This Is What Post-IPO Life Will Look Like For Spotify

With a fair wind, Spotify’s long-anticipated public offering should happen before the end of Q2 2018 (and yes, probably a direct listing rather than an IPO but ‘IPO’ worked better in the title!) . The music industry will be watching with keen interest as it is going to be the bellwether for the streaming music sector. Posting three or four successive quarters of well-received earnings will be key to Spotify’s life as a public company. Note my careful use of words, ‘well-received earnings’, not ‘strong earnings’. Spotify’s currently challenged underlying financials are not going to change in any fundamental sense over the course of nine to 12 months, so it will need to construct a series of narratives and targets that Wall Street will buy into. The only problem is, Wall Street often has very high expectations for growth stage tech stocks, and falling short of those expectations can result in a tumbling stock price, even if the growth trend is actually solid.

When narratives alone will not be enough

I’ve written before about how Spotify will need to construct a number of new narratives for life as a public company. They will need to demonstrate:

  • Sustained strong growth in subscribers, users and revenue
  • Improved profitability metrics
  • Diversification of revenue streams
  • Reduction of risk factors

All except the first could prove contentious, as many of the solutions will be inherently challenging for record label partners. Netflix has set a strong precedent for how to drive net margin with a 70% rights cost case (like Spotify’s) by creating its own content and using accounting technique,  such as amortization of costs, to turn cost into profit on the books. Netflix can get away with this because there are many TV networks so no single one can kill the service by removing its content. For example, Disney recently announced it was pulling its content, but Netflix continues to go from strength-to-strength. Spotify without Universal Music would swiftly wither on the vine. Spotify ‘becoming a label’ will be highly disruptive so it will have to do it slowly and in non-obvious ways. The news today that Spotify has acquired online music and audio recording studio Soundtrap – reportedly for $30 million – fits this thinking. In effect, subtly reversing into becoming a label. Meanwhile, it will need to have other new less disruptive revenue streams to spin narratives around, such as selling data to music industry stakeholders.

The upshot of all this is that during its first year as a public company, those narratives are unlikely to be enough. Instead, investors will be applying forensic scrutiny to Spotify’s user and revenue metrics. More than that, investors will set their own targets and if Spotify misses the consensus of these third-party targets, the share price will go down. Apple tried to distract investors from its slowing core metrics in 2016 by releasing a supplemental information document that focused on new metrics such as revenue per user. But investors refused to have their fixed gaze moved away from iPhone shipments.

spotify netflix users growth and stock price

So, Spotify will live or die by meeting investor-set subscriber growth targets? This means it will have to tread a delicate line between being bullish about its prospects to get investors’ interest piqued, but not so bullish as to raise their expectations too much. What complicates matters further though is the relationship between user growth and stock price. Pandora and Netflix have had very different journeys in the last 24 months, but both have endured ‘4 Quarter Kill Zones’ during which period stock prices struggled:

  • Pandora: Pandora’s post-earnings closing stock price declined at ever-greater rates than its monthly active user (MAU) count did. In Q1 2017 Pandora’s stock price fell by $0.11 for every million MAUs lost. By Q3 2017 this rate was $0.79.
  • Netflix: Between Q4 2015 and Q4 2016, Netflix added 12 million memberships (subscribers and trialists), yet its share price fell from $107.89 to $99.80. Investors, quite simply, expected even stronger growth. The irony is that since that time Netflix has continued to add memberships at a similar rate but its stock price has rocketed to $202.68 in Q3 2017.

Growth at what cost?

The lesson from these two cautionary tales is that it is not so much user metrics that is essential, but meeting user metric expectations. And Spotify will need to be careful about how it meets those targets. Growth stimuli like $1 for three-month super-trials can spike growth but hit profitability, which will be there for all to see in SEC filings. Therefore growth cannot come at any cost. In a similar vein, with market maturity approaching in many major western markets, Spotify will need to rely on a combination emerging markets for subscriber growth, and total free users (everywhere) to drive its user numbers, both of which will dent ARPU and margin. It is yet another balancing act for Spotify to manage and navigate.

Music market IQ

Spotify has one major advantage and one major disadvantage going into its flotation:

  1. Disadvantage: Since large investors have steered clear of the recorded music business for so long, the level of institutional market IQ is relatively low. The music business is notorious for being highly nuanced. This means that although big investment companies have been busy getting up to speed over the last 18 months, their expertise in music still lags massively behind the other sectors they invest in. Pandora learned the hard way that investors did not have the market IQ to differentiate between its ad supported radio model and Spotify’s subscription Similar things will happen to Spotify.
  2. Advantage: There are very few places truly big investors can put their money. Spotify’s IPO and a potential UMG sale or listing are about it. Big institutions see WMG as too small, and Sony Music as too small a part of Sony Corp. It’s no coincidence perhaps that UMG is reported to have been valued at between $30-$40 billion by Vivendi, conveniently keeping it well north of Spotify’s likely flotation valuation of $15-$20 billion.

