Spotify

You're about to read how Spotify cracked the code that changed music forever. This is one chapter from "Subscriptocracy" - my book exploring the subscription revolution. Read 70% here, then subscribe for the full chapter + 2 bonus chapters + insider insights on the subscription economy.

A Good One Out of Ten

Before diving in, let’s take a brief detour—or rather, two.

I.

In 1996, 'The Cable Guy' premiered, but alongside the movie came another release: its soundtrack. On it was a song with a ridiculously long title: ‘Standing Outside a Broken Phone Booth With Money in My Hand.’

The story behind that track is important for this little aside. The song belonged to the album Rocket by the band Primitive Radio Gods. Chris O’Connor, the band’s lead singer, had spent years trying to make it in the music industry without success. Then, in 1994, while cleaning his house, he stumbled upon a few old demo tapes. He thought, “Why not? What’s there to lose?” and sent some of those demos to various record labels.

To his surprise, one of them responded, and things moved quickly. Somehow, that one song ended up on the soundtrack of the Jim Carrey movie, sparking interest in the band and their album. But there was a problem. The album was awful. It was because the only decent song on the ten-track album was the one from the movie. The rest were little more than experiments, and as one industry critic aptly put it, “At its core, Rocket feels like a demo tape with one promising track.”

Which, of course, is exactly what it was—and O’Connor knew it. That didn’t stop the album from becoming a success. Back then, if you wanted to listen to that one good song without buying the movie soundtrack, you had to buy Rocket. But the rest of the tracks? Filler. Everyone knew it: the label, O’Connor, the critics, and the listeners.

II.

In 1959, 12-year-old Terry McManus bought a copy of Jerry Lee Lewis’s single ‘I’ll Sail My Ship Alone’ from a store in Birmingham, Alabama. Over the years, McManus kept buying singles as a cheap way to decide which albums were worth purchasing. But by the 1980s and especially the 1990s, with the rise of CDs, he noticed something: singles had vanished. He couldn’t find them anymore. Neither could anyone else. They had disappeared.

When Napster emerged in the late 1990s, McManus immediately knew what to call it: “the revenge of the single”. And as we’ll see later, he was right. Why had the industry killed off singles? For music executives in the 1990s, the answer was simple: singles weren’t profitable. They were expensive to produce and didn’t sell enough to justify the cost. So, the industry boiled music sales down to a simple
formula: 2 good songs + 10 to 12 mediocre ones = a $15 CD.

This is how one-hit wonders sold millions of albums only to vanish soon after. Remember ‘How Bizarre’ by OMC or ‘Tubthumping’ by Chumbawamba? And who can name another song by Los del Río besides ‘Macarena’? Yet for a time, if you wanted to own those hits, the only way to do so was to buy the entire CD. Even though most of the other tracks were mediocre at best. Fans knew it, artists knew it, and, of course, the industry knew it too.

These two anecdotes make it clear: this was how the business worked. Hold onto that thought—that not so long ago, you couldn’t buy individual songs. You had to buy the whole album, even if you didn’t care for the rest of it. Let’s move on.

Enter the MP3 Format

The internet was still in its infancy when the MP3 was on the verge of taking off. Sharing files in this format was cumbersome —nostalgia for the screech of dial-up modems aside, transfer speeds were painfully slow— and the number of internet users was relatively small.

But by 1997, the legendary Winamp player exploded in popularity,marking a turning point. The internet was becoming more established, and the convergence of these two phenomena led humanity to do something it excels at.

Sharing.

In that case, sharing MP3 files. People had shared cassette tapes before, but the small size of MP3 files made them much easier to distribute over the internet. By January 1999, for example, the term “MP3” had surpassed “sex” as the most searched word on the internet. MP3s were thriving on PCs, but they also paved the way for new devices.

In May 1998, the first hardware MP3 player, the MPMan, wasreleased. It was expensive and clunky, but it worked. Soon after, other devices followed—going beyond the Walkman and Discman. These players could store hours of music in your pocket, with spectacular sound quality, in a digital format, and with impressive features.

Not long after, Diamond Multimedia launched its Rio PMP300 (for Portable Media Player), the first commercial MP3 player to achieve real success. The Recording Industry Association of America (RIAA), increasingly worried, sued the company, claiming it violated copyright laws. The RIAA lost the case. That little device marked a significant turning point, signaling the inevitable decline of Walkmans and Discmans and the promising rise of MP3 players. Eventually, the device that truly changed everything arrived—and it did so with the help of the MP3 format.

That device, of course, was the iPod.

But we’re getting ahead of ourselves. There are a few more things to
cover first.

Napster Shows Us the Future of Music Distribution

Months after the lawsuit between the RIAA and Diamond Multimedia, a tumultuous year for the music industry began. In June 1999, a young programmer named Shawn Fanning launched Napster, the MP3 file-sharing service that revolutionized the music world. Napster didn’t just show the world what the future of distribution could look like; it demonstrated it in action.

