Growth drivers – what comes after streaming

The pandemic-defined 2020 was an outlier year across digital entertainment, with the extra 12% of time consumers spent with entertainment boosting everything, including music. One of the effects was that streaming grew more than it would have otherwise, delaying the inevitable slowdown in streaming revenue growth. This artificial 2020 boost meant that the slowdown impact was felt even more strongly when it arrived in Q1 2021. 

The major labels saw streaming revenue grow by just 0.8% between Q4 2020 and Q1 2021, while Spotify saw revenues fall by 1%. Seasonality plays a major role here (a similar trend was seen last year) and year-on-year revenues were up by around a quarter. Nonetheless it reflects a maturing market. 

Back in 2019 Spotify’s revenues grew 15.7% from Q4 2018 to Q1 2019, while the majors’ streaming revenue was up 3% between Q4 2017–Q1 2018. In short, when the market was growing faster, seasonality did not result in flat / negative growth. Streaming is still in good shape and is going to remain the core of recorded music revenues for the foreseeable future, and Spotify’s price increases will bring a little extra revenue in 2021, but it is clearly time to start thinking about what comes next.

There is an argument that in today’s post-format world, we should not even be thinking about the next thing. So, it is better to think about what new business models and user experiences can grow alongside streaming, to diversify the music industry’s income mix. 

Music businesses, labels in particular, are busy exploring where future growth will come from. The more pessimistic argue that this is largely as good as it gets, that there will not be a ‘next streaming’. That might be right in terms of a single revenue source, but the early signs are that there is enough potential in a range of sources to collectively drive growth. Here are a few of the music industry’s potential growth drivers:

  • Games: Ever since the Marshmello Fortnite event, games has acquired a new degree of importance for the music business. WMG’s stake in Roblox points to just how serious labels are taking the opportunity. With global games revenues hitting $120 billion in 2020 (around $100 billion more than the recorded music market) and more than a third of those revenues being driven by cosmetic (i.e., non-gameplay) spend, there is a wealth of opportunity. But to succeed, music companies will need to think about creative ways to enhance the gaming experience rather than simply seeing it as another licensing play.
  • Social: Revenue from the likes of TikTok and Facebook finally became meaningful in 2020, accounting for around three quarters of the growth registered in ad supported. We are still scratching the surface of what social can do for music, but building tools for users to create their own music and audio will be key. Facebook’s Sound Studio could prove to be a defining first step towards the establishment of the consumer’s version of the social studio.
  • Creator tools: As regular readers will know, MIDiA considers the current revolution in the creator tools space to be one of the most important shifts to the entire music business in recent years. Not only is it transforming the culture of music creation, it represents a new set of opportunities for deepening artist-fan relationships and a set of new facets for the future of music companies.
  • Next-generation sync: Although traditional music sync revenues fell in 2020, music production libraries (including royalty free) grew. We are on the cusp of a major new wave of opportunity in sync, with social content, platform and creators representing a scale of demand that far exceeds that of the traditional sync market. And it is the slow-moving nature of that traditional sector which means that the likely winners in the social sync market will be the new generation of companies that offer solutions that are sufficiently agile and fast to meet the scale of micro-sync demand.
  • Live streaming: The pandemic virtually created the live stream marketplace, resulting in a tidal wave of new start-ups rushing to fill the void left by live. While the results have been a mixed bag, there have been enough high-quality successes to suggest that this is a sector with longevity that will outlive lockdown. The services that will prosper when IRL returns are those that deliver genuinely differentiated experiences that complement rather than try to replace IRL live. 
  • Fitness: Another of the pandemic’s second order effects was a surge in consumer spending on home fitness equipment, including Peleton. Right now there is some meaningful music licensing revenue building around the space, but Beyoncé’s Peleton partnership shows that the opportunity goes way beyond simply piping music into workouts. Crucially, the Beyoncé partnership creates an audience that is focusing their entire attention on the artist, which is rarely the case when people are listening to music on audio streaming services.
  • Fandom: Fandom is the next frontier for music monetisation. Western streaming services monetise consumption, whereas Tencent Music Entertainment monetises fandom, with two thirds of its revenue coming from non-music activity. We are beginning to see a flurry of activity in artist subscriptions and meanwhile, Patreon goes from strength to strength. Check out this free MIDiA report for more on how to tap the fandom opportunity.