So, with institutional investor demand massively exceeding supply, Spotify – and potentially UMG – could be very well placed to benefit. But a strong start can soon falter, as in the case of Snap Inc., which has fallen from an opening $24.48 to $12.56 now. The beauty of being a privately held company is that you can chose what metrics to report, and when. If you’ve had a tough quarter you can keep quiet until you have a good one. When you’re public you have no such luxury. It is warts and all, every quarter. Spotify’s life as a public company will be as much about managing expectations as it will be about driving growth.

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Is Hip Hop Keeping Female Artists Out Of The Charts?

There is a gender divide in the upper echelons of popular music. In the US, Taylor Swift is the first woman to top the Hot 100 in 2017, with hits by women accounting for just 14% of all top 10 hits throughout the course of the year. But this is not just a US thing; it is a global trend, with female artists in the distinct minority in streaming too. There are various contributing factors, including unintended consequences of label A&R strategy and streaming service curation techniques.females in spotify

Looking at the global top tracks on Spotify, just 18% of the tracks from the top 30 streams are from solo female artists. In terms of chart positions the male dominance is even more pronounced with female artists making up 13%, or just four, of the top 30 slots.

So how did we get here? Part of the reason is that big female acts like Beyoncé, Rihanna and Katy Perry are out of cycle, but there are other factors too:

  • Hip hop A+R strategy: Hip-hop has replaced EDM as the record labels’ second favoured genre (after pop). When streaming exclusives were a thing, Apple Music and Tidal were fighting it out over hip hop and urban exclusives such as Frank Ocean and Beyoncé. Meanwhile, Drake was the most streamed artist of 2016. In 2014 and 2015, labels were falling over themselves to sign EDM artists. In 2016 and 2017, hip hop and urban artists have become the sought-after commodity. EDM is a male dominated genre but hip hop is even more so. Thus of the 11 hip hop artists in the top 30 most streamed tracks on Spotify globally for the week ending 8/11/17, all of them are male. You have to go down to position 33 to find the first and only solo female hip hop artist (Cardi B) in the top 50 streamed tracks.
  • Streaming algorithms: Playlists are at the heart of streaming consumption and their relevance is determined by a combination of user-data learning and human curation. As a result, a vicious circle emerges, whereby playlists end up full of the music labels are pushing, and because people tend not to skip that much when listening, the user data suggests that this is the music they want to listen to. To quote Paul Weller’s lyrics: the public wants what the public gets. With hip hop now de rigueur, it essentially self-accelerates on streaming. And with most of the big artists being male, females end up becoming side lined. It is a classic case of the law of unintended consequences.

In truth, many genres have a strong male bias. Rock, now a shadow of its former self (just two artists in the top 30 Spotify tracks are rock) is similarly male dominated. Pop and vocal music have long been the genres where female artists have done best. However, right now, the hip hop-defined picture of popular music is particularly skewed. When you get further down the tail, things even out a little. Within the top 50, female artists generate 23% of streams, and the full year numbers will be better balanced when seasonal skews, such as big female artist release cycles, are balanced out. Nonetheless, the inescapable takeaway is that the combination of label A+R strategy and streaming curation have, unintentionally, created a distorted picture of the top of the music pile.

Musical.ly Sells For $800 Million But Peaked By Being Too Silicon Valley

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News has just emerged that lip synching app Musical.ly is to be sold for between $800 million and $1 billion to Chinese company Jinri Toutiao, which also bought Musical.ly predecessor Flipagram. I’ve long held the belief that Musical.ly and competitor companies like Dubsmash represent some of the only genuinely needle moving user experience innovation in music of recent years. Musical.ly introduced the concept of the 15-second song and shone a light on how to engage Gen Z with music-led experiences by playing by their rules not the traditional music industry’s rules. In doing so it created a whole generation of Musical.ly stars, such as Baby Ariel with 20 million Musical.ly followers.

But as with all previous lip synching and music messenger apps, Musical.ly has run into its inevitable user base peak and is now starting its equally inevitable decline. According to data from MIDiA’s Quarterly Brand Tracker, weekly active users (WAU) across the US, UK, Canada and Australia and was just 1.4% in Q3 2017, down from a high of 2.1% in Q1. Dubsmash is following a similar trajectory.

So, what’s gone wrong for Musical.ly?

