Warner’s Streaming Equity Pay Out Is Commendable But Not Enough

During his latest investor conference call Warner Music’s CEO Stephen Cooper announced that the label will pay artists a portion of any income it earns from equity stakes in services such as Spotify and Soundcloud. With Spotify potentially announcing its IPO next quarter the announcement is more than a token gesture. It is a bold move by Warner and follows on from Sony and Universal both announcing last year that they will pay artists a portion of streaming breakage revenue (the difference between what services pay labels in guarantees and how much royalty revenue they actually generate – WMG has been doing this since 2009). The big labels are waking up to the fact that transparency is key if they are going to keep artists on side. Streaming is where consumer behaviour is going, but currently YouTube is growing quicker than everyone else. The labels need premium and freemium services to make up ground fast. Which is why they cannot afford the Black Keys-Taylor Swift-Adele-Coldplay trickle to turn into a torrent. They need artists to be as vested as they are.

Streaming Hostilities May Have Thawed But Underlying Issues Remain

With the exception of the songwriter class action suits that closed out the year, 2015 was actually a pretty good year for streaming service – artist relations. Artists became a little more accustomed to streaming and many started to see a meaningful in their streaming income. But there is still much distance to go. The crucial issue for the majority of mid ranking and lower artists is how to deal with sizeable up front payments being replaced by a long term flow of micro payments. If you are a sizable label or a big artist you won’t feel the pain too much, but for the rest it normally means a very serious tightening of the belt.

The True Value Of Streaming Doesn’t Lie In Equity Stakes After All

There has, wrongly, long been a suspicion among many that streaming services are some sort of elaborate money making scam for labels, with the real value hidden in the money they will earn from their equity stakes. But as the ever excellent Tim Ingham explains, Warner is likely to only make around $200 million from a successful Spotify floatation. Of course $200 million is no small amount of money, and would represent more than half of Warner’s quarterly digital income. But it represents just 16% of the money Warner has earned from streaming since 2010 and just 2% of all global streaming revenue in 2015 (at retail values). Thus the label equity stakes in Spotify & co. are meaningful but they are far from where the real label value exists. Indeed as Cooper stated: “the main form of compensation we receive from streaming services is revenue based on actual streams”.

So If Artist Equity Income Isn’t Going To Fix Streaming, What Will?

All of which then raises the awkward question: if artists getting a Spotify IPO pay out isn’t going to ‘fix’ the model for artists, then what is? There is not really much scope for streaming services to pay out more to rights holders (80% of revenue doesn’t leave much scope for operating profit). While there is certainly scope for increasing ARPU among the super fan subscribers, there is little opportunity to raise prices for the majority of users ($9.99 is already more than most are willing to spend). So the only part of the equation left is how much labels pay artists.

Streaming Is Neither A License Nor A Sale And Its Time Artist Deals Recognise It

Right now the entire recorded music business is trying to figure out whether streaming is replacing radio or sales. The likelihood is that it is doing both and by doing so creating something new in between. That means that labels need to rethink how they pay artists, because currently they typically pay them on either one or the other of those models, and most often on the basis of a stream being a sale. A stream being the equivalent of a sale is completely counterintuitive because streaming is all about consumption not transaction. So why are labels most commonly treating streams as sales? Because the % they have to pay artists is so much lower, often in the 10% to 15% range rather than around 50% for a license. Of course there is as strong an argument to be made for streams not to be considered as a pure license as there is a sale, but there is an even stronger one for a hybrid rate that sits in the middle. Doing so would double the amount of money most artists make from streaming, instantaneously transforming its revenue impact for many. There is some precedent too. In 2012 Universal was successfully sued by FTB Productions over its treatment of Eminem downloads as sales rather than licenses, for which Eminem would have been paid a 50% rate instead of the much smaller sales rate.

Warner Music deserve credit for their commitment to paying artists a portion of equity related income (though no mention of how much of course) but it is just one step on a bigger journey. A wholesale reassessment of artist streaming compensation is required. Increasing artist streaming rates will dent label margins but ultimately the labels need to decide whether they want to build a business that is as sustainable for artists as it is for them.

Postscript: One interesting quote stood out from Cooper: “Although none of these equity stakes have been monetized since we implemented our breakage policy…there are some services from which we receive additional forms of compensation”. Translation(?): Sony used to get paid by the big streaming services on some sort of stock dividend basis and probably still does from some others.

The Handshake Economy

We are in the era of the always-on fan, with artists making themselves ever more available to their fans. It is a transition that comes with no shortage of challenges, not least the extra workload it places on artists and the way it chips away at the magical aura that surrounds them.  There is an inherent tension between increasing an artist’s appeal through increased accessibility and creating it by maintaining distance.  Contrast this with YouTubers like Jenna Marbles, PewDiePie and Phil and Dan who share so much of their lives with their fans.  Platforms like Kickstarter, Paetron and the ever excellent PledgeMusic have given artists the ability to balance artistic credibility with monetizing their super fans. But while such efforts are currently on the fringes there is a country where super fans are at the heart of recorded music revenue. Artistic credibility however is not exactly at the top of the menu.

Merchandise Disguised As Albums

In Japan 78% of music sales are still physical. On the surface, for such a technologically sophisticated country as Japan this looks like a resounding success story for the CD. But all is not as it may at first appear. The Japanese music business long ago mastered the skill of using the CD as a tool for driving ancillary revenue. J-Pop artists used to routinely simultaneously release multiple editions of albums. But while in Western markets special editions typically entail different tracks, artwork and packaging, J-Pop special editions often featured exactly the same tracks and artwork but a different free gift. In practice this was merchandise sales disguised as music sales. This strategy banked on the repeatedly proven theory that super fans would buy every single edition. The practice still continues but looks patently philanthropic compared to the successor strategy of Japanese idol artists.

