Four Companies That Could Buy Spotify

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For much of 2016 it looked nailed on that Spotify would IPO in 2017 and that the recorded music industry would move onto its next chapter, for better or for worse. The terms of Spotify’s $1 billion debt raise (which mean that Spotify pays an extra 1% on its 5% annual interest payments every six months beyond its previously agreed IPO date) suggest that Spotify was thinking the same way too. But now, word emerges that Spotify is looking to renegotiate terms with its lenders and there are whispers that Spotify might not even IPO. It would be a major strategic pivot if Spotify was to abort its IPO efforts and it begs the question: what next?

The World Has Changed

When Daniel Ek and Martin Lorentzon were drawing up the Spotify business plan in the 2000’s, the music and tech worlds were dramatically different from what they are now. The ‘Potential Exits’ powerpoint slide in Ek’s investor pitch deck would have listed companies such as Nokia, Microsoft, Sony and HTC. Over the subsequent decade, those companies have fallen on harder times (though Microsoft is now experiencing a turnaround) and all of them have moved away from digital music, which is why an IPO seemed like a much better option for being able to get a large enough return on investment for Spotify’s investors.

The only problem is that the IPO market has changed too. IPOs were once the best way for tech companies to raise capital but with the current VC bubble (and its recycled cash in the form of exited-founders reinvesting as Angels) equity and debt investment is much easier to come by. In 1997, there were 9,113 public companies in the U.S. At the end of 2016, there were fewer than 6,000. 2016 was the slowest year for IPOs since 2009. And of course, Deezer aborted its IPO in 2015. Snapchat’s forthcoming IPO will be a Spotify bellwether. If it does well it will set up Spotify, but if Facebook’s continued aggressive feature-cloning on Instagram continues, it could underperform, which could change the entire environment for tech IPOs in 2017. The fact that only 15.4% of Snapchat’s stock is being listed may also push its price down. No fault of Spotify of course, but it is Spotify that could pay the price.

$8 Billion Valuation Narrows Options

Because Spotify has had to load itself with so much debt and equity investment it has needed to hike its valuation to ensure investors and founders still have meaningful enough equity for an exit. Spotify’s revenues will be near $3 billion for 2016 but its $8 billion valuation is half the value of the entire recorded music market in 2015 and more than double the value of the entire streaming music market that year. However, benchmarked against comparable companies, the valuation has clearer reference points. For example, Supercell had revenues of $2.1 billion and was bought by Tencent for $8.6 billion in 2016. King had revenues of $2.6 billion and was bought for $5.9 billion by Activision Blizzard, also in 2016.

The complication is that both of those companies own the rights to their content, while Spotify merely rents its content. Which means that in a worst case scenario Spotify could find itself as an empty vessel if it had a catastrophic fall out with its rights holder partners. King and Supercell would both still have their games catalogue whatever happened with their partners.

Western Companies Are Not Likely Buyers

So, in the event that Spotify does not IPO, it either needs to raise more capital until it can get to profitability (which could be 3+ years away) or it needs someone to meet its $8 billion asking price. Of the current crop of tech majors, Apple, Google and Amazon are all deeply vested in their own streaming plays (Apple Music, YouTube and Prime) so the odds of one of those becoming a buyer is, while not impossible, unlikely and for what it’s worth, ill advised. Though there could be a case for Apple buying Spotify for accounting purposes as buying a European company would be a way to use some of its offshore domiciled $231.5 billion cash reserves. Reserves that the Trump administration is, at some stage, likely to make efforts to repatriate to the US in one way or another. Facebook is the wild card, but it’s unlikely to want to saddle itself with such a cost-inefficient way of engaging users with music. A distribution partnership with Vevo or launching its own music video offering are much better fits.

Go East: Four Potential Suitors For Spotify

So much for Western companies. Cast your gaze eastwards though and suddenly a whole crop of potential suitors comes into focus:

imgres-2Tencent: With a market cap of more than $200 billion and a bulging roster of consumer propositions (including WeChat) and 3 music services, Tencent is arguably the most viable eastern suitor for Spotify. The fact that the company recently reported inflated subscriber numbers for QQ Music (which were in fact a repetition of the same inflated numbers given to Mashable in July last year) hints at Tencent’s eagerness to court the western media and to be judged on similar terms. A Spotify acquisition, especially an expensive one, would be both a major statement of intent and an immediate entry point into the west. It would also transform Spotify into a truly global player.

