This week I’m talking to Horacio Gutierrez, head of global affairs and chief legal officer of Spotify, to help me understand why Spotify and so many other app developers are so frustrated with Apple. Horacio recently testified in front of Congress about Apple’s business practices, and he just wrote an op-ed in The Wall Street Journal calling Apple a “ruthless bully.” That’s a lot.
But it’s all part of a trend. You probably know that there’s a lot of government interest around the world in managing the size and power of big tech companies. A few weeks ago, we had Senator Amy Klobuchar on the show to talk about her proposed antitrust law reforms. There are ongoing antitrust lawsuits from the Department of Justice, the Federal Trade Commission, and various states against Google, Facebook, and now Amazon. There is a ton of regulatory pressure in Europe, with a new proceeding against Apple and a long history of enforcements against Google and Facebook.
And of course, there is the trial between Epic Games — maker of Fortnite — and Apple. Epic sued Apple nine months ago, claiming that the iPhone maker unfairly restricts competition for app distribution and in-app payments, and requested sweeping remedies from the judge, including allowing other app stores on Apple devices. That trial took three weeks, involved testimony from both Apple CEO Tim Cook and Epic CEO Tim Sweeney, and produced a mountain of internal emails and documents from both companies as evidence. At the heart of it all is one number: 30 percent. That’s the fee Apple charges app developers for in-app purchases of anything digital. So if you buy a physical hardcover book from Amazon for $10, you pay the entire 10 to Amazon. But if you were able to buy a Kindle book in the Kindle app for $10, three dollars would go to Apple. Amazon doesn’t want to give up that money, which is why you can’t buy books in the Kindle app on the iPhone.
Epic claimed that this whole situation was anti-competitive, and we had a trial. We’re not expecting a decision from that trial for weeks, if not months. But I wanted to understand what all of this legal maneuvering means, what we’ve learned, and how involving courts and politicians in the workings of our phones would actually make them better. There’s some fuzziness there, right? I don’t think it’s obvious to most people.
I really wanted to push on what Horacio sees as the biggest problems with Apple’s behavior, what he would actually do to fix it, and how all of that connects to having more interesting, innovative, and better products in our lives. Because if you can’t make that case, then aren’t we just moving money around?
I also asked Horacio if he sees a connection between how he perceives Apple and how musicians perceive Spotify — after all, they’re both huge companies with which most working creatives don’t get to negotiate. And Spotify has been buying up big chunks of the podcasting ecosystem, giving it a dominant position in a fast-growing industry.
Horacio unsurprisingly pushed back on these comparisons — citing a range of statistics from Spotify’s Loud and Clear website that lays out exactly how and how much it pays artists around the world. But as all of these companies get bigger, the dynamics that play out between platforms and creators feel eerily similar. Keep that in mind as you read this conversation: what does it even mean to have a market if so many players don’t feel like they can negotiate?
Transcript has been lightly edited for clarity.
Horacio Gutierrez, you’re the chief legal officer of Spotify, welcome to Decoder.
Thank you, Nilay, great to be here.
You just wrote a pretty scathing op-ed in The Wall Street Journal called “The Monopolist Worm in Apple,” in which you called Apple a “ruthless bully.” Tell me what you mean by calling Apple a bully?
Listen, Apple’s a large company, it’s an incredibly successful company and an admirable company in many ways. I’m a fan of Apple’s products, I’ve always been. One of the things that people commented on after they saw my testimony in the Senate Judiciary antitrust subcommittee meeting a couple of months ago is that they couldn’t believe that I was being critical of Apple while visibly wearing an Apple Watch.
But the reality is that you can admire a company and a lot of what they’ve done and the beautiful products they create and [still] be critical in the way that they behave in certain aspects of their business. It is clear to me that when it comes to their policies on app stores and the way in which they’re treating [not just] competing apps, but a whole variety of apps on their App Store, is just unfair, and I think it deserves regulatory attention and I think they’re getting regulatory attention for it. You can love a company and at the same time be able to point out things that they should be doing differently.
There’s regulatory attention in the United States, there’s also a lot of regulatory attention in the EU. I want to talk about that specifically with you and compare and contrast. There’s also legal attention with Epic v. Apple, but I noticed as I read this piece, you didn’t lay out any specific remedies or changes that you want governments or judges to make. What do you think needs to change?
There are some concrete things that are needed in order to restore the competitive environment, and then there are some sort of longer-range issues and things that have to happen just with respect to online platforms in general, and especially for larger gatekeeper platforms like Apple. Concretely, when it comes to the App Store, it is very clear that the choice to tie Apple’s proprietary payment system to the App Store was an arbitrary choice. It wasn’t part of the App Store in the beginning, just as the 30 percent Apple tax wasn’t a requirement when we made it into the App Store. They bolted that on later in the process and in doing that, they created this environment in which competing apps really have to contend with Apple’s own music streaming service as well as other competing products on what’s not really a level playing field.
