UMG’s buoyant stock debut is a new chapter for the music business

Universal Music Group (UMG) had an extremely positive first day of trading as a standalone entity, with shares at one stage trading 35% up from their reference point and making the market cap leap to $55 billion, while former-parent, Vivendi, saw a drop of two thirds in its value. Prior to the first day of trading, there were questions over whether Vivendi had pushed the indicative value of UMG shares too high, due to, in part, a series of UMG equity sell offs – but day one suggests that pent-up demand was sufficiently high to negate those concerns. Meanwhile, Warner Music Group’s (WMG) stock also surged, showing that investors see this as a market dynamic rather than a pure company dynamic. So, what is going on? Why is there so much investor enthusiasm in the music industry? The answers lie in the two-tier narrative that is building around today’s music business.

If the UMG listing had happened as recently as two years ago, we probably would not be talking about such a stellar trading debut. The fact that we are doing so now is because the music market has moved on a lot since then – and I mean a lot. This is what the music market looked like in September 2019:

For those deep in the music business, it is sometimes hard to appreciate just how much change has happened in such a short period of time. As CS Lewis once wrote: Isn’t it funny how day by day nothing changes, but when you look back everything is different? Crucially for UMG’s listing, these changes have contributed to a major shift in the music industry’s metanarrative for investors:

  • 2019: The Spotify vs the labels narrative was in full swing. Investors viewed the market through the lens of ‘rights vs distribution’. They were backing Spotify against UMG, vice versa or simply backing both horses in the race as a sector hedge. Record labels looked vulnerable in a market which was dominated by digital service provider (DSP) growth, which, in turn, was dominated by Spotify. Streaming’s future was bright, but there was a risk that as streaming got bigger, the labels would get weaker.
  • 2020: Streaming revenues continue to grow strongly, up 18.3% in 2020 with 467 million subscribers, and up a further 25.9% in H1 21 in the US. But, crucially, the market is diversifying beyond DSPs. New growth drivers (social, short-form video, games, fitness, and mindfulness) are now making a truly meaningful contribution to label revenues (around $1.5bn in 2020). Music is becoming the soundtrack to the new digital entertainment universe. Vitally, unlike the traditional approach of sync (an ad hoc model that struggles to be agile and to scale), the labels are applying scalable licenses, born out of the DSP model, to ensure music rights can be agile enough to grow with the fast-changing digital entertainment marketplace. On top of this, a) the catalogue M+A boom has established music as an investor asset class, b) recorded music grew during the pandemic while live declined, thus demonstrating it to be the most resilient component of the wider music industry. The outlook for music is now a multi-layered narrative, with DSPs still centre stage but no longer the only game in town.

What this all means is that music rights are a compelling investment proposition for bigger institutional investors. However, the thing about bigger institutional investors is that they typically like to invest in big established companies. So, looking at the marketplace, unless an investor wants to build a catalogue investment fund (which is a highly specialised approach), there are not many big companies to invest in. WMG is the smallest major, Sony Music is just one smallish part of the Sony Corporation, and Believe is an indie label. So, while those are still interesting options for investors, the opportunity to invest into the world’s largest music company was previously the exclusive domain of a few large investors. Now, finally, everyone can have a part of UMG. 

So, what we have is the confluence of two factors:

  • Pent-up investor demand
  • A compelling and diversified industry narrative

The timing for UMG is perfect, but, of course, it has not been a neutral player simply watching the sands shift. It has actively driven this narrative, not just through what Sir Lucian Grainge and other executives have been telling the market, but also through its succession of equity transactions which helped build demand and value recognition. Part of the reason UMG is the world’s biggest music group is because it is the world’s biggest music group. It uses its scale and influence to help shape the market and its future trajectory. This is arguably one of UMG’s most valuable assets: it exercises control over its own destiny.Whether UMG’s share price falls or whether it grows in the coming weeks, the listing represents a high water mark for the music business as an asset class and may well be reflected upon as a useful bookend for one phase of the music business as another emerges.

‘Middle class’ artists need niche, not scale

Streaming continues to grow strongly, as evidenced by the 28% growth reported by the RIAA for H1 2021 in the US. Everything looks great for the build-up to the impeding Universal Music Group (UMG) IPO. But all is not well in the creator community, as many artists and songwriters continue to be unhappy with streaming income (seen most pertinently in the UK parliamentary DCMS inquiry). However, the origin of so much of their ills, even if they do not yet realise it, is the mechanics of streaming itself rather than any party (labels, publishers or streaming services) not passing on enough money. Could these entities transfer more to their creators? Yes, of course. But there is no increase that could transform the outlook for most of these creators without potentially breaking the entire streaming economy. The crucial, emerging dynamic is that most mid-tier creators are never going to be big enough to gain adequate streaming scale to use as a reliable income source. In fact, they need the opposite of scale – they need niche.

