Invest Like the Best with Patrick O'Shaughnessy Episode: Gustav Söderström - How Spotify Thinks (EP.424) Release Date: May 20, 2025

Introduction

In this enlightening episode of Invest Like the Best, host Patrick O'Shaughnessy engages in a deep conversation with Gustav Söderström, Spotify's Co-President, Chief Product Officer, and Chief Technology Officer. Together, they delve into Spotify's strategic thinking, leadership philosophies, AI integration, business model evolutions, and the company's intricate relationship with the music industry.

Embracing AI in Spotify

[05:55 - 12:12]

Gustav opens the discussion by addressing the imperative of AI adoption, echoing the sentiment that "it's AI or die"—a technological shift as monumental as the advent of smartphones or the internet. He emphasizes that AI's impact is multifaceted, influencing not just consumer products but also internal productivity and competitiveness.

• Machine Learning Evolution: Gustav recounts Spotify's early adoption of machine learning to enhance user playlisting experiences. Initially, Spotify relied on user-generated playlists and editors to curate content. Over time, machine learning enabled Spotify to develop a "music friend" for users, personalizing recommendations more effectively.

• Generative AI vs. Traditional Machine Learning: Gustav distinguishes between statistical machine learning—focused on output mechanisms like TikTok's full-screen feeds—and generative AI, which introduces two-way natural language interactions. He envisions a future where consumer products become more conversational, offering a symmetric flow of information between users and platforms.

"I think consumer products are going to change fundamentally. I can't predict exactly how. They're going to be much more symmetric in terms of information you receive versus information you give." — Gustav Söderström [10:00]

Impact of Generative AI on Productivity

[12:12 - 26:50]

The conversation shifts to how generative AI tools, such as Cursor, are transforming workflows within large organizations like Spotify. Gustav highlights that while current AI tools offer incremental productivity gains—particularly in coding—the real impact lies in reshaping entire processes.

• Beyond Coding: Gustav points out that coding constitutes only a fraction (approximately 7%) of a developer's time. The greater productivity gains from AI are expected in areas like communication, planning, and collaboration. For instance, AI-powered peer reviews and automated code refactoring are poised to revolutionize how development teams operate.

"The biggest impact is yet to come when it comes to coding. These models are getting big enough to understand really large and complex code bases like Spotify's." — Gustav Söderström [12:15]

• Prototyping and Real-Time Data Exposure: Gustav envisions a future where AI tools interact seamlessly with real-time data across the organization, enabling non-developers to engage in complex tasks without traditional coding barriers. This requires extensive retooling to expose data via APIs, facilitating intelligent reasoning and decision-making.

Leadership and Strategic Frameworks

[26:50 - 54:59]

Gustav delves into Spotify's unique leadership and strategic processes, emphasizing structured strategic thinking and fostering a culture of explanatory understanding.

• Strategic Frameworks: Drawing inspiration from frameworks like Hamilton Helmer's Seven Powers and Felix Oberhausen's Value Stick, Gustav explains how Spotify evaluates consumer value through the lens of "willingness to pay" versus "willingness to sell." This approach ensures that Spotify maximizes consumer surplus by offering value far exceeding the subscription price.

"The promise of Generative AI is really a deep, ongoing, qualitative user research with almost 700 million users all the time." — Gustav Söderström [15:38]

• Socratic Debate and Good Explanations: Gustav advocates for a culture of Socratic debate, where ideas are rigorously discussed and explained before implementation. Inspired by philosopher David Deutsch, he underscores the importance of explanations that are falsifiable, scalable, and hard to vary, transforming pattern recognition into robust, scalable understanding.

"Even if something works in an A/B test, I try to tell them that I don't want to launch it until you have a good theory of why it works." — Gustav Söderström [26:15]

The Bets Process: Planning and Execution

[54:00 - 76:41]

Gustav introduces Spotify's "bets process," a strategic approach to project selection and resource allocation conducted every six months.

• Stack Ranking Innovation: Each Vice President (VP) pitches projects as if presenting to venture capitalists. These proposals are then stack-ranked based on their strategic alignment and potential impact. Spotify typically selects between 30 to 50 "bets" each cycle, ensuring that resources are allocated to the most promising initiatives.