One Fan, Many Votes

Idol artists are Japan’s reality TV pop stars. Typically tied to a TV show they build the same sort of audience relationship that contestants do on western shows like American Idol and the XFactor. But whereas the western shows most often see competing acts, these shows usually focus on just one. The most successful of these acts so far is AKB48, an all girl troupe featuring 48 members. However the crucial twist to AKB48 is that fans get to vote for their favourite members, the most popular of whom then go on to be the core focus of the band and get all the best appearances and TV slots. While in a western talent show the vote would take place via a premium phone line, votes for AKB48 can only be cast with an official voting slip, which conveniently enough comes inside the band’s latest CD. So fans flock to the shops on release day not because they desperately want to hear the latest AKB48 tunes but to vote. In fact, street bins are often full on release day with discarded CDs, with the voting slips removed.

But it doesn’t stop there. Voting follows a process Stalin and Saddam Hussein would be proud of. Instead of one-fan-one-vote, AKB48 fans can vote as many times as they like, just so long as they buy more CDs, and boy, do they do just that. As you can see from the graphic, some fans go to extreme lengths to try to influence the outcome of the vote for their favourite members of AKB48 and copycat acts like Nogizaka 46. Some fans literally bankrupt themselves in the process. The bottom left picture in the graphic shows what one fan got for spending $330,000.

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The Value Of A Handshake

There are countless other tricks employed by the companies behind these idol acts, such as releasing singles by individual members and watching the fans try to outspend each other to ensure their favourites triumph. But the most intriguing of all is the handshake. Idol acts stage huge handshake events where fans queue up in their thousands to high five or shake the hands of their favourite idol stars. ‘How do you get your pass for a handshake?’ I hear you ask, yep, you go it, by buying a CD. But why stop at just one CD? Many artists will let you upgrade to a hug if you buy 5. You might be getting a little uneasy thinking about where 20 might get you but some acts pretty much do go, ahem, all the way, with actual dates for those fans who buy enough CDs. Though to be fair the dates are entirely platonic and are carefully chaperoned.

PledgeMusic’s Evil Twin

Just when you thought flagrant exploitation of super fans couldn’t get any worse, along came Deep Girl, a rock focused girl band that released their debut single at the end of their TV series. Priced at a hefty $8.38 the single included the song, a karaoke version and one of 7 different covers for each band member. But where the cynicism needle was really ratcheted up was the star system. Each CD included one star which could be redeemed against a menu of benefits, starting with the good old handshake at one star, going up through items such as an hour long phone call for 150 stars, lunch and, ahem, ear cleaning, for 300 stars, right up to a trip to a hot springs together for 2,000 stars. Bear in mind that a fan would have had to spend over $16,000 to get 2,000 stars. Oh, and just to pile the pressure on fans, the powers behind the band made it absolutely clear that if Deep Girl’s single didn’t top the charts they would be forcibly disbanded. No pressure then.

It all feels like an evil twin version of PledgeMusic. And let’s not even mention Happening Girls, the only ‘all year round swimsuit idol group in Japan’ that are all ‘available to marry’ for fans that buy marriage interview sessions.

It’s easy to be critical of this highly cynical practice that is exploitative for both the idols and their fans. (Not to mention the blatant chart rigging aspect). But there is no denying that the approach has successfully generated truly big spending in what is otherwise a rapidly declining recorded music market. Indeed, AKB48 were the first female group to sell over 30 million records. At its heart the idol approach skillfully balances the utterly mass media reach of super stars with intimate and (relatively) scarce access. The bigger the idol the more valuable the intimate access feels. The macro is simultaneously micro.

The Dark Side Of The Idol Model

There are also, not at all surprisingly, dark sides to the idol model. The most disturbing of which was a vicious attack on two AKB48 members at a handshake event with a disgruntled fan attacking them with a 50-centimeter saw. Other, thankfully less dramatic, events include the shattered dreams of super fans spurned by their idols when they try to approach them outside of the official events. One Nogizaka 46 fan had bought 3,000 CDs in support of his favourite act – going into debt in the process – but was curtly snubbed by the idol singer when he approached her after a gig. These setbacks aside though, the idol model looks like it has a lot of life in it yet and of course a host of Western pop acts such as Rihanna and Taylor Swift have long been in the paid meet and greet game.

As music sales dwindle all types of artists need to get more creative about how they generate income from their fans and with ever more passive music fans falling out of the habit of buying, it is the super fans that will matter more and more. The Japanese experience is utterly unpalatable for most artists and probably wouldn’t translate anyway in most Western countries. But the essence of understanding that the fandom itself is just as valuable to fans as the music is the essence of truth that YouTubers have already grasped and that more artists need to do. Welcome to the handshake economy.

