Spotify had already thought through.

40:08 And if if you if you find if you find the content of this episode uh interesting, you'll just like like love every word of of reading this. So go check it out in the show notes. Well, and this is what's interesting. So I don't know it It's probably impossible to know whether Spotify had uh already had on their roadmap all the things that I'm about to say that Uh Parker lays out. But essentially this is, you know, the first key to Spotify was what we talked about.

40:33 Uh earlier, which was really getting the product experience right. Like it's a better product experience than either iTunes or Piracy because you don't have to worry about organizing in files and all it's just right there at your fingertips, you know, wherever you are on any device. That's great. But that's only the first thing. The second key to Spotify is Facebook and distribution. So Yeah, so Sean Sean in his email to to Daniel says My goal for the second generation Napster, once we'd gotten around to cleaning up the messy interface, which he actually rails on as an aside. Which is funny because he was

41:16 Basic I mean he he was technical, but he was basically the business dude at at Napster. Like he was not the product designer. Yeah. So my goal for the second generation Napster was to implement social and sharing features. This would have dramatically increased the volume of sharing happening through the system. Based on the comment you made to Zuck, I suspect you're moving in this direction. You should build this capability directly into the client, using Facebook to connect. To authenticate. and then leveraging the viral communication channels to spread Spotify rapidly around the world.

41:45 That he says you guys are likely going to be the first major success story with Facebook Connect, which Facebook had just launched, which was their login platform. Then he says if you need some on its own has been has been quite the topic of discussion. Well, Cambridge Analytica and all that. Um Then he says, If you need some help navigating Facebook platform In particular the viral channels. I'm happy to lend a hand. And this is really how Spotify It becomes a thirty billion dollar company. Um

42:15 So also this email is a masterpiece of, you know, if you're a V C and you're trying to Get yourself into A deal, an investment, or win a deal. Like this is how you do it. Take notes. Uh, because shortly thereafter, Founders Fund comes in and Sean adds another fifteen million to the round that was already closed. Uh, Danielle says, Of course, I need to have you involved, and uh uh and then Founders Fund and Sean end up end up investing. Um But this is This is it. And so

42:44 At this point in time, this is the end of two thousand nine. Um the company Spotify believes, they're about six weeks away from being able to launch in the US. They've been working on deals with the record labels forever. Sean knows dealing with the record labels takes longer than you think. He thinks it's about twelve weeks away, you know, in the next quarter they'll get

43:03 out in the US. Turns out to take another two years until they until they're finally able to launch in the US. It's not until twenty eleven. Um But that also is very fortuitous for the company because they basically take those two years and they do two things. They

43:20 Foster their relationship with Facebook. through brokered through Sean Parker. Um And the Essentially re architect the entire product. To

43:30 Rely on Facebook connect and social log in. And then distribute every action that every user takes, uh, and we'll get into this uh within Spotify gets distributed out to their Facebook account. uh to the newsfeed.

43:44 Uh and this is really what drives Spotify's viral growth. This is this is uh you know, it's the Farmville for music. Like you you really are just seeing every update that every one of your friends takes in Spotify in in your newsfeed. Yeah. Ben listen to Wake Me Up Before You Go. I mean, I seriously I remember turning publishing on and off specifically when I was listening to certain songs, like I hope this doesn't go out on my Facebook. And I was one of those people, David, did you ever use um

44:12 Um Audio Scrolbler. Or last with last FM. I was like I I had that hooked into iTunes, so I was always scrobbling to my last.fm account, and then when I realized uh so that I enabled the switch for that to get published to Facebook, but like no one else Like it was very much a like homebrew computer club type thing to be

44:36 sharing all your music data on Facebook before Spotify. And then I remember when Spotify lit up in the US, it was like, holy God, every single person's listening ex you know. um habits are are showing up here in real time. You know, it's either like you farmed a root vegetable or you listen to You know, I don't know. What was popular music at this point in time, like uh So hard to remember. Justin Timberlake. Here's the thing that's actually not hard to remember is I'm pretty sure uh I I heard a great quote once that was uh your your music taste for the rest of your life is whatever you're listening to senior year of college. So I would bet if we go look at what you and I actually listen like I was listening to a ton of Radiohead and what I listened to today, a lot of Radiohead. Yeah. I think uh

45:22 It's uh So it works. Colleges. That's why it's important. It sets your habits for life. Uh So two thousand eleven.

45:30 Basically Spotify's now had time to build this relationship with Facebook. And In July of two thousand eleven, they launched in the US, but September Two thousand eleven is the biggest moment in Spotify's history. And that is twenty eleven Facebook F eight, their big annual conference. Uh

45:49 During the keynote. Zuckerberg invites Daniel Eck up on stage and announces a major partnership between Facebook and Spotify. Uh And it's two things. One, at that F eight, Facebook had announced uh launched Open Graph and the platform the year uh well, the platform would been launched many years before, but Open Graph launched the year before. uh that basically allowed

46:11 Lots of people to now insert. activities that people were doing in non Facebook apps like Spotify, like Zynga, into The the newsfeed. Um They launch the ticker.

46:23 in twenty eleven, which is basically like a real time fire hose stream. I think this was kind of in reaction to Twitter of um Everything, literally everything all your friends would do streaming by you. And the it was like that little you had your regular newsfeed, but then up in the top right corner you also had the real time ticker. Yep. And it was basically just garbage that like got overwhelmed with marketing that all these companies were hacking into Facebook. Um But so in this partnership, not only is um is Spotify a launch partner for the ticker. So, you know, all what all your friends are listening to, playlists they're making, everything, uh is getting pumped into the ticker and the newsfeed. They also, if you have Spotify installed on your computer and you're on Facebook, there are play buttons on all of these things uh in the ticker and in the newsfeed. You just click the play button on the song right within Facebook, it starts playing

47:16 The the music. And so if you don't have Spotify installed, this is a big incentive to now install Spotify. And you know what, we we sort of um Yeah. What's the right way to say this?

47:31 criticize and poke fun at the um wow, they really hijacked Facebook for this purpose. But This is like the Exact perfect

47:43 Product usage fit. Match where It it was an amazing, amazing experience as a Facebook user to suddenly have like real time music. uh available as a play button from that little thing. Like I At the very least, it was super valuable to see uh to have social music recommendations. And this is a thing that like we uh it's sort of assumed today that's like

48:09 Oh well, Spotify's cool playlist will show me what my friends are listening to, or based on my listening habits, or um, you know, a friend will tweet out what they're listening to. But this was like so crazy breakthrough that I uh it basically takes the way that people used to r uh word of mouth recommend new albums to their friends or or old things they had found that were cool and and bring them into the primary way that you were interacting online. And I I just think like It was a brilliant move on Spotify's part to to be able to get this distribution and um um you know partner with Facebook in this way, but Yeah.