Streaming income is always going be different from sales income

One of Daniel Ek’s Spotify ambitions is to create and empower a new ‘middle class’ of artists, enabling a new wave of creators to build careers from their creativity. But the irony is that the ‘middle class’ (depending on how you define this amorphous group) is, perhaps, least well served by streaming. Here is why: in the old world, a ‘middle class’ five person band might sell 50,000 copies of an album in a year, for, say, $10 each – thus receiving $35,000 each*. In streaming, this group might generate 10 million streams in a year, which would result in $7,000 each. The old model delivers far fewer fans but far more income. In isolation, the streaming model is less beneficial, however, in a wider context, the streaming-era group is likely to generate more live performance, merch and branding income as a result of streaming’s bigger audience. This is why streaming received much more critical creator attention during the pandemic, as the halo effect across other income avenues was cut off at the knees.

The squeezed middle

This comparison is not intended to suggest the streaming model is broken, but for the middle tier of artists, the scale at which streaming delivers is not enough on its own, and instead it catalyses the wider mix of creator income streams. At the other ends of the creator spectrum, superstars get enough scale to earn a truly meaningful streaming income, and the emerging independent artists are able to reach global audiences in way they could never do pre-streaming. So, the ‘middle class’ of creators actually become the ‘squeezed middle’ of the creators’ streaming economy.

Monetise niches, not scale

Even doubling the creator royalty rates would still leave streaming income 2.5 times smaller than sales income, but it would break the streaming model in the process. Rather than break streaming, an alternative attempt at resolve would be to focus on finding an artist’s core fans – the ones who really care – and selling them products and experiences. With this approach, middle tier artists would be able to replicate the same sort of income flows as the old sales model. Clearly, that theoretical five person group would likely sell fewer than 50,000 copies of a product because much of their audience would already be getting all they need from streaming. But this is not about replacing streaming – this is about complementing it, by bridging the income gap. So, while some artists have opted to remove themselves from streaming and focus solely on platforms like Bandcamp, this approach is unnecessarily reductive and will actually hurt the artist’s earning income in the longer-term, as the funnel for acquiring new fans has been massively narrowed.

Fame and fandom

The concepts in this post are not particularly new and I have, in fact, discussed a few of them before. But they are crucially pertinent, nonetheless. ‘Middle class’ artists need to start thinking about streaming more like radio, i.e., a tool for growing fanbases which they can then monetise elsewhere. Streaming delivers the fame, while niche delivers the fandom. And it is fandom where an artist and a fan get the most value, in all possible permutations of the word ‘value’. As long as, of course, the artist does not get lazy and simply try to fleece their super fans!

*These calculations are simplified, do not include cost deductions (other than retailer margin), assume group members each have an equal share of recording and publishing rights, and assume that rights splits are the same across both.

The oncoming fandom crisis

The Chinese authorities’ crackdown on fandom represents the first major growing pain for the global fandom economy. Tencent Music Entertainment (TME) will likely be the bellwether of this shift, with two thirds of its revenues coming from non-music (i.e., fandom) related activities. But this is more than just about China – it shines a light on the dark underbelly of the global fandom machine. The companies behind K-pop and Idol acts industrialised fandom by leveraging, and even exploiting, fan psychology to massive global businesses that trade upon extracting every possible ounce of spend from fanbases. The China crackdown should act as a wakeup call for the global music market. 

The industrialisation of fandom

Regular readers will know that MIDiA has focused on fandom analysis and research for a number of years now, looking at it across all forms of entertainment. The reasons we believe it is so interesting in music is because Western streaming services monetise consumption rather than fandom, leaving both passion and spent on the table

The Chinese music apps illustrate just how much more can be achieved when experiences are built around the music, rather than simply relying on music to always be the experience. Alongside this, the rise of K-pop, which leans heavily on the Japanese Idol model, shows how much fanbases can be willing to support their favourite artists, particularly in terms of both spend and passion. But, as exciting as these models are, they have also been underpinned by the temptation to push fans’ spending and obsession further and further.

Even Western artists are getting in on the act. When Taylor Swift encouraged her fanbase to go and buy the re-recorded version of Fearless, she was looking for their support in her old master recordings ordeal. But who really needed the $50 for a vinyl copy most, Swift or her fans? 

This industrialisation of fandom has actually weaponised it, and, in doing so, puts its very essence at risk.