The Labels Still Don’t Get YouTube And It’s Costing Them

This is the fifth post in my YouTube economy series. You can read the other posts here, here,here and here

2015 was the year that streaming came of age across global markets (it had already got there in the Nordics and South Korea of course). In the UK and the US stream volumes grew by 85% and 93% respectively in 2015. These markets matter because they are the 1st and 4th largest recorded music markets and between them account for 40% of global revenue. But as strong as a validation of the music streaming model as those numbers might be, the real success story here isn’t Spotify, Deezer or Apple Music…it’s YouTube. In both the US and UK YouTube outgrew audio streaming services. With YouTube delivering so much less back per stream to rights holders than freemium audio services and the whole issue of safe harbour and un-monetized tracks (however good Content ID has gotten) it is little wonder that the record labels are having an identity crisis over YouTube. Indeed, as I wrote last year, the YouTube discovery journey has become the consumption destination. The advert has become the product. But there’s even more to it than this. Not only is YouTube outperforming the audio pure plays, music is being outperformed on YouTube by its growing body of native creators, the new generation of YouTubers.

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YouTube started out as a place simply to watch (and upload) videos but has evolved into a sophisticated entertainment platform that supports a multitude of diverse use cases, both in terms of content and audience. Nowhere is this more pronounced than in channel subscriptions. In many respects ‘channel’ isn’t the most appropriate term as they are in effect talent feeds rather than channels in a traditional video / TV sense. Nonetheless, or perhaps because of this, they have become the lifeblood of native YouTube creators as diverse as Michelle Phan, PewDiePie, Zoella, SMOSH, stampylongnose and IISuperwomanII.

These are creators who often do everything from writing, filming, production through to front-of-camera. DIY superstars if you like. And they are fast becoming the lifeblood of YouTube. Of the 330 million subscriptions in the top 50 YouTube channels, YouTubers account for 34%. Compare and contrast with the measly 15% music artist and label channels have. And despite all the excitement around the increased subscribers Adele and Justin Bieber have racked up these last few months – they gained 8 million subscribers between them, making them the two fastest gainers across all of YouTube – music artists as a whole lost ground, accounting for just 31% of the top 50 gains during the last 90 days compared to 53% for YouTubers.

Music Is Losing Ground To Native YouTubers

Music does fare better in terms of views with 36% of the 41 billion top 50 views in the last 90 days. However it still plays second fiddle to YouTubers who account for 45%. But it is the direction of travel that reveals the most telling trend. Over the last 90 days 42% of the 50 top 50 growing channel views compared to 39% for music. In itself that may sound like a modest difference, but this is just the latest 90 day chapter in a much longer story. Music used to be the clear focal point of YouTube but that is changing. In terms of all time views music actually outpaces YouTubers with 42% compared to 41%. But at current rates that lead will be wiped out in the next 90 days. And here’s the paradox: music’s hold on YouTube is slipping even though YouTube is outperforming music services.

Part of driving force is out of the hands of the labels: video is eating the world, with more than 5 trillion short form views in 2015 alone. Music is always the first mover in digital content consumption, the trailblazer for other media. Once distribution, bandwidth and consumer sophistication all improve, video moves in.

Time To Stop Using YouTube Like School Kids Use Instragram

But record labels and artists can seize some control of their destiny, by taking a more sophisticated view of YouTube and exploring how to build strategies that work for YouTube in 2016 not for YouTube in 2010.  Right now record labels are using YouTube like school kids use Instagram, obsessing with vanity metrics such as views rather than thinking more deeply about how to build lasting relationships with YouTube audiences. A new generation of music artists is emerging that have created and nurtured audiences on YouTube, often with little or no help from labels. Artist like Dave Days, Tyler Ward, Boyce Avenue and Hannah Trigwell have built their fanbases on YouTube, often starting with covers but also crucially often non-music content such as parodies and vlogs. Raised in YouTube these artists are entirely native to the platform. They understand what audiences want because that’s where they come from.

If the big traditional artists and labels want to start making up some ground on the YouTuber revolution they could do worse than take a few hints from this new breed of YouTube artist.

The Three Things You Need To Know About The UK Music Sales Figures

As most people expected, the UK recorded music industry returned to growth in 2015. The UK now follows an increasingly familiar European narrative of strong streaming growth helping bring total markets back to growth. Sales revenue increased 3.5% to reach £1.1 billion while total streams increased by 85% to reach 53.7 billion, with audio stream representing 49.9% of that total. There is no doubt that these are welcome figures for the UK music industry but as is always the case, a little digging beneath the surface of the numbers reveals a more complex and nuanced story. Here are the three things you need to know about UK music sales in 2015.

1 – Streaming Growth Accompanied A Download Collapse

Long term readers will know that I’ve long argued the ‘Replacement Theory’, that streaming growth directly reduces download sales. It is a simple and inevitable artefact of the transition process. Indeed a quarter of subscribers state they used to but no longer buy more than one album a month since they started paying for streaming. There have been plenty of opponents to this argument, normally from parties with vested interests. But the market data is now becoming unequivocal. While streams increased by 257% between 2013 and 2015 download sales decreased by 23%. And of course the vast majority of that streaming volume came from free streams, not paid.

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2 – The Transition Follows A Clear Defined Path

The download to streaming transition is an inevitability, whatever business models are wrapped around it. It is part of the fundamental shift from ownership to access of which streaming music is but single component. It comprises consumers progressively replacing one behaviour with another. In fact, the evolution is so deliberate and predictable that it manifests in a clear numerical relationship: the Transition Triangle.

The UK music industry trade body the BPI has created a number of additional classifications for music sales and consumption. These include Stream Equivalent Albums (1,000 streams = 1 album) and Track Equivalent Sales (10 track sales = 1 album). Using these classifications and adding in actual album download sales we see a very clear relationship between the growth of streaming and the decline of downloads. The difference in volumes between downloads and streams each year is almost exactly the same as the amount by which downloads decreased the previous year. At this point even the most ardent replacement theory sceptic might start suspecting there’s at least some degree of causality at play.