• Global Synchronization and Prototyping: Before committing to projects, Spotify engages in a prototyping phase, utilizing tools like Figma and generative AI to visualize and iterate on ideas. This pre-commitment synchronization minimizes internal conflicts and ensures that projects are aligned with the company's overarching strategy.

"The biggest risk with this model is that the planning is very expensive. So you have to be really good at planning." — Gustav Söderström [27:11]

• Execution Team Meetings: Weekly three-hour execution team meetings facilitate real-time problem-solving and escalation. VPs must bring their issues directly to the room, promoting transparency and swift resolution.

"Nothing goes offline, and you actually can't bring your direct reports for good and bad... You have to be on top of it enough to explain it yourself." — Gustav Söderström [23:19]

Business Model Evolution with Technological Shifts

[40:05 - 74:24]

Gustav discusses how Spotify has navigated significant technological shifts—such as the transition to mobile—and the corresponding need to innovate its business model.

• From Desktop to Mobile: The rise of smartphones necessitated a fundamental change in Spotify's business model. Initially reliant on a desktop-based free tier and a paid mobile feature, Spotify ingeniously introduced a mobile free tier without cannibalizing premium subscriptions by allowing shuffle-only playback.

"We managed to create a tier where you could playlist all your favorite songs in a playlist, press play, put the phone in your pocket and listen forever for free in the background." — Gustav Söderström [54:59]

• Bundling Strategies: Spotify's expansion into podcasts and audiobooks is driven by a bundling strategy—offering multiple media types under a single subscription. This approach increases user retention and willingness to pay by continuously stacking value, rather than competing through content exclusivity.

"Spotify is a bundle. Now you pay some price and you get a bunch of value. Our job is to try to increase the value you get so you value it more." — Gustav Söderström [64:52]

• Marginal Cost Considerations: Unlike traditional software, AI introduces significant marginal costs. Spotify anticipates the need for tiered pricing based on AI-driven features, aligning with their existing experience in managing marginal costs within their business model.

"We decided that the marginal cost is a net new thing for Spotify... We've had several tiers already." — Gustav Söderström [40:33]

Relationship with the Music Industry

[58:22 - 64:00]

Gustav reflects on Spotify's pivotal role in transforming the music industry, likening Spotify to the industry's R&D department.

• Investing in Music: For 15 years, Spotify operated at a loss, pouring investments back into the music ecosystem. This patient capital injection enabled the music industry to flourish, with Spotify now achieving profitability while continuing to reinvest in innovation and AI.

"We are literally the R&D department of the Music industry. We invested and had losses for 15 years and the music industry has been gaining profit." — Gustav Söderström [64:00]

• Revenue Sharing and Market Growth: Spotify maintains a revenue share model, distributing approximately 70% to the music industry. Gustav argues that instead of increasing the per-stream payout, which remains a minor factor, scaling the number of premium subscribers is the key to expanding the overall music ecosystem.

"The solution is not the revenue share or giving away the vast majority. The solution is to quickly scale the amount of people paying for music." — Gustav Söderström [64:00]

• Expanding the Music Pie: With nearly 300 million paid subscribers and 700 million monthly active users, Spotify is poised to continue increasing the total revenue generated within the music industry by converting free users to paying subscribers globally.

Podcasting Strategy and Evolution

[64:00 - 74:24]

Gustav elaborates on Spotify's foray into podcasting, highlighting the initial challenges and strategic pivots that shaped its current success.

• Initial Approach and Mistakes: Spotify initially attempted to differentiate through exclusive podcast content, mirroring Netflix's strategy with exclusive shows. However, this proved misaligned with the inherently low-production-cost nature of podcasts, leading to strategic missteps.

"We tried exclusivity in podcasts as a way to differentiate the service, but I think it was ultimately a bad bet because the production cost was so low." — Gustav Söderström [76:41]

• Strategic Pivot to Syndication: Recognizing the pitfalls of exclusivity, Spotify shifted to a syndication model, embracing open distribution and leveraging machine learning to personalize content delivery. This pivot enhanced the podcast catalog and improved user engagement without incurring unsustainable costs.