In that future, music wasn’t just free—a major draw for most users—it was also free of restrictions. It bypassed the artificial locks (like DRM, or Digital Rights Management) that other platforms had imposed. Napster offered access to hard-to-find songs that traditional media outlets neglected, but it went further: it redefined how people consumed music by enabling the exchange of individual tracks rather than entire albums.

Gone were the days of buying a full vinyl LP or CD just to get the two songs you liked while slogging through the other eight or ten filler tracks. Napster offered a solution to what many saw as an exploitative industry practice. Remember the case of O’Connor’s hit from the Jim Carrey movie? Exactly. Napster eliminated that frustration. It was revolutionary.

But the music industry’s power players quickly saw Napster as a threat. From day one, they fought to shut it down. Their initial response was clumsy: several companies worked together to create the SDMI (Secure Digital Music Initiative), a rights management platform co-developed with Microsoft and IBM.

That technological counterattack failed spectacularly, so the industry started to use more brutal tactics. Napster, sued by artists like Metallica and several record labels, ultimately lost the legal battle and was almost entirely dismantled by 2001. Despite this, both the industry (begrudgingly) and users learned an essential lesson: as Bob Dylan once sang, “The times they are a-changin’.” While independent Napster alternatives—Morpheus, Grokster, Gnutella (created by Winamp developer, Justin Frankel), and KaZaA,

among others—sprang up, record labels tried to regain control by launching their own platforms. Warner, Bertelsmann, and EMI partnered with RealNetworks to create a subscription service—yes, a subscription service —called MusicNet. It was an absolute disaster. Universal and Sony followed suit with a similar service called Pressplay. At the same time, Rhapsody emerged, offering a subscription-based model that allowed access to a digital music catalog.

But let’s not forget: this was 2001, and people were hardly subscribing to anything. The concept was new, and while the idea had potential, its execution and terms were abysmal. Consider the conditions of Pressplay, for example. The $9.95 monthly basic plan allowed users to stream up to 500 songs in low quality, download 30 tracks, and burn just 10 songs to a CD. Even worse, not all songs were available for download, and users couldn’t burn more than two songs from the same artist on a single CD. Downloads expired after a month, and they couldn’t be transferred to portable music players.Awful.

Pressplay was the perfect example of the music industry’s possessive attitude toward its assets. They were unwilling to let go of control, and users were equally unwilling to accept such a mess. The industry’s attempts at creating their own platforms were largely ignored or ridiculed. Both Pressplay and MusicNet landed on PCWorld’s infamous list of “The 25 Worst Tech Products of All Time,” becoming case studies in how not to launch a digital distribution platform.

The result? Chaos. Peer-to-peer (P2P) file-sharing applications flourished, but they required internet access and some technical know-how to be used. Meanwhile, record labels failed over and over again, releasing poorly executed platforms. There was no legitimate, user-friendly alternative, and that’s when Steve Jobs saw his chance. Apple’s co-founder identified the problem and used his influence to
negotiate with the music industry’s Big Five. Having failed to adapt to the coming changes, the labels were open to Jobs’s proposal, which promised benefits for both Apple and the music industry. His plan included two key concessions that pleased the record executives.

First, the iTunes Music Store would initially be available only to Apple computer users. To music executives, this was low-risk: Mac’s market share was minuscule, making it a safe test bed for gauging revenue potential without significant exposure. The second condition was even better for the industry: Jobs agreed to protect the music catalog with DRM. This ensured the labels retained control, as songs purchased on iTunes could only be played on Apple devices. The record labels approved, and the project received the green light.

Of course, Jobs had long-term plans in mind. The iTunes Music Store, announced in April 2003, expanded to Windows users just five months later, opening up the iPod to a much broader audience. Meanwhile, Apple’s DRM system, while initially critical, gradually faded. Jobs himself criticized DRM in a 2007 open letter titled “Thoughts on Music.” On it, he outlined his vision for the future of music distribution: “Eliminate DRM entirely.”

This vision became reality for iTunes in 2009, but not just because Jobs was a visionary or an advocate for consumer rights. DRM had actually been advantageous for Apple, as it reinforced the company’s control over its ecosystem—a strategic move that solidified Apple’s dominance in both hardware (iPod) and digital distribution (iTunes). The relationship was a virtuous cycle: one drove growth for the other. Perfect synergy.

Then Amazon arrived, offering record labels the chance to distribute DRM-free music as unprotected MP3 files that could be played anywhere —even on iPods. This provided the music industry with a way to bypass Apple’s dominance in digital distribution. The labels embraced Amazon’s model, leading Apple to remove DRM from iTunes shortly after.