48:46 Yeah. Talk a perfect uh a perfect reason for Facebook to have a platform. Like Facebook was never gonna do this. They can't Wirehog, they had a million other things to do, and and this made their service so much better. At least in you know maybe not as as uh crazy as they went with the implementation, but this notion of of being able to experience my music based on what my friends are are listening to. Actually I think you're right. Like It is unfair to

49:11 lump Spotify into this whole group of companies Zynga being, you know, primary offender number one of just hijacking the newsfeed. Like it actually was a pretty good product experience. Now, do I care that like Ben is listening to Wake Me Up Before You Go, or somebody I went to middle school with is like No, so they overdid it. But like this and I think you see this now, like of all these companies, and there's a whole wave of them, you know, Zinga, there were a bunch of social newsreader apps, there were social sop shopping sites, like all this stuff. All of these companies are dead because they weren't actually like useful products that people wanted. But Spotify is still around and is a thirty billion dollar company now. It's like the only What I mean, zinc is still around, but

49:52 That's mostly'cause of their real estate holdings, but uh And I one other point on on Spotify is while it's significantly ratcheted back on Facebook, like you don't really see um see this in people's newsfeeds anymore. Um, Spotify themselves gained enough of a critical mass where Yeah, most people or let's let's throw out most millennials in the US who are going to be on Spotify are on Spotify.

50:18 I don't know if that's a totally fair assumption, but let's just take that at face value for the moment. Um they have that experience in the sidebar on Spotify where you can see what your friends are listening to that is snagged from the Facebook friend graph. And so you know, they're not using it as necessarily as a growth vehicle anymore, but I would say maybe once every other week or so I will listen to a song because it's in that sidebar on Spotify. And it's still Um, you know, hearkening back to that, it added to the Facebook experience. It adds to the Spotify experience to have a current view of what your social network is listening to.

50:54 Yep. Yep. Well Regardless, it certainly works for Spotify. So basically overnight, like I mean, literally in twenty four hours, they get a million

51:05 Sign up from this. Uh,'cause it's all over everyone's due speed. Wow. Um And then within the month, they've doubled their user base. They were well, almost doubled. They were Just over three million users, um, primarily across Europe at this point in time. They just launched in the US. Uh and by the end of September they're uh there are I believe over six million users and over two million of those are paying.

51:31 So US is a heck of a market to enter. Yeah. Right. So two two million of the six million from the US were were s uh premium? Uh that was I bought that was worldwide. Yeah, six.

51:48 Two million got it. Six million worldwide, two million. Paying premium. And that's a lot of money. Like That's also that's not so different from today. I mean, today it's in the high forty percent, but um I mean it f it's it's really interesting from the earliest days they had an incredibly well converting freemium model. You're incredibly well converting.

52:08 Um and they tweak it over time, so Uh originally it was free. uh to listen on desktop, uh, and then you had to pay to go mobile. Um they tweaked that so that it was free on mobile as well, but only shuffle mode. So you couldn't you s you still can't pick specific songs. You can only shuffle playlists. Um Yeah, it converts really well.

52:28 Um So basically, you know, on the back of that, like that's the rocket fuel that That Spotify needs to um To it.

52:37 reach escape velocity and take off into the large company it is today. So they finished twenty twelve the next year with twenty million active listeners. So huge growth, like over three X from twenty eleven. uh five million paying subs, so almost three X growth on Paid. uh one million paying subs in the US at the end of twenty twelve.

52:58 Um And then they just start raising a ton of money to keep pumping it into marketing. And product development too. Uh twenty twelve they raise a hundred million from Goldman Sachs at a three billion dollar valuation. Twenty thirteen there is two hundred fifty million at a five billion dollar valuation. They also funny aside, kinda just like Dropbox, this is the era when everyone wants to be a platform. So Spotify also gets caught up in this, builds the Spotify platform, uh, allow app developers to build apps based on music. Wait, really? Yeah, really of course this is all buried in history now, but completely missed that. Lots of hype. They launch it

53:33 Late twenty eleven, they kill it in twenty fourteen, but it's like this is the future, you know, you can build apps with music. And it's like, what? Anyway. Which is so funny. It's so funny to watch these companies try and launch these like broad based platforms that don't make sense and then you kill it and then years down the line launch another platform that is like highly targeted, something that really makes sense. Like Spotify Connect today is freaking awesome. Like the ability to play Spotify out to various partners, Sonos and you know, everyone that can hook a uh a speaker or a playback device into Spotify. It it works so well. And like that turns out that was the killer way to integrate with with Spotify for things coming out of Spotify. Yeah. Yeah. Totally. But they get there. Um

54:17 And they just keep raising more and more money. They they ultimately end up raising, I believe, about two and a half billion dollars in the private markets. Um They also in late twenty fifteen and then into twenty sixteen As you know Facebook is now no longer Facebook has vastly locked down its platform. You're not getting all this crazy distribution. Um

54:40 They really catch the next wave really well, too, and time it well with machine learning and uh recommendations. Uh they launched the Discover Weekly playlist uh uh machine learning generated, uh algorithmically generated playlist unique to each user with new songs that they think you'll like or songs that you don't know well that they think you'll like. They launched that at the end of 2015. Radar, which is new music from Artists You Like, launches in 2016 along with the Daily Mix. Um, and this drives kind of the next wave of of growth in the company. Um And engagement.

55:13 And so by the end of twenty sixteen, they have forty million pay subscribers, which like that's huge growth. And just to take a pause on sort of um uh internal innovation. It's worth pointing out that the Discover Weekly playlist was a like very much an experiment within the company before they launched daily mixes, before they came out with release radar, before that got promoted to like a first class thing on the home screen. It was just one of the playlists available to you, like seventies, eighties, nineties, discover weekly. And they had this framework, which were playlists on which they could sort of test this new concept of can we algorithmically generate

55:55 stuff that people we will want to listen to and be accurate in that and improve in that. And it's really interesting, I mean the the innovation that the company had that they have th sort of a few innovations over their lifetime, but that ultimately made them a thirty billion dollar company, it was Streaming should be the way that this that this world works and we're gonna persevere with the music labels to make that happen. Facebook is this amazing distribution vehicle, so we're gonna, you know, that that's that's our sort of innovation number two. And we're in the w the wave of number three right now, and they really had a nice framework internally to be able to um not only test something, but then like now we're seeing really double down on it as it was working and promoting it to like a first class piece of the platform. Yeah. And I think it also It's a good point. We d we didn't really cover earlier. This has always been a thread through Spotify's product history, but um is best expressed in in these in these playlists in Discover Weekly and Radar and Daily Mix.

