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Audible subscribers can listen to all episodes of Business wars ad free right now. Join Audible today by downloading the Audible app. It's June 21, 2015. In nine days, Apple Music will go live. But right now, the launch is in crisis. Earlier this morning, pop star Taylor Swift publicly rebuked Apple because it doesn't plan to pay artists for music streamed by users during Apple Music's three month free trial. Her criticism spread quickly online, threatening Apple Music's attempt to brand itself as the more artist friendly alternative to Spotify. Inside his Southern California home, Apple Music creative consultant Jimmy Iovine joins an urgent call with Apple executive Eddie Q and CEO Tim Cook. Q brings Cook up to speed. Taylor's criticism is getting a lot of traction. This risks becoming the entire narrative around Apple Music. Okay, Jimmy, does she have an argument? Well, yes, she does. She's saying people should get paid for their work. It's hard to argue against that. Well, then we should pay. You two figure out how much. Ten minutes later, in Nashville, Tennessee, Scott Borchetta, the head of Swift's record label, answers Iovine's call. Hey, Jimmy. Hi, Scott. I've got Eddie Q here with me. Hey Eddie, sorry about the noise. I'm at a pool party. This about Taylor's Tumblr post? Yeah. Apple wants to do the right thing here. So how do we resolve this? Well, Eddie, the good news is you haven't launched Apple Music yet, so you can still fix it. Uh huh. So what's the right rate per stream? Bear in mind we're getting zero revenue from users during the first three months. Well, you know what Spotify pays? Q does just over a half a cent for every song streamed on average. Beat that. A few hours later, Q makes peace with Swift by agreeing to pay for songs streamed during Apple Music's free trial. Exactly how much they agree to pay isn't made public. Some reports say it's just a fifth of a cent per stream, well below Spotify's average. But after the trial period ends, Apple Music averages $0.01 per stream, almost double what Spotify pays. Either way, Apple Music's costs quickly skyrocket. It will now take even longer for the service to recoup the cost of recruiting each new subscriber. But Apple can afford that hit. It has more than $150 billion in the bank. And there's simply too much at stake for Apple to do anything else. Apple was caught napping by the rise of music streaming. Now it's racing to catch up with Spotify. Apple Music is the first step in A much larger strategy, launching a whole suite of content subscription services designed to keep people within Apple's ecosystem and buying its hardware. In other words, Apple Music is strategically vital, and Apple is determined to make it a triumph, even if that means busting budgets, breaking antitrust laws, and and failing to comply with a court order. From audible originals. I'm david brown, and this is business wars. In the last episode, Swedish startup Spotify overcame skeptical music executives to make music streaming a reality. But now, with Spotify eroding itunes market share, Apple is muscling in. The American tech giant has already acquired headphones manufacturer Beats to fast track the launch of Apple Music. But while Apple prepares to strike back, Spotify is dreaming up new tricks. This is episode two, Dehumanizer. It's a Monday morning in 2015 in Spotify's Manhattan office. A marketing employee fires up the Spotify app on her computer and slips on her headphones, ready to focus on the report she needs to finish. When the homepage loads, something catches her eye. A playlist she's never seen before. It's called Discover Weekly. It has 30 songs, none of which she's heard before, but they all seem to fit with her taste for gothic metal. Intrigued, she clicks shuffle. And that's when she notices the playlist's description. It explains that Discover Weekly is a new feature being tested internally, and its aim is to brighten users Monday mornings with a personalized playlist tailored to their musical tastes. The inspiration for Discover Weekly had come several months earlier, during Spotify's annual Year in Music Marketing campaign in late 2014. Usually, the campaign simply recapped what people had listened to that year, but this time, Spotify added something new. Along with their listening statistics, users received a playlist called Play It Forward, a collection of songs Spotify's recommendation algorithms thought they'd enjoy based on their listening history. From a technical perspective, it was straightforward to create. Spotify had already built a music recommendation engine for its Discover page. The company just repackaged those recommendations as a playlist as an end of the year treat for users. And the results surprised everyone. 