About Mark Mulligan

Music Industry analyst and some time music producer. Vice President and Research Director with Forrester Research

The paradox of small

When the history books are written about our current times, the rise of creator culture will likely go down as one of the most impactful paradigm shifts. It is a dynamic that extends far beyond music, but it is impacting the music industry more directly than it is other entertainment industries – in large part because the music business is not yet set up for the economies of micro audiences. Until it is, artist royalty woes will remain a festering wound that risks infecting the entire business. The solutions will require a combination of a new approach to monetisation and a realistic understanding of what streaming can truly deliver to an artist community that is continuing to grow faster than streaming revenues.

More mouths to feed

Despite the challenges of the pandemic, streaming revenues grew by 20% in 2020, with subscriber numbers growing even faster. Over the same period, the number of releasing artists grew by more than a third. The arithmetic is brutally simple: more new artists than more new music revenue meant lower average income per artist. As economist Will Page puts it, there are more mouths to feed. Even within the fast-growing artists direct segment, where revenues grew dramatically faster than the overall market (34%), the average income per artist grew by just 2% to $234 a year – that’s right, just $234 a year, across all recorded music formats. And of course, that figure is heavily skewed up by a few thousand ‘superstar’ independent artists, with the vast majority earning far, far less.

Big numbers, small income

With artists direct numbering five million in 2020, never have there been so many people releasing their music to the global public. This creator revolution is unprecedented and represents five million dreams being chased. But with just $234 of annual income up for grabs, the reality is that nearly all of those dreams will be unfulfilled. It has always been thus with music, but the difference now is that expectations have been raised, with matters compounded by the fact that streaming numbers can appear big but deliver only small revenues. For example, a self-releasing artist that racks up 100,000 streams might only take home $500, which could easily feel like a very modest return to an artist that does not have a comprehensive grasp of how streaming royalties work.

The 0.05%

This is the paradox of small: more artists can reach global audiences and drive sizeable streaming metrics but have little or no realistic prospect of meaningful income. Much of the streaming income debate has revolved around the plight of the middle class artist but the bigger dynamic at play is the creation of the amateur enthusiast class. In the old music business, these artists lived in a different world from professional artists. They played in local bars and sold a handful of CDs there that they recorded in a local studio. Now they use the same creator tools as the pros and have their music on the same platforms. This can give the impression of playing in the