imgres-4Alibaba:
Another Chinese giant with a market cap north of $200 billion (although it has lost value in recent years), Alibaba has a strong retail focus but has been diversifying in recent years. Acquisitions include the South China Morning Post, Guangzhou Football Club and the Roewe RX5 ‘internet car’. Spotify would be a less obvious fit for Alibaba but could be a platform for building reach and presence in the west.

imgres-1Dalian Wanda: With assets of over $90 billion, revenue of more than $40 billion, a heavy focus on media and an insatiable appetite for acquisitions, Dalian Wanda is a strong contender. The company has built a global cinema empire in its AMC Theatres division, most recently picking up a Scandinavian cinema chain for a little under a billion dollars late January. Dalian Wanda’s strong US presence and long experience in that market, along with its bold global vision make its fit at least as good as Tencent’s. The fact that it is currently mulling a €6 billion acquisition of the German bank Postbank indicates it can buy big.

imgresBaidu: Baidu’s $10 billion revenues make it a markedly smaller player than Dalian Wanda but its $66 billion market cap and strong music focus (e.g. Baidu Music) make Spotify a good strategic fit. Spotify could help Baidu to both counter the domestic threat of Apple Music and to build out to the west, which could act as a platform for building out Baidu’s other brands.

imgres-3Other runners: A host of telcos could be contenders, including the $78 billion SoftBank and India’s Reliance Communications. However, most telcos will surely realise that emerging markets will soon hit the same music bundle speed bumps that are cropping up in western markets. One other outsider is the $29 billion 21st Century Fox. Perhaps less of a wildcard than it might at first appear, considering that News Corp was a major shareholder in the now defunct Beyond Oblivion. And of course, don’t rule out Liberty Global.

An IPO, albeit a delayed one, still remains the most likely outcome for Spotify, but if it proves unfeasible there is a healthy collection of potential buyers or at the very least, companies that could buy into Spotify to give it enough runway to get towards profitability.

Change Is Afoot In Music Video

Music video’s two power players are both in the news for strategic resets. On the one hand YouTube has announced that it is merging its YouTube Music and Google Play Music teams while on the other hand Vevo has announced it is postponing the launch of its subscription service in favour of prioritising global expansion. These are both important developments in their own rights but together form part of a changing narrative for music video.

Music video is streaming music’s killer app. According to MIDiA’s latest consumer survey, 45% of consumers watch music videos on YouTube or Vevo every month, while 25% of consumers use YouTube for music every week (more than any of the streaming audio services). So what YouTube and Vevo do has real impact.

YouTube Is Where Google Is Placing Its Music Bets

YouTube’s merging of teams is not a huge surprise. It always appeared overkill having 2 separate teams, especially considering that Play was performing so poorly in the market (its weekly active users are measured in single digit percentages) and that Google’s music priority has always been, and will always be, YouTube. Although nothing will change immediately in terms of user proposition, the strategic direction of travel is clear: YouTube is where Google will place its music bets. Which places even greater importance on rights holders and Google coming to an understanding around royalty payments. YouTube moving to minimum guaranteed per stream rates is untenable (for Google) as is the Value Gap/Grab (for rights holders). Something has to give.

My long-term bet is still on Google creating a parallel music industry around YouTube, one that is entirely opted out of the traditional music industry’s rights frameworks. But a more immediate concern for Google is contingency planning in the event of Vevo upping sticks and becoming the centre piece of a revamped Facebook video play. A combination of no Vevo and disgruntled rights holders would be a recipe for disaster for YouTube’s music strategy.

Facebook And Vevo May Be Courting 

Vevo jumping ship to Facebook is not as far-fetched as it might have seemed when it was first mooted a few years ago. Facebook is now the world’s 2nd biggest online video property and has finally admitted that it is a media company. Slowing ad revenues in 2017 will see Facebook double down on ancillary revenue streams and content will be a key plank of that strategy. Games is the biggest addressable market and it has already made moves in that direction. Growing video is another. While streaming music is a relatively small market opportunity for Facebook, it has wide appeal. Launching an AYCE streaming service would be an ill-advised (and highly unlikely) option for Facebook, but partnering with Vevo would be a higher margin, lower risk way of getting into music. It would also be the perfect vehicle with which to showcase Facebook’s next generation of video UI, which will include features such as curation, channels, recommendations etc. In short, a lot less like Facebook video and lot more like YouTube.