The oncoming fandom crisis

A fandom crisis is coming. Fandom is far more meaningful and profound for fans than mere consumption. It is also far harder to measure – in fact, it is only the effects of fandom that can be measured (i.e., merch sales, comments, likes, etc.). Fandom is rooted in human psychology. It is about identity, belonging and self-expression. Things that often matter more to younger people than anything else, especially teens in their formative years. It is no coincidence that the industrial fandom machines are primarily built around younger consumers. The Chinese government’s decision to limit fandom, in part because of its negative social impacts, is an extreme move, but it could also act as an ice breaker for regulatory scrutiny in Western markets. 

The fandom crisis goes beyond music

The oncoming fandom crisis is neither confined just to Asia, nor just to music. In fact, huge swathes of the global social economy are built on exactly the same dynamics. TikTok, Instagram, YouTube, Twitch – all of these platforms exploit the creator / fan relationship and have constructed sophisticated monetisation frameworks around them. The sophistication does not so much lie in payment methods or technology, but instead in deploying products that drive competitive fandom. Fans compete to be the biggest fan, often by spending more. This can be a kid spending their parents’ money to have his comment pinned to the top of a YouTube gamer’s comment stream, or a Twitch user paying to unlock exclusive emotes and sub badges of their favourite Twitch streamer. 

The platforms need to consider a crucial principle: just because you can do it does not always mean that you should do it.

A crucial moment for the business of fandom

Fandom is the ozone layer of the entertainment world, and it is a critical resource that is too often taken for granted and can be irrevocably damaged. 

This is a crucial juncture for fandom. We are beginning to see the emergence of cool new apps, like Fave, and Western labels looking East for inspiration, such as UMG tapping Hybe’s Weverse app for some of its artists. It is crucial that well intentioned efforts do not falter because of a wider fandom backlash. Fandom should be nurtured, not harvested.

Not only is there so much that can be done, the music industry needs more to be done. A key reason there are armies of BTS and Black Pink fans in the West is because a generation of kids were growing up with a sense that something was missing from music for them, that streaming simply did not let them express themselves and feel part of something. Streaming in the West does not do fandom. Streaming in China, perhaps, does it too well. Clearly, there must be a solution somewhere in the middle that enables fans to be fans, while also doing the right thing for them. 

Fandom and ethics should not occupy opposite sides of the debate. They should be intertwined and interdependent. Fandom is about who you are and what you are. Without ethics, what are any of us?

Kanye just obliterated the creative full stop

Kanye just obliterated the creative full stop 

Kanye West knows how to stir things up, not least in making us rethink what music is and nudging us away from considering it as linear and static. First there was his announcement that Life of Pablo was a “living, breathing, changing creative expression”, and now there is his Donda Stem Player – which we wrote about here last week. Transformational change does not normally happen in one big wave, but instead is triggered by disruptive outliers, things that, at the time, might look like inconsequential edge cases, but act as the ice breakers for the paradigm shift that follows. Digital entertainment in its wider sense is entering its lean inphase, where audiences participate with content, whether that be simply commenting on a YouTube video or creating your own TikTok video. Given simple but powerful tools, it turns out that the consumers like to be creators too. First it was pictures and video, but now it is audio’s turn, and Kanye’s Donda Stem Player could prove to be a pivotal step in that journey.

Formats do not need to be how they have always been

The future always looks much more like the past. The Model T Ford looked more like a horseless cart than it did a 1950’s car. Change takes time. Digital entertainment business models have undergone dramatic change, but the content itself much less so. We think of TV shows, movies and music as being clearly defined things that have always been thus, but, in truth, they were defined by analogue technology in the 19th century. Now that linear TV schedules, radio and CD players are entering their final phases, there is no need for the traditional formats to continue to dominate. Creatives who argue that a 45-minute drama and 3.5-minute song are simply the best formats, do so because that is all that they have ever known. Yes, they work, but that does not mean that other formats cannot also work. Just look at the album. Many artists still like the creative construct, but just 21% of music streamers regularly listen to albums on streaming services. Music fans have already decided that this format is not part of their future.

Fluid audio erases the creative full stop

The Donda Stem Player, made for Kanye by Kano, takes this concept and runs with it. This, as my colleague, Kriss Thakrar, identifies, is fluid audio, and it fits into the Agile Music that we first identified back in 2011. Analog entertainment formats were inherently creative full stops. When an album was recorded, it was done – final. It did not matter if the artist’s creative vision had moved on, as the songs remained the same. This seems entirely natural, but until the recording era, this would have appeared as a creative anathema in popular music. Before recordings, a song was never the same twice. It only existed as a live performance that was played in the moment and survived in the listener’s memory. Songs evolved and changed. Whether that be centuries of evolution in European folk music or decades in American blues and jazz. Then recording came along and songs became petrified – the stuffed animals of creativity. 