So it’s actually quite simple. We want Apple to go back to the situation that existed at the time when we joined the App Store. We want them to undo the tying of their proprietary payment system to the App Store and all of the other anti-steering provisions, which is a fancy way of saying punishments and penalties that they’ve created for those people who do not want to use their proprietary payment system. Basically, restore the situation to the way it was before their anti-competitive abuse started.
It feels like one of the hills you have to climb is that people really love Apple, including regulators. You mentioned people calling out the fact that you wore an Apple Watch, you clearly like their products. But regulators, the general public, and people like you and me, think the company makes good products. Tim Cook always calls out their customer satisfaction in excess of 90 percent. Do you have to wage a public relations battle in order to win this sort of policy battle that you’re trying to win?
I don’t know if I would call it a public relations battle, but I think it is important for people to be told about all the bad acts that companies like ours have experienced on the part of Apple.
I think the perception is [that] because their products are attractive and popular — and obviously there’s the whole legacy of Steve Jobs and what he meant for Apple and for technology in general — one has to overcome this presumption that everything they do is equally innovative and pro-competitive, when in reality, that wasn’t the case. Every time we had these discussions with regulators and policymakers over the years, even before we filed our complaint in Europe, we did notice that we had to overcome a number of assumptions and a number of myths, so to speak, about Apple’s behavior, and they needed to be educated, not based on our opinion, but based on the actual facts. What did Apple do and when, and what was the justification for the steps that they took?
They created these obligations after they had lured apps into the App Store. People don’t realize, initially when the iPhone was launched, it was designed to only have Apple’s own apps in it. But at the time [they were in a] dog fight with Android, and they saw that they were not going to be able to keep up with Android unless they opened up the App Store, which they did later on. They had this campaign on TV, “There’s an app for that,” and they were touting how every user could find any app that they wanted on the platform.
Then they got to a point where they achieved critical mass in terms of applications. And at that point they started to change the rules and they started to tighten the rules, and they started to do that especially with respect to applications on the App Store that were competing with Apple’s own services. So people need to be reminded, a little bit, of history, so that they understand the pattern of behavior and the motivations behind those actions on the part of Apple, which is why we felt we needed to tell our story. We were the first ones that had the courage to be able to come out. It is not easy to make the decision to take on a $2 trillion company with the global footprint and the power over life and death of an app developer that they have, but now we’re not alone. It’s like the dam broke and there’s all kinds of companies that have come out in many sectors of technology and media and other areas, and now it’s clear.
It sort of reminds me a little bit of what happened in the Microsoft case, where initially the issues were with Sun Microsystems and a handful of other companies, and then at some point it just became a chorus of companies pointing out, “There is a fundamental problem here with the way this company behaves, and it’s one that needs to be remedied if we’re going to allow the next generation of technology companies to emerge.”
You have filed this complaint with your case in the EU and now we are talking just a couple of days after the Epic v. Apple trial has wrapped up, which laid out a very similar story. What, if anything, from the trial stood out to you?
A couple of things. Obviously when we filed our case, we didn’t have the benefit of going through discovery of a number of documents and internal email that really opened the curtains on the way that Apple was thinking about these things. There’s a lot of very interesting internal communications that really reveal the way Apple executives were thinking about the App Store, and the imposition of Apple’s payment system, and their intent to lock in users and things like that. So obviously in that sense, the trial has been very revealing.
The other thing is, it’s remarkable how little we learned about Apple’s explanation for these things. They continue to go back to the same pretextual explanations for why they do what they do. They continue to say, “Well, we have to protect the privacy and security of our users and that’s why we have to charge 30 percent and have all these other restrictions.” But how can it be indispensable for them to do all those things in order to protect privacy and security when they don’t even apply those rules to a number of other apps that are on the App Store? Even if it was that essential, there’s really a disconnect between the explanations that they’re trying to give and the reality.
The other thing that struck me is how disingenuous it is that they would say that nobody’s ever looked at the economics of the App Store, nobody’s even asked the question, “How much money does the App Store make?” You’re talking about tens of billions of dollars of revenue, based on the estimates that are out there. This is not like the budget line for printer toner at Apple, this is a huge sum of revenue. I think it defies credulity for Apple to say they’re not doing this for the money and they haven’t even asked how much money they’re making there. There’s a number of things that have come out that are quite telling about the way that Apple has thought about these things internally, and there is a clear anti-competitive pattern behind their actions.
Let me push you on this a little bit. There were multiple sealed documents in sessions that obviously you and I didn’t get to see. As far as the public discovery, Epic wasn’t able to find anything, any charts or presentations or graphs or financial results, that would prove Apple was actually keeping track of App Store profit and loss. You would think Epic would be laser-focused on trying to find that. And as far as we are aware in the public record, they were not able to.