The Rise Of Music Inspired Video

Interestingly, Vevo’s CEO Erik Huggers has announced that Vevo will be increasing its focus on short form, non-music video, such as artist interviews, mini-documentaries, and animated shorts. This snackable, highly shareable content bears closer resemblance to the sort of video that works well in Facebook’s more social-centric video platform than YouTube’s more viewer-centric environment. Vevo’s non-music video approach is smart. As we explained in our report ‘From Music Video To Music Inspired Video’, if rights holders want their share of overall video time to grow, or at least hold their own, then they need to start exploring creating music related video rather than just music videos.

The core consumption format will still be the music video, but the additional content expands reach and time spent. In a Facebook environment (especially if Instagram was incorporated) this sort of content would spread like wildfire. Add into the mix that Huggers also referenced Vevo’s prioritization of building its direct audience via its own apps (ie not via YouTube) and we might just be starting to see the emerging shape of a planning-for-life-after-YouTube strategy. Even if Vevo decided to stick with YouTube (which remains the most likely outcome), it could use all of these moves as leverage for getting a better deal.

Change is afoot in the music video space and we may just be beginning to see the two key players beginning to put competitive space between each other. But perhaps most tellingly, as both companies up their game, they are also both, in different ways distancing themselves from their subscription plays. Music video is the killer streaming app for many reasons. The fact that it is free is reason number one, and Vevo and YouTube both know it.

Streaming Music Pricing: Inelastic Stretching

Pricing has long been an issue for streaming music subscriptions, with the $/€/£ 9.99 price point above what most people spend on music each month. Streaming services have navigated around the issue with a combination of tactics such as telco bundles and aggressive price discounts (e.g. $1 for 3 months). However, these tactics place long term pressure on the 9.99 price point as they create a consumer perception that streaming music should be cheaper than it is. There is no doubt that discounts are doing a great job of converting users and of easing otherwise reluctant consumers into the 9.99 pricing, but the next phase of the streaming market requires a more sustainable approach to pricing strategy, coupled with some serious product innovation.

To explore this issue in detail, MIDiA has published its latest music report: Streaming Music Pricing: Inelastic StretchingIn it we use proprietary MIDiA data to assess how much of the 9.99 opportunity has been tapped, how much further opportunity exists and what level of demand exists for different price points.

midia music subscriber projections

These are some of the key takeaways from the report:

  • 2017 will be a stellar streaming year: A combination of enough growth being left in the market and the continued success of pricing discounts should see subscriber numbers grow at a slightly faster rate in 2017 than they did in 2016, hitting 146.6 million. This is up 44.3 million from the 106.3 million hit in 2016. (That 2016 figure is 5.9 million more than our provisional estimate published back in the start of January, as the result of receiving a couple of slightly stronger than expected numbers. However, the increase is not due to the very high subscriber numbers reported elsewhere for some Chinese services. We consider these numbers to be high and we place our estimate closer to half of those.) By 2018, subscriber growth will begin to lessen and by 2019 we’ll be in market maturation phase. Around 2/3 of the readily addressable opportunity for 9.99 has already been tapped and this remainder is what will drive the 2017 growth. New tactics will be required for the rest of the cycle.
  • Beyond 9.99: Emerging markets, new partnerships and discounts will all be important growth tactics, but pricing will also be key. Many readers will be familiar with my longstanding enthusiasm for mid tier streaming pricing. Unfortunately, mid-tier pricing by stealth (e.g. price discounts, student offers) coupled with an overly resplendent free marketplace (YouTube, Vevo, Spotify free, etc.) have combined to suck most of the oxygen out of the mid tier sector. Nonetheless, there is a major need for something to cater for the lower end of the market. One of the key sections in the report reveals that streaming pricing is inelastic and the change in demand is smaller than the change in pricing. Even dropping the main price to $6.99 would only result in reducing the size of the streaming market.
  • Unbundling: So how do we square the circle? By using super low prices (e.g. 2.99; 3.99) to launch laser focused niche apps aimed at specific demographics and genres. This can be done both by standalone specialists (e.g. the Overflow, FreqsTV) and by the big incumbents taking a leaf out of Facebook’s app strategy and creating standalone, unbundled apps. In order for them to work, they cannot simply look like a thin slice of Spotify or Apple Music. They have to be as different from their parent apps as Instagram and Whatsapp are from Facebook. That means new user experiences, new functionality, different approaches to programming/ curation and standalone branding. To work, mid tier products have to look like something unique, not a compromised, watered down version of the full fat product. Mid tier services risk looking like low-fat, gluten-free, sugar-free, organic, diet, hand knitted soya milk. While there is a market for it, it shouldn’t come as a surprise that the market is in fact tiny.