4 million users listened to Play It Forward, far more than Spotify ever imagined. And that sparked an idea. Spotify's Discover page had never been popular. Few users bothered to wade through its album selections to find new tunes. But by presenting the same information in the familiar form of a playlist, it caused engagement to spike. By reusing its existing infrastructure in a creative way, the company struck gold. And Spotify is eager to capitalize on it in an even bigger way. So during an internal hack day, a team of three engineers start a project to give users a personalized playlist Every Monday morning. When the first test launches, Discover Weekly goes viral with Spotify's employees. Almost 80% of those who try it keep listening week after week. But the team knows better than to trust that result, because Spotify employees aren't normal users. For them, Spotify is front of mind in a major part of their lives, but customers, not so much. The average user doesn't spend their days thinking about Spotify. So while employee tests are cheap and sometimes valuable, they can be misleading, as the results don't always reflect real world behavior. So Spotify runs a second Test. It gives 1% of its users access to Discover Weekly, and this test confirms that its personalized playlist is as sticky as glue. In July 2015, less than a month after Apple Music's launch, Spotify rolls Discover Weekly out to all of its 75 million users. The feature quickly becomes one of the most beloved parts of the service. Within the first six months, Discover Weekly generates 1.7 billion streams and bolsters user engagement. It also introd emerging artists to millions of listeners, helping to ignite the careers of acts like Halsey, Turnstile and Borns. Discover Weekly also highlights a growing divide between Spotify and Apple Music. Spotify is leaning into data and machine learning to personalize the user experience, but Apple is betting on the human touch. Now, this isn't just product differentiation, its philosophy. Apple is betting that people still matter when it comes to musical discovery. Businesses often talk about features, but the deeper battle often comes down to worldview, and companies that win tend to pick a philosophy and push it relentlessly. By the end of 2015, Apple Music is approaching 10 million subscribers. Spotify is still far ahead with 28 million subscribers, but Apple has achieved its numbers in just six months, whereas it took Spotify six years to achieve similar results. A big reason is Apple's hardware advantage. Every iOS device now comes with Apple Music pre installed. It also has a price advantage. Apple music costs $9.99 a month. So does Spotify, except if you pay through its iOS app, where Spotify costs $3 more. That's because Apple charges Spotify and other app developers a 30% commission on in app purchases, including subscriptions. It's the price of entry to Apple's ecosystem. Spotify refuses to absorb this cost, so it passes the fee on to customers who subscribe through its iOS app. Technically, Apple users can still subscribe at Spotify's standard price if they sign up on the Swedish company's. But few know this because Apple's rules prevent apps from directing users to alternative payment systems. Apple says this protects customers from fraud, but Spotify and other app developers say it's really about protecting Apple's revenue. Faced with the growing threat from Apple Music, Spotify decides it can't live with this arrangement any longer. In May 2016, it removes the option to subscribe through its iOS app. Then it tries to update the app so users can request an email explaining how to subscribe elsewhere. Just as Spotify expected, Apple blocks the update. And armed with this refusal, Spotify's lawyers start preparing to sue Apple for monopolistic behavior. But while Spotify secretly prepares its legal arguments, Apple Music starts signing exclusive deals with major artists. It reportedly pays $19 million to make Drake's new album Views exclusive to the service for several weeks. It strikes similar deals for new albums from Dr. Dre and Frank Ocean. Spotify refuses to respond in kind. The company doesn't want to deepen its losses by paying huge sums to top artists. Besides, it's not sure that big name artists will move the dial as much as Apple believes. Behind the scenes, Spotify is experimenting with a different strategy. The company is populating its official playlists with songs created by background music suppliers who charge less than the major labels. These tracks are cheaper because they're created by musicians for a one time fee. This means the musicians aren't owed any ongoing royalties, so the companies that hired them are willing to charge Spotify less per stream than most artists. The move horrifies some of Spotify's playlist editors, who see these songs as junk filler, the equivalent of padding out a sausage with cereal grains to save money on meat. But executives ignore the objections. Using cheaper songs will increase the company's profit margins, and they believe most users won't notice or won't care. And often users don't notice because these tracks are frequently credited to fake artists with fictional biographies. Soon, songs like Polar Circle by Ekfat are getting millions of listens. Ekfat's biography claims he's a classically trained Icelandic beatmaster a In reality, he doesn't even exist. When Spotify's strategy is exposed publicly, it sparks controversy and reinforces the perception that Spotify underpays artists. Estimates suggest Spotify pays an average of 0.4 cents per stream, significantly less than Apple's 0.7 cents. But Spotify does pay out more overall because of its larger user base. It also pays far more than YouTube, which is estimated to pay less than a tenth of a cent per stream. Spotify's embrace of these filler tracks is part of a broader attempt to improve its finances. The company is still losing eye watering sums of money in its ongoing quest to scale, which means it needs two more capital and a way for its early investors to cash out. The solution is obvious. It's time to go public. But for its listing to go well, Spotify needs to get into better financial shape. Padding out playlists with cheaper tracks is just one tactic. The company is also using promotional