To reiterate, streaming is, and will remain for many years, the beating heart of recorded music revenue. In fact, more than that, most of these new opportunities exist at such scale because of streaming. Until now, streaming enabled revenue growth in its own right, now it will enable growth in new adjacent markets.

Spotify pushes prices up, but do not expect dramatic effects

Spotify finally announced a significant price increase, raising prices in the UK and some of Europe, with the US set to follow suit. The increases affect Family, Duo and Student plans. The fact that streaming pricing has remained locked at $9.99 since the early 2000s is an open wound for streaming, so this news is important – but less so for actual impact than statement of intent.

Back in 2019 MIDiA showed that since its launch, Spotify’s $9.99 price point had lost 26% in real terms due to inflation while over the same period Netflix (which increased prices) saw a 63% increase. Price increases are a must, not an option. Not increasing prices while inflation raises other goods and services means that streaming pricing is deflating in real terms. In this context, Spotify’s move is encouraging, but it is not yet enough. The increases of course do not affect the main $9.99 price point, currently apply to a selection of markets and do not address the causes of ARPU deflation (promotional trials, uptake of multi-user plans, emerging markets). But let’s put all that aside for the moment and look at just what impact these changes will have:

  • Pricing: The increase is 13% for a Family plan and 20% for Student, both meaningful but below the 26% real terms deflation that was hit back in 2019. Averaged across all price points, the price increase represents a 10% uplift (in the markets where this is being done). By comparison, Netflix’s last major price hike averaged out at 11% across all price points, so it is line with that, though obviously Netflix had numerous other previous increases.
  • ARPU: ARPU (i.e. how much people are actually spending) matters more than nominal retail price points, which are subject to promotions and discounts. Spotify ARPU fell from €4.72 in 2019 to €4.31 in 2020. Let us conservatively estimate that would fall to €4.00 in 2021 without any price increases. Let us also assume that the announced price increases roll out to every single Spotify market (which of course they won’t) and let’s assume it all happened on January 1st 2021 (which of course it didn’t). On that basis, and factoring in what share of Spotify subscribers are on family and student plans, total revenue and premium ARPU would increase by 6.2%. ARPU would hit €4.25 (still below 2020) and premium revenue would hit €9.5 billion.
  • Income: Spotify would earn an extra €166 million gross margin, music rights holders would earn an extra €388 million, record labels €310 million and the majors €212 million, representing 2% of their total income. UMG would earn €95 million. Meanwhile, a recouped major label artist could expect to see a million streams generate €1,487 rather than €1,400 (assuming all the streams were premium).

All of these assumptions are based on this rollout being global and FY 2021, neither of which are the case. So the actual effect will be markedly less. The key takeaway is that this is an important first step on what needs to be a continual journey, and one followed by the other streaming services. Spotify was previous locked in a prisoner’s dilemma where no one was willing to make the first move. Spotify had the courage to jump first. What needs to happen next are (though not necessarily in this order):

  • Pricing increase to all remaining tiers, especially $9.99
  • Other streaming services follow suit
  • Tightening up of discounts and promotional trials in well-established markets

Good first step by Spotify; now let the journey begin.

The music industry’s centre of gravity is shifting

Regular readers will know that MIDiA has been analysing the creator tool space for some time now and building the case for why the changes that are taking place will be transformational not just for the creator tools space itself but for the music business as a whole. In fact, we believe that the coming creator tools revolution could be at least as impactful on the wider music business as streaming was. Firstly, it establishes a new top-of-funnel that sits above distribution companies, meaning that creator tools companies are now able to fish upstream of labels for the best new talent. Secondly, audio will become the next tool with which consumers identify themselves, following the lead of images (Instagram) and video (TikTok). But there is another factor too: the fast-growing volume of institutional investment is changing where the centrifugal forces of the music industry reside.

Outside of the currently crippled live business, the record labels used to be the undisputed central force of the music business. Then streaming services grew in scale and attracted the first wave of inward investment into the industry. Alongside labels, streaming services became the joint central force of the music business, around which all else orbited. Big investors started to make bets on either side of a binary equation: rights or distribution.