So, a good 2017 looks on the cards for streaming, one which will confirm the maturity of the streaming sector as a whole. But the next stage of the market will require product and pricing innovation, at both the high end and the low end. Now is the time to start putting the pieces in place for 2018 and beyond.

The report from which this insight is taken (Streaming Music Pricing: Inelastic Stretching) is immediately available to MIDiA report subscribers. To find out how to become a MIDiA subscriber email info@midiaresearch.com.  If you just want to buy the report and the supporting data then visit our report store here.

Ed Sheeran’s Ticketing Fiasco Shines A Harsh Light On A Broken Industry  

Ed Sheeran has hit the news, bemoaning the inflated prices that tickets for his forthcoming tour are being sold at on ticket reseller websites. Some tickets have sold for as much as £999, compared to the original face value of £77. As the chart below shows, even the standard resold tickets are selling for up 5 times the original price.

ed-sheeran-ticket-prices

Sheeran is in the fortunate position of being one of the most in demand artists of the moment, but the broken nature of the ticketing market is locking his core fans out of his gigs. It is just the latest example of an industry in dire need of change:

  • Ticketing companies are playing double agent: Over the course of the last decade the live music market has grown almost dollar-for-dollar at the same rate the recorded business has declined. In 2000 live was around 30% of the global music business, now it is around 2 thirds. The live boom has long been seen as the good news for the music business, held up as evidence of value simply shifting from one part of the business to another, and the new way in which artists can build vibrant careers. The problem is that a) much of that growth has come in ticket price inflation, and b) most of the money does not make it back to artists. In fact, on average, artists only earn 14% of ticket sales revenue. Ticket resellers are a major contributory factor. Hiking up the prices and only distributing a small fraction back to artists, often in many cases (eg ticket marketplaces) nothing at all. The big ticketing companies are not merely passive observers, they are actively driving the reseller market, essentially acting as double agents and often cross promoting  reseller destinations they own. For example, Ticketmaster is also the parent company of Seatwave and GetMeIn. Though Ticketmaster’s reseller destinations do not bulk buy tickets, some independent resellers have teams of people that do exactly that.
  • Resold tickets put gigs out of reach of core fans: Resellers argue that there is a market for high priced tickets. There is, but it is a different market than that of core fans. Many sports leagues have seen a ‘gentrification’ of crowds, with older, more affluent fans being the only ones that can afford inflated ticket prices. The result is more subdued crowds and less vibrant atmospheres. The same thing is happening to live music, with young fans being forced out in favour of older audiences. It might be good for the ticket resellers and venues and booking agents, but it is bad news for bands and fans. The presence of ticket reselling marketplaces actively encourages nefarious behaviour, with a whole segment of professional resellers that use technology such as bots to bulk buy tickets before real fans get their hands on the tickets. There is an opportunity, nay a moral obligation, for more connected action to be taken to eradicate this sort of behaviour.
  • It is a problem that can be fixed, but it requires coordinated effort: Ed Sheeran’s camp has told fans not to buy from resellers at inflated prices. But Sheeran’s camp have to shoulder some of the blame.  The solution is as simple as it is complex. The simplicity is not to allow tickets to go to resell and to only admit fans whose names are on the tickets (which cuts out the ticketing marketplaces like Seatwave). But the complexity is that vested interests apply pressure to ensure this doesn’t happen. Nonetheless, action can be taken. Adele and her manager Jonathan Dickins took a bold stance last year, only allowing named ticket holders to attend some of her gigs. They even went as far as cancelling some resold tickets for other gigs. Mumford and Sons went one step further and booked Wembley directly, cutting out all the middle men.

But isolated action is not enough. Unless artists, managers and labels act together, to take a bold stance, change will not happen. And the losers then will be the fans.

Quick Take: A Big Deal Benefits Both Sprint And Tidal

News just emerged that SoftBank owned Sprint has acquired a 30% stake in Tidal, reportedly for $200 million against a valuation of $600 million. The valuation seems on the high side, but a big ticket investment works well for both parties.