BPI 2

3 – Thanks Are Due To Adele, Again

Back when Adele’s ‘21’ was setting sales records, music markets across the globe owed her a debt of gratitude for helping slow the incessant decline in sales. Global revenue decline fell to less than 1% and US revenue actually grew by 2.9% (falling back down the following year). Now she’s done it again with ’25’, giving album sales enough of a boost to ensure that the growth in streaming revenue lifted the entire market. For although album sales actually declined in 2015 and streaming volumes had grown more strongly in 2014, it was the combined impact of slowed album decline and streaming growth in 2015 that enabled the total market to grow so strongly.

Adele generated around £25 million of retail sales revenue in 2015, which was equivalent to 70% of the £36 million by which UK music sales revenue increased that year. While of course a portion of that £25 million would have been spent on other repertoire if ‘25’ had not been released, the majority would not. With ‘21’ and now with ‘25’ Adele has been able to pull casual music consumers out of the woodwork and persuade them to buy one of the only albums they’ll buy all year, often the only one.

Without that £25 million UK music sales would have increased by just 1%.  So in effect streaming services have Adele to thank for ensuring their growth lifted the whole market even though she famously held ‘25’ back from each and every one of them. Sweet irony indeed.

BPI 3

As a final postscript, the role of YouTube, while underplayed in the official figures, is crucial. While audio streams grew by an impressive 81% in 2015, video streams grew by 88%. So however good a job the streaming services might be doing of growing their market, YouTube is doing an even better one.

The Beatles, Streaming And The End Of The Record Label Business Model

So the Beatles are finally coming to streaming…well much of the Beatles’ catalogue is at least.  Is it a big deal?  Kind of. The Beatles were late to iTunes and they’re now late to streaming.  Fashionably late though. No so soon as to be left standing awkwardly waiting for something to happen and not too late to miss the real action.

The Beatles are unique enough, and important enough to dictate their own terms and set their own timetable. For streaming services the Beatles catalogue is strategically important in the way it was for iTunes in that it helps communicate the value proposition of all the music in the world…well most of it. For the Beatles it represents the opportunity to reach younger audiences that sales are currently missing (which in large part explains why the catalogue is being made available on free tiers too).

It’s All About Targeting

20 years ago everyone pretty much bought the same product, the CD. Now though the music consumer landscape is fragmented and siloed. The fact that Adele’s ‘Hello’ simultaneously delivered stellar performance across audio streaming, video streaming, download sales and radio illustrates that there are many highly distinct groups of consumers that do one but not the other. This what Universal will be banking on with bringing the Beatles to streaming: they’ll be hoping that most of the future prospective buyers of Beatles albums are not streaming. For as long as this elongated transition phase continues, this sort of approach can work.

What Happens When The Bottom Falls Out Of the Catalogue Business?

The business model of record labels has long depended on revenue from back catalogue propping up the loss-leading new artists, on whom labels have to spend heavily to break. That model works as long as back catalogue sales are vibrant. But cracks are now showing in that model. Labels, especially the big ones, are increasingly spending even more heavily on a smaller number of big bets. For major labels many of these are either manufactured or laser targeted pop acts that grow big fast but like genetically modified crops, soak the nutrients out of their fan-base soil and are less likely to have long term careers. This means breaking artists are costing more to break and have less long term revenue potential.

That double whammy in itself would be bad enough, but there is an even more important structural factor at play. Catalogue sales depend on people buying classic albums, reissues and retrospectives. The secret is in the term ‘sales’. The model does not translate the same way to sales. Getting someone to spend $10 on an album for old times’ sake that they might listen to a handful of times but value having in their collection is very different from earning $0.20 or so from the same number of listens. But that is the way the world is heading. Older music buyers (i.e. from late 30’s onwards) are the lifeblood of catalogue sales.

That model works for older consumers that grew up buying music and thus have the habit. But what happens what happens when the first millennials enter their late 30s? Which is exactly what is going to start happening from 2016 onwards. As each new cohort of aging millennials passes 35 a smaller percentage of them will have ever regularly bought music. Thus from 2016 onwards every year will mean an ever smaller number of catalogue buyers coming into the top of the funnel.

The long term implications are clear. While this will not be anything like an instant collapse, the impact will be progressively more painful as each year passes. The old label model of developing a vast bank of copyrights will become less and less relevant.

So Beatles, welcome to streaming, this will be your last new format hurrah.

Pandora’s Rate Ruling Reveals The Cracks In Streaming Economics

The much anticipated outcome of yesterday’s Copyright Tribunal decision was a 20% increase of Pandora’s ad supported stream rate from $0.0014 per non-interactive stream to $0.0017. The result was roughly equidistant between the two parties’ preferred rate: Pandora wanted $0.0011, SoundExchange (the body that collects the royalties on behalf of the labels) wanted $0.0025. As with any good compromise neither party will be truly happy, though on balance Pandora probably came out slightly better. Both the rate and the whole rate setting process shine a bright light on the economics of streaming, especially when contrasted against on-demand services.

pandora dec 15 - 1

Pandora’s semi-interactive radio service operates under statutory rates in the US that are set by the Copyright Royalty Board for a few years at a time, with inflation baked in. This means a continual rise in rates (see figure). It also gives Pandora a degree of certainty over its mid term future but prevents record labels from negotiating for better rates (publishers however are able to strike direct deals with Pandora). Spotify, and other on-demand streaming services, negotiates deals directly with multiple record labels, publishers and rights bodies. Deals typically come up for renewal every couple of years, involve large upfront payments and Minimum Revenue Guarantees (MRGs). They also run the risk of core product features being threatened in renegotiations – as we saw with the labels’ dalliance with killing off freemium this time last year.