The publishing renaissance

Then music publishers and publishing catalogues started to attract investment. At the time, the only real place big institutional investors could place their bets on the rights side of the equation was Vivendi – and even then, it was an indirect bet as UMG was just one part of Vivendi. SME is just too small a part of Sony Corporation for the parent company to be a viable music industry bet. Since then, UMG divested 20% of its equity and is on path towards an IPOWMG went public and Believe is on track to an IPO also

When growth isn’t growth

Investors may be given pause for thought by the way in which leading music industry trade associations such as ARIA in Australia and Promusicae in Spain have restated their 2019 figures, having the effect of making what would otherwise be declines in 2020 instead look like growth. Take a look at Australia (2019 total revenues AUD 555 million here versus 2019 total revenues AUD 505 million here) and Spain (2019 subscriptions €159 million here versus 2019 subscriptions €138 million here).

Publishing catalogues by contrast look more predictable, with performance still largely shaped by non-recorded music market trends, including radio and public performance – though COVID-19 threw a lot of that stability down the toilet. Music publishers used the inward investment to diversify their businesses. Kobalt pushed into artist distribution (recently sold to Sony), neighbouring rights and a PRO; Downtown pushed hard into the independent creator sector (CD Baby, Songtrust); while Reservoir is going public with a Spac merger; and then of course there is Hipgnosis.

The creator tools gold rush

With music publishing catalogue valuations over-heating, big investors started looking for places where they could still play in the music market but get better value for money. Enter stage left creator tools. Key moves include Francisco Partners’ moves for Native Instruments and Izotope; Summit Partners’ investment in Output; and Goldman Sachs’ investment in Splice

What this means is that the music industry now has an additional gravitational force at its core. Just as music publishers and streaming services used their newfound investment to push into other parts of the music and audio businesses, expect creator tools companies to do the same. With hundreds of millions of dollars pouring into creator tools (and lots more set to follow), investors are making big bets on audio in a broader sense, with bold ambitions that will not be sated by staying in the creator tools lane as it is currently defined. Avid’s recent move into distribution follows on from LANDR’s similar move, and of course Bandlab has 30 million ‘users’. Adding label-like services (e.g. marketing, debt financing) and streaming functionality are logical next steps for creator tools companies.

Streaming may be the change agent that has enabled all of these shifts – but streaming is the start of the story, not the end point. The process of music business diversification is only just beginning and the next chapter may be the most exciting yet.

Assessing the streaming opportunity: You’re doing it wrong

Buoyed by lockdown, streaming enjoyed another strong year in 2020, up 17.1% on 2019 according to MIDiA’s recorded music market shares report. But the revenue slowdown will come in 2021, driven by the maturation of the big music markets (e.g. US, UK, Australia) and the growth of emerging markets. Identifying emerging markets growth as a slowdown factor might sound oxymoronic but the lower ARPU in these markets means that subscriber growth and revenue growth are becoming uncoupled. Look no further than Spotify’s earnings: subscribers were up 25% in 2020 but premium revenue was up just 17%, driven by a premium ARPU decline of -9%. Despite the dampening effect of emerging markets, they will be crucial to future growth – yet much of their potential may go untapped. The reason is all to do with how the music industry measures the opportunity, and that approach needs to change.

Anyone who has seen, or prepared, an investor presentation will be familiar with the total addressable market (TAM) concept. It is the big number that is used to impress investors with just how big the market opportunity is. The framework is also widely used in the music business to illustrate how much growth remains for streaming. But it only tells part of the story, and crucially it can be highly misleading – especially so for the streaming music market.