According to MIDiA’s latest survey data from December 2016, just 2.7% of consumers in the US, UK, Australia and Canada use Tidal weekly (and that’s probably over reporting). Subscriber wise Tidal had 1 million subscribers at the end of 2016, just 1% of the global subscription market. (Although Tidal has published numbers suggesting it is closer to 4 million, those numbers are not commercially active subscribers but instead ‘users’ and trialists). Tidal is a small player in the global streaming subscription market. So why would Sprint / SoftBank a) want to invest in a small player and b) pay so much?

Making A Small Partnership Bigger

As we discussed in our December MIDiA Research report Next Steps For Telco Music: The Revenue Or User Dilemma telco music bundles are at a turning point. Telco music bundles were highly important in the early stages of streaming subscriptions, helping kick start the market. But their share of total music subscribers has fallen from a high of 32% in 2013 to just 14% in 2016. The original thinking behind telco bundles was differentiation, but when every telco has got a music bundle there’s no differentiation anymore. Additionally, if you are a top tier telco and you haven’t got Apple or Spotify, then partnering with one of the rest risks brand damage by appearing to be stuck with an also-ran. By making a high profile investment in Tidal, Sprint has thus transformed its forthcoming bundle from this scenario into something it can build real differentiation around. Also Tidal has built its proposition around exclusivity and that is being put front and centre of this partnership.

Buy Big To Look Big

Meanwhile, SoftBank has the benefit of a high priced acquisition. Such deals are typically viewed more favourably by investors than smaller ones as it is a statement of intent. Often companies can quickly make their investment back in increased market capitalization because of an uplift to the share price. This is the strategy that kept Yahoo afloat for the last 15 years.

Tidal has struggled to make a dent in the streaming market and has seen more clear water opening up between it and the market leaders. It also has shallower pockets than Spotify, Apple or Amazon. This deal gives Tidal access to Sprint’s customer base, free marketing (well free to Tidal at least) and a war chest to take on the streaming incumbents. Tidal is not about to suddenly become the global streaming leader but it can now, with a fair wind, become a serious player in the US.

 

Why Netflix Can Turn A Profit But Spotify Cannot (Yet)

Having just celebrated its 10th (streaming) birthday, Netflix followed up with a strong earnings release, announcing 5.8 million net new paid subscribers in Q4, sending its share price up by 9%. This wraps up a stellar year for Netflix, one in which it doubled down on original programming and delivered acclaimed hits such as Stranger Things and The OA, shows that don’t fit the traditional TV mould. In fact, Stranger Things was turned down by 15 TV networks before finding a home at Netflix and The OA’s oscillating episode lengths (from 1 hour 11 mins to 31 mins) would have played havoc with a linear TV schedule (not even considering its mind bending plot).

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Netflix closed 2016 with 89.1 million subscribers and the temptation to benchmark against Spotify’s equally strong year is too strong to resist. Spotify (which celebrated its decade in June 2016) closed the year with around 43 million subscribers, 48% the size of Netflix. But a closer look at the numbers tells another growth story.

Read the full post on the MIDiA blog by clicking here.

Announcing MIDiA’s New Research Practice: Paid Content

We are proud to announce the launch of MIDiA’s latest research practice: Paid Content. We’ve been working on this service for the past 9 months and it is headed up by our Paid Content analyst Zach Fuller.

The Paid Content service is the definitive source of analysis, data and research on the digital content marketplace, the trends that are shaping it, the technologies that are disrupting it and the companies and the consumers that are driving innovation.

It enables clients to get smart fast on the latest new technologies and start ups that are looking to change the marketplace. It shows them best practices in user acquisition, monetization and retention. Clients can benchmark themselves against competitors and against other industries, as well as getting the inside track on where tomorrow’s audiences are heading.

Some of the reports we have already published include:

  • Facebook The Media Company: If It Looks Like A Duck
  • How Consumers Adopt Technology: Why The S-Curve Rules
  • VR Vendor Landscape: Virtual Reality’s Path to Mainstream Entertainment
  • The Death of the Monthly Active User: Redefining User Metrics For The App Era
  • Paid Content Consumer Deep Dive: The Emergence Of A Sophisticated Audience
  • Instagram User Profile: Edging Towards Mainstream
  • SoundCloud User Profile: Male Dominated Music Sophisticates
  • Netflix User Profile: Mass Market Streaming Video Users

The topics we cover in the service include:

  • Full Stack media companies
  • Content strategy for virtual reality
  • Making digital audience measurement work
  • Media Consumption, cannibalization and wallet share
  • Freemium strategy and conversion
  • Blockchain and the payments landscape
  • How consumers adopt technology
  • Emerging market paid content trends and adoption
  • Paid content user profiles by individual app
  • How to utilize messenger app audiences

Who should subscribe?