56:47 Is this idea the playlist? Like Playlists had been around, you know, since recording cassette tapes, you know, in the eighties. Um And then certainly iTunes had playlists. But what was great about Spotify is they really made playlists the first classes. And so like, and this is part of what they got the labels back on board with is Whereas iTunes is a singles focus, like you you are buying individual songs. You can buy albums, but like people buy songs. With Spotify, the focus is on playlists, and that kept people engaged, engaged with artists, um, and and listening a lot more. Uh, and when the labels were getting paid,

57:24 b labels and artists are getting paid based on number of streams, keeping people streaming more, listening more, Alliance Incentives a lot better. Yeah. Absolutely. Um So end of twenty sixteen, forty million ping subscribers. Now

57:41 Some of those are family plans, some of those are student plans. We talked about this in the Beats episode. You know, it's not quite fair to say that, um You just multiply that by ten and that's how much they're ten dollars per month or Euros per month, um is the is the cost, and that's how much they're making per month. But even if you multiply it by five, be really conservative. That's two hundred million Dollars or euros in subscription revenue. Per month. Um That's a lot of

58:07 lot of revenue. I mean, that is a serious business. Wouldn't it be great if they could keep, you know? A ton of it instead of just like you know, like ten percent of it. Wouldn't that be great? Well, they keep thirty percent. Yeah, well ultimately so I guess w where I was going with this is ultimately their during that year in in twenty sixteen, um, their uh

58:29 uh gross margins on the premium stuff is uh is sixteen percent. um the ad consolidated stuff they actually lose or sorry, the ad supported stuff they actually lose twelve percent. So it's a negative twelve percent gross margin and and their consolidated is uh is fourteen percent, which jumped up the next year due to sort of a a deal negotiation, but um you know the the thread as we f uh as we get into um sort of narratives around the IPO, which we'll we'll go to in a few minutes. Um I'm sorry, the the uh direct listing, not the IPO. Is is certainly that it's you know, that it's incredibly low margin business relative to a lot of these other technology behemoths that have uh have really

59:10 become huge in the last few years. Yep. Well To get us there quickly. Uh Company's growing.

59:18 As we mentioned earlier, there's always been a robust secondary trading market for the stock. They've raised all of this money. They don't need to raise any more money. Um we'll get into the business model and uh in a minute in narratives, but At the very least they have a very nice cash flow dynamic where their subscribers pay them up front. Every month. Uh the ten dollar or ten euro a month subscription fee.

59:42 They don't pay their revenue share. uh Spotify doesn't pay the revenue share out to the labels until after the end of the month. So um just like Amazon in this regard, they have a positive or a negative working cash flow cycle um that allows them to be cash flow positive even if they're not net income positive. Um And in the meantime, they had hired uh the guy named Barry McCarthy as their CFO, who is their CFO. He had been the former CFO of Netflix, also took a Short detour after that to be COO of Clinkle. Uh.

1:00:23 Good call. Oh my goodness. One of my friends in business school did his summer internship at Clinkle. Mm. That's for another episode. Anyway, fortunately for Barry, he moves on quickly from Clinical and becomes the CFO of Spotify. And Barry's the one who really leads the charge saying Why would we do an IPO and give seven percent of the offering? A raise money when we don't need it.

1:00:45 take delusion of the company, give seven percent of the offering to banks. Let's just do this direct listing. Um So they do. They set a reference point. So there's no there's no pre sales like in an IPO. Uh they set a reference point for trading of$132 a share or uh which equates to a market cap of about twenty three and a half billion. That's where shares have been trading on the private market. Um they announced that they're gonna do the first trade publicly on uh Tuesday, April third.

1:01:13 Which they do. It opens the first trade happens at one hundred and sixty five. Dollars a share and ninety cents. Right around a thirty. Totally way higher. Like the reference price was one thirty two. Reuters reported that it would be between one forty five and one fifty five. Um, you know, but it just just kept climbing up to the day. Yep.

1:01:31 And so that's about a thirty billion dollar market cap. It ends the day at a hundred and forty nine dollars a share or twenty six and a half billion dollar market cap still up. Um As we alluded to, the folks at the New York Stock Exchange mistakenly raised the Swiss flag outside the exchange. Swedish flag. It's okay. That's quickly rectified. Uh but this morning here we're Thursday morning, two days later, um still trading about$150 a share. So Right around just below a twenty seven billion dollar market cap. Yeah, and the really important thing here, sort of for the future of direct listings, is, you know, will it will it sort of settle here? Because the thing that everyone was really worried about is there's gonna be all this incredible volatility. They didn't hire bankers to stabilize, um you know, the the

1:02:21 uh i if it if it ends up falling below one hundred and thirty two dollars a share, that's below the last uh uh last place it was trading in the private markets. Um, but you know, all indicators are are positive right now and uh Um, Spotify did a few really intelligent things to sort of mitigate some of the possible risks of uh of doing this direct listing and having all the volatility. Um, the first of which being They actually did hire investment banks. Um and and as you sort of read a lot of these articles, it it becomes clear that like it wasn't one, it wasn't two. Like they they they paid uh Goldman Sachs, Morgan F Morgan Stanley, Allen and company, um Morgan and Stanley is is technically serving as financial advisor, but ultimately they're gonna they're gonna pay forty four to fifty million bucks in banker fees. Yep, uh advisory fees. Yep.

1:03:10 Yeah, it's quite comparable to what they would have paid if they had actually IPO'd. Um it's it's sort of shy of uh recently if you look around, um, Snapchat paid over 60 million, but but if you look, you know, Sp Dropbox was only around thirty million, Mongo was at like seventeen million, Stitch Fix was at seven million. Like they're actually Despite the fact that that uh they are doing a direct listing and there's lots of other reasons why that's awesome. Um they are uh uh they are paying a hefty fee out to banks to help uh I think to help stabilize or help craft the messaging or or something. Yeah, I'm not sure exactly what the banks are doing. I think it's probably their institutional sales forces that are Um

1:03:53 uh marketing the stock to large institutional investor clients, hedge funds, mutual funds, and the like. Um I think that's probably what they're Paying them for. Which is really what a bank would do in an IPO process. It's just that

1:04:07 They're doing it on an advisory basis instead of taking literally buying the shares from the company and then reselling them to those investors. So Yeah, and yeah, one other thing, the other really smart thing that Spotify did leading up to this is they um you know they they encourage sort of second market uh trading for their employees. And they um you know the more volume gets out there to be traded, the more certainty they have around what it's gonna be in the in the public markets. And so Um, I I don't know exactly what they did. I this I I think they waived they waive s the basically their right to um uh be the ones purchasing when employees are selling their shares, um to to kinda encourage this. So All right listeners.

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1:06:43 Yeah, let's do it. Let's do it. So one thing that's interesting to take a look at before we're getting before totally doing narratives is what the cap table looked like. So um Daniel X still owned twenty five point seven percent of shares. And Martin owned uh thirteen point two percent. So that's almost forty percent among the two co founders. That's like a Dropbox level of ownership. It it's more than Dropbox. Yeah, they took on So much capital. Yeah. I mean they they've raised two and a half billion dollars and it's been twelve years.