When MIDiA works on market opportunity projects for clients we always take the next two steps in the TAM approach: serviceable addressable market (SAM) and serviceable obtainable market (SOM). Here’s how it works:

  • TAM is how big the pond you are fishing in is
  • SAM is how many fish there are in the pond
  • SOM is how many fish you are likely to catch

TAM: you’re doing it wrong

The obsession with the TAM can be problematic because, while it results in impressive-sounding numbers, it is not a useful measure for understanding what a company or sector can actually do. If you are one person fishing in a lake, it does not matter how big the lake is nor how many fish there are; you and your fishing rod can only catch so many fish. When Spotify announced its extra 85 markets in February it said it was bringing its service to ‘more than a billion people’. That might give the impression of representing massive future growth, but it is simply the TAM. In fact, the figure is more than the TAM because only a sub-component of that one billion have mobile data plans – the industry’s principal TAM measure. In order to understand where the streaming market can really go, we need to go deeper and lay out the SAM and SOM.

The SAM and SOM layers are even more important for emerging markets than developed markets. There is a tendency to assume that because most people listen to music in some way or another, they are all addressable by music. But this is not the case. Most people, at least in developed markets, read – but that does not mean they all buy books, magazines or newspapers. The same applies for music.

Going beyond the TAM hype

In order to get beyond the TAM hype, MIDiA is building a new TAM, SAM, SOM model for music and we are for the first time going to use it to drive our forecasts (we have previously used a weighted scorecard methodology). One of the key reasons for the shift is to better understand just how much, or little, opportunity can be tapped in emerging markets with currency pricing strategies. Although subscriptions are much cheaper in emerging markets in dollar terms, when they are looked at in affordability terms, a very different picture emerges. Take India: the average headline cost of a subscription is just 15% of what it costs in the US. But when looked at on a purchasing power parity (PPP) basis (i.e. a measure of relative affordability) it is five times more expensive. Therefore in India, one of the world’s lower per-capita GDP markets, music streaming has been priced for the well-off, urban elites. And that is fine, as there are plenty of them. But it means that streaming subscriptions are out of reach for the majority of the population, which means that it is irrelevant to refer to India’s 1.4 billion people when talking about the opportunity, unless prices are reduced by a fifth – something music rights holders, at least Western ones, are currently loathe to do.

To better determine the market opportunity, MIDiA is using the following approach:

  • TAM: A hybrid measure of people with smartphones and data plans (including assessing the ratios between them)
  • SAM: The share of the TAM that is interested to some degree in paying for music
  • SOM: The SAM with additional discounts for factors such as a PPP measure of streaming pricing and urbanisation rates

Although this approach results in much smaller end figures, it is a much more useful way of understanding where music subscriptions are likely to get to in the next five to ten years. It also helps us better segment the emerging market opportunity, with some regions, such as the Middle East and North Africa, coming out much stronger – in large part because of better affordability in relation to per-capita GDP.

I appreciate we are giving away some of MIDiA’s ‘secret sauce’ here, but we think that this is such an important issue that we want to highlight it to as many people as possible. If your research provider (internal or external) is providing you with TAM figures to assess the market opportunity, then they are simultaneously under-selling you and over-selling the market opportunity.

Creator tools platforms could become social networks

With all the growing interest and investment in creator tools companies, music production platform Bandlab hitting 30 million users points to a longer-term future for the space – one in which the boundaries spread far beyond the base of music makers. Unlike most creator tools companies, Bandlab has simultaneously built itself as a platform for creators and fans. While the 30 million ‘users’ does not specify ‘active users’, it nonetheless points to the potential of creator-centric fan communities. While this blog’s title says ‘social networks’, in truth the term is becoming redundant. Everything is becoming social; the distinction now is howsocial a platform is. Right now, most creator tools solutions are not very social at all, but that will change and those that harness the change early will have an advantage.

Artists have a branding problem 

The song economy of streaming has created a branding problem for artists, relegating the profile of the artist to the side lines. If streaming was a computer, the artist would be the processor chip, the Intel inside. There are no signs that is going to change in a meaningful enough way anytime soon, so artists need to look to other places where they can build their profiles and relationships with fans. One solution is to bring fans closer to the creative process. A growing number of artists that have done writing and production videos on Twitch have learned that there is strong fan interest in what might otherwise look like quite a niche topic. 

Music production software and hardware have traditionally been relatively complex, and so it is only natural that fan spaces did not get built around them. However, the music creation process is undergoing a user experience revolution, with elegant, intuitive design prioritised. This user-centric mindset means that the newer generation of creator tools products already have a more consumer-friendly feel, and many also already have strong creator community tools. These are the foundations for building fan communities.