The most significant difference between the models is how the per stream rate works. For on-demand services a royalty pot as a % of revenue is determined. This is then divided between rights holders based on plays in a given period and allocated on a per stream rate basis. Thus royalty payments remain a comparatively constant share of revenue, assuming of course that the service hits the MRG targets – if it doesn’t the share increases, often above 100% of revenue. This model also implies a clear ceiling to the potential profit an on-demand service can earn. By contrast Pandora pays out on a (largely) pure per stream basis. The direct consequence of this is that Pandora is able to increase it revenue per play faster than its rights cost per play which in turn creates the potential to grow margin (see next figure).

pandora dec 15 - 2

Between 2009 and 2014 Pandora’s content acquisition costs per listener hour increased by 27% from $17.52 to $22.29. This reflects both the CRB set rate as well as deals with rights bodies and publishers. But over the same period Pandora’s revenue per listener hour increased by 114% from $21.48 to $45.97. Now clearly, an increase in revenue per hour does not inherently mean increased profitability, or even profitability at all. Indeed, Pandora’s continued losses have been a perennial bugbear for investors. But Pandora has chosen to invest its increased revenue to grow its business, building out regional ad sales teams and making acquisitions such as Next Big Sound, Ticket Fly and Rdio. In short, Pandora could have been profitable for some time now if it had so chosen. Instead it is chasing a bigger prize, namely to become the single biggest revenue driver in US radio. To get big it needs to spend big.

Pandora’s Core Strength Is Being Able Increase Profitability Per User

The underlying principle is clear: while on-demand services have little meaningful way of increasing revenue per user with the current model, Pandora has more than doubled revenue per user in 6 years while rights costs have declined in relative terms. Content acquisition costs fell from a high of 82% of revenue in 2009 to 48% in 2014. That rate will increase in 2015 due to direct deals struck with publishers and the $90 million pay out for the pre-1972 works ruling. But it still remains well south of Spotify’s 70%+.

On Demand Services Have Similar Fixed Costs But Tighter Margins Because Of Royalties

While there is a clear case for semi-interactive radio rates being markedly lower than on-demand rates many of the fixed costs of both types of streaming business are the same.  Both have to commit similar amounts to product development and tech, bandwidth, data analysis, reporting marketing, customer care, management. This puts on-demand services at an operational disadvantage compared to webradio services.

If paid-for streaming services are going to become commercially sustainable there is going to need to be pricing and product innovation to both reach more mainstream users (cheaper tiers) and to drive more revenue from high value users (more expensive tiers and bolt ons). Right now there is relatively little commercial incentive for on-demand services to innovate upwards as profitability will remain largely the same. There is an opportunity for labels to offer Spotify and co a Pandora-style pure per-play license structure for all products launched above and beyond the standard 9.99 tier. This would give the services the ability to follow Pandora’s path of growing revenue per user faster than rights costs per user, thus improving commercial sustainability and allowing them to invest more in product innovation.

Rights Frameworks Need To Engender Commercial Sustainability

Pandora is one of the few stand out, independent success stories of the entire history of digital music. It has become one of the world’s biggest music services despite being largely constrained to the US, it has built a commercially viable model and it has delivered a big return for investors via its IPO. Only Last.FM, Beatport and Beats Music can genuinely lay claim to having delivered big returns for their investors. There are many mitigating factors, but the unique licensing structure Pandora operates under is the single most important one. Do songwriters and labels feel that they’re getting short changed? Absolutely. But it is in the interest of every music industry stakeholder that the economics of digital music are structured in a way that enables standalone companies like Pandora, Spotify and Deezer to thrive. Otherwise there can be no complaints when the only options left on the table are companies like Apple, Amazon, Facebook and Google whose interest in music all stems from trying to sell something else. That’s when artists and songwriters are really at risk.

Consumer Spending On Digital Music Actually Fell In 2014 (Yes You Read That Right)

The following are excerpts from recent MIDiA Research blog posts.  If you’re not already signed up to the newsletter type your email address in the box on the blog home page and you’ll get analysis and data on the digital content economy straight to your inbox every Monday.

consumer spending on digital music fell in 2015 midia

Spending money on recorded music has become a lifestyle choice, an honesty box for the conscientious consumer.  No one really needs to pay for music anymore.  That much is familiar to most, but what is new is that it is now manifesting itself in a new worrying way.  In 2014 consumers actually spent less on digital music than they did in 2013. Though the drop was small – 1% – it was still nonetheless a drop at a period when digital spending should be booming.  In some key markets the consumer spending decline was significantly larger, such as a 3% fall in the UK.  Of course, overall digital music revenue grew globally in 2014 but all of that growth came from the 37% increase in digital music B2B revenues, such as advertising income and telco bundles.  In short, the music industry is getting better at selling to businesses and worse at selling to consumers in the digital arena.

With B2B digital revenues 6 times smaller than consumer digital revenues the music industry is not about to suddenly become a B2B2C business.  But the direction of travel indicates that there is a problem.

Read the original post in full here.

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The music industry has long been viewed as a canary in the mine for how media industries transition into the digital era.  In many respects that role has now been outlived.  Book publishers quickly realised that after a few short years they had moved beyond where the labels had got to in 10.  Meanwhile games publishers (mobile, console and PC) have learned how to monetize their super fans in a way the music industry could only dream of.  But it is the video sector that provides the starkest contrast.