Kanye took his first swipe at the creative full stop with his continual updates of Life of Pablo. Not everyone got it. Many fans simply wanted it to sound the way it did when they first heard it. It takes time for people to get their heads around change – quite literal change in the case of Life of Pablo. Now, with the Donda Stem Player, Kanye has obliterated the creative full stop. Donda will never sound the same twice, and that is now literally in the hands of his fans.

In some respects, making a piece of physical kit looks to be quite a retro move in this digital era, but the subtle, yet crucial idea here is to make the Donda Stem Player an actual instrument. It is the ultimate form of creator culture, by turning songs made with instruments into an instrument itself. How very meta!

Back in 2015, I published my book ‘Awakening’, which was part history of the digital music business and part vision for the future. Some of my predictions did not age as well as I would have liked, but some of them are still looking good. One of them was the DISC concept. I proposed that future music formats needed to be:

Dynamic

Interactive

Social

Creative

I mainly aimed this at the digital realm, and we are already seeing it happen, whether that be TikTok lip sync videos, Facebook Audio Studio, Clean Bandit’s Splice sounds pack, or apps like Voisey and Trackd. But I also suggested that it could apply to physical formats in order to free music of its smartphone chains. One theoretical proposal was for pieces of art that would enable to the user to change the songs by walking between them, triggering a vocal part here, a drum beat there, etc. It is not a million miles away from the Donda Stem Player.

A lean in future

The entire music world is not suddenly going to go from static streams to interactive widgets, but change is a coming. In a year from now, we may look back on the Donda Stem Player as being a fun gimmick, but if we do, it will be because we have not yet found the Model T Ford, rather than the underlying principles being wrong. Of course, the majority of music listening will most likely remain lean back and static, but not all of it will. As audiences lean in ever further, more of them will want to create as much as they consume, just like they do with social video today. There is one thing we can be certain of – the future of music creativity and consumption is changing, and Kanye just played his part, again.

Can Spotify break out of its lane?

After years of relative stability, music consumption is shifting, with the DSP streaming model beginning to lose some ground as illustrated by the major labels growing streaming revenue by 33% in Q2 2021 while Spotify was up by just 23%. It is never wise to read long-term market trends into one quarter’s worth of results, but there was already enough preceding evidence to suggest we are entering a genuine market shift. The question is whether Spotify and the other Western DSPs are going to find themselves left behind by a fast-changing market, or can they innovate to keep up the pace?

Social music is streaming’s new growth driver, generating around $1.5 billion in 2020 and growing fast in 2021. It represents a natural evolution of social media rather than an evolution of streaming. Audio is just another tool for social expression, along with video, pictures and words. MIDiA has long argued that Western streaming focuses too heavily on monetizing consumption, at the expense of fandom. While social video does not fix the fandom problem, it does cater to some of the key elements of fandom: self-expression, identity and community. Which means that, in some respects, Spotify and the other DSPs only have themselves to blame for having kept fandom out of their propositions. In doing so, they created a vacuum that TikTok and Instagram eagerly filled.

The data in the above chart comes from MIDiA’s latest music consumer survey report which is available now to MIDiA clients and is also available for purchase here.

Rights holder licensing met market demand

Spotify and the other DSPs are the dominant, core component of recorded music and they will remain so for the foreseeable future. But whereas a couple of years ago it looked like they might be the entire story, now music consumption is moving beyond, well, consumption. Finally, we are seeing music becoming an enabler of other experiences. Historically this was restricted to non-scalable, ad hoc sync deals. Now rights holders have established licensing frameworks that are flexible, dynamic and scalable enough to enable a whole new generation of experiences with music either in a central or supporting role.

DSPs occupy one of streaming’s lanes

The implication of this is that Spotify and the other DSPs now risk looking like they are stuck in just one lane of the streaming market. What looked like a highway is now just a single lane – and Spotify, Apple and Amazon do not have the assets to build propositions that can get them out of it. Being part of this social music revolution requires both massively social communities and video. They could all build that, of course, but with little guarantee of success. YouTube is a different case, having launched Shorts in a belated bid to ward off TikTok’s audience theft – but at least it is now running that race, and Alphabet reported 15 billion daily global views for Q2.

An increasingly segmented market

Spotify and other DSPs now find themselves not being part of streaming’s new growth story and, YouTube excepted, with no clear path to becoming part of it. To be clear, Spotify will continue to be the world’s largest subscription revenue generator and the DSP subscription model will continue to be the biggest source of revenue, at least for the foreseeable future. But revenue growth will increasingly come from elsewhere. In many respects this simply reflects the maturation of the music streaming market. Consider video streaming. Netflix added just 1.5 million subscribers in Q2 2021 while YouTube grew by 84% and TikTok went from strength to strength. Netflix occupies just one lane in a multifaceted streaming market. The same is now becoming true of the DSPs.