Ecosystem plays

Bandlab is building an end-to-end creator tools platform, incorporating a DAW (the music making software), sounds, distribution and audience. This ecosystem play will become more widespread as investors put together multiple creator tools companies to build single combined entities, such as Francisco Partners’ investments in Native Instruments and iZotope. The depth and breadth of fan involvement will become a key battle ground for creator tools companies. The rise of these fan-micro-communities built around exclusive and early access to their favourite creators will become a defining characteristic of the future of the music business. Perhaps even more important is the way in which these micro-communities will open up new income sources for artists. Products like creator subscriptions and virtual merch could ensure that most creators would earn many multiples more from their micro-communities than they could from streaming.

Just one more way in which creator tools companies are set to transform the music business.

IFPI confirms global recorded music revenue growth

Last week MIDiA reported that recorded music revenues grew by 7% in 2020. Today the IFPI confirmed that figure, reporting 7.4% growth. (Similarly, the IFPI reported 19.9% growth for streaming, MIDiA had 19.6%). Given that the majors’ total revenues collectively grew by just 5.5% in 2020, this means that even by the IFPI’s reporting the majors lost market share, driven largely by the continued rapid growth of the ‘artists direct’ segment and also the similarly stellar growth of smaller, newer independent labels. Whichever measure you use, the recorded music market is transforming at pace.

There was one big difference between the IFPI and MIDiA figures. MIDiA’s figure for 2020 is $23.1 billion while the IFPI’s estimate is $21.6 billion. The gap between the IFPI’s and MIDiA’s figures is steadily widening each year, in large part because of the way in which the market is changing. The traditional market, which is of course the easiest to measure, is being out accelerated by an increasingly diverse mix of non-traditional revenue streams. MIDiA has spent the last few years putting considerable resources into measuring these emerging sectors. These include the music production library sector, of which the revenues do not flow through any of the channels that traditional music industry trade associations track. You have to go direct to company financials, ad agencies and sync companies to collect this data, which MIDiA spent a lot of months doing. The recordings side of that sector alone was worth the best part of half a billion in 2020. 

The long tail of independents is the other key area of variance, which is why MIDiA fielded a survey of independent labels to capture the revenue of independents of all ages, regions and revenue sources. This gave us an unrivalled view of just how much the independent sector was growing and its contribution to global revenues. 

Direct to consumer has also been a growth sector and one which access to the data is limited for traditional trade associations. During the pandemic impacted 2020, direct to consumer became a lifeline for many smaller labels and independent artists. MIDiA was able to size this sector through the independent label survey, an independent artist survey and data collected directly from platforms.

The key takeaway from all of this is: change. The industry is changing and in turn it is becoming more difficult to measure. There is also a host of additional challenges to how anyone measures the market in the future. For example, Bandcamp did $100 million of merch and live streaming revenue in 2020 and even though total Bandcamp revenues went up, recorded music income growth ground to a near halt. It turns out that aficionado indie kids only have so much disposable ‘fandom’ spending. As more platforms aim to monetise fandom, whether that be subscriptions on Twitch or NFTs, more music consumer spending will shift from traditional recorded music to derivative formats. The old distinction between merch and recorded may become counter-productive when trying to size the music business.

But these are all quality problems to have. The recorded music business grew in a year when the live music business was decimated. It was a rare beacon of hope when the world was falling apart. And as MIDiA’s recorded music market figures revealed, global Q4 revenues were up 15% year-on-year. The recorded music business weathered its fiercest storm in 2020 and entered 2021 in fighting shape. 

Recorded music revenues hit $23.1 billion in 2020, with artists direct the winners – again

The global pandemic caused widespread disruption to the music business, in particular decimating the live business and impacting publisher public performance royalties. Although the recorded music business experienced a dip in the earlier months of the pandemic, the remainder of the year saw industry revenue rebound, making it the sixth successive year of growth. Global recorded music revenues grew 7% in 2020 to reach $23.1 billion in record label trade revenue terms. The growth rate was significantly below the 11% increases seen in both 2018 and 2019, and the annual revenue increase was just $1.5 billion, compared to $2.1 billion in 2019. These metrics reflect the dampening effect of the pandemic. Global revenue was down 3% in Q2 2020 compared to one year earlier, but up to 15% growth in Q4 2020, suggesting a strong 2021 may lie ahead if that momentum continues.