offers to convert more free users into paying subscribers and upgrading its accounting practices to better manage costs and cash flow. It's also trying to reduce how much of its revenue goes to the music industry. When Spotify started, it had little leverage and was forced to accept the major labels terms in order to get music licenses. But now those labels need Spotify just as much as Spotify needs them. Music downloads are fading. The future is streaming. For years, Spotify has paid 85% of its revenue to the music industry. Now it wants to cut this down to 75%. You might expect the music companies to refuse point blank, but there's a complication. They aren't just Spotify's suppliers, they're also shareholders. Together, the major labels own 10% of Spotify, which means they're in line for a windfall worth billions if Spotify's stock market launch goes well. So they agree to let Spotify pay less. It's March 2018, and in Manhattan, Spotify CEO Daniel Ek is charming Wall street analysts. Spotify is about to list on the New York Stock Exchange, and Ek is here to build excitement ahead of the debut. And he's no longer the young, scruffy entrepreneur either. He's now 35, bald and exuding confidence. Over the next two hours, he and his team hype their business for the analysts. Spotify now has nearly 160 million users, including 71 million paying subscribers. And the company's revenues are just shy of $5 billion a year. Even so, it's still deeply unprofitable. In 2017 alone Spotify lost more than $460 million. Burek sells this as an investment in the future. He argues that Spotify shouldn't be viewed as a mature 12 year old business. Instead, it's a company that's just getting started. Spotify has yet to launch in India, Russia and Africa. Eck predicts that in time, as many as 3 billion people will subscribe to music streaming services. But reaching profit will take time. Whenever Spotify converts a free user into a paying subscriber. It takes 12 months to recoup the cost of acquiring that customer. Only after that does the user become a source of profit. In other words, profitability will come with scale and patience. A few days later, Spotify shares begin trading on the New York Stock Exchange. There's no bell ringing, champagne or confetti. Eck and his co founder Martin Lorenzen, don't even show up. The only hints that a tech firm worth $25 billion is going public are a few signs on the trading floor and a Swiss flag flying outside the building, raised by a stock market employee who mistook it for the Swedish flag. It's an understated debut, very much in keeping with the company's Swedish roots. But there's nothing low key about the money being made. Eck and Lorentzen are now multi billionaires. Combined, the major record labels now own Spotify stock worth around $3 billion. It's a hell of a payday. But there's a shadow looming over it because Apple Music is growing fast. Fast enough to threaten Spotify's position as the number one music streamer in the US But x not sweating yet, because as a newly public company, Spotify now has easy access to plenty of capital and more. More importantly, he's ready to launch an all out attack, not just against Apple Music, but against Apple's entire business model. It's 2018, and all over the world, millions of Spotify users are being turned into unwitting assistants in a plot to strike back at Apple. In the United States, Western Europe, Brazil, Mexico and Australia, the owners of Android devices are quietly being served different versions of the Spotify app. On the Surface, the four versions all look the same, but each one offers a different path for upgrading from a free user to a paying subscriber. One version lets people subscribe directly inside the app, just like the regular Android experience. Another sends users to an online checkout outside the app. A third tells people to go to Spotify's website to subscribe. And finally, there's the fourth version, the one that replicates the Apple device experience. In that version, users can't subscribe in the app and receive no information about how to do it elsewhere. Spotify wants to measure how these different pathways affect the chances that a free user converts into a paying one. And the results confirm exactly what the company long suspected. Apple's rules reduce the likelihood that people will subscribe to Spotify. But now, for the first time, they can put a figure to it. Apple's Restrictions are reducing signups for Spotify subscriptions by 20%, and that translates into millions of lost customers on iOS. You know, sometimes the most powerful tool isn't a product. It's data. And the kind of evidence Spotify just gathered changes the conversation, not just in the boardroom, but potentially in the courtroom. It's another piece of compelling evidence for Spotify's legal team. Ever since Spotify stopped offering subscriptions through its iOS app in 2016, the company's lawyers have been assembling a case. And now the data from their Android user experiments shows how Apple is using its position to hurt Spotify and leave millions of consumers confused about their options. It's bad for Spotify and bad for listeners. Spotify wants the right to let users buy subscriptions without Apple taking a cut. And it hopes this evidence will persuade antitrust regulators to force Apple to change its ways. In March 2019, Spotify files a formal antitrust complaint against Apple with the European Commission in Brussels. The company did consider making its complaint to US Regulators, but it found a reluctance