Streaming media companies, mobile app companies, TV and online video companies, music companies, telcos, consumer electronics companies, investors

If you’d like to learn more about how to get access to Paid Content email us at info@midiaresearch.com

Music Subscriptions Passed 100 Million In December. Has The World Changed?

In streaming’s earlier years, when doubts prevailed across the artist, songwriter and label communities, one of the arguments put forward by enthusiasts was that when streaming reached scale everything would make sense. When asked what ‘scale’ meant, the common reply was ‘100 million subscribers’. In December, the streaming market finally hit and passed that milestone, notching up 100.4 million subscribers by the stroke of midnight on the 31st December. It was an impressive end to an impressive year for streaming, but does it mark a change in the music industry, a fundamental change in the way in which streaming works for the music industry’s numerous stakeholders?

Streaming Has Piqued Investors’ Interest

The streaming market was always going to hit the 100 million subscriber mark sometime around now, but by closing out the year with the milestone it was ahead of schedule. This was not however entirely surprising as the previous 12 months had witnessed a succession of achievements and new records. Not least of which was the major labels registering a 10% growth in overall revenue in Q2, driven by a 52% increase in streaming revenue. This, coupled with Spotify and Apple’s continual out doing of each other with subscriber growth figures, Spotify’s impending IPO and Vevo’s $500 million financing round, have triggered a level of interest in the music business from financial institutions not seen in well over a decade. The recorded music business looks like it might finally be starting the long, slow recovery from its generation-long recession.

100-4-million-subs

Spotify Continues To Set The Pace

Spotify has consistently led the streaming charge and despite a continually changing competitive marketplace it has held determinedly onto pole position since it first acquired it. Even more impressively, it has also maintained market share. According to data from MIDiA’s Music Streamer Tracker, in Q2 2015 Spotify’s share of global music subscribers was 42%, H2 15 41%, H1 16 44%, H2 16 43%. Not bad for a service facing its fiercest competitor yet in Apple, a resurgent Deezer and an increasingly significant Amazon. Spotify closed out the year with around 43 million subscribers, Apple with around 21 million and Deezer with nearly 7 million. 2nd place is thus less than half the scale of 1st, while 3rd is a third of 2nd place. Meanwhile Apple and Spotify account for 64% of the entire subscriber base. It is a market with many players but only 2 standout global winners. Amazon could change that in 2017, largely because it is prioritising a different, more mainstream market (as long as it doesn’t get too distracted by Echo-driven Music Unlimited success). Meanwhile YouTube has seen its music streaming market share decline, which means more higher paying audio streams, which means more income for rights holders and creators.

A Brave New World?

So far so good. But does 100 million represent a brave new world? In truth, there was never going to be a sudden step change but instead a steady but clear evolution. That much has indeed transpired. The music market now is a dramatically different one than that which existed 12 months ago when there were 67.5 million subscribers. Revenues are growing, artist and songwriter discontent is on the wane and label business models are changing. But 100 million subscribers does not by any means signify that the model is now fixed and set. Smaller and mid tier artists are still struggling to make streaming cents add up to their lost sales dollars, download sales are in freefall, many smaller indie labels are set to have a streaming-driven cash flow crisis, and subscriber growth, while very strong, is not exceptional. In fact, the global streaming subscriber base has been growing by the same amount for 18 months now: (16.5 million in H2 2016, 16.5 million in H1 2016 and 16.4 million in H2 2016). Also, for some context, video subscriptions passed the 100 million mark in the US alone in Q3 2016. And streaming music had a head start on that market.

At some stage, perhaps in 2017, we will see streaming in many markets hit the glass ceiling of demand that exists for the 9.99 price point. Additionally the streaming-driven download collapse and the impending CD collapses in Germany and Japan all mean that it would be unwise to expect recorded music revenues to register uninterrupted growth over the next 3 to 5 years. But growth will be the dominant narrative and streaming will be the leading voice. 100 million subscribers might not mean the world changes in an instant, but it does reflect a changing world.

Here’s Why Vinyl Isn’t About To Save The Music Business And Why Albums Need Rethinking

The BPI announced that ‘album equivalent sales’ were up by 1.6% in volume terms in 2016, with vinyl and streaming identified as the key drivers. Many people retain a nostalgic soft spot for vinyl, so an apparently vinyl led revival is always going to get people’s attention. But not only is vinyl not the future (it was just 2.6% of sales in 2016), the big differences between the most popular vinyl, streaming, singles and album artists reveal just how fragmented the music business has become.