I do take Apple’s point that their exertion of control over the platform is required to keep people safe from the massive number of threats that everyday users of internet services face. For example, if you don’t want to see a massive amount of extended credit card fraud, it is better for Apple to just hold all the credit card information. If you don’t want to see a massive amount of social engineering, it is better for Apple to more tightly control user data. I’m sure Facebook has a lot of thoughts about that. But I guess the question here is, how does that all relate to the 30 percent rate, right?
That’s exactly the point that I was trying to make. The connection between the need to charge 30 percent of all revenues generated by apps, that compete with Apple’s for the most part, in perpetuity…how does that in any way connect to the desire to keep users data protected and to keep them secure? If there is a connection, then [why do] they only charge the 30 percent mostly to digital content and gaming applications and not to Walmart or Facebook or Uber or other things like that? It’s a completely arbitrary construct and it is not justified by privacy and security.
Apple should have enough of a powerful incentive in the billions of dollars that they generate from selling devices like iPhones and iPads to keep users safe. That’s where the bulk of the revenue comes [from]. Having users’ data be protected and users be secure is one of the selling points of those devices. So the notion that all of a sudden they would stop investing in privacy and security protections if they didn’t have the 30 percent tax that they impose on the App Store is just ridiculous and it really defies credulity.
The rate, and the lack of negotiation on the rate, feels like the issue. If I could wave a magic wand and set that rate at 15 percent, would you be happy?
Let me take issue with your premise. The issue is not whether the rate is 30 or 15 or 10 percent, the issue is that the rate is arbitrary and they get to set it unilaterally because they’ve insulated themselves from competition. What should happen is Apple should be able to charge 30, or 50 percent, if they can convince users in a market economy that the value that they provide justifies the 30 percent, or the 15 percent, or the 50 percent. What we’re saying is they actually prevent competitors from coming in and offering alternative payment systems, and therefore there is no market. There is a monopoly on payment systems, which is why they can afford to impose the 30 percent. Let the market decide. Enable PayPal and Mastercard and other new payment systems to come in and then let users decide, vote with their dollars on whether Apple’s technology is so superior when it comes to payment and all these other things that they’re willing to pay 30 percent more.
It is really complicated because the market for a payment processing service is not consumers, it’s app developers. And the market for privacy and security is consumers.
How do you connect those two markets such that you’re saying to regular people, “We’re investing all of this stuff in keeping you safe.” Which is Apple’s argument. And you’re saying to Spotify and Epic and whoever else, “Hey, our technology solution is better such that it’s worth more money than PayPal.”
If app developers have the choice of offering more than one payment system, they will decide which one is better for their products and then users ultimately would decide whether they want to use those services or not. So the decision on which payment systems to incorporate would be left to the apps and the users then will decide which apps they trust. That’s the way it has always worked, that’s the way it works on most other platforms outside of the mobile operating system device.
That is actually the way that it should work so that there is real competition, but developers don’t have that choice. Developers can’t even [create] a system in which you said, “You have to offer Apple payment systems as a choice, but you can tell users there are others, and by the way, there is a price difference. You can go with the Apple in-app purchasing system, and your product will be 30 percent more expensive. Or you could use this one that has PayPal as the service technology provider and it’ll be 30 percent cheaper.”
Let users decide. Why can’t users make that choice based on the information that is transparently provided to them? That’s the concern. The market is not operating. And people assume it has always been like that. “You kind of knew what the rules were when you came in.” And that’s when I stop them and I say, “Well, no. That is not historically correct. It wasn’t always like that. It wasn’t like that when we joined the App Store.” Those rules were bolted onto the system later on by Apple, once they knew they had a position where people had no choice but to accept the terms that Apple would impose unilaterally.
I think about other disputes in related industries. The one that comes to my mind most often is a carriage dispute between a cable channel and a cable operator. We see this all the time. Some set of channels are going to leave DirecTV, and then both sides do a bunch of marketing, and eventually both sides cut a deal and the cable channels come back.
Epic kind of used that model, didn’t they? They pushed a hotfix [to Fortnite], Apple kicked them off the store, and they launched their marketing campaign. Now they’re in a lawsuit against Apple, and on and on it goes. Have you ever thought about saying, “Hey, look, in 90 days we’re going to leave. We’re taking Spotify off iOS devices unless Apple comes to the table. Every Spotify user, make your voice heard so we can gain the leverage to negotiate.”
There is no reason why a platform provider that’s supposed to be a neutral platform provider like Apple would be allowed to create conditions that would force companies like ours to have to make that choice. They say, “Well, but we built it.” Yeah, you built it. But when you built it it wasn’t like that. It was significantly built on the backs of the work of many app developers that came to the App Store that you touted as the reason why people should come and use your platform. And whether you built it or not, it really doesn’t matter from an antitrust perspective. The railroad companies built the railroads, the steel companies built the steel mills, and the telephone companies built the telephone lines. … The biggest cases in the history of antitrust enforcement in the US had to do with companies that had built that infrastructure and then used the power that that control gave them to hurt competitors.