in Washington to challenge Apple's power. In comparison, the European Commission had already proven its willingness to fight Apple in a major dispute over Irish tax breaks. There was also a lingering feeling that, as a Swedish company, Spotify would get a more favorable hearing in Brussels than in D.C. spotify's filing accuses Apple of limiting competition and consumer choice in order to give its own music service an unfair advantage. It argues that Apple's policy of taking a 30% cut of subscription payments is an unfair tax, one that forces Spotify to charge more than Apple music. It also details how Apple blocked its app upgrades and restricts its ability to communicate with Spotify users. A few days later, in Berlin, Spotify CEO Daniel ETT takes the stage at a conference on competition law and turns his speech into a rallying cry. Apple is both the owner of the iOS platform and its app store and a competitor to services like Spotify. In theory, this is fine, but in Apple's case, they continue to give themselves an unfair advantage. At every turn, the words Apple isn't playing fair appear on the screen behind him. They've set themselves up as both referee and player. In the world of audio streaming, we have to make a choice. Do we want a few select dominant players to have the power to strong arm others and tax the rest of the ecosystem, taking away the ability for smaller companies to effectively compete? Or do we want a healthy ecosystem where real competition flourishes and where consumer choice wins? It might be strange to see the CEO of a $25 billion corporation with a rep for underpaying musicians casting itself as the underdog. But Apple is 35 times bigger than Spotify. In this showdown, Spotify is a house cat squaring up against a leopard. But you see what Daniel X doing here, right? He's not just fighting Apple in court, he's fighting them in the court of public opinion. By framing Apple as both referee and player, he's turned a complicated antitrust argument into something anyone can understand. This is why your story matters. The narrative you tell regulators, journalists and customers can matter almost as much as the facts themselves. Apple's response to Spotify's attack is no less aggressive. In a statement, it accuses Spotify of wanting all the benefits of its App Store ecosystem without contributing anything in return. It insists it only blocked Spotify app updates when the Swedish company tried to break the rules. Apple also seizes the moment to remind people that Spotify is making ever smaller payouts to musicians and songwriters. It points out that Spotify is suing to stop the US Copyright Royalty Board from forcing it to pay more to music creators. Apple ends its statement by declaring that Spotify is a company trying to make money off of other people's work by squeezing artists and Apple alike. But for the moment, Apple Music looks anything but squeezed. Just one month after Spotify files its complaint with the European Commission, Apple Music overtakes Spotify in the US Apple Music now has more than 28 million American subscribers, 2 million more than Spotify. But Spotify's free tier means it's still the most popular streaming service in the US and globally. It's far ahead of Apple Music, but its once dominant position no longer looks so secure. The two rivals battle becomes a nonstop rumble as they try to outflank each other with new features. Apple launches a web player so subscribers can listen on their work computers. Then it introduces Replay, its answer to Spotify's hugely popular year end roundup Wrapped. But unlike wrapped, Apple's Replay playlists update continuously all year long, becoming a time capsule of each listener's musical history. Apple also introduces real time lyrics for those wanting to sing along. Spotify quickly copies that feature. Both companies also step up their international expansion in a race to capture listeners. Spotify launches in India with a heavy focus on its free tier. Apple Music makes a major push into African countries. In February 2021, Spotify announces a new plan to gain an edge over Apple Music, a super premium subscription tier called hifi. It will be the company's most expensive option aimed at Audiophiles who want high fidelity, lossless playback. And it's set to launch by the end of the year. But just three months later, Apple Music reigns on its parade. It adds lossless audio and Dolby Atmos Spatial audio to its service at no extra cost. It's a mic drop moment. Spotify's plans are totally derailed. Until now, music streaming services like Tidal had charged more for superior audio quality. But Apple's decision to give it away for free instantly reduces the added value of lossless audio to zero. It also beats the intended launch date of Spotify's hi fi tier by months. See, this is one of the brutal realities of competing with a company that has multiple revenue streams. When profit from one product isn't essential, a giant can reset the market overnight. And when that happens, carefully crafted pricing strategies can vanish with a single announcement. By the end of the year, all 90 million tracks on Apple Music are available to stream in lossless audio. And Spotify's hi fi tier is still missing in action. Eventually, four years later, Spotify gives its regular subscribers lossless audio for no extra cost. But while Apple scores victories on the features front, it's losing the battle over its App store rules. It's April 2021, and in Brussels, there's good news for Spotify coming out of the European Commission.