1:07:15 Yeah. Well they raised it such high valuations along the way. Um And again, you know. This is narratives here. They raised at such high valuations. Their revenue numbers were so impressive. Um

1:07:28 But the question is How much of that is, you know, gonna flow down to the bottom line after the labels take their seventy percent cut. Well, it's so funny to be doing this right after Dropbox because if you look at them, you know, these ownership per percentages are so high and you say, Why are they so high? Growth is an amazing leverage point. And uh and um

1:07:49 uh profitability or or close to profitability or at least running a lean operation and generating a lot of cash is also a really high leverage point. So both of these companies grew like wildfire, monetized from an early day Um and and you know, that just gives them a lot of of uh ability to um to raise it really high valuations and and bring a lot of cash into the business with a lot of certainty in the future. Yeah. But The difference between Dropbox and Spotify.

1:08:19 And so I actually didn't look up what do you know offhand what Spotify's overall gross margin is uh I do. I do. So it actually went up uh last year because of a renegotiation with the labels, right where Spotify said, look, we want it we want a higher take rate. Um But if we don't grow and hit our numbers, uh you get to take more money. And so it went from if you look at their consolidated gross margin from twenty fifteen, sixteen, and seventeen, it was twelve percent, then fourteen percent, and then a huge jump last year to twenty one percent. So they're definitely uh betting the farm on on future growth here right now. And you know, being nicely compensated for it from the labels. Yep. So it's uh twenty one percent.

1:08:59 Gross margin. Twenty one percent. Yeah. And and for folks that are that haven't stared at gross margins all day, uh, what you would want from a technology company is really high fixed costs and really low variable costs. So th that would be a really high gross margin because you you're actual cost of revenue is uh is is very low. So if you look at something like a Facebook, they tend to hover around an eighty five percent gross margin. And uh Google I think is high eighties, low nineties. Um But Dropbox, getting back to that comparison, uh, is uh just under seventy, so sixty seven percent gross margins currently at Dropbox. Uh so all of this is

1:09:36 significantly higher. And and Ben, just like you were saying, like the reason this is important Is like Yeah, tech companies require a huge amount of fixed costs in the engineering, in the servers, all the stuff that you need, um uh the employees that you need to uh build the companies. Um

1:09:52 But then The business models tend to be so scalable on a marginal cost basis, like it doesn't cost Facebook anything to sell another ad or Google anything to sell another ad word. Dropbox, it does cost them in storage, uh, to bring on new customers. But especially as after they've moved off AWS, it doesn't cost them that much. You know, they're still making Seventy percent gross margins. Right. Not the case with Spotify.

1:10:19 That's right. That's right. So getting into the narratives, um, a a a quick snapshot of their business today. They're they're unprofitable. Um in twenty seventeen they did five billion dollars in revenue, which is awesome. Uh but they took a$1.46 billion loss. So, you know, j d y you would you would hope to see that um sort of change soon where they're actually generating um generating a profit rather than generating a billion and a half dollar loss when they have five billion in revenue, but they're not there yet.

1:10:49 Um, on their balance sheet, they have five hundred and eighty-two million dollars of cash available. So about half a billion bucks of of cash. Um, now if one thing that's interesting to note, so they didn't raise any money because this wasn't an IPO. They've got half a million dollars of cash available on their balance sheet, but they're losing a a billion and a half Every year. um or at least at their current run rate. So unless they get profitable fast, uh they will actually need more money to continue funding the business. Uh yeah, uh I think there's there's a yes but here. Um

1:11:23 Yes. But If you look at you know, because of some of the dynamics we were talking about earlier with the negative work and cash cycle, they actually are cash flow positive, operating cash flow positive. So in twenty seventeen, they generated 179 million euros. in operating cash flow. Um now they still lost money uh on a cash basis for the year. Right. Um because they're having to pay off uh interest on um on the debt that they have, the convertible debt that they have. Um

1:11:55 So you know, yes, they will eventually need to turn um net income positive. That's the bet here. Uh but they are cash flow positive on a uh they are cash flow positive. But it's not Anywhere near the levels that Dropbox is at. I believe Well, I can look it up quickly. I believe Dropbox is um

1:12:14 generating right around half a billion in operating cash flow right now. And growing quickly. Spotify growing too, but like they're kinda hamstrung by these margins. Yeah. Yeah, and thanks for that correction. That's a g that's a that's a great point and not to be overlooked.

1:12:29 Um And the last thing I'll say is Growth is spectacular. Like if you look at revenue growth from twenty sixteen to twenty seventeen, they went from three point six billion up to that that five billion number. Um, you know, when you're generating that much revenue to be growing like that is is really I mean they're they're in a they clearly uh um you know, hit a high pressure valve when they were uh uh looking around for what market to enter. Um this doesn't look like it's gonna stop flowing any time soon.

1:12:55 Um they uh they have a hundred and fifty nine million monthly active users. Seventy-one million of those, which is almost half, are uh are paying paying premium subscribers, which means they're they've um switched off the ad tier and into the the paying tier, um, which is uh they have double the number of of Apple Apple Music subscribers. I actually don't know if that's subscribers or or monthly active users, but they sort of brag that they're double Apple Music. Um So you know, that that's I think it's huge growth. I think it's subscribers, I think it's paying. Yep, I think that I think that's true too.

1:13:30 Uh real quick, I looked up Dropbox. So Dropbox Two thousand seventeen three hundred and thirty million dollars in cash flow from operating activities. Uh Spotify a hundred and seventy nine million dollars. So Roughly. A little less than twice as much, uh for Dropbox.

1:13:46 Mm-hmm. Cool. Thank you. Uh so if you look at what Spotify says in their their F one Um You know, they're they're they're advertising that streaming is the the title wave on here and it's it's very early days and it's it's growing globally. Um, that smartphone growth is a huge driver, that Spotify's the market leader in a huge way, and even this behemoth, Apple, can't

1:14:10 Can't catch'em. Um They uh use data in a huge way to provide this personalized experience. They're running as an operationally lean business. Um and that that they really saved music. Like they they are not shy about this story. The way that they open their F1 is really by talking about um the incredible decline that the music industry was in and uh and how streaming sort of pulled them out of it and saved the music industry. And so the way they talk about themselves, you know the the skeptics would argue that um you know they are really at the mercy of these these labels and they have no bargaining power and they have no pricing power and the what Spotify says is look like the music labels love us because we save the industry and there's all these ways for both artists and labels to

1:14:57 Um, for everyone to do better because the way that we enable people to listen to music actually creates growth for music. Yep. And I think all that is is is true. Um You know, it's uh Mm.