I’m going to push you, because I hear from our listeners and our readers all the time that they love the way that Apple products work. They are paying the premium for Apple’s products because they expect Apple’s executives to make choices about how the products will work and where the limits are. They do not want regulators and lawsuits to change it. I understand it — I think in a way it is an expression of consumer preference.
You’re wearing an Apple Watch. I think it’s really notable that everyone called that out; it’s a good product. What is the mechanism by which all of this regulatory and legal pressure actually makes the products better? I think that’s the hump you have to get over with regular consumers. Instead of just moving money around between a bunch of huge companies, showing them that at the end of the day they are going to get better products out of more competition.
Yeah, I know that’s sometimes hard for consumers to envision. They’re not in this world and they are judging the reality by the products that they have in front of them. But the reality is that fair competition and open competition is really a prerequisite for more innovation, for new products that will exist a year down the road that don’t exist today. It’s super hard to say what they are. That’s why it’s called innovation. Somebody has to invent these things and develop them.
The problem, fundamentally, and the way I explain it to my relatives, and to my friends, and to my high school classmates, is to say that consumers also enjoy the fact that they have choice. The fact that there is a thriving competitive environment between different music streaming services that are trying to do new things, that you’re allowing a company like a Clubhouse or another company to come up with new audio streaming scenarios that weren’t there before. Everyone benefits when there’s an environment where companies have an incentive to try to think of things that haven’t been thought through before.
The problem we have right now is … you have the world of mobile devices — which have become the primary way in which people access the internet and commerce and all those things — that are controlled essentially by two companies. Two companies that are not only the platform but also competitors downstream in some areas. Consumers know what happens when there is no competition and when there is only one company left. We’ve experienced that in broadband services, we’ve experienced that in a number of other areas in our lives, and in our lifetime. We know that what happens is at that point the incentive to innovate, the incentive to continue to improve your products goes away, prices rise, and that hurts consumers.
There is evidence in history of what happened there. When Apple was the only game in town with iTunes and [music] downloads before music streaming rose because of the things we did and then other companies did later, it wasn’t great. It wasn’t great for music labels, it wasn’t great for a number of other companies because you are negotiating with one single player who has all the cards and who has all the control. Competition is good, competition ensures that there is a pipeline of exciting innovative products, it keeps companies on their toes.
When a company with this amount of power decides that they’re going to forbid competition in areas where they really didn’t have a position [in] before, they’re doing it because they have the power to do it. It is not the market economy system that we want to have in this country and that other countries want to have, and it is not right. At the end of the day, consumers benefit when, without all these hurdles, and friction, and artificial things, they can enjoy all the perks of the latest and greatest innovations.
That was a lot of very high-minded, idealistic conversation about competition and where it comes from and where innovation comes from. But as you said, Apple makes most of the App Store revenue with in-app purchases and games. So if Apple came to you, Spotify’s head lawyer, and said, “Okay. We’re going to open up third-party processing for music streaming services. But we’re going to keep it locked down for games.” Would you take that deal?
Would I hold out the solution to the problem in wanting to stream until the problem for all industries were solved? It’s a hypothetical, but I would tell you, I [would] take the win. But it doesn’t mean the discussion is over.
The reality is, you look at each and every one of these cases independently, the Epic litigation, the Spotify case, all of these things. I’m actually convinced that whether any one of those cases is won or lost is less important than the fact that now this is a topic that’s in the forefront of the minds of policymakers and regulators around the world. I actually think that what has started is irreversible, and there is no outcome in the Epic case or in our case that is going to change the direction of this. If we win, that will solve some aspects of this and then there’ll be other cases that will solve other aspects of this for some other industries. If we lose, it will just strengthen the cause for legislative reform, because if we lose it is because the current antitrust legal system hasn’t kept up to speed with the internet economy and the power that these gatekeeper companies can have on a global perspective.
One way or the other, there are going to be changes. There is a realization in the US that is remarkably bipartisan, that these online platform companies are just too powerful, that self regulation has not worked, and is not going to work because the economic incentives of these platform companies are just too strong, and that the government needs to step in and needs to take steps to restore competition. As has happened in the history of the US and in Europe, over the last century, there have been major cases that have reset how we understand the competitive landscape from a legal perspective.
What is your prediction of what the judge will rule in the Epic v. Apple trial?
Any lawyer that has any self-respect will decline politely any invitation to make a prediction.
These are difficult cases. What I’m telling you is whatever happens at the trial level is not going to be the end of the Epic case. And whatever happens in the Epic case is not going to be the end of the Spotify case in Europe, or so many other cases, or regulatory investigations that are happening across Europe and in Asia, and in other parts of the world. This is not the end, there is no individual case where all the marbles are at stake. This is the beginning of a process to change our understanding on how policy and regulation should work with respect to these super powerful platform companies.