Time to do a Facebook?

So, what can Spotify and the other DSPs do about it? If Spotify really wants to ‘own’ audio, then it will have to do what Facebook did to ‘own’ social: create a portfolio of standalone sister apps. Facebook would have become the Yahoo of social media if it hadn’t bought / launched Instagram, WhatsApp and Messenger. The signs are already there for Spotify. Even ignoring the slowdown in monthly active user (MAU) growth in Q2 2021, podcast users stopped meaningfully growing as a share of overall MAUs in Q4 2020. It turns out that trying to compete with yourself in your own app is hard to do. The time may have come for a standalone podcast / audiobook app (by the way, I’m just taking it as read that Spotify is going to take audiobooks a whole lot more seriously). If Spotify does launch a podcast app, then the case suddenly becomes a lot clearer for other audio-related apps, all of which could include subscription tiers, such as social short video, karaoke, and artist channels.

The more probable outlook however is for specialisation, with segments going deep and vertical rather than wide and horizontal. While Spotify, and other DSPs, might have success in one or more side bets, it will be the specialists who lead in streaming’s other lanes. Whatever the final market mix looks like as a result of this change, the streaming market is going to be more diverse and innovative for it.

The record labels are weaning themselves off their Spotify dependency

The major labels had a spectacular streaming quarter, registering 33% growth on Q2 2020 to reach $3.1 billion. Spotify had a less impressive quarter, growing revenues by just 23%. After being the industry’s byword for streaming for so long, Spotify’s dominant role is beginning to lessen. This is less a reflection of Spotify’s performance (though that wasn’t great in Q2) but more to do with the growing diversification of the global streaming market. 

Spotify remains the dominant player in the music subscription sector, with 32% global subscriber market share, but streaming is becoming about much more than just subscriptions. WMG’s Steve Cooper recently reported that such ‘emerging platforms’ “were running at roughly $235 million on an annualized basis” (incidentally, this aligns with MIDiA’s estimate that the global figure for 2020 was $1.5 billion). 

The music subscription market’s Achille’s heel (outside of China) has long been the lack of differentiation. The record labels showed scant interest in changing this, but instead focused on licensing entirely new music experiences outside of the subscription market. As a consequence, the likes of Peloton, TikTok and Facebook have all become key streaming partners for record labels – a very pronounced shift from how the label licensing world looked a few years ago.

The impact on streaming revenues is clear. In Q4 2016, Spotify accounted for 38% of all record label streaming revenue. By Q2 2021 this had fallen to 31%.

Looking at headline revenue alone, though, underplays the accelerating impact of streaming’s new players. Because Spotify already has such a large, established revenue base, quarterly dilution is typically steady rather than dramatic. Things look very different though when looking specifically at the revenue growth, i.e., the amount of new revenue generated in a quarter compared to the prior year. On this basis, streaming’s new players are rapidly expanding share. Spotify’s share of streaming revenue growth fell from 34% in Q4 2017 to just 26% in Q2 2021. Unlike total streaming revenue, the revenue growth figure is relatively volatile, with Spotify’s share ranging from a low of 11% to a high of 60% over the period – but the underlying direction of travel is clear.

Spotify remains the record labels’ single most important partner both in terms of hard power (revenues, subscribers) and soft power (ability to break artists etc.). But the streaming world is changing, fuelled by the record labels’ focus on supporting new growth drivers. The implications for Spotify could be pronounced. With so many of Spotify’s investors backing it in a bet on distribution against rights, the less dependent labels are on it, the more leverage they will enjoy. From a financial market perspective, the last 18 months have been dominated by good news stories for music rights – from ever-accelerating music catalogue M&A transactions to record label IPOs and investments. 

Right now, the investor momentum is with rights. Should the current dilution of Spotify’s revenue share continue, Spotify will struggle to negotiate further rates reductions and will find it harder to pursue strategies that risk antagonising rights holders. Meanwhile, rights holders would be surveying an increasingly fragmented market, where no single partner has enough market share to wield undue power and influence. That is a place where rights holders have longed dreamed of getting to, but now – divide and conquer – may finally be coming to fruition.

Labels are going to become more like VCs than they probably want to be

When you are in the midst of change it can be hard to actually see it. Right now, the music business is undergoing a consumption paradigm shift that is changing the culture and business of music. Streaming may be well established and maturing in many markets but the market impact will continue to accelerate as behaviours continue to evolve and bed in. Whether it is the rise of catalogue or the decline of megahits, everywhere you look, the music landscape is changing. So it is only natural that the role of record labels is going to change too. They have already of course, but shifts like label services deals and JVs are not the destination, instead they are preliminary steps on what is going to be a truly transformational journey for labels. 