To be clear, Musical.ly is not a failing company but it is beyond its peak. Musical.ly did an amazing job of laser targeting, becoming one of the destinations of choice for teen and tween females. More than four fifths of its user base are female. It recognized that the opportunity for this segment wasn’t full albums, nor even full tracks. It was short clips of music that they could use to express, and identify, themselves. In Musical.ly, music was the tool for Gen Z identity, not consumption. It tapped into Gen Z’s desire to digitally peacock, or to show off and say who they are. The problem for Musical.ly is that Snapchat and Instagram do a great job of this for these consumers too. Musical.ly became a one trick pony that suffered from not being able to use its core functionality as a beachhead for something much bigger. In the 20th century the railroad companies were disrupted by cars because they thought they were railroad companies and didn’t realise they were transportation companies. Similarly, Musical.ly got caught up with being a social music company rather than a social company.

In many respects Musical.ly was a victim of the West Coast VC bubble, following the mantra of obsessing with doing one thing really well. As a result, Silicon Valley has a habit of churning out feature companies rather than product companies. This isn’t a problem for VCs as it is easier for a company to buy and integrate a feature company, than it is a product company. But, it does leave the digital landscape unbalanced.

Jinri Toutiao has every opportunity to build a music messaging powerhouse with its acquired assets but to succeed, it will need to recognize that these are features not products.

Pandora’s Loss Is Sirius XM’s Gain

Pandora is in trouble, as explained by the consistently excellent Tim Ingham at Music Business Worldwide, after losing a billion dollars over the last four years and monthly active users (MAU) fell to 73.7 million – its lowest point since Q1 2014. Regular readers will know that I’m a long-time advocate of Pandora’s model. Indeed, Pandora’s model is the future of radio. However, it now appears that Pandora may not be the future of Pandora’s model. In fact, with Liberty Media subsidiary Sirius XM waiting in the wings for Pandora’s market cap to fall even lower than its current $1.4 billion (down from $8 billion in Q1 2014), Pandora might not even be the future of Pandora. In fact, Pandora’s struggles could be Sirius XM’s gain, exactly when it needs the help.

Pandora’s three most important metrics have long been:

  1. MAU
  2. Revenue
  3. The share of total radio listening it accounts for

All three are intertwined, but Pandora has managed to sustain strong growth in numbers two and three because it got better at increasing engagement and driving ad revenue from a largely flat MAU base. However, Pandora was only ever going to be able to squeeze so much revenue out of a flat user base. So, it is no surprise that ad revenue for the nine months to September 2017 was up a paltry 2.4% at $777.3m, compared to the same period in 2016 (figure). Pandora’s problem is not monetization. Indeed, it is better at monetizing ad supported streaming than any other player on the planet, having invested heavily in ad sales infrastructure and continuing to innovate ad formats. But even the shiniest car will eventually grind to halt if it has a gaping hole in its fuel tank. And make no mistake, Pandora has a gaping hole.

Spotify Stole Pandora’s Clothes

Long before Spotify was changing the music business, Pandora was virtually single-handedly creating the US streaming market – though subscription service Napster (then Rhapsody) was also making a small contribution. For the best part of a decade Pandora had almost all of the market to itself, but it is now buckling under the impact of on-demand streaming. Pandora was meant to be different to Spotify, and it was, until Spotify started stealing Pandora’s clothes. Pandora grew its user base by delivering a lean back, but personalized listening experience. Radio on its users’ terms. Spotify soon recognized the value of lean back listening, bringing in a vast selection of curated playlists, directly and via partners. Beats Music followed suit and soon became the foundation for Apple Music’s curated streaming proposition.

Pandora’s Reach Metrics Obscure The Real Story

Pandora’s own key metrics have been part of the problem. It fell into the same trap that traditional radio broadcasters did, of convincing itself that its reach metrics were a genuine indicator of its success. But reach means nothing in the digital era. Engagement is everything. MAU is a meaningless metric in today’s always on world. If you have an app on your phone that you only use once a month, you’d hardly consider that active usage. Active usage is measured at the very least in weekly active user (WAU) terms. That’s why at MIDiA we track all digital media apps using this measure to reveal just how active user bases really are.

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On this basis, Pandora has jut 22% WAU penetration in Q3 2017, representing around 57 million users, or 77% of its MAU base. That ‘missing’ 17 million users will be the ones that Pandora will lose next over the coming 12 months. Yet, its WAU base is at risk too. 26% of Pandora’s WAUs – its most engaged users – also use Spotify. Although Pandora has done an admirable job of building its own subscription business – reaching 5.1 million subscribers in Q3 put it at a credible sixth in the global subscriber rankings, it is looking like it’s too little too late. Furthermore, dumping its founder Tim Westergren robbed Pandora of a genuine visionary just when the company needed him most.