Let’s talk about the US and the EU. We are living through what a handful of very smart people have told me is like a natural A/B test in regulatory policy. The United States has a very deregulatory approach. Our antitrust policy is based on something called consumer welfare, which is very focused on pricing effects. That means we’ve done virtually no regulation at all. The EU has antitrust policy based on ensuring competition, which means social regulators are very active in ensuring competition. They do a lot of things all of the time.
How do you see those two approaches playing out right now? And do you worry that one of the promises of the internet is this immediate global market access? Do you worry that, as those approaches splinter, the power of the internet market is going to shrink over time?
When I think of antitrust policy in the US, I really think you have to take a broad lens and look at the long history of antitrust enforcement. People say, “Well, we have a more Darwinian mindset when it comes to competition and so it is more or less a fair thing.” But the reality is antitrust law was created in this country. Sometimes the US has been at the forefront of that. There is a kind of a pendulum swing that goes through the appetite of governments to take certain cases on. The Microsoft case was the last one that went through the appeals process.
But now you see the DOJ, even during the last administration, file cases against other technology companies. The EU likewise has tried a number of things, and it’s developed their own set of cases, and their own line of things. But in many respects, while you could say the sources of the legal philosophy and the legal history of the two systems have been slightly different, they’re more similar than they’re different.
I think right now what we are reacting to is the fact that over the last decade or so there has been little enforcement in the US, when it comes to unilateral conduct cases, which in Europe are called abuse of dominance. Part of that is, there is a series of case law that really created a very deferential sort of approach, in which it is super hard for the Department of Justice, or the FTC, or somebody else to bring cases. But that’s just a moment in history.
If you listen to the policy debates that [are] happening right now on Capitol Hill, in universities, if you look at the people who are leading this work in the FTC and the DOJ, you can tell that we are witnessing another step in the evolution of our policy when it comes to these things, which is normal, considering that we’re facing this unprecedented technological revolution with mobile computing and these platforms achieving a level of success and influence over every aspect of the economy that not even Standard Oil or AT&T had at their time.
These platforms affect every aspect of our lives to an extent that not even the Windows operating system did 20 years ago, or AT&T, or any of these other companies. These are unprecedented challenges that require thoughtful thinking through.
And by the way, we are not advocates of some radical set of rules. We are super sensitive to the fact that the incentive to continue to innovate, to continue to improve technology, including the incentive for Apple to continue to improve their products, needs to be protected. But it isn’t an all-or-nothing thing. We’re talking about surgical things that go after specific decisions Apple made for self-serving purposes that we think can and should be reversed. We’re not talking about taking away Apple’s well-earned right to enjoy the fruits of their labor and their innovation of the great products that they’ve created.
We had Sen. Amy Klobuchar on the show a few weeks ago, she gave me the long history of American antitrust law. And certainly, Europe imported a lot of that, and then the US diverged. I take that point. But I look at the EU approach over the past 10 years and I see a lot of direct interventions in how products work in an effort to introduce competition.
They introduced a browser ballot on Windows, they broke apart Chrome and search from Android. There’s now a search ballot in Android. The EU has been chasing after Google for a decade and they have not managed to create the conditions for there to be a meaningful competitor to search. Is any of this working? In the United States, we’ve done nothing and Google is the dominant search engine. In Europe, they have done a lot of things and Google is the dominant search engine. Is there another way forward that actually creates competition?
I think you’re right, there is a little bit of trial and error, especially when it comes to remedies. I think when you look at the cases in Europe, you may think that the particular approach that they took to try to remedy the anti-competitive behavior and try to restore market conditions, in some cases were not effective and in other cases they were somewhat effective, especially when you’re talking about mergers and some structural remedies, and things like that. But trying to balance an effective remedy that doesn’t overshoot the mark and create more harm, is very hard. There is a learning process. There is a trial and error process.
Sometimes these cases take [a] long [time] because the rights of defense of the companies involved want to be respected. So if they were shooting from the hip and they were imposing draconian remedies, you and I would be having a completely different conversation today. I think what you’re seeing is a result of regulators that are trying to grapple with the economic implications of these things and trying to tailor remedies that solve the core of the problem without creating all of the collateral damage that we would decry.
The problem in Europe is that Google has 90 percent market share, and then eight companies have a slice of 10 percent. One of those companies is Microsoft, which is not hurting for money, and their interventions have not changed that number in 10 years. It might be a targeted remedy, but I think it’s fair to ask if the remedy is effective at all.
That’s a legitimate question and I’m sure, depending on who you ask, they will give you a different answer.
I think Google thinks it’s been very effective.