Record labels often like to compare themselves to venture capital (VC), taking risks, investing in talent and sharing in the upside of success. While that comparison is flawed, its relevance is going to increase, but not in the way many labels will like. 

Firstly, where the comparison breaks down: VCs invest money early in a company’s life and then earn back if / when a company has a liquidity event (e.g., it sells, it IPOs, a new investor buys out earlier investors). But record labels invest and then take money immediately. As soon as the artist is generating royalties, the label is earning a return, it does not have to wait until some distant time in the future. What is more, even after the label no longer has an active relationship with the artist, it continues to earn. So a record label basically has a perpetual liquidity event. Which means its risk exposure is lower than a VC. Even if the artist flops, it will have recouped at least some of its outlay. VCs can be left with nothing if a start- up fails.

But where the label / VC analogy works best, is when looking at how the role of labels will evolve. VCs are typically earlier-stage investments so start-ups use VCs as launchpads for future success, a means to an end. Labels will likely have to start getting used to the same dynamic. Ever more artists are going their own way, launching their own apps, labels, using D2C sites. But the reason why record labels are around (despite artists being able to create their own virtual label from a vast choice of services – see chart) is that artists still need someone to build their audience (at least in most instances). The investment and A&R support help too, though those services can also be tapped into ad hoc from standalone companies.

This value chain dependency is what has helped labels to stay relevant despite dramatic industry shifts. But the next stage of this evolution will see a cohort of artists viewing labels as accelerators rather than long-term partners. They will use labels to establish their fan bases and then engage with them on their own terms, sometimes with labels, sometimes not. This is of course already beginning to happen, but it will become an established and increasingly standard career path.

Major labels like to think of themselves in the business of creating superstars. But as the very nature of what a superstar is dilutes, more artists will simply see labels as a launch pad. Start-up Platoon positioned itself as an artist accelerator and was bought by Apple. In many respects it was ahead of its time, pioneering a model that labels will increasingly find themselves filling, even if it is not their preferred role. 

Labels as artist accelerators

The repercussions will be massive. Labels, especially majors, will often over invest early to establish an artist. The business model depends on recouping the investment on future earnings. But with ever more artists looking to retain their rights, the labels only have a finite window in which they can monetise those rights, unless they negotiate term extensions. What this means is that labels are becoming a utility for many artists, a stepping stone while their brands are built for them. Like it or loathe it, savvy, empowered artists will increasingly see labels as the launchpad for future independence, and in this respect, labels are becoming more like VCs than ever.

As disruptive as this paradigm shift will be, record labels will find a way to adapt, just as they have to streaming, TikTok, label services, distribution etc. The difference here though is that this may represent a complete recalibration of the role that record labels play in the music industry value chain. This will mean a riskier, more limited role for labels, which in turn will make them more like VCs than they may be comfortable with. Turns out that modelling yourself on VCs can be a risky business in itself.

Spotify and music listening 10 years from now

July marks ten years since Spotify’s US launch. Although the tendency among some is to consider this ‘year zero’ for streaming (thus ignoring everything that had happened in prior years both within and outside of the US) it does present a useful opportunity to reflect on what the next decade might hold for Spotify. 

Rather than focus on the business outlook, I am going to explore how Spotify and other streaming services, could change the way in which music is consumed ten years from now. But first, three quick future business scenarios for Spotify:

  1. It continues to be the global leader but with reduced market share due to the rise of regional competitors in emerging markets
  2. It loses market momentum, stock price tumbles and is acquired by another entity 
  3. It morphs into a true multi-sided entertainment and creation platform, doing for entertainment what Amazon now does for retail but with more tools and services

So, on to the future of music consumption.

To map the future, you need to know the past. These are (some of) the key ways streaming has transformed how we engage with music:

  • We listen to a larger number of artists but spend less time with individual artists
  • We listen to tracks and playlists more, and albums less
  • Music is programmed (by ourselves and by streaming services) to act as a soundtrack for our daily lives and routines
  • Genre divisions are becoming less meaningful
  • Artist brands are becoming less visible
  • Music fandom is becoming less pronounced

Music is more like the soundtrack to daytime TV than blockbuster movies

In 2015 Spotify’s Daniel Ek said that he wanted Spotify to ‘be the soundtrack of your life’. Undoubtedly, Spotify and other streaming services are achieving that but the utopian vision is more prosaic in practice. Less ‘that was the best day of the summer’ and more ‘put on some tunes while I cook’. It is a soundtrack, but less the soundtrack to a blockbuster movie and instead more like the soundtrack to daytime TV. Music has become sonic wallpaper that is a constant backdrop to our daily mundanity. (Though the pandemic, the climate crisis and stagnant labour markets can make even the mundane look aspirational for many).