Pandora Will Enhance Sirius XM’s User Base

Pandora’s loss will be Sirius XM’s gain. Sirius XM has been feeling the pressure from Spotify and co, just like Pandora, but it has also experienced competitive pressure from Pandora. Sirius XM is another of radio’s potential futures, but it has faced growing pressure from Pandora and also other streaming services. The growing adoption of interactive dashboards in cars has been key (5% of US consumers now have one). Sirius XM’s WAU base fell from 11% of consumers in Q4 2016 to 8% in Q3 2017. That 30 decline is far more dramatic than Pandora’s 6% WAU decline over the same period. The 8% WAU penetration represents around 21 million users which means that its active user rate is even lower than Pandora’s at just 69%. Added to that, more of Sirius XM’s WAUs (30%) use Spotify. It also has a demographic time bomb ticking: just 8% of WAUs are aged under 35 while just 49% are female. This compares to 31% and 57% respectively for Pandora. Sirius XM’s aging user base is old and male. While Pandora’s is young(er) and female. This is Sirius XM’s opportunity.

In 2016, Sirius XM made an informal offer of $3.4 billion for Pandora. Today, it looks like an amazing deal for Pandora, but Pandora turned it down. Sirius though was not deterred and was able to get close to its goal by investing $480 million in a struggling Pandora in June 2017 and securing three board positions. Now all Sirius has to do is wait for Pandora’s stock to fall further and make its move – perhaps when the market cap gets closer to $750 million. When this happens, Sirius will get a major boost to its user base. More than that though, Sirius will significantly enhance its audience profile. Sirius and Pandora’s user bases are so different in composition that they will slot together like jigsaw pieces. The challenge for Sirius will be how to integrate Pandora in terms of feature sets, user experience, business model and, of course, company organisations. That challenge could prove even bigger than Pandora’s attempted turn around.

The data in this blog post is taken from MIDiA’s forthcoming report: Radio – Streaming’s Next Frontier: How Streaming Will Disrupt Radio Like It Did Retail 

If you are not yet a MIDiA client and would like to find out how to get access to this report email stephen@midiaresearch.com

Announcing MIDiA’s Streaming Services Market Shares Report

coverAs the streaming music market matures, the bar is continually raised for the quality of data required, both in terms of granularity and accuracy. At MIDiA we have worked hard to earn a reputation for high-quality, reliable datasets that go far beyond what is available elsewhere. This gives our clients a competitive edge. We are now taking this approach a major step forward with the launch of MIDiA’s Streaming Services Market Shares report. This is our most comprehensive streaming dataset yet, and there is, quite simply, nothing else like it out there. Knowing the size of streaming revenues, or the global subscriber counts of music services is useful, but it isn’t enough. Nor even, is knowing country level streaming revenue figures. So, we built a global market shares model that breaks out subscription revenues (trade and retail), subscribers, and subscription market shares for more than 30 music services at country level, across 30 countries and regions. You want to know how much subscription revenue Spotify is generating in Canada? How many subscribers Apple Music has in Germany? How much subscription revenue QQ Music is generating China? This is the report for you. Here are some highlights:

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  • At the end of 2016 there were 132.6 million music subscribers, up from 76.8 million in 2015
  • In Q4 2016 Spotify’s subscriber market share was 35% and it had $2,766 million in retail revenue
  • Apple Music was second with 21 million subscribers at the end of 2016, a 15.6% market share and it had $912 million in retail revenue
  • In 2016 Apple was the largest driver of digital music revenue across Apple Music and iTunes
  • The US is the largest music subscription market, which Spotify leads with 38% subscriber market share
  • The UK is Europe’s largest streaming market, which Spotify also leads
  • China’s subscriber base is the second largest globally, but it ranks just 13th in revenue terms
  • Japan is the world’s third largest subscription market, in which Amazon has the largest subscriber market share
  • Brazil is Latin America’s largest music subscription market

The report contains 23 pages and 13 charts with full country detail as well as audience engagement metrics. The dataset includes four worksheets and a comprehensive methodology statement.

Streaming Services Market Shares is available right now to MIDiA premium subscribers. If you would like to learn more about how to access MIDiA’s analysis and data, email Stephen@midiaresearch.com.

The report and data is also available as a standalone purchase on MIDiA’s report store as part of our ‘Streaming Music Metrics Bundle’. This bundle additionally includes MIDiA’s ‘State of The Streaming Nation 2.1’. This is our mid-year 2017 update to the exhaustive assessment of the streaming music market first published in May. It includes data on revenue, forecasts, consumer attitudes and behaviour, YouTube, app usage and audience trends.

Examples of country graphics (data labels removed in this preview)

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What Spotify Can Learn From The Roman Slave Trade

OK, you’re going to have to bear with me on this one, but let me take you back to 2nd century Rome….

Roman Slaves

Roman Slaves

The Roman Empire was at the peak of its powers. Its borders stretched from Scotland down to Syria and across to Armenia, and across its dominions Rome spread its culture, language, administration and of course, military prowess. It brought innovations such as under floor heating, running water, astronomy and brain surgery but the consensus among many modern day historians is that the Roman Empire could have been much more. Rome was fundamentally a military, expansionist state. Its endless conquests produced a steady flow of captured people that fuelled Rome’s most important economic interest: the slave trade. By the mid 2nd century around 1 in 4 Romans were slaves. It was common for wealthy citizens to have 40 or more household slaves while the super-rich had hundreds.