I think that sometimes, the problem you’re trying to solve, the evidence of it being solved is not necessarily going to be market share.
There [are] many reasons why a company might have reached a high market share, based on completely legitimate pro-competitive reasons, because they have a really good product, and I’m not talking about a particular case. So the measure cannot be, has the market share come down. That is the wrong way to judge these cases. The measure needs to be, are you creating space for competition? Are you creating space for a market to compete?
It’s incumbent upon the competitors to have products that are good enough, innovative enough, and economically attractive enough to actually challenge for market share [of] a particular product. I don’t know that you can burden one or a set of antitrust decisions with creating that outcome.
What you have to do is create the environment for competition, and then see if the market decides. And, again, these companies are very innovative and a lot of what they do is legitimate, and frankly, the more competition there is, the more they will invest in innovation and the better their products will be. That is the virtual cycle that you want to create.
You mentioned there were gatekeepers, which I’m guessing is a reference to the proposed Digital Markets Act in Europe. That law would basically lay out a set of rules by which dominant platforms would be classified as gatekeepers, and then they would have to do a bunch of things around interoperability. There would be prohibitions against self-preferencing their own services. It would address a lot of themes that you and I have talked about.
The last big e-regulation was the General Data Protection Regulation. I have a vantage point in the United States. Spotify is based in Europe, you probably feel it a lot more directly than I do. But I see the GDPR as something that created a lot of compliance costs, a lot of “I accept” buttons on the web, but maybe not more privacy. As you think about the DMA, what do you think its opportunities are and where do you think it needs to be beefed up?
As the person who was responsible at Spotify for insuring [that] we were complying with GDPR, and who had to persuade our CEO that we needed to dedicate dozens and dozens of engineers for almost a couple years to build the systems, I can definitely attest to how hard it was to get to a point where we feel we’re compliant with it. But I would disagree that it didn’t achieve anything. We can always find things that could work better or could criticize, but the reality has become [that] the standard by which we measure user data protection practices has really elevated the significance of this issue and made sure that companies were prioritizing it.
And as painful as it is and was for us to be able to comply with it, and it’s an ongoing job that we have to do every day, we actually think it is worth it. One of the biggest problems that the technology industry has today is the fact that trust, to a certain extent, has been lost with users because there are so many things there. And having a set of minimum standards, in terms of how user data is used, is something that we think would build and restore that trust.
Turning to the Digital Markets Act, at the end of the day, the reality is unless there is a new, more effective set of rules that take into account the complexity and the magnitude of these companies and the economic impact that they have and that can actually bring about a resolution in a timely fashion, we’re going to be in trouble. We’re going to end up in a world in which a couple companies are going to control most of the user data and most of internet commerce, and they’re going to essentially exact a toll from everyone. That’s not a world that we want to live in.
The problem with trying to address the modern technology competition challenges with the preexisting tools is that there’s a risk of it becoming like an archeological expedition. It’s like regulators trying to dig out the bones of a dinosaur, and then pondering whether it was another dinosaur or a meteorite that killed it. By the time that that happens, it’s ancient history. There would be scores of technology start-ups and innovative companies that would’ve been essentially extinct by that time. So how do you equip competition enforcers with the tools that they need, considering they’re facing these enormous information asymmetries?
They’re dealing with companies that are $2 trillion companies with a global footprint. How do you equip those regulators with tools that can bring about a fair and effective result in a shorter amount of time, as opposed to, like you said, a case against Google lasting 10 years.
We filed our complaint two years ago [and] they announced the opening of an investigation a year ago. Only recently have they issued a preliminary finding in the form of a statement of objections. We’re still a number of years away from a decision. And we will prosecute that case until the end. But the fact that you have to wait, in the best of cases, five to 10 years until resolution, tells you that currently, the antitrust enforcement tools are not really up to the challenge of protecting the competitive process in the face of these massive online platforms.
You mentioned that Apple is a $2 trillion company; Spotify is up against Apple. That’s an order of magnitude bigger than Spotify. Spotify, though, is a $45 billion company.
We hear a lot from musicians. There is a musicians’ union that’s very mad at Spotify all the time. They say that your rates are too low, that the deal-making with labels opaque, that you’ll cut deals with big artists and labels, but you won’t negotiate with smaller ones. Do you feel competitive pressure as Spotify to make better deals with artists and labels?
The reality is, 80 percent of the content on our platform is provided essentially by three or four content suppliers, four labels, if you think about it. These companies control 80 percent of the musical content that gets streamed on our platform. These companies have tremendous leverage over us.
There is a reason why two-thirds of the gross revenue that Spotify generates goes back to artists and the labels and publishers and organizations that they represent. In fact, we’ve gone from zero to billions of dollars of revenue every year.
Our margins are nowhere near what you would expect from technology [company] margins. The content industry, particularly when you’re dealing with music and you’re negotiating with a handful of incredibly powerful labels, have kept it incredibly competitive.