Like it or loathe it, this sound tracking dynamic is likely to play a key role in what the future of music consumption looks like. But it is not all sonic dystopias; personalisation, algorithms, user data and programming also have the potential to reinvigorate music passion. Here are two key ways in which Spotify and other streaming services could transform music listening ten years from now:

  • Dynamic and biometric personalisation: The current recommendation arms race works from a comparatively small dataset, focused on users’ music preferences and behaviour. The next battle front will be the listener’s entire life. Any individual user can appear to be a dramatically different music listener depending on the context of their listening. Even the same time of day can have very different permutations; for example, looking for chilled sounds at 7pm after a manic Monday but banging beats at the same time on a Friday. If streaming services could harvest data from personal devices and the social graph, elements such as heart rate, location, activity, facial expression and sentiment could all be used to create a music feed that dynamically responds to the individual. Instead of having to actively seek out a workout or study playlist, the music feed would automatically tweak the music to the listener’s behaviour and habits. The faster the run, the more up-tempo the music; the later in the evening, the more chilled (unless it’s 9pm and you’re getting ready for a big night out). Selecting mood and activity-based playlists will look incredibly mechanical in this world. Think of it like the change from manual gear change to automatic in cars.

  • Music catalogue reimagined: Just as activity and mood-based listening will become more push and less pull, so can music catalogue. Traditionally catalogue consumption is driven by a combination of user behaviour (‘I haven’t listened to that band in a while’) and marketing pushes by labels, publishers and now music funds’ ‘song management’. But it needn’t be that way anymore. Over the years, streaming services have collected a wealth of user data. Just as Facebook introduced memories for users’ posts, so streaming services could deliver music memories, showing users what they were listening to on this day ten years ago, or what the soundtrack to your summer was way back in 2021. Clearly Spotify is already making steps in this direction with Wrapped but this would be much bigger step, routinely delivering nostalgia nuggets throughout a day, week, month, year. In many respects the result would be a democratisation of catalogue consumption. It wouldn’t simply be the rights holders with the biggest marketing budgets and smartest campaigns on TikTok (or whatever has replaced TikTok ten years from now) that get the biggest catalogue bumps. Instead, catalogue consumption across the board would boom. This could make the current 66% of all listening look like small fry in comparison. What that means for frontline releases finding space is another question entirely.

These are of course just two well-educated guesses, and their weaknesses are that they are based on what has happened so far rather than what currently unforeseen consumption shifts may happen in the future. Indeed, streaming itself may have been surpassed ten years from now. But tomorrow’s technology often looks more like today than it does tomorrow. Henry Ford’s model T Ford looked more like a horse and trap than it did the swept wing aerodynamics of 1950s cars. Change takes time. But ten years is a long time in the world of technology, so even if neither of the above come to pass, you can be sure that music listening is going to look a whole lot different than it does now.


Global music subscriber market shares Q1 2021

The music industry’s growing obsession with declining ARPU will continue to colour the outlook for the global streaming market in revenue terms, but the positive driver of this equation is the rapid growth of music subscribers. There were 100 million new music subscribers in 2020, taking the total to 467 million. (In 2019 there were just 83 million net new subscribers). A further 19.5 million new subscribers in Q1 2021 pushed the number up to 487 million. While the failure of subscription revenues to keep up with the pace resulted in ARPU falling by 9% in 2020, this lens detracts from the huge momentum in paid user adoption. Subscription revenue might not be increasing as fast as some would like, but the global music subscriber base is not just growing – it is growing faster than ever.

Spotify continues its global dominance, adding 27 million net subscribers between Q1 2020 and Q1 2021, more than any other single service. However, it lost two points of market share over the period because its percentage growth rate trailed that of its leading competitors. Google was the fastest-growing music streaming service in 2020, growing by 60%, with Tencent second on 40%. Amazon continued its steady trajectory, up 27%, while Apple grew by just 12%.

Google’s YouTube Music has been the standout story of the music subscriber market for the last couple of years, resonating both in many emerging markets and with younger audiences across the globe. The early signs are that YouTube Music is becoming to Gen Z what Spotify was to Millennials half a decade ago.

Emerging markets are now central to the music subscriber market, with Latin America, Asia Pacific and Rest of World accounting for 60% of all 2020 subscriber growth. This is of course, also a key reason why global ARPU declined. Nonetheless, a number of emerging markets services now boast large subscriber bases. Beyond Tencent’s 61 million, China’s NetEase hit 18 million subscribers in Q1 2020 and Russia’s Yandex hit 8 million. (For more on streaming in emerging markets check out MIDiA’s latest free report: Local Sounds, Global Cultures.)