This shift marked a turning point: for the first time, users had a legitimate, affordable alternative that functioned much like the traditional music market—something vital for both the industry and user adoption. It wasn’t a subscription service; the music was yours to keep. But with the advent of this model came another fundamental shift—one that, as we’ll explore next, was inspired by Napster.

Is That You, Steve?

There he was. Steve Jobs, walking across the stage happily. He was wearing his usual jeans, New Balance sneakers, and black turtleneck sweater. A little chubbier, with noticeably less hair, unshaven, and slightly scruffy. But that didn’t matter —his aura was undeniable, and everything he said just seemed to make sense.

It was April 2003. The Moscone Center in San Francisco was packed. Steve paced back and forth, speaking with precision and confidence. No mistakes. No hesitation. “Starting in 1999 there was this phenomenon called Napster,” he remarked at one point. “It was shut down in 2001, but it demonstrated some
things for us,” he continued. “It demonstrated that the internet was made for music delivery.”

He went on to mention KaZaA, which was still thriving at the time, providing that all-important “near instant gratification” to users—a term Jobs used deliberately. While not widely recognized then, the concept would soon become a part of everyday vocabulary. However, Jobs noted, “The downside” of platforms like Napster and KaZaA was simple: “it’s stealing. It. Is. Stealing.”

After weighing the pros and cons, he posed a critical question: “Why has this proliferated?” The answer he gave was as blunt as it was truthful. “Well,” he concluded, “because there’s no legal alternative.” And he was right. The music industry at the time offered no meaningful options for buying or listening to music online. Record labels, basking in their own success, were reluctant to adapt. CDs were a goldmine: production costs were minuscule by then, and profit margins were soaring. Jobs knew this well because, in reality, there were alternatives.

It was time to discuss them, and Jobs did so in his signature style —with a rhetorical question. “So, what about Pressplay and Rhapsody?” Both platforms had aimed to provide a legal alternative to Napster, and despite backing from the music industry, they hadn’t gained traction. Jobs believed he knew why.
“The reason?” he said. “Both are subscription services.”

To Jobs, that model wasn’t the right one. “You can’t just pick a song and pay a little bit of money,” he explained. These platforms forced users to pay a monthly fee, but “if you stop paying the subscription fee, your entire music library disappears.”
The problem, according to Jobs, was that “these services treat you like a criminal.”
He wasn’t talking about the now-defunct Napster or KaZaA. He was criticizing legitimate services that relied on streaming technology to let users play their favorite songs wherever and whenever they wanted. But the music wasn’t truly theirs—it was only accessible as long as they kept paying.

At the time, Jobs couldn’t make sense of it. He seized the moment to deliver a dramatic pause. Then, an image of someone dressed as a prison inmate, looking like a mobster, appeared on the screen. Jobs drove his point home: “These platforms are based on subscriptions, and we think subscriptions are the wrong path.” People had always bought their music, he explained. “We’ve bought music on LPs, we’ve bought music on cassettes, we’ve bought music on CDs.”

For Jobs, this was the way music consumption worked. And that’s exactly what he proposed on April 28, 2003: just as people had bought music in those physical formats, now they could purchase it by downloading songs. “People are used to buying their music and having a broad set of rights when they do. When you buy your music, it never disappears.”

That was the announcement of the iTunes Music Store. Jobs had managed to secure deals with the five major players in the music industry—BMG, EMI, Sony, Warner, and Universal. Apple launched its muchanticipated music store, integrated into iTunes 4, with an initial catalog of 200,000 songs.

You could burn them to a CD, though not without limitations: there were restrictions on how many times a playlist could be burned. You could play the songs on up to three Macs. And, of course, you could sync them with your iPod, the industry-defining music player. The price? 99 cents per song. No strings attached. “No subscription fee,” Jobs emphasized. The music was yours—and yours in a meaningful way. No need to buy an entire album when you only loved one track. You owned just the music you loved. Nothing more, nothing less.

Or was there more?

At that moment, there wasn’t. The iPod, which had launched in 2001, began to pick up steam—thanks in large part to the release of iTunes for Windows. By 2005, Apple had sold 22.5 million iPods. By 2008, that figure would reach its peak at nearly 55 million.

But the iPod had its nemesis within Apple itself. After the iPhone’s 2007 debut—launched at a time when the iPod reigned supreme—sales of Apple’s smartphone soared, relegating the iPod to a quiet second place. In 2014, Apple sold 14.38 million iPods, but the iPhone, which could do everything the iPod could and more, achieved stratospheric success, with 169 million units sold. That was only the beginning: the following year, iPhone sales hit 231 million and remained at that level for years to come.

But then something shifted in a distant Nordic land.

"Want to know what happened next? Subscribe to read the complete Spotify chapter + get 2 more free chapters from Subscriptocracy."