There’s a lot of information out there and there’s a lot of passion on this topic. We’ve tried to add some transparency. A couple of months ago, we launched a website called Loud and Clear that I really encourage people to go look at because it really explains the structure of the music industries and how the streaming royalties trickle from the streaming services down ultimately to the artist, and all the players in the value chain, and the commissions or the transaction cost that is associated with that.
The reality is when Spotify was created, the music industry was in trouble. It essentially had come down to be, on a global economic basis, about half of what it was before. It was streaming that really brought the industry back to growth, where now we are really approaching the levels prior to the challenges that made the music industry shrink. And we’re very proud of the role that we played in that.
We are actually convinced that we’re only getting started, that we can all continue to grow the pie and that everyone, artists and the labels that represent them, and publishers and collective organizations and others can benefit if we do that. But we have to grow the pie, as opposed to basically pointing to the next guy and saying “I just want a bigger slice for my piece, as opposed to yours,” because at the end of the day, we’re all in the same boat. We need to lift the boats together, as opposed to turn on one another.
I talk about this with every executive from a service that distributes culture, whether it’s Vimeo or Instagram or Spotify. If you were an artist in the ’70s or ’80s, you could spend two years in the studio and then release your record, sell a lot of copies of your record, and that would make all of your money for you. If you’re an artist now, your music is actually devalued because of streaming and widespread access. Today, you’re on tour all the time.
I hear the idea that you would grow the whole pie, but I think the average indie artist is saying, “How do I negotiate with Spotify? I don’t have a label. I don’t have a publishing organization. I’m just trying to make money as a musician.”
How many indie artists in 1970 were able to actually release albums that were successful and that allowed them to reap the economic benefits that you’re describing?
I’m an old punk-rocker. I feel like I could name a bunch of old punk-rock acts that started labels.
The reality is there were some bottlenecks in the music industry before. You really had to be discovered by a label or create your own label, which was really the exception rather than the rule, and then you had to sign these deals, and then there was only a small percentage of new artists every year. They had to be marketed through radio, and you had to truck the vinyl records to the record stores and things like that.
What the internet has done is really eliminated a lot of the friction and a lot of the cost associated with both creating and distributing and marketing music. What that has created is a world in which there are now an incredible number of artists. And when you’re talking about independent artists, the growth of independent artists on our platforms have been remarkable. They are some of the artists that have benefited the most from the music streaming infrastructure.
In 2020 alone, there were 76,000 artists that were added to Spotify playlists for the first time. And the large majority of these were discovered because they were pitching music through our playlist pitching tool. Last year, 57,000 artists represented 90 percent of the monthly streams on Spotify. And so essentially, what used to be the bottom of the pyramid has actually moved up, and there’s a much larger number of artists that are now being streamed. Artists are able to find niche audiences that were not available to them before.
You look at the Belgian hip-hop scene, you go to the Netherlands and places like that, these are things that have been enabled because the barriers to entry into the market and to achieve global distribution have been dismantled because of the streaming business model and technology. We now have over 300 million users that are listening to music that is being monetized, and that is benefiting the creators of music and the organizations that represent them.
It’s a constant negotiation. Everyone always wants a little bit more, their slice to be a little bit bigger. But the reality is, when you look at the economic situation of the music industry today, the industry is much better. You’re seeing a tremendous explosion of creativity, a tremendous number of international artists. You look at K-pop, Latin crossover, and things that are now popular because we created this large audience of globally-minded users that are willing to experience it. We’ve developed personalization and discovery tools that expose people to music in ways that the radio model of music marketing would have never been able to allow.
We’re very proud of that. And we’ll continue to change and learn and try new things. We’ll also continue to add transparency to the way that the economics of the music streaming world work, because we believe that the value of our contribution is not necessarily obvious for some people. We have to talk about it and understand the economic structure of the industry for people to get it.
I’m asking these questions because I see your relationship with Apple somewhat mirrored by the relationship creators might have with Spotify. Beyond music, Spotify has this large position in podcasting.
You’ve bought a number of companies: Gimlet, The Ringer, Anchor, Megaphone. Megaphone is the central player in the podcast ecosystem. Our show is distributed on Megaphone. This is great synergy for you. You’re going to talk on Decoder, and then Megaphone is going to distribute it. But that gives you a huge amount of data insight into the podcast industry that almost no one else can get. You could use that to inform programming decisions.
I could take that, abstract that out, and say, “Okay, that’s the criticism of Amazon.” If I was an e-regulator looking at a law like the DMA, I might say, “Well, Megaphone is a gatekeeper.” Do you feel that pressure as well?
I just have to tell you this sort of moral equivalence between what Apple has done with the App Store and Spotify and some other platform, I think it’s not based on fact.