Streaming growth driven by independents (labels and artists)

Streaming revenues reached $14.2 billion, up 19.6% from 2019, adding $2.3 billion, up from the $2.2 billion added in 2019. So, 2020 was another year of accelerating streaming growth and, given that Spotify’s revenue growth increased by less in 2020 than 2019, this indicates that it is for the first time meaningfully under-performing in the market, due to the rise of local players in emerging markets and strong growth for YouTube. For the first time, the major labels under-performed in the streaming market – but not all majors were affected in the same way. Sony Music Entertainment (SME) was entirely in line with streaming market growth, Universal Music Group (UMG) slightly below and Warner Music Group (WMG) markedly below. Independent labels and artists direct both strongly overperformed in the market, collectively growing at 27% and thus increasing their combined streaming market share to 31.5%.

Market share shifts

The major record labels saw collective market share fall from 66.5% in 2019 to 65.5% in 2020. While this shift is part of a long-term market dynamic, most of the dip was down to WMG reporting flat revenues for the year. SME gained share and UMG remained the largest record label with 29.2% market share. Independent labels also saw a 0.1 point drop in market share, but there was a very mixed story for independents. MIDiA fielded a global survey of independent labels and the data from that helped us track the contribution of independents. Independent labels as a whole grew by 6.7% (i.e. slightly below the market), but within the sector there was a massive diversity of growth rates, with smaller, newer indies tending to grow faster than the market (some dramatically so) and larger, more established indies growing below the market rate. There were also many independents (of all sizes) that saw revenues fall in 2020.

The unstoppable rise of independent artists

In 2019, artists direct were the stand-out success story, massively outperforming the market. History repeated itself in 2020 with artists direct growing by a staggering 34.1% to break the billion-dollar market for the first time, ending the year on $1.2 billion and in the process increasing market share by more than a whole point, up to 5.1% in 2020. The continued rise of independent artists reflects the clear and pronounced market shift towards this new, emerging generation of artists. With lots of private equity money now pouring into creator tools companies like Native Instruments, expect this space to heat up even further in 2021. The recorded music business is changing, and it is changing fast.

Native Instruments and iZotope: creator tools major in the making

At the start of the year private equity firm Francisco Partners acquired a majority stake in creator tools stalwart Native Instruments. It always looked like it was going to be the start of something big and today we saw the next step on Native’s new journey, with leading audio plugin company iZotope added to the Francisco roster. Although both companies will operate independently for now, this is the first step of a standard private equity strategy of creating a ‘roll up’ play, with Native the lead acquisition around which a portfolio of creator tools companies will be created. This is one of the first big moves of the new era of creator tools that MIDiA identified last year.

The cultural shift in music making

The music streaming market has enabled many things, not least the era of the artist. A new generation of empowered independent artists have an unprecedentedly rich (and fast growing) array of self-serve tools and services that enable them to replicate the traditional roles once performed only by record labels, marketing agencies and studios. This shift is underpinned by a seismic cultural trend: the act of musical creativity has been simultaneously simplified, amplified, and improved. Creators can go from one to 100 faster than ever before. Creativity has been accelerated and intensified. In doing so, the creator tools space has merely borrowed from wider consumer culture, where new tools enable the masses to make great content without having to put in the years of hard graft to learn the ropes. Just like Instagram did for photos and TikTok did for videos.

The new, predominately younger, generation of music consumers expect to be able to make great sounds at the swipe of a finger. New companies like Landr and Output have created tools that focus on great user experiences rather than overloading on features and complexity, the latter of which is the modus operandi of traditional creator tools companies.

Embracing the new

Native and iZotope both make great tools, but fall into the traditional category. If they are to represent the backbone of a future creator tools powerhouse, then Francisco Partners will also need to start integrating some next gen creator tools companies which can act as innovation catalysts for Native and iZotope. Key to this will be developing compelling subscription offerings. 