1:15:12 Sean Parker and Napster two point oh. Working with the music industry. Yeah, so what would the skeptics say? Um You know, it's I haven't heard as much about this in the last call it six months, but for the few years before that, it was like Spotify was a trope. Like It's a terrible freaking business. They're always the the suppliers have all the leverage. The the uh music labels take a huge cut. Not only do they have take a huge cut, but there's a most favored nations clause in the uh in their um

1:15:42 um agreements where uh basically for Spotify to get a better rate, they have to go and agree and get all of the major labels, the sort of four or five major labels that make up eighty five percent of the the music's listened to on Spotify to agree to this new lower rate. Um it's a It's a total cartel. And unlike uh the the technology business of uh let's s let's look at Netflix, for example, where they actually um license the shows and pay an upfront cost of you know, you look at house of cards, a hundred million dollars to create house of cards internally or a license that Netflix creates the shows. that Netflix creates the show or or pays a license fee. Sorry, I conflated those to uh existing back catalogs of from from other existing produced shows. They pay a one time fee up front and they own that for a certain number of years. Whereas uh and and so they can generate as much revenue as they want for it. They get to keep the revenue and it's just a sort of a one time cost.

1:16:41 Um, but if you look at what Spotify is doing, compare and contrast, every single stream, um, you know, uh has a percentage that's paid out to the music labels, and therefore, um, you know, Spotify cannot outrun their costs. It's it's this yeah, it's this difference between variable and fixed costs. Like Netflix has an even greater amount of fixed costs versus Spotify, both because they're paying upfront A a fixed price to license the the shows and and movies that they didn't make. And then a lot of money to actually make Their own content.

1:17:11 Uh but then when they all their revenue It they just keep all the revenue. Um, they don't have to pay a percentage of their subscription fees to the movie studios. It's the opposite what you're saying with. with Spotify where uh A percentage, a large percentage of their subscription revenue is getting handed s right back to the label. So as the subscription revenue grows, so does the amount that they have to pay.

1:17:37 Yeah. It's a good good succinct explanation. Uh S skeptics also argue they they have catalog parity with Apple Music, whereas if you look at something like a Netflix, um, I have all this great stuff available on Netflix, oh gosh, there's this entirely non-overlapping subset of stuff available on HBO Go, maybe I'll pay for both. I'm sorry, HBO Now, um, maybe I'll pay for both. And and there's actual um um people actually do subscribe to multiple of these things, and if you look at uh a music s subscription service, basically no one subscribes to multiple uh because they have the same back catalogs and skeptics would say that

1:18:13 Congratulations, you have algorithmically generated playlists. Uh I don't think that's differentiating enough to make people switch or uh make artists want to launch with you know any sort of exclusivity or anything like that, because it's still only ever going to be this subset of the market of listeners they could release to by releasing on both. Um and lastly that that music is something that's just gonna be owned by the platform owners. So it sure you've done well, Spotify, but you had a ten year or nine year head start on Apple Music, and God, they're growing so much faster than you are. They will catch you soon. I think when we did the bundle with the devices. When we did the Beats episode Was it thirty six million subscribers, I believe, that Apple music is at now, so Roughly half of Spotify's paying subscribers, and that's in uh Uh.

1:19:00 Two years, th two and a half years since it launched. Yeah, I mean it's a bit of a farce for Spotify to say we have twice as many subscribers as Apple Music. Like you are almost a decade older than Apple Music. Yep. And they're they're coming up fast. And for all of Spotify's really brilliant as we talked about distribution tactics. Uh you can't beat being the default player on the device.

1:19:22 Uh But then also, you know, there's another there's another um I don't so th who i that was what the skeptics would say. I mean Uh I use Spotify. I don't pay for Apple music. I'm uh I highly ingrained in the Apple ecosystem. Like maybe they're the ones who can do it. Yep. Well, I was gonna say there is another um Player

1:19:42 you know, lurking in the shadows here, uh, which is what do I do? Uh I use Amazon music and that's Jeff Bezos. Your margin is my opportunity, even if your margin is very small. Uh David, that's because you don't like music. I do like mus I actually converted. I now pay for Amazon music, uh, but it's cheaper. I think it's seven bucks a month, uh six or seven bucks a month. Um But because it's baked into Prime, either so when you pay for it. Like it' welcome to welcome to Bezos Land, you know. Yeah. Uh because it's all bundled, it's all part of Prime. Uh

1:20:20 Amazon can have a totally different business model. Um so Amazon Music Unlimited, which is what you pay for, is cheaper than Apple and Spotify. just as good. Um I mean maybe there's some small things on the margin that like Spotify does better with with algorithmic recommendations and Apple being baked into the device, but like ultimately, especially with in an Alexa world now being the default on Alexa, um that's very powerful Um Apologies to all the speakers of our listeners who we just activated. Lady A. Uh

1:20:52 You know, uh And price is is meaningful to a lot of people. And then and then there's the free tier for Amazon, which is You have complete control. It's a limited catalog, but it's most of the stuff that you care about if you're a casual music listener. And then it's just completely free with Prime. And you can play directly, you're not limited to shuffle mode. Uh, you can play on any devices. Um You know, it's it's a big disruptive force.

1:21:20 Yeah. Yeah, I'm not gonna bet on it, but um Good case. I think it's Wh wh why wouldn't you bet on it?

1:21:32 I don't think Amazon gets music. Like I think um I mean we we've seen them try with Amazon M P three, like they they've taken multiple stabs at music. I think it's uh It's a um an animal that you have to have the right DNA to create. I think that could be. And we talked about that a lot on the Beats episode. I do think though there's an element of segments of the market, like

1:21:53 There are a lot of like how big is Spotify's Tam, really, of people who are gonna pay ten bucks a month. in the world for music. Like they already have seventy million people doing it. How many more people will do it? Especially when there's an alternative out there of like I could get something that's like Sixty percent is good.

1:22:11 For free. Yeah. I mean for free that yeah, so I think Amazon will take share on the f f f from Spotify's free tier or better yet, since it's a growing market, will take the share that would have gone to Spotify's free tier. I I I don't I wouldn't bet on him for the

1:22:33 the subscriber revenue. Yeah. Well. I think there you have the narratives on on Spotify. Yep. All right, into what would have happened otherwise? Let's do it.

1:22:46 Um I they could've they could have IPO'd. They could have IPO'd. Yeah. Um

1:22:54 Now they are Generating cash from operations. Um So they don't need the capital. They've already raised a lot of capital. Um

1:23:05 Yeah. H here's a crazy thing that could happen, and I was foreshadowing this a little bit earlier with the Ben and Jerry's thing, but They could IPO. Like now that they're publicly traded, I mean the it six months or a year or two years like If they need to raise cash, I mean it's it's like doing a you know diluted secondary offering that a a a public company would do uh secondary offerings. Yep.