MIDiA will be publishing its country-level music subscriber numbers as part of the global music forecast report and dataset which will be available to clients Monday 12th July. If you are not yet a MIDiA client and would like to know how to get access to the data, email stephen@midiaresearch.com

Emerging markets may be about to change the superstar business

The traditional recorded music business was all about selling units, which naturally meant that the most important markets were not the most populous but the wealthiest. Throughout the late 20th century this created a ‘global’ market that was dominated by North America, Europe and a few others. This is why (among other political reasons) Japan became the biggest Asian music market, rather than China. 

Today’s music business is different. Streaming (particularly via ad-supported and bundles) can monetise large-scale audiences in lower per-capita GDP markets. Suddenly population size matters, and emerging markets become the world’s largest addressable music audience. The emerging markets opportunity has the western music and investment sectors salivating, but there is another layer many have missed: this shift is going to change how western record labels operate, not least by challenging the very notion of the global superstars which they trade in.

Anglo repertoire’s traditional dominance

Prosperity drives prosperity. Where music sales did well, music businesses did well. The music business did best in the US, as well as to a lesser degree in the other big English-speaking markets. These countries also benefited from English being the most exportable language for music. By the start of the 2000s (and excluding the US), of the top 10 music markets, domestic repertoire represented more than half of sales in only Japan and France. Anglo repertoire dominated the global music market and was extending its reach. Most countries across the globe were seeing their domestic repertoire shares falling year-on-year as we entered the new millennium. This of course meant less money feeding back into the local scenes, which meant more opportunity for international superstars to dominate. It was a cultural vicious circle. And then piracy happened.

A decade of piratical wilderness hit domestic repertoire hardest in many countries. For example, in Spain, the best way to keep track of domestic artists was ‘la manta’ chart. Literally ‘the blanket’, referring to the guys who would unfold a blanket on the street corner full of counterfeit CDs. So many local music scenes in lower-income emerging markets essentially remained largely organic and local for a decade. Then came along streaming, and suddenly artists can find their audiences in ways previously unimaginable. In geographically large countries like India and Brazil, touring the country was not a realistic option for most artists, so streaming enabled them to reach across their countries, and beyond, in an instant. 

Streaming, cultural catalyst for local scenes

Streaming’s cultural impact on local scenes was actually first seen at scale in Europe, with German, Dutch and French rap scenes fast emerging that found massive domestic popularity but that rarely export. In the old model, the lack of ‘exportability’ meant no record deal which meant no local scene. Streaming changed that. Another early milestone was the rise of Latin American music, especially Reggaeton. Although some Latin American artists have broken through on the global stage, the most important impact has been the rise of both domestic and regional superstars. This is the future that we are entering.

To expect emerging markets to lap up Anglo repertoire just because they are now streaming not only smacks of cultural imperialism, it also misses the underlying fundamentals of how music scenes and consumption are changing. The steady rise of Anglo repertoire up to the early 2000s has been replaced by a rise in local and regional music. Globalism is becoming replaced by internationalism, homogeneity with diversity. All of which means that global Anglo superstars will feel the pinch. The superstar business was already facing the headwinds of fragmenting fandom, so emerging markets are an accelerant to a pre-existing trend, along with multipliers such as the growth in the number of artists, releases and personalised recommendations. 

Build from within, not from without

None of this, however, necessarily means western labels cannot prosper in emerging markets. After all, they have the resources and expertise that decades of global success bring. They will need to shift their mindset from looking for export markets to territories where they can build new, domestic talent-centred business. A smattering of joint ventures from the western majors in Asia and Africa suggest the first steps are being made, but to succeed these strategies will have to be seen as the central plank of repertoire strategy for emerging markets, not a supporting strand. 

However, the western majors should not assume they will be able to out-perform local and regional labels. In Japan and South Korea, the western majors are minority players, having been unable to unseat the dominant local ‘majors’. Interestingly, both countries are long-term exceptions to Anglo repertoire dominance. Both are high per-capita markets with large economies that can sustain thriving domestic music businesses. Also, Anglo repertoire does not import as well to these markets (despite endless western acts trying to ‘break’ Japan), with international repertoire stuck at around a quarter of sales in both markets at the turn of the millennium. Now in the third decade of the millennium, it is South Korea that is exporting music to the world, from ’Gangnam Style’ through to Black Pink and BTS. This shows that global superstars will still be a long term-feature of the music business – though fewer will be Anglo artists. 

The outlook will thus be defined by:

  • Fewer Anglo global superstars
  • A rise in non-Anglo superstars
  • The rise of regional superstars
  • The rise of local scenes and domestic artists

It is an exciting time for music culture across the globe and we are most likely entering what will be the most culturally diverse era the global recorded music business has ever known.

If you are interested in emerging markets themes, then keep an eye out for a free report MIDiA will be publishing next week. Watch this space!