We would be equivalent to Apple if we told artists and labels that they couldn’t be on the Spotify platform unless they paid us 30 percent of all the revenue that gets generated, and we get to promote certain artists that we pick over somebody else, and we get to make it super hard for artists to be able to find an audience on the platform.
The parallels are maybe not in the specifics, but in that feeling of, “This is a contract I can’t negotiate,” or, “This is data I don’t want to give up.” I’m wondering how you balance those out.
Nobody has provided more data transparency in the music industry than we have. We created Spotify for Artists. We provided it to artists for free. They get the ability to get real-time data on how their music is performing. We added transparency in an area that was really characterized by tremendous opacity when it comes to data. And this data is incredibly valuable. It’s data that we are able to pull together because we have this incredibly large user base, and we have the technology tools to create it. So we are providing that data to artists. The feedback that we get from artists is incredibly positive when it comes to that.
We are allowing artists to find audiences that would have been very hard for them to find, including artists that have chosen to be independent and that are not signed by one of the major labels, because now there are tools that they can benefit from where, in some respects, they don’t need some of those terms. So, I take exception to the comparison. I know it’s very easy to say, “Well, these people are a platform. You guys are saying you want to be a two-sided platform. Ergo, you’re equally bad as somebody else who’s behaving badly.” But that’s not a real comparison.
I wouldn’t say bad. I think the challenges are similar of how you might manage a platform.
Let me bring these two threads together, I’m seeing across the entire range of other social apps this huge push towards tipping. Twitter’s going to let you tip people who are good at tweeting. They’re going to let you do ticketed events. Clubhouse is doing tips. Down the line, you name a platform, they’re all opening the cookie jar. All those platforms have to pay Apple 30 percent.
One class of creators that people would be most likely to pay for are artists. If I love some indie band that’s mad about their rates from Spotify, they could tell their listeners, “Listen to this on Spotify, but kick us five bucks.” Is that a service that you just won’t offer because of the Apple tax right now?
I won’t say that we will never offer it. I think it is hard because of the set of rules that Apple has. I can’t comment on what might or might not be in the product roadmap. And there is nothing intrinsically related to tipping that would cause us not to consider it, if we can make it work from a technology and economic perspective.
Some of that means trying to figure out these App Store rules, and some of it is making sure that the market is there for that. We are looking for different ways in which we can create monetization avenues for creators. When we have something to say about that, we’ll come out and announce it.
We have announced the rollout of paid podcast opportunities. I think tomorrow [we] begin the rollout of the program. So, in terms of podcast monetization, the ability of podcasters to be able to monetize on our platform by having their direct subscription and payment relationship with users, that is something that we have announced. So we are trying to create those opportunities, and we’re trying to actually learn from Apple’s mistakes and trying not to replicate them in the way we run our business.
The paid podcast execution is really interesting. There is not a button in Spotify that lets you spend money inside of Spotify to pay for a podcast. You have to leave, go to Anchor on the web, and sign up over there. That feels like trying to avoid this platform tax situation in a way, that doing that for whatever number of artists at scale would be almost impossible.
Obviously, if we can avoid having to pay the Apple tax, we will do it. We will create ways consistent with the law and consistent with the sound business practices that would allow us to create that. We thought we did that in 2016 when we took Apple’s in-app payment system down. One of the first things we did when I joined Spotify was actually look at the rules, the app developer guidelines. It was, I think, Section 311 at the time. We spent weeks looking at that rule and all it required for us was not to have a “Buy” button on the app for subscriptions. All we had to do was not to have an explicit link to an external payment site.
The reason we took it down is, we were in this situation where they had forced us to increase our consumer prices to $12.99 per month. And then they bought Beats Music, rebranded it [as Apple Music], and launched it at $9.99. So now they were undercutting us in price because we had to pay them the 30 percent. At that point, it was inevitable. We had no choice. We had to take the IAP down. And we did it in compliance with the rules.
What did [Apple] do? They changed the rules the month after to retroactively make the stance we had taken a violation of the rules. Since then, they’ve amended the rules two more times in ways that give them ever-expanding powers to basically control the way in which we run our business.
The facts speak for themselves, whatever you think about Apple as a company and the history of Apple. I have a lot of respect for it, and I actually have a lot of respect for a number of friends that I know who work for Apple. But you have to call out the areas in which they’ve behaved in a way that’s not right. That’s what we’re doing.
You’re a good lawyer. I know you’re not going to make a prediction about the trial. But make a sweeping prediction. Where do you think this overall platform regulation energy comes from next?
I think you’ve seen companies from every slice of the technology industry come out. You’ve seen media companies come out. You’ve seen a number of other companies come out. I think this is irreversible. I think the calls for sound but effective regulation are unstoppable. And I think a couple years from now, there will be strong pieces of legislation as well as law enforcement and competition law enforcement decisions that will begin the process of laying the foundations for how competition in technology markets should be conducted in the future.