1:23:29 Yeah, yeah. and they could just do that as their IPO. Um And as I was thinking through this, David, like I I I wanna make sure I'm thinking about this right. So Let's hypothetically say they do this they did this direct listing and started trading at

1:23:46 Um what one sixty five? Um and it's up to 150, right? It's or it fell to 150, but it's at 150 right now. Um let's say it goes up to 180 or 200 in the next year or so. Um and then they go and do an IPO at 200, they basically get to raise cash later. and take less dilution. Yep, yep, yep. And so like if there were these liquidity reasons why they wanted to be public, but they thought about it like huh, I don't

1:24:17 think we actually need the d need the cash right now, so let's not take the dilution let's take some dilution later if we do need to raise capital. Like you could see that this is maybe only chapter one. And that the The Dilute offering happens later.

1:24:34 Yeah, I mean I think the question though is will they Need capital. I think they they don't in in their current business model. They will need capital potentially. If they try and

1:24:46 move to the Netflix playbook of we are gonna develop our own artists and make our own Content. Now that's been bandied about in music and you know, there was the famous Taylor Swift, you know, exclusive with Apple, and then that didn't work out. Ben Thompson's written a lot about this. Does it make sense in music to have exclusive content in the way it does with video? Unclear. Um

1:25:11 Yeah. Because here's the thing is In in Video since people are used to paying for multiple or switching between If somebody launches something like Stranger Things

1:25:21 Then you're gonna switch to that provider or you're gonna add the provider if you wanna watch that. Uh If you're an Apple Music subscriber and Taylor Swift drops her new music video only on on Spotify, you're not switching. Like you're highly, highly ingrained with all these playlists and configuration and friends that you've made in one service or the other. You're probably not gonna do it for a new album. I mean maybe for like

1:25:46 two or three artists that are all like if Jay Z and Beyonce here's the thing they actually do with title. Like if if if you look at like It hasn't worked for anyone yet. Well, I think it doesn't work because it doesn't make sense for the artists. Like, especially in today's industry, as an artist, you make your money from shows and from Branding and merchandising. So you need maximum exposure. Maximum reach. You wouldn't want to artificially limit You know, your audience. Um Whereas in video it's a lot different. Like you have a lot more

1:26:18 Niche. Content. Uh and people are used to you know, oh this'll be this is an HBO exclusive or whatever, like, you know, they're

1:26:27 Uh the paying directly for content is a lot more ingrained in uh in people's uh psyche. Yeah. Plus you also have the actors who Actors act in content across

1:26:43 Yeah. You know, creators and publishers essentially. Like, just because um Yeah, Will Smith did that exclusive movie. I forget what it's called with Netflix. That doesn't mean Will Smith can't go do his next movie with Disney or Fox or well, Fox is part of Disney now or you know, Universal or whoever. Whereas in music, like Taylor Swift becoming a Apple exclusive or Pot Spotify exclusive

1:27:07 That means She's not gonna ever release content on the competitors? Like that doesn't make sense. Yeah. Yeah, something would have to change in the ecosystem where Um

1:27:19 people would have to actually subscribe to multiple multiple providers, which I don't think is gonna happen. Or people the artists would actually start generating more of their revenue from streams rather than from streams being their top of funnel and then monetizing fans more through shows and all that. Yeah. Hm.

1:27:40 So Yeah, I don't think they need the cash. Yeah, well then it makes sense that they didn't do an IPO. Yeah. Which I think was the whole argument of Barry McCarthy, the CFO.

1:27:53 Uh. Right. And it's super the thing they touted, which I don't think is the main driver, but it's super employee friendly because they they don't have this uh six month lock up period. In fact, the only group I think actually Yeah. I think ten cent is restricted from selling shares for some amount of time, but um that was a one off thing in in uh in their agreement and all employees were free to trade on day one.

1:28:19 Yeah, so Tencent is a, I think seven and a half percent shareholder of Spotify. They did a deal with Tencent at the end of last year and of twenty seventeen, where they essentially squ swapped equity stakes. In Spotify and with Tencent. music entertainment, which is their Spotify competitor in China. And this is Spotify was never gonna be able to launch in China, just like Facebook and Google haven't. This is a way to get access, you know, to likewise Tencent TME, Tencent Music Entertainment was not ever gonna be dominant in the US or Europe or the like This is a way to go global, essentially, for both companies. So it makes sense that there'd be a Lock up for um

1:28:54 For those. Uh. Well, should we get into tech themes? Let's do it.

1:29:01 Let's do it. Um well mine so I uh in these uh IPO ones I wanna broaden to sort of tech and investing theme. Um This big uh the big one for me that that I think is the I'm gonna use your phrase, a thing that's been bandied about in the press a lot recently, uh, has been are we gonna see more direct listings? Because, you know, if this can be a shift away from the sort of um

1:29:27 walled garden of Wall Street and pay the banker fees and um you know having to ingratiate yourself to that world which people have just railed on for you know uh particularly in Silicon Valley, how dumb the process is. I mean there's Dick Costello's done a lot of great interviews about um w how silly it felt to go do the exact same presentation eighty times on the road show and um have to really be a dog and pony show. And so to the extent where you know Spotify can put up one stage presentation on that they video recorded and then everybody can just look at that and then they don't fly to New York and bring half the company and ring the gong and throw the parties and give the interviews, like maybe this is the way of the future. Yeah. Well, there are a bunch of problems too. Like You know, the Dropbox IPO last week, like, you know, has uh It was a big day, as we said, in in Silicon Valley here. Lots of Dropbox employees and investors.

1:30:18 But like it wasn't too because they're all subject to the lock up, like, you know. Uh and then And then you know depends then the lock up comes off, but like maybe that depresses the stock. A lot of people are selling. Sometimes companies, you know, will re lock up their employees and investors to prevent the stock being depressed. Um Traders build the lock up into their models. Yep, yep. It just You know, it kinda sucks. And You know. The

1:30:44 Plus the having to create new shares to sell to the public if you don't need the cash. And you always have to do basically a minimum of seven percent of the company. Like why would you do that. You know, I mean in these later rounds that drop I uh that Spotify was raising, they were selling, you know, one percent or less of the company. Why would you

1:31:05 now sell a huge amount of the company. Yeah, I mean it uh the criteria that I basically came up with was fourfold for uh will we see this in the future. One is I think you have to be a household brand name like Spotify. Like one of the things the bankers do on the road show is like really familiarize the institution and large blocks of potential share owners with with the company. lots of people were already very familiar with the company. Yeah. You have to not need the cash. So you know, that that already limits lots of companies. Um, you have to have a this very cash efficient business model.

1:31:37 Um, and uh we need this Spotify price to hold steady. And if if it doesn't, I think it'll scare off people from doing this for a long time. Um and and it's not that volatile right now. It's done a a nice job of staying around where it should be, but it's it's bounced around a little bit. So I I think the next few days are gonna be Uh telling. Very telling, yeah. Well I think there's One nuance I'd add to your first point. Which I totally agree with. is you have to be a known name. I don't think you have to be like a consumer household name. You have to be known amongst the institutional investor community.