39% of consumers regularly stream music for free, nearly four times the rate that pay for music subscriptions.  While free tiers of paid services play a clearly defined subscriber acquisition role, the purpose of standalone free services is becoming less clear-cut:

  • Old favourites trump new gems: Half of free streamers say they use these services mainly to listen to music they already know. While it would be unrealistic to expect anything other than the most on-trend of super fan to be spending all their time sampling new tunes, these trends illustrate that free on demand streaming services are most used as consumption destinations.
  • The end goal has changed: Just under a third of free streamers go onto buy the music of artists they discover on these service while 37% simply stream newly discovered artists more. Both use cases will coexist for some time, but with with music purchasing fading phenomenon, the latter will dominate.

Read the original post in full here.

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The TV business is of course a vastly bigger one than music but it is, in years spent terms at least, at far earlier stage of its streaming subscription transition.  And yet already there are more than twice as many online video subscribers as there are music subscribers and the nascent online video subscription market is already bigger than the entire recorded music business.

Even discounting the relative scales of each business, the comparisons illustrate the contrast between what can be achieved with a niche product aimed at largely male, high spending super fans (music) and the reach a lower priced, more broadly targeted product can do (even with the hindrance of limited catalogues).

 

The days of other media industries learning from the music industry are gone. Now it is time for the music industry to heed its lessons from its peers.

Read the original post in full here.

Why Moving Video Centre Stage Is About More Than Just Doing Deals With YouTube Stars

 

 

This is the fourth post in my YouTube economy series. You can read the other posts here, here and here

The music industry has a long history of underplaying the role of video, insisting on seeing it as merely a tactic for driving sales.  In doing so it let two businesses that understood the wider value of music video become global superpowers.  MTV and YouTube knew that music fans, especially younger ones, could connect with their favourite artists via video in way that they could not with audio alone.  The labels were able to put MTV and YouTube down as an irritating mistake (albeit the exact same one made twice) because for a long while they were still selling units of music product, albeit in reducing numbers by the time YouTube arrived on the scene.  Now though, as we accelerate into the consumption era all bets are off.  Consumers want to pay for access to content – either with money (subscription) or with attention (ads).  With revenue generated by streams rather than up front transactions, both access models demand increased engagement.  This means that video must shift from marketing tactic to revenue bearing product.  Slowly but surely labels are waking up to this new reality and Sony Music’s deal with YouTube star Kurt Hugo Schneider hints at what the future may hold.

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Sony’s Schneider Deal Is A Nod To The Future Music Economy

Sony’s partnership with Schneider will see the creation of a 10 episode series of shows featuring Sony artists performing their songs with him.  Crucially the shows will be distributed via Schneider’s YouTube channel which has 6 million subscribers and 40 million monthly views.  5 years ago, even trying to build the business case for such a project around a frontline Sony artist would have been nigh-on impossible with production costs failing to justify likely TV licensing revenue.  But with YouTube Sony can both spend less on production and cut out the TV network middleman, going direct to the audience. Whilst a big part of the internal business case justification at Sony will likely centre around the ‘exposure’ Sony’s artists will get, there will be no small number of Sony execs who know that the real value of this is the video series itself, both in terms of audience engagement and revenue.

As I explained in my previous YouTube posts, the platform is emerging as the single most important content destination for Millennials and their younger siblings Generation Edge (i.e. those born since 2000).  Right now traditional music artists are at a marked disadvantage to native YouTube creators: they put out 1 music video maybe once every 3 months while a YouTuber will put out that many videos a week.  A middle ground exists between those two extremes, one that can provide the vital ingredients for helping music artists get more viewing time and help transition music video from low income marketing tool into a meaningful revenue generating product in its own right.

Universal’s KSI Deal Only Scratches The Surface

Universal Music have taken a more traditional approach to tapping YouTube, picking a successful YouTuber and turning him into a pop star.   The YouTuber in question is British gamer KSI who numbers 2 billion YouTube views, 11 million subscribers and $4.5 million in annual YouTube earnings, making him the fifth highest YouTuber globally.  So far his cross over pop/Grime singles have had modest success though Island will be hoping his latest collaboration with JME, ‘Keep Up’ will make bigger sales waves.  But even if it does that will be missing so much of KSI’s potential.  By his own admission KSI is a YouTuber first and a rapper second.  Island should be exploring all the ways they can make that distinction blur into insignificance.  Partnering with YouTubers like KSI is an invaluable first step, but the real opportunity for Universal is to explore how KSI can take them on a journey into the YouTube industry not for them to take KSI on a journey into the music industry.

Online Video Momentum Is Acclerating, And Some

The direction of travel of the video market is hard to discount.  Short form video is growing at an unprecedented rate: there were 5.9 trillion short from video views in in the first three quarters of 2015 with growth more than doubling from Q4 2014.  (See the MIDiA report ‘Short Form Video Growth’ for more).  Meanwhile the glut in online display ad inventory driven by content farms like Outbrain and Taboola is making video advertising an increasingly sought after commodity.  Will video revenue ever be enough to offset lost music sales revenue at an industry level? Perhaps not, but it certainly can at an artist level.  Not too many artists can boast KSI’s $4.5 million annual income.