"We decided to change our mind and say this looks like the age of syndication. Creators actually want to be everywhere." — Gustav Söderström [76:41]

• Bundling Podcasts with Music: Integrating podcasts into the existing music platform allows Spotify to utilize its established distribution network, enhancing the overall value proposition for subscribers by offering a diverse range of audio content.

"We saw that it's not more; when you add podcasting, it's just more retention, more time spent, and more willingness to pay." — Gustav Söderström [69:28]

Personal Insights and Leadership Philosophy

[74:24 - 82:15]

Gustav shares personal anecdotes and philosophies that underpin his leadership style at Spotify.

• Continuous Learning and Curiosity: Gustav maintains a regimen of continuous learning, delving into areas like physics, math, and philosophy to stimulate his intellectual curiosity and remain abreast of emerging technologies.

"Sometimes it's reading physics or math or something. It's a combination of keeping up with what is happening... and also stimulate myself mentally." — Gustav Söderström [76:50]

• Humility and Adaptability: Through practicing Brazilian Jiu Jitsu, Gustav cultivates humility and adaptability—traits that translate into his professional life by fostering a mindset open to learning from failures and adapting strategies accordingly.

"You come in and you think you do something and you get absolutely smashed... it's technique, it's leverage." — Gustav Söderström [78:38]

• Embracing Failure: Gustav recounts a significant professional failure related to an experimental user interface at Spotify. His boss, Daniel Ek, exemplified trust and support by valuing Gustav's input and allowing him to learn from the mistake without punitive measures.

"I have one experience organization... I got more chances. And that made me actually take more risk instead of scaling down on the risk." — Gustav Söderström [82:15]

Closing Stories and Lessons

[82:15 - 85:18]

In the episode's concluding moments, Gustav shares a poignant story about a failed project, illustrating Spotify's culture of learning from mistakes and fostering innovation.

• The "Moments" UI Failure: Gustav describes an ambitious project to redesign Spotify's user interface, which ultimately failed due to it being ahead of its technological capabilities. Despite the setback, the supportive response from leadership encouraged him to continue taking risks and innovate.

"He was more like Jeff Bezos matches the inputs, not the outputs... If you have good inputs, eventually you're going to get right." — Gustav Söderström [83:30]

• Cultural Resilience: The story underscores Spotify's emphasis on structured ideation and execution, where the focus remains on generating high-quality ideas and understanding their underlying principles, rather than merely chasing successful outcomes.

"If you have a strong consumer theory, then you can predict things that were very unlikely." — Gustav Söderström [54:59]

• Final Reflections: Gustav concludes by highlighting the importance of supportive leadership and a culture that embraces risk and learning, emphasizing that such an environment is crucial for fostering innovation and sustained excellence.

"What made me really excel in my role was being allowed to take a lot of risk by Daniel. So I've actually screwed up a bunch of things in Spotify that didn't work and I never felt that I was going to get fired for it." — Gustav Söderström [81:33]

Conclusion

This episode offers a comprehensive look into Spotify's strategic mindset, exemplified through Gustav Söderström's leadership. From embracing AI's transformative potential to fostering a culture that learns from failure, Spotify underscores the importance of adaptability, structured innovation, and deep industry investment. Gustav's insights provide invaluable lessons for investors, entrepreneurs, and business strategists aiming to navigate rapidly evolving technological landscapes.

Notable Quotes:

• "It's AI or die." — Gustav Söderström [05:55]
• "Good explanations need to be very hard to vary." — Gustav Söderström [26:15]
• "The solution is not the revenue share or giving away the vast majority. The solution is to quickly scale the amount of people paying for music." — Gustav Söderström [64:00]
• "What made me really excel in my role was being allowed to take a lot of risk by Daniel." — Gustav Söderström [81:33]

This detailed exploration captures the essence of Gustav Söderström's approach to steering Spotify through technological and market changes, emphasizing the blend of strategic foresight, cultural ethos, and relentless innovation that defines Spotify's success.