1:32:11 Um But that's also happening because those those mutual funds, those hedge funds have been investing in private companies over the last five years. Yeah. So they know these names, these these Stocks. Uh Um

1:32:26 You know, whether it's whether it's T Row Price or Tiger or Wellington or you know, like all these I I don't know about T Row, but or but all those other firms were already shareholders in Spotify. Uh so they already and these are the biggest owners of public stocks uh in the market. Um So a lot of that education and marketing is kinda already happening while companies are private.

1:32:49 Mm-hmm. Mm-hmm. I have one self serving tech theme that I thought was just fun to read in there F one. So they list they list podcasts. And they're uh

1:33:02 Uh they have a services section and they list new content offerings and one of them is video and one of them is podcasts. And I have been noticing like You know, as as much as I have held the belief that um Spotify uh and sound cloud and anyone else that's starting to work in podcasts. Um just isn't doesn't do it well relative to dedicated podcast apps. You know, it's now the it's I don't know if it's on like this on everyone's app, but at the the top of the home screen on my little homepage for Spotify, it's listen to these podcasts. And they say in their F one, um

1:33:38 Which this is a this is a big market stat about podcasts, that there were three hundred and forty eight million podcast listeners across all platforms worldwide at the end of twenty sixteen, going up to four hundred and eighty four million in twenty seventeen, which is a growth of thirty nine percent year over year. Wow. And their quote on that is this engagement presents a significant opportunity for Spotify as we believe we have the ability to enhance the podcast user experience with a better product that is focused on Discovery. Which is notoriously the problem in podcasts.

1:34:09 Think about the dynamics are very different, the problems are very different. But think about Mm. The issues with the music industry when Spotify came along and just fixed them from a product perspective, just like Dropbox just fixed, you know, file sharing. Uh a different type of file sharing. Uh The podcast and this is where the podcast industry is today. Like

1:34:29 The market is there. It's growing like there's huge but like the The industry and from a product perspective is completely broken. Like somebody Somebody needs to come along and just

1:34:42 Fix it. Mm-hmm. Mm-hmm. I still don't know if it's gonna be them. I like the bet on the industry right now, and I just think it's kinda fun that they had in their F one. Yeah, yeah.

1:34:53 I don't think it's gonna be Spotify either. Like it's It's hard for big companies to Do this. Um Anyway.

1:35:01 It's kind of hard for me to believe that Spotify is worth thirty billion dollars. I mean, maybe I'm getting into gr grade the grade the DPO right now, but Like I mean think about like uh Uber just had the share tender for like fifty ish billion. And like you look at Airbnb's most recent private valuation.

1:35:19 Like Uh I Is Spotify really a thirty billion dollar company? Yeah. I mean, yeah.

1:35:28 The thing is like we're just So divorced from fundamentals at this point. You know, like Spotify is definitely a thirty billion dollar company if you If you Value it on a revenue multiple.

1:35:42 A hundred percent. But but Their margins, their gross margins are Structurally. Very

1:35:49 different from, you know, other tech and software companies. Um So if you value it on a you know Well you can't do a P P E basis because they don't have earnings. But if you value it on a cash flow, multiples of cash flow basis, it's still nutty, you know? Like uh even so let's say they do three hundred million of operating cash flow uh in twenty eighteen. Uh I don't know if that's what they're projecting, but let's just assume, you know, then that's a

1:36:16 uh what hundred times uh hundred times operating cash flow that they're trading at? So like you're telling me that if you buy sto uh Spotify today Uh you are assuming You know. So much growth that you're willing to pay a hundred times the cash flow, because cash flow really is how you should be valuing these companies. A hundred times its cash flow today.

1:36:37 No, I mean it's not crazy like other Other um It's not r crazy relative to other stocks trade that way too, but I think this gets back to something I mentioned a little bit before. Like What's the Tam? How many how much growth is left in Spotify? You know, to to be willing to pay a hundred times cash flow for something, you have to be willing to believe that there's so much growth that like that's gonna

1:36:59 'Cause essentially what you're doing right now is you are paying for one hundred years of cash flow of Spotify. Like the cash flow will repay your investment in one hundred years. You believe that there's a lot of growth, that it's gonna be a lot shorter than a hundred years, but like I don't know, can Spotify double? Probably. Can they 10 X? I don't know. I don't think so. Yeah, I mean it's interesting how my anecdotal evidence is so much different than the numbers. Like what I said at the opening of this episode, and I said it feels like pretty much everybody that is a millennial that is going to buy you know that's going to subscribe to Spotify is already subscribed to Spotify. But if you look at, you know, what they

1:37:36 they their reported uh user growth. I mean they let's see. Our hundred and fifty nine million monthly active users have grown 29% year over year as of December of twenty seventeen. So and and their premium subscribers have grown forty six percent year over year. So Yeah, to your point, will they two X? Probably. Will they three X?

1:37:58 Seems like they could get there. Well they ten X? Uh. So then the other bet you're making is like, well, maybe they can improve their margins. That's like a big bet, you know. Or can they offer another product. I mean like the other the other piece here is they've got this audience, you know, can they start meaningfully doing ticket sales to concerts? Um, can they enter video in some way? Can they become the the provider of podcasts uh and then figure out how to monetize that? I mean it There's

1:38:30 Yeah, the qu How much do you model in uh possibility of a bolt on business. Yeah. Whereas like When I look at

1:38:39 Spotify's a great company, for sure. I think I'm gonna be very um Laudatory in grading this direct listing,'cause I think it was the right thing to do. But it just in terms of like Comparing I can't help but compare Dropbox and Spotify's, you know. First public offerings'cause they're listings'cause they're back to back

1:38:57 W with Dropbox, like I feel Personally, I feel a lot better making that bet because The bet on Dropbox to me is a bet like will the TAM increase? Will more people have a use case over time to share files in a like semi professional sort of way versus with

1:39:15 Um, Spotify. Like, are more people gonna listen to music and wanna pay for Spotify who aren't already? Now they're going into more countries, but like how many more countries can they go into? Um You know, they're not going into China. They did this deal with Ten Cent. Um so they do have exposure to China. Um I don't know. Mm-hmm.

1:39:35 Mm-hmm. Hm. Well, I think it's time to go into grading and uh listener. I wanna I wanna sneak in a couple of tech themes first, so Yeah, I'll go for it. All right. I have three sort of interrelated tech themes that really we've covered all throughout the history and facts, but I think um I think our our Important here.