The Importance Of Economic Surplus

The problem was that the over-supply of labour meant that wages were horrifically low for the masses while the rich over spent on slaves to keep up with the neighbours. The net result is that the Roman Empire was not able to create an economic surplus across its population, which meant that there was insufficient investment in learning, science and culture. If that surplus had been created, Rome would have spawned a generation of innovators, inventors and entrepreneurs that should have created an industrial revolution. This raises the tantalizing possibility of steam power and steel emerging before the middle ages, which in turn could have meant that today’s technology revolution might have happened hundreds of years ago by now.

Instead, the Roman Empire eventually crumbled with Europe forgetting most of Rome’s innovations, paved roads weeding over, aqueducts running dry and heated floors crumbling. We had to wait until the second half of the 18th century for the Industrial Revolution for the change, which crucially followed and overlapped with the Age of Enlightenment, a period of learning unprecedented since the Renaissance (when everyone busied themselves relearning Rome’s lost secrets) which was fuelled by Europe’s economies have developed sufficiently to create enough surplus for more than just the aristocracy to learn, invent and create. 

So, Rome inadvertently held back human progress by half a millennium because of its obsession with slaves. But what does that mean for Spotify? The key lesson from the Roman experience is that being saddled with too large a cost base may not prevent you from becoming big but it will hold you back from fulfilling your potential and from building something truly lasting. You can probably tell now where I am heading with this. Spotify’s 70% rights cost base is Rome’s 1 in 4 are slaves.

Product Innovation Where Are You?

Spotify has made immense progress but it and the overall market have done too little to innovate product and user experience.  There’s been business and commercial innovation for sure but looking back at the streaming market as a whole over the last 5 years, other than making playlists better through smart use of data and curation teams, where is the dial-moving innovation? Where are the new products and features that can change the entire focus of the market. Compare and contrast how much the likes of Google, Facebook and Amazon have changed their businesses and product offerings over that period. Streaming just got better playlists. Musical.ly shouldn’t have been a standalone company, it should have been a feature coming out of Spotify’s Stockholm engineering team. But instead of being able to think about streaming simply as an engine, Spotify has had to marshal its modest operating margins around ‘sustaining’ product development and marketing / customer acquisition.

Post-Listing Scrutiny

Spotify will likely go public sometime next year as a consequence. But once public it will need to be delivering demonstrable progress towards profit with each and every quarterly SEC filing. Growth alone won’t cut it. Just ask Snap Inc. Spotify does not have a silver bullet but it does have a number of different switches it can flick that will each contribute percentages to net margin and that collectively can help Spotify become commercially viable and in turn enable it to invest in the product and experience innovation that the streaming sector so crucially lacks.  Spotify hasn’t done these yet because most will antagonize rights partners but it will be left with little option.

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Spotify The Music Company

To say that Spotify will become a label is too narrow a definition of what Spotify would become. Instead it would be a next generation music company, encompassing master rights, publishing, A+R, discovery, promotion, fan engagement and data, lots of data. If Spotify can get a couple of good quarters under its belt post-listing, and maintain a high stock price then it could go on an acquisition spree, acquiring assets for a combination of cash and stock. And the bigger and bolder the acquisition the more the stock price will rise, giving Spotify yet more ability to acquire. This is the model Yahoo used in the 2000s, with apparently over-priced acquisitions being so big as to impress Wall Street enough to ensure that the increase in market cap (ie the value of its shares) was greater than the purchase price. Spotify could use this tactic to acquire, for example, Kobalt, Believe Digital and Soundcloud to create an end-to-end, data-driven discovery, consumption and rights exploitation music power house.

What other ‘label’ could offer artists the end-to-end ability to be discovered, have your audience brought to you, promoted on the best playlists, given control of your rights and be provided with the most comprehensive data toolkit available in music? And of course, by acquiring a portion of the rights of its creators though not all (that’s where Kobalt / AWAL comes in) Spotify will be able to amortize some of its content costs like Netflix does, thus adding crucial percentages to its net margin. It will also be able to do Netflix’s other trick, namely using its algorithms to over index its own content, again adding crucial percentages to its margin.