Each of the top 10 charts (album sales, singles, top streaming artists, vinyl sales) almost reads as a standalone group of artists with remarkably little cross over. In fact, only 2 artists (the ubiquitous Drake and Justin Bieber) appear across streaming, singles and albums. None appear across all four charts.

top-10s-20165

The fragmentation adds complexity to an already sophisticated and nuanced landscape:

  • Two tribes: Only one of the top single artists of 2016 (Justin Bieber) was also a top album artist. This is why the album vs playlist album argument will continue way beyond 2017. Both realities co-exist with one catering more towards older audiences and the other to younger ones. The top 10 albums list is like browsing through a high street music store CD rack circa 2005: Elvis Presley, David Bowie (twice), Coldplay, Michael Ball. Of course, there is some overlap with streaming, an inescapable overlap considering that streams are now (for all the wrong reasons) counted towards album sales. Thus, we see contemporary artists Little Mix, Drake and Jess Glyn fill the 7,8 and 9 slots, while Justin Bieber is at #4. But first and foremost this is a tale of 2 tribes, 2 groups of music fans whose tastes and consumption patterns rarely overlap.
  • Old format, old bands: Vinyl sales may have hit their highest level in the UK since 1991 but this is hardly a sign of what is to come. Indeed, a quick look through the top 10 vinyl albums of 2016 reveals that all but one of the artists were releasing music back in 1991! The exception is Amy Winehouse and she’s dead. The majority of the volume of vinyl sales is driven by nostalgic older music fans. Of course, younger people do buy vinyl too, but interestingly they generally do so as either a form of merch or as a way of supporting their favourite artist. In fact, many under 30’s vinyl buyers don’t even have turntables.

The really important takeaway from all this though, is what it means for driving sales and marketing artists in 2017. One size stopped fitting all long ago, but now there are clearly two broad groups of music audiences which must be addressed in entirely different ways, across different channels and with different tactics. At the most base level this is a case of youth versus grey, of digital native versus digital immigrant, of playlist versus album, of sales versus consumption. But it is also more complex and nuanced than that. There are overlaps and cross pollination. They may be relatively thin on the ground right now, but like some long-lost treasure map, they may point to how bridges can be built across these two worlds. If no such links can be made then ultimately this will be a story of one world hurtling to oblivion while the other booms. That is of course the more likely scenario, highlighted by the fact that (in volume terms) UK CD sales fell by 12% and download sales by 26% in 2016 while streams were up 67%.

As large volumes of older consumers switch to streaming (and Amazon should play a key role here) there will be more opportunity to join the dots. But do not mistake this simply as an opportunity to try to revive yesterday’s formats in today’s platforms. The album is clearly fading. According to MIDiA Research survey data, 68% of subscribers state that playlists are replacing albums for them. It is time to start investing though and effort in rethinking what album experiences should be in the digital era. And that conversation should have no bounds, everything should be on the table (number of tracks, street date vs continual updates, interactivity, changing content etc.).

The 2016 sales figures show us that the album in its traditional format still has a very solid, albeit quickly declining, audience. But if it is to outlive that dwindling customer base it must be rethought for the streaming era.

Experience Should Be Everything In 2017

 

2017 is going to be a big year for streaming. Spotify will likely IPO, paid subscribers will pass the 100 million mark in Q1, playlists will boom. 2017 will build upon an upbeat 2016 in which the major labels saw streaming drive total revenue growth. This stirred the interest of big financial institutions, companies that had previously avoided the music industry like the plague. These institutions are now seriously assessing whether the market is finally ready to pay attention to. The implication of all of this is that if Spotify’s IPO is successful, expect a flow of investment into a new wave of streaming services. But if these new services are to have any chance of success they will need to rewrite the rules by putting context and experience at the centre of everything they do.

Why User Experience Often Ends Up On The Back Seat

Putting experience first might sound like truism. Of course, everyone puts user experience first right? Wrong. You may be hard pushed to find many companies that do not say that they put user experience first, but finding companies that genuinely walk the talk is a far harder task. Just in the same way that every tech company worth its salt will say they are innovation companies, only a minority do genuine, dial-moving, innovation. Prioritising user experience is one of those semi-ethereal concepts that may be hard to argue against in principle, but that is much more difficult to actually build a company around. Why? Because the real world gets in the way. In the case of music services ‘the real world’ translates into (in no specific order): catering to rights holders’ requirements, investing in rolling out to new territories, paying out 81% of revenue to rights holders on a cash flow basis, spending on marketing etc.