1:39:56 The importance of a couple key product decisions, and only a couple key Things like with Spotify it was You know, the focus on playlists. It was uh we didn't talk a lot about this, but it was doing a desktop app, not a web app, because that enabled almost zero latency when you click play, the file streamed and played immediately. Whereas some of their competitors because there were competitors, remember Groove Shark and some of the others. Um

1:40:21 They were all web apps. The performance was clueey. People don't want to wait for music. Um just like a couple of key product decisions that can really Make the difference early on. But then you have to couple that with distribution too. Like Spotify would have done well without Facebook. But it wouldn't be a thirty billion dollar company without Facebook. Um And uh

1:40:42 And then I think the related one to both of those That we just see time and time again on this show is like To do all that, you have to be like, you have to have such tenacity as a founder. You have to have a vision. It has to be right. But then you gotta like. Work at it for And focus maniacally for

1:40:58 Many years. Uh Years and years. It took so long for Spotify to even get off the ground and then to go country by country and then five years later come to the US, or or I guess uh three or four years later come to no five years. Five years after founding come to the US. Um It just takes a long time. Yeah.

1:41:19 Daniel X's only thirty five. I thought he was a little a little older. But yeah, maybe he's only thirty five. I think that I think I saw that in the F one. Uh I mean I mean it's looking at those comp he started those companies before Spotify. Spotify's been twelve years and it's just Um

1:41:37 Impressive, passionate, motivated founder. Yeah. Totally. Alright, that's what I got. Alright, so on grading, listeners to clarify, though we did just talk about um, you know, do you feel like this is actually worth thirty, thirty billion dollars? Um, the way that we grade is was, you know, on on the typical acquired format, was it a good idea for the acquirer to pay this money for the acquiree?

1:42:02 um the way that we grade IPOs and now DPOs is um was it a good move for the company to um to do this transaction? You know, was it was this the right move for them? And so um you know we're basically looking at three options here. Do what they did. I PO Or Don't do anything. Stay private. Um you know, keep keep doing what they were doing.

1:42:27 Uh Sure seems like a great call. I mean They they couldn't do nothing. They had to g they had to get liquidity. Um

1:42:35 They didn't need to raise money. it it seems like they're not seeing any of the downsides that w that would have come from um potentially doing this direct listing instead of the IPO. I mean the whole Wall Street community was a little freaked out and trying to naysay that gosh, there's gonna be all this volatility and it's gonna drop below the last price that it was trading in the private rounds and the demand's not gonna be there and you know there's l lots of things, but I I don't think we're seeing any of that. So

1:43:05 It seems like it was a great decision and a uh gutsy one at that. Yeah. Caveat that we're still early. It's only two days in. Uh very early. So a lot will depend on what happens over the next um couple of weeks. But but thus far. Yeah, thank you for that. Because we we may need that clause. But the fears were about what happened immediately after trading. Like the whole point of doing an IPO, the argument of the bankers is we're there to stabilize the stock, stabilize trading.

1:43:33 If you go back and listen to our Facebook uh IPO episode, they definitely needed the bankers to stabilize training in the stock because it was a rocky, rocky start. Um But you know, without the bankers there, what'll happen and like everything's been Stable. So uh Yeah.

1:43:51 I I hope you've got to do it. Yeah, I don't know I don't know how to assign a grade to it per se. Like it feels weird to grade this against We gotta figure out what our our actual uh sort of format is for

1:44:05 for these IPOs because it you know. It's it's sort of like either it was an A, probably not an A plus, or it was like a C. It's it's it seems rare that we're gonna ever have a IPO decision that was an F or a D PO decision that was an F. Yeah, we might Maybe if we revisit the Snapchat I can go. Oh, there you go. There you go. Um

1:44:28 Well, do you want this do you want me to. Yeah, I mean I'll I'll I'll say A. We just have like a lot it it's kind of silly for these on the scene ones to do any grading at all, but um you know, all signs are positive right now. Yeah. If There is Uh stability, no, no.

1:44:43 I do have some questions personally about a thirty billion dollar valuation for Spotify. Uh but that's what it's you know, the market is. Saying. Um Or at least that's what three three point two percent of

1:44:56 shareholders who have sold have managed to get the market to say. Right, right, which is not a large float. Um so that may be artificially uh artificially supply constraining the stock and raising the price, uh driving the price up. Um But you know, as long as there's not like panicked trading, which it seems like there's not

1:45:15 This seems like a good new path for companies to get liquidity, get out on the public markets. It would be great for Silicon Valley if like this becomes a viable path. Um So so far so good. Yeah. Hey. And if it does, like Barry McCarthy, the CFO, is going to be hailed as a genius.

1:45:33 Yeah. Yeah, no kidding. Yeah, former Clinical former Clinkel employee hailed as genius, story eleven. Come a long way. It's come a long way. True. Uh. Carmouts.

1:45:49 Carve outs. Um So uh I can't remember if I've actually mentioned on the show or not, but uh I know I've talked a bunch about my my wife, Jenny. Uh she is uh the head of Um

1:46:01 audience engagement and education at San Francisco Ballet here in San Francisco. And The ballet. So if you if you live in San Francisco, uh you should come to the ballet anyway'cause it's awesome. Uh David. The athletes, the dancers are are amazing. It's wonderful to watch always. Um but they're doing a big festival at the end of the season coming up uh at the end of this month in April. Um and uh festival of new works, it's gonna be really cool. Uh and Jenny is uh hosting a number of um

1:46:32 of panel discussions around it, but one It's gonna be called Silicon Ballet. Bringing ballet and technology together, the intersections of tech and ballet. And it is uh it's at the end of the month, April twenty eighth, at five thirty PM. Uh is it starring you and Jenny?

1:46:49 Uh actually neither of us are are speaking on the panel. Um but they're gonna be some really cool uh participants. So uh if you're in San Francisco and Silicon Valley Uh Come come to the ballet always, but uh but come see this panel it'll be really cool. Awesome.

1:47:06 Well I finally saw a Black Panther. And that movie was amazing and everybody should go see it in its uh remaining few few days in theaters. Um And even more awesome was the uh so Kendrick Lamar Uh

1:47:21 put together the soundtrack and he um did a couple of songs himself and guest it on a couple of other songs and then handpicked a bunch of other artists and it's just powerful. Like it's a really uh Um It's w maybe one of the best maybe the best Marvel movie. I mean the the the the um the amazing sort of uh societal themes that are going on right now that they manage to pull into the movie and make extremely accessible, deal with really difficult topic, um, and have a really cohesive story with great character development and stunning m visuals. Um, I think I'm like the last person that to like be

1:47:59 be talking about this and be aware of this, but um if you haven't seen Black Panther yet, I highly recommend it before it leaves theaters. Ah it's awesome. Yeah, I haven't been able to get to the theater to see it, but I definitely want to. It uh it looks awesome. Or go on Spotify and listen to the soundtrack. Well that's what I was gonna say is can you get a playlist of the soundtrack on Spotify? You can, you can. Alright, we'll link to it in the show notes. We will. Spotify's new viral growth mechanic.

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