Streaming Is The Engine Not The Vehicle

The way to think about Spotify right now, and indeed streaming as a whole, is that we have built a great engine. But that’s it. We do not have the car. Streaming is not a product, it is a technology for getting music onto our devices and it is a proto-business model. While rights holders can point to areas where Spotify is arguably over spending, fixing those will not be enough on their own, they need to accompany bolder change. Once that change comes Spotify can start to fulfil its potential, to become the butterfly that is currently locked in its cocoon. While rights holders we be understandably anxious and may even cry foul, they have to shoulder much of the blame. Spotify simply doesn’t have anywhere else to go. Unless of course it wants to end up like Rome did….overrun by barbarians, or whatever the music industry equivalent is…

Despacito Is About To Hit 4 Billion YouTube Views

­­In January Despacito became the second fastest music video in YouTube history to hit one billion views, taking just 97 days to do so. Now it is on track to hit four billion. In January Despacito was part of a succession of new music video consumption records that YouTube and Vevo are setting. YouTube music video views are on the rise, dramatically so, driven both by more users (YouTube announced 1.5 billion signed in active users) and deeper engagement. This is YouTube’s music renaissance and the record labels (their marketing divisions at least) are loving the increased exposure their artists are receiving. At first glance this might not appear to make much sense, given that: a) video streaming growth is outpaced by audio streaming in key markets such as the US and UK, and b) that the whole value gap-grab debate is as far from a resolution as it has ever been. Then, along comes Despacito to drive yet another bulldozer through everything, breaking all the rules again.

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The days of one billion streams being considered exceptional are fast disappearing. Despacito added one billion streams in July alone. Just as Spotify spent 2015 and 2016 continually rewriting the rules each quarter, now YouTube is doing the same in 2017. Spotify, of course, is also having a spectacular year but it has established a steadier pace of change, especially in developed markets. Spotify is the new normal (until it’s not again). YouTube had its ‘normal’ but now the acceleration of usage, particularly from Latin America, is making the previously accepted reference points irrelevant.

Moreover, Latin American driven streams might actually intensify the value gap-grab debate. In 2016 YouTube delivered a monthly average revenue per user (ARPU) of $0.07 to the labels. In contrast, Spotify delivered a monthly ad supported user ARPU of $0.34. On paper YouTube has a lot of ground to make up, but things are a little more complex than that. YouTube pays out a share of ad revenue to rights holders. So, if revenues go down the amount it pays goes down by the same rate. Spotify (at risk of simplifying excessively) pays out on a per stream basis. So, if revenues go down, Spotify still pays a certain amount.

This is where Latin America comes in. The local video advertising markets throughout Latin America are much less developed than in the US and, additionally, there is much less advertiser demand. Compared to the US, there are fewer advertisers with less money to spend on consumers, who also spend less money. This means that advertiser demand massively outstrips supply, which suggests that ad prices are lower. So, as Latin American YouTube music consumption grows, effective per stream rates will decline. In our MIDiA’s 2017 Predictions Report, 2016, we predicted that this would happen.

“In 2017, audience behaviour will continue to grow faster than advertiser budgets, meaning that CPMs (and in the case of YouTube, effective per stream rates for music) will fall.”

YouTube and the music industry are unlikely to truly see eye to eye, but value gap or no value gap, we are now at a decision point. The accelerating role of Latin America and other emerging markets in YouTube consumption will see more and more records broken, with bigger and bigger hits made, but the gap between consumption and revenue will widen. So the music industry needs to decide what it really wants YouTube to be for the next few years: promotion or revenue. Trying to make it do both well will most likely result in YouTube doing neither of them properly.

Introducing MIDiA Fuse

FUSE TriangleOn October 16th MIDiA Research will officially launch Fuse, MIDiA’s new data dashboard. Ahead of that we will be having a free launch party in our London offices at 6pm on the 12th October (and there’s free beer!). If you want to join us then sign up here: https://www.eventbrite.co.uk/e/midia-presents-fuse-drinks-and-networking-tickets-38291113752

Here’s a little more on what Fuse is….

Fuse is a next generation data tool, which will revolutionise how research and insights teams access and utilize their data sources. In a world awash with big data, Fuse is about smart data. Combining proprietary industry trackers, market forecasts and consumer surveys with quarterly company financial data, Fuse is real time dashboard for the digital economy. For the first time, insights and strategy teams across the Video, Music, Media and Games sectors will be able to create their own bespoke charts and data drawing from over half a million data points, – with more being added on a weekly basis.

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The graphic above is an example of a bespoke chart created using Fuse. It maps the subscription growth of three major music streaming services against three specific music streaming markets of India, China and the US. Using Fuse’s technology, this chart and MIDiA’s proprietary market data can be exported both as an image file and as an excel data file. All MIDiA Research tracking and forecast data can also be mapped against quarterly financial data ranging from the market level down to specific companies.

fuse_consumer_survey_example

Alongside the market sizing and the financial data, Fuse users have access to MIDiA Research’s multiple territory consumer surveys covering Europe, North America, Latin America and the Asia Pacific region. Users are able to segment the survey results based upon specific countries, demographic cohorts (distribution and penetration), and user segmentation (Music, Video, Games, Mobile, Adblocker segment etc.). Survey results can also be searched through keywords.

fuse_browse_feature

Fuse data is handily curated on the browse section covering the following research areas:

Adblocking, Console Games, Gamer Attitudes and Behaviour, Games Publishers, Gaming, Live Music, Media Companies, Messaging Apps, Mobile Ad Tech, Mobile Apps, Mobile Games, Music Attitudes and Behaviours, Music Rights, OEM, Payments, PC Games, Piracy, Publishers, Radio, Record Labels, Social Media, Sports, Streaming, TV Companies, Value Chains, Video Attitudes and Behaviours and Virtual Reality.

fuse_curated_data

Every month additional curated data articles will be published on the tool in the curated data section. It will provide users with expert insight on a monthly basis on the core coverage areas of Media, Streaming Music, Video, Games and Consumer Technology.