The distinct advantage that the next generation of streaming services will have is that they will sit on the shoulders of the streaming incumbents’ innovation. Instead of having to learn how to fix stream buffering, drive compelling curation, make streaming on mobile work and define rights holder licenses for freemium, they can take the current state of play as the starting point. They are starting the race half way through and with completely fresh legs. They come into the market without the same tech priorities of the incumbents and also without any of their institutional baggage (baggage that, whether they like it or not, shapes world views and competitive vision).

Streaming Music Is Not Keeping Digital Pace

During the last 5 years, users’ digital experiences have transformed, driven by apps like Snapchat, Instagram and Musical.ly. Video has been at the heart of most of the successful apps, as has interactivity. Music services though have struggled, not only with how to make video work, but also with how to give their offerings a less 2 dimensional feel. They have lagged behind in the bigger race. For all of the undoubted innovation in discovery, recommendation, personalization and programming, the underlying streaming experience has changed remarkably little. We are still fundamentally stuck in the music-collection-as-excel-spreadsheet paradigm. Underneath it all is the same static audio file that resided on the CD and the download. Granted, there have been some major improvements in design (such as high resolution artist images, full screen layouts and strong use of white space). Now though, is the time to apply these design ethics to streaming User Interface (UI) and User Experience (UX).

Successful (non-music) apps are multidimensional, highly visual and often massively social. These are the UX and UI bars against which streaming services should benchmark themselves, not how other streaming services are doing. Of course, a key challenge is that music in not inherently a lean forward, visual experience. Most people want much of their listening time to be lean back, without interruptions. Nonetheless, Vevo and YouTube have shown us that there is massive appetite, at truly global scale, for lean forward, highly social, visual music experiences.

Fixing A Plane Mid-Flight

The streaming incumbents could all do this, but they will be at distinct disadvantage compared to potentially well-funded new entrants. It is no easy task to refit a plane mid-flight. Also, Spotify, Deezer and Napster are built on tech stacks with origins more than a decade old. All have made massive changes to those original tech stacks (Spotify in particular, shifting from a monolithic structure to a modular one) but in essence, all these companies were first built as desktop software providers in an era when Microsoft and Nokia were still technology leaders. They have adapted to become app companies but that change did not come naturally and took a huge amount of organizational discipline and resource. This next market phase will require exactly the same sort of discipline, but more effort and at a time when competition is fiercer and costs are higher.

Streaming Services Need To Know Who They Are Really Competing With

The streaming services might think that they are competing with each other but in reality they are competing in the digital economy as a whole. Their competitors are Snapchat, Instagram and Buzz Feed. Right now, music listening accounts for 36% of consumers’ digital media time but that share is under real threat. Over the course of the millennium, music has relied increasingly on growth in lean back environments and contexts. The rise of listening on the go via MP3 players and then smartphones created more time slots that music could fill, while media multitasking has been another major driver of listening. All of this works well when whatever else is going on does not require the listener to be using their ears. The rise of video is, paradoxically, creating more competition for the user’s ear. Even though we are seeing the 2nd coming of silent cinema with social video captioning, there are many more calls to action for our eyes and ears. Even a Facebook feed 24 months ago would have been something that could in the large be safely viewed in silence. Now it is full of auto playing videos, willing the user to unmute. As soon as s/he does so the music has to stop. On video-native platforms like Snapchat the view is even starker for music. Killing time in the Starbucks queue is now as likely to involve watching a viral video as it is listening to a song.

Thus streaming music has to create a user experience renaissance, not just to keep up with contemporary digital experiences but in order to ensure it does not lose any more share of digital consumers’ consumption time. This is the new problem to fix. The Spotify generation fixed buffering and mobile streaming, the Apple Music generation fixed discovery, the next generation will fix UX. Just as Apple Music and Google Play Music All Access were able to skip the first lap of the race, launching with what Spotify and co took years to develop, so the next generation of streaming services, when they come, will take all of the recent innovation playlists, curation and user data analysis as the blank canvas. Which in turn will force the incumbents to up their game fast. Until then, the streaming incumbents have an opportunity to get ahead else get left behind.