Thus far, most of the subscriptions from creator tools companies have been rudimentary, making the false assumption that subscriptions are a billing mechanism rather than a customer relationship. Output’s Arcade subscription (a sampler tool with daily content and a well-thought-out CRM strategy) is a better indication of where creator tools subscriptions need to go. It is this sort of thinking that is often embedded in new, young digital insurgents that needs baking into the DNA of traditional incumbents.

Going wide

The other move that Francisco Partners will be most likely considering, is how to construct a creator tools ecosystem that goes beyond music creation, and into all the other aspects of an artist’s needs. It is not a giant leap to think that rights management (e.g. Stem), distribution (e.g. Amuse), collaboration (e.g. Delic), sounds (e.g. tracklib) and marketing (e.g.  Linkfire) companies could be built into the portfolio. Perhaps even a certain DAW company might be in the sights.

The future of music companies

When Spotify was going big on independent artists the labels pushed back and it was forced to put its plans on ice, shifting focus to podcasts as its next growth driver. Meanwhile, it continued to leave its creator tools assets (Soundbetter, Soundtrap) to tick over, finally giving them some love in its recent Stream On event. As MIDiA has long argued, the labels may have stopped Spotify from competing with its business of today, but could do nothing to stop it building out what will likely become its business of tomorrow. 

Just as every label of size now has a distribution play to give it access to the ‘top of funnel’, sometime soon(ish) they will also need a creator tools play. Creator tools are simply becoming the future of what a music company is. Francisco Partners has an opportunity to not only build a future creator tools company, but the future of what a music company is. In fact, Francisco Partners might have the opportunity to create the first creator tools major. It is certainly showing more enthusiasm for it than Spotify is right now.

The music business in 2021: Joining the dots

It has been one of those weeks, with impactful music business announcements coming thick and fast. As is often the case, a succession of apparently unrelated events actually have a connecting thread. In this instance there are three:

  1. The (continued) astronomic rise of the independent artist
  2. The growth of creator tools
  3. Streaming’s growing pains

This is how the events of the last week or so are both interconnected and interdependent:

  • CD BabyIndependent artist powerhouse CD Baby just released a bucketful of great data, including the fact it increased artist pay outs by 26% in 2020 with $125 million of streaming revenue and 111% growth in YouTube revenue – yes, 111%. MIDiA will be releasing its 2020 music market figures soon and the artists direct number is little short of mouth-watering. 2020 was the year of the independent artist and creator tools and that momentum has continued into the start of 2021. Independent artists are making dramatically more music than the traditional labels (releasing 8.5 times more than major labels in 2020) and there are more of them than ever, with around five million by the end of 2020, up a third on 2019.
  • Another big year for UMGVivendi’s FY 2020 results revealed UMG grew recorded music revenues by 6.9% on a current currency USD basis. Which means they outperformed the total market, again. But this time Sony grew faster (again, on a current currency USD basis) and more significantly, all the majors grew slower than artists direct, again. More on this to follow shortly.
  • Spotify indie growth: Arguably the most significant statistic in Spotify’s annual report is the share of streams accounted for by the majors and Merlin (a proxy for the traditional music business). The 2020 figure was 78%, down from 85% in 2018. Smaller independents and artists direct grew far faster than the label establishment. This changing of the guard has many first and second order impacts but the key dynamic is that the number of small artists and labels is growing faster than streaming revenue is. They are taking a progressively larger share of the pie but they are splitting it more ways. For streaming platforms this means a) more consumption, and b) further fragmentation of their partners, which helps their negotiating position. For artists it is the paradox of more artists reaching more audiences but taking smaller chunks of income.
  • Soundcloud: In what may be the smartest piece of music industry branding ever, Soundcloud introduced its own take on user-centric licensing: fan powered royalties. I for one will be using this term to refer to UCL henceforth. What is significant is that Soundcloud was able to launch this with its pool of independent artists, because these artists that own their own rights represent a much more straightforward way to drive fast, market-defining innovation than navigating the often-complex mesh of the traditional business.
  • Spotify: 2020 was the first year since 2017 that Spotify’s premium revenue growth was less than the prior year (up €1 billion compared to €1.4 billion in 2019). Subscriber growth boomed, however, which meant a continued deterioration of ARPU, down to €4.31 from €4.72 in 2019 and €6.20 in 2016. Meanwhile, ad-supported ARPU was down too, as was podcast ARPU. Spotify is getting better at growing audience but less good at growing revenue.
  • Square buys Tidal: Coming from the left field, Square just acquired a majority stake in Tidal. This is a very different play from MelodyVR acquiring Napster to rebrand and piggyback a user base, albeit a small one. Instead, Square sees Tidal simply as a new vertical within which to drive creator tools growth. Until now, the creator tools space in music has been driven by, well, music creator tools companies. Square’s move reflects an understanding that the combined growth of creator tools, new small independent labels and artists direct represent a tipping point for the music business.