The Business Case For YouTube’s Music Economy Role Needs To Be More Rounded

We need to take a realistic view of YouTube’s current role in the music ecosystem.  It can no longer be justified as a loss leader for driving sales and ‘exposure’.  The number one activity that consumers do after they discover a new artist on YouTube is….watch them on YouTube some more.  65% of under 25’s say they use YouTube this way. So more value needs to extracted from those users when they are on YouTube, rather than hoping for them to pop over to Spotify or iTunes to do something that creates bigger chunks of direct music industry revenue.  Sure some of that is still going to happen but it will do so in dwindling numbers over the next 5 years, with music sales revenue declining by 39% by 2020.

The business case for YouTube has to be much more rounded and nuanced while the industry continues through its transition phase. Sales and access will coexist for many years, occasionally giving the impression of a schizophrenic nature. Adele encapsulates the twin-speed nature of the music industry as it transitions between eras.  As impressive as Adele’s sales figures are they are an anomaly, a temporary high tide while the music sales waters continue to irretrievably recede.  Plotted against the longer music sales trend it is clear that ‘21’ followed exactly the same path – a dramatic stand out success that was a blip on the downward curve.  Adele is also unique in having such strong audience reach among older consumers that still buy music and younger ones that stream. So while she’s been busy breaking sales records she has also excelled on streaming, racking up half a billion views of her ‘Hello’ video.

For Better Or For Worse, YouTube Is Generation Edge’s Punk

Music fans exist in multimedia, on demand environments where video, social engagement are the norm and authentic connections with stars are the gold dust that they seek out.  YouTube is the punk movement of Generation Edge.  It is an antidote to the over-produced, generic, middle of the road, overtly commercialism of traditional media.  YouTube creators may still be finding their creative voices but the fact Sid Vicious couldn’t really play bass was part of the entire point of the Sex Pistols.  It was a big fat two fingers up at the establishment.  Sure, most YouTubers are hardly rebels without a cause but they are outside the traditional media establishment and therein lies the real power of video that the music most learn how to participate in without ending up looking like a dancing dad.

Pandora Buys Rdio To Become A Global Streaming Powerhouse

 

pandora rdioPandora today announced that it was acquiring the assets of now failed subscription service Rdio.  While the whispers about Rdio’s future had been building for some time, the deal is more interesting for what it says about Pandora’s plans than what it says about the state of the subscription business.

 

Rdio Battled Bravely And Set Innovation Standards But Fell Short

For what Rdio lacked in subscriber numbers it made up for in innovation.  It continually set product and feature precedents that Spotify and others subsequently aped, and its $75 million dollar ad inventory deal with US radio giant Cumulus sets a business model blueprint that other streaming services will follow. But for all its efforts and extensive marketing efforts Rdio was simply not able to get to the same sort of level as Spotify’s 2nd tier competitors, let alone to seriously challenge Spotify itself.  The music subscription business is not a winner-takes-all market.  But it is one in which some degree of meaningful scale is required to trigger the telco partnerships and brand advertiser deals that are necessary to achieve sustainability.  Eventually a company transitions from ‘bright new hope with potential’ to an ‘also ran that isn’t ever going to make it’.  Once that imperceptible line of market perception has been crossed it is only a matter of time before the end comes.

Pandora Will Use Rdio’s Assets To Go Global

Crucially Pandora is not acquiring Rdio as a going concern but only its assets, which won’t include licenses (as they have to be renegotiated when a music service changes corporate hands).  What those assets represent, or at least the bits that matter to Pandora, are teams, product and tech, licensing know how and an international footprint.  That last bit is particularly pertinent.  Rdio’s 100 markets contrasts sharply with Pandora’s 3 (US, Australia and New Zealand).  Indeed Pandora CEO Brian McAndrews stated “We seek to be the definitive music source for music discovery and enjoyment globally”.  While 100 markets is probably a step too far for Pandora, expect a healthy selection of top tier and emerging markets to feature in Pandora’s roadmap.  And if you’re eager to identify which ones, just take a look at the bigger radio markets globally (Japan possibly excepted).

Pandora’s Success Is Built On Lean Back Not Lean Forward

Pandora’s success is firmly rooted in delivering a high quality, lean back experiences to largely mainstream audiences.  That’s how it reaches 78 million monthly listeners, more than a quarter of US adults.  That positioning has served Pandora well and made it one of the few success stories of digital music.  In fact, other than Beatport and Last.FM, it is one of the very few music start ups that had an exist that considered to be a true financial success. Crucial to that success has been the fact Pandora has operated under statutory licenses for semi-interactive radio, which leaves it with dramatically higher (potential) operating margins than on demand services.  Which begs the question, just why is Pandora getting into the subscription business?

This Is The Latest Part Of A Major Strategic Pivot

The answer is that it forms part of a much bigger, much bolder plan.  Pandora has spent the last couple of years quietly amassing the assets that will transform it into a music platform super power.  In 2015 it acquired music data company Next Big Sound (c.$50 million), then came ticketing company Ticketfly in October ($450 million) and now Rdio ($75 million).  The combined $0.6 billion is a truly sizeable investment in a streaming-centred business model by anyone’s standards.  It also accompanies a concerted and costly investment in Pandora’s regional ad sales teams across the US to compete on a level footing with traditional radio’s sales teams.  Couple all that with November announcements to become the exclusive streaming outlet for popular podcast series ‘Serial’ and the landmark direct deal with Sony/ATV Publishing and a picture of something truly ambitious starts to emerge.