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The company overviews section allows  users to deep dive into the companies covered on the tool along with a curated section of relevant data to provide a comprehensive overview of the most significant companies across MIDiA Research’s 4 core coverage areas (Video, Music, Games, Media.)

fuse_value_chain

Finally, the Fuse value chain feature allows users to map out the vendor relationships between companies in the following coverage areas: Augmented Reality, Games, Mobile, Music, Online Video, Advertising, Financial, Media, Mobile Content, OEM and Social Network. Searches can be further refined by keywords, whether the company is active or inactive, geographies, key markets and country of origin.

To find out more about how Fuse can supercharge your organisation’s insights and strategy teams please email Stephen at Stephen@midiaresearch.com .

Spotify, Netflix And Instagram Make Gains In Q2 2017

Since Q4 2016 MIDiA Research has been fielding a quarterly tracker survey across the US, UK, Canada and Australia to build a proprietary dataset that provides a unique insight into how digital consumer trends are evolving quarter-upon-quarter. Through the tracker we monitor weekly active usage of apps for streaming music, streaming video, games, social and messaging. We also measure the shifts in key consumer behaviours, such as curated playlist listening, binge watching and subscriptions, in each of these sectors each quarter. We have structured the data so that clients can explore each app and behaviour by demographics, and, crucially, users can examine how much each app overlaps with others and with all the 40 different behaviours we track. We recently published a report for MIDiA’s paid subscribers analysing key trends across the first three quarters of our tracker. Here are some of key insights from the report. To find out more about how to get access to MIDiA’s Quarterly Trends report, email stephen@midiaresearch.com.

The leading apps in each of the categories tracked are largely consistent across all of the countries surveyed and they are also the big names that are familiar to all (see figure above). However, where things get interesting is in a) the variations in penetration across countries and b) how usage has evolved over successive quarters. For example:

quarterly trends midia figure 1

  • Messaging apps on the rise: Weekly Facebook usage was up slightly in the US between Q4 2016 and Q2 2017, but down in the UK. Over the same period WhatsApp was flat in the US but up slightly, along with Instagram, in the UK. WhatsApp penetration stood at just 11% in the US in Q2 2017 but 33% in the UK, while penetration in Australia and Canada laid in the middle of those two points.
  • Netflix growing but not in the UK: YouTube is still the standout video destination in terms of weekly usage across all the markets tracked. However, growth has slowed in these markets, with penetration going down slightly over the three quarters. YouTube’s loss is Netflix’s gain, with the streaming TV platform’s usage increasing each quarter. Though, again, there is an intriguing country level exception: Netflix is growing everywhere except the UK where weekly usage was flat over the period.

top streaming music apps in q2 2017, spotify, youtube, apple music, soundcloud, amazon, musical.ly

YouTube is the world’s leading streaming music app and this is true of the larger, mature markets. The continual breaking of YouTube music streaming records by the likes of Shakira and Luis Fonsi point to a renaissance in YouTube as a music streaming platform. However, the origin of those artists point to the location of YouTube’s music momentum: Latin America. Meanwhile, across the US, UK, Canada and Australia, weekly usage of YouTube as a music app was flat, and down actually in Australia. Most of the music apps we tracked had a dip in Q1 2017 but in the main held ranking and overall usage. Deezer saw a small rise while Soundcloud fell slightly. Spotify was the big winner, gaining penetration to close the gap on YouTube, and becoming the leading standalone music app. In the UK, Spotify surpassed YouTube for music among 16-19 year olds, hinting at a strong future for Spotify among Gen Z. Talking of Gen Z, lip synching apps Musical.ly and Dubsmash maintained momentum across the period, something other music messaging apps have previously failed to do this late on in their lives. These sort of apps, though niche in scale, point to what Gen Z want from their social music experiences.

These are just some of the very high-level trends, and there is much more in the report itself. If you are a MIDiA subscription client you can access the report and data right away here. If you are not yet a client and would like to learn more about how to get the report and the other benefits of being a MIDiA client email Stephen@midiaresearch.com.

Sonos @ 15

Sonos_2015-LogoSonos, granddaddy of the connected home audio marketplace, is now 15 years old. Sonos was a pioneer that was so far ahead of its time, it inadvertently found itself as one of the key early drivers of streaming subscriptions. Visionary founders John MacFarlane and Tom Cullen had some long-term inkling that streaming would eventually be a major force for them, but their near-term vision was built on getting music downloads piped around the home. Now, 15 years on, Sonos has effectively achieved two missions: deploying iTunes around the home, as well as Spotify and co around the home. But now, the outlook is less clear. Sonos’s marketplace is complex and competitive more than ever. Furthermore, the departure of MacFarlane, a round of lay-offs and having ‘missed voice’, may have left Sonos looking less vibrant than it once did. So, where next for Sonos?

These are some of the key challenges Sonos faces:

  • Battle of the apps: Sonos hardware reflects the company’s obsession with elegance and attention to detail. But, as with so many hardware companies (in fact the majority of them), Sonos’s weak point is software. Apple makes seamless software-hardware integration look deceptively easy – it is, in fact, nigh on impossible to do well. The Sonos app works well enough, certainly much better than it used to, and the networking of devices is usually relatively pain free. But in the app economy, consumers expect apps to work perfectly, not ‘well enough’. They expect high-quality user experiences, not functional experiences with lots of clicks and swipes, which is what Sonos can feel like when doing activities like building playlists. In spite of this, the biggest software threat for Sonos is the very fact that it is a standalone app. A Spotify user does not want to have one app to use on the train, or in the car, and a different one to use in the home. This is what Sonos effectively does right now. Sonos’s new CEO, Patrick Spence, knows this needs fixing but the question is whether Sonos can make the fix before Spotify and co come up with their own fix.
  • Just play: Traditional home audio just works. You press play and there’s music. Sonos stood out way ahead of the pack – an admittedly poor quality pack – for out-of-the-box simplicity, though even now it remains a marker of good practice. However, the convenience benchmark for connected home audio still falls far short of traditional home audio. Sonos works most of the time, emphasis on most of the time. Every so often there’s a network problem; sometimes this is due to a firmware issue, other times it is the network itself. The network glitches of course aren’t Sonos’s fault but that doesn’t matter to the user experience. A CD player works every time, Wi-Fi or not. That is the convenience benchmark Sonos and all other connected audio players must meet. But even without Wi-Fi issues, pressing play is not always so straight forward because Sonos’s app experience is not on a par with its hardware experience.
  • Sonos…sonos….sonos…: Ok, that was meant to be an Echo. Yes, Amazon’s Alexa vehicle has totally shaken up the connected home audio space. And with Amazon Music integration, it sets a standard for what an integrated hardware-software service experience should be. One voice command pulls up a song in an instant, no having to select which music source to choose. Yet Echo is far from the end game. In fact, voice is not an ideal interface for music. It’s fine for when you know exactly what you want to play, it’s also pretty good for when you want to select a lean back experience e.g. ‘play me music to work out’ – but it struggles with the more nuanced use cases that lie in between. Voice is another thing that Spence knows needs fixing.
  • Good enough: And of course, the Echo is not a super high-quality audio experience. It’s a decent audio experience. Sonos might grumble at otherwise sophisticated users tolerating modest audio playback, but ever since the advent of MP3s and iPod earbuds, convenience trumps quality for most when it comes to music. Even Sonos is guilty of playing the convenience game. Though its speaker quality has improved, Sonos speakers are still a long way off the audio specs audiophiles seek. And yet, even this isn’t the biggest challenge for Sonos. The core problem Sonos faces is that the likes of Amazon, Google and even Apple are not focused on winning the home audio race, instead they view smart speakers as a beachhead for controlling the smart home. That is the war, home audio is the first battle. Just as Apple used the iPod as the first step towards winning the personal digital life war, smart speakers are being used in the same way in the home.

Under attack from all sides

There are countless other challenges too. Sonos’s mission of filling rooms with audio might not actually be what most people want. A smart speaker in the kitchen and a sound bar under the TV might be enough for most, and those may be best served via a native hardware / software / content ecosystem like Amazon’s Prime. At the bottom end of the market, cheap Bluetooth speakers are flooding the market, while for those consumers who do value audio quality over convenience, incumbent audio companies like Bose, Panasonic and Sony are all upping their games. (In virtually all markets MIDiA tracks, Bose wireless speakers are more widely adopted than Sonos.)

Foundations for success

Sonos is also upping its game and tweaking its strategy. The recently launched PlayBase shows both high-quality product design and a recognition that TV is the next big battle Sonos needs to fight, having already made good ground with its PlayBar. Sonos needs all the strategic nous and product excellence it can get. It has the low-end and high-end squeezing it in a pincer movement, while the big tech companies carpet bomb its heartland simply to gain a foothold in the smart home. Five years ago, Sonos was the golden child of its market. Now it is a company with a very strong brand in need of some laser focussed positioning in a remarkably competitive field. Sonos has enviable foundations, it now needs to build a new house.