Streaming was the economic shift that the recorded music business needed to take it into the digital era. However, streaming is now experiencing growing pains, due to slowing growth in mature markets, declining ARPU in emerging markets, and more artists and more tracks sharing the royalties. The UK parliamentary inquiry into the economics of streaming may herald a form of equitable remuneration but could hurt songwriters in the process, illustrating that there are no easy fixes to streaming remuneration.

Big money is flowing into the independent artist and creator tools sectors because the big investors have identified that that is where a new, parallel music business can be built. Let’s just hope that the independent artist goldrush ensures that the creator remains at the centre of remuneration and not just the focus of revenue creation. This is an opportunity to build a new, more balanced ecosystem that can complement the existing one, not simply build a reconfigured version of the old one.

Smaller independents and artists direct grew fastest in 2020

Last year we identified a small but crucial metric from Spotify’s annual report: the share of all streams accounted for by majors and independent licensing body Merlin. It was crucial because it enabled us to segment the streaming market in detail, when combined with market data from majors and independent artist platforms. The key takeaway was that independents grew fastest, but that not all independents grew at the same rate. Now the 2020 figure is out from Spotify and the trends have accelerated.

The share of Spotify streams accounted for by the majors and Merlin fell four percentage points in 2020 to 78%, down from a high of 85% in 2018. The recorded music market is one in which label market shares typically move at a near glacial pace. In comparison, this shift is nothing short of tectonic. What we are witnessing is not just the emergence of a new pattern of growth in the recorded music business but also the emergence of a new breed of record label.

Firstly, the methodological health warning: this percentage reported by Spotify refers to streams, not revenue, so will have some margin of error as there are certain types of labels that do better among ad supported users than paid, which means their contribution to revenue is less than to streams. Emerging markets such as India (which skew heavily to free users) will also over index. Also, non-Merlin independents will include by inference all record labels that are not majors and that are not Merlin licensed, so this will include big record labels in Korea, Japan, India etc. who in their own markets are the equivalents of majors.

All that said, the shares are still directionally invaluable and provide us with some great market insight. By applying the major labels’ market shares for revenue, coupled with artists direct (i.e. DIY) and independents overall, we can work out what the splits between Merlin, the majors and everyone else are.

The headline is that independents as a whole grew market share in 2020 from 29.7% to 31.1%. In 2018 the figure was 28.3%. That is nearly three whole points of market share gained. To drive such big shifts in market share in a fast growing market like streaming, big revenue growth is needed. The Spotify figures would suggest that majors grew by 14%, Merlin was down by 3%, artists direct were up by 28% and non-Merlin independents were up by 49%. As in 2019, artists direct and non-Merlin independents were the big winners. These two segments represent the new vanguard of streaming-era music strategy, entities that have learned how to use their smaller scale to be agile and play to the unique rhythms of streaming in a way that bigger, more established companies have not. 

Merlin’s dip in streams may well not be reflected in revenues, as Merlin labels tend to over index for premium streams. Even if they were around flat or even slightly positive in revenue terms, the contrast with the newer breed of smaller independent labels is clear. Of course, not all Merlin labels are the same, but the category-level trend suggests that many Merlin labels might be stuck in the difficult middle ground between the agility of newer, smaller labels, and not having the scale of tech, data and catalogue to enjoy the same scale benefits that majors do.

Even with all the caveats considered, the direction of travel is clear: streaming is paving the way for a new breed of independent, one that is gaining share at the expense of both majors and traditional independents.