Pandora was fortunate to be able to IPO at a time when public offerings were still a highly viable option for digital start ups.  Spotify and Deezer (which just cancelled its IPO) will look on with no little jealousy at the power that a market capitalisation of nearly $3 billion gives you.  Now it is using this financial firepower to take the next step on its streaming journey.  Whatever that will prove to be, expect it to be a platform in its truest sense, rather than simply a streaming service with a few loosely attached ‘alternative revenue’ models, which is a mistake some of the subscription incumbents have made thus far.

Discovery Doesn’t Lead Anywhere Anymore, At Least Not To Sales

Pandora may aspire to be the definitive source of ‘music discovery’ but streaming discovery is becoming streaming consumption.  i.e. it is increasingly not leading to sales.  Live music sales is one alternative way to make money from ‘discovery’ but if ‘free music to sell tickets’ is Pandora’s end game then some difficult conversations with songwriters (who of course often don’t play live) will need to be had.

Pandora has just thrown its hat into the ring as a top tier player in the global streaming business.  By some measures you could say it is poised to become the biggest.  McAndrews left no room for doubt by stating “We plan to substantially broaden our subscription business.”  But in doing so Pandora will have to look itself in the mirror and ask itself “what am I now?”.

 

 

 

YouTube And The Attention Economy

This is the third in the series of posts exploring how the music industry can better leverage the potential of the YouTube economy.  You can see the first post here and the second here.

Short form video is accelerating at a rapid pace, racking up 4.2 trillion views in the first half 2015.  While challengers Facebook, Snapchat and others now account for just over half of that total, few platforms of scale yet provide content creators and owners comparable ability to build engaged audiences and income.  For music the situation is even more pronounced – no other platform is even on the same lap of the race (and I include Vevo as an extension of YouTube). YouTube is the most popular online music destination by far (46% of consumers use it regularly) and its role for Digital Natives cannot be exaggerated – 65% of US under 25’s use YouTube for music regularly.  But the share that regularly watch YouTube as a whole is even higher: 76%.  The added complexity is that most artists and labels do not feel that YouTube is pulling its weight in revenue terms.  Free music streamers – of which YouTube is the largest single component – comprise 92.5% of all music streaming users and just 32% of all streaming revenue.  Yet a whole generation of non-music creators like PewDiePie, Smosh and the Janoskians have via YouTube built audiences and income that most artists could only dream of.  So what’s the secret?

Talk Don’t Shout

One of the key factors is the way in which YouTubers use the platform, releasing 2, 3 or more videos every week.  Contrast this with an artist releasing a music video maybe once every couple of months.  YouTubers treat the platform as place to build relationships with their audiences and to engage them in regular interaction.  The prevailing approach among artists, their managers and labels is to simply view YouTube as a place to promote.  YouTubers use YouTube as an interactive digital platform for engaging in conversations.  The music industry uses it as a broadcast channel, a soap box from which it can shout about its wares.

While clearly it doesn’t make sense for most artists to be creating 3 videos a week there has to be a compelling middle ground between that and one promo video every quarter.  Nearly half of music’s super fans say that music for them is more than just the song, that they want to know the artist’s story.  Music videos, the highly stylized form that they are, are hardly a vehicle for telling the artist’s story.  In fact there are few mediums less suited for the task.  But there is so much around the video that can be harnessed.  Imagine how much extra content could be created by adding half a day to the video shoot to film extras such as goofy outtakes, the band talking about the song, a making of, behind the scene reportage etc.

Think Of It Like DVD Extras That People Actually Want To Watch

And the costs should be modest.  YouTube is DIY.  Part of the authenticity most YouTubers deliver is by not being over produced.  So only a fraction of the crew used for the music video shoot would be needed.  The resulting video extras could then be planned into a release schedule on the artists’ YouTube channel, building up weekly to the main music video and then maintaining interest thereafter.  This is just one illustration of how it is entirely feasible to create lots of added value content with relatively little additional burden on the artist.  Yes, this might feel like creating the extras for the bonus disc on a DVD, and in some ways it is.  But there is a crucial difference.  DVD bonus discs are a means of charging more for a release and usually go unwatched.  Among young YouTube viewers this sort of content is often of comparable – though different – value to the song itself.

Prospering In The Attention Economy

In the sales era fans invested in their favourite artists by buying an album.  That cash investment usually meant a fan would spend time listening to the album again and again.  And that familiarity became the foundations of a long term relationship that would result in buying concert tickets and future albums.  But now as sales dwindle (down by 29% in the last 5 years) music fans are investing in their favourite artists in time and attention rather than money.  We now operate in an attention economy.  YouTubers totally get this, artists and labels less so.

This is all so important to artists because YouTube is not suddenly going to start delivering dramatically better music stream rates, largely because labels and publishers haven’t had the courage to demand the requisite fair share it should pay.  Rights owners’ fears are understandable: one senior label executive recounted a YouTube negotiator saying ‘Don’t push us.  Right now you don’t like us much and we’re your friend.  Imagine what we’d be like if we weren’t your friend.’  Sooner or later bullying tactics need standing up to.  But that will not be a quick process, regardless of the steps currently being taken behind the scenes.

So in the meantime artists and labels need to figure out how to get more out of YouTube in a way that complements the other ways they make money digitally.  Put simply that means making more non-music video content to generate more viewing hours and thus more ad revenue from YouTube. Heck, they might even generate some YouTube subscription revenue some time.  But do it they must, else they’ll forever be leaving chunks of YouTube money on the table.

The irony of it all though is that the biggest reason of all for doing it isn’t even about the money.  Treating YouTube as a fan engagement platform rather than a marketing tool is currently the most sure fire way artists have of creating engaged fan bases at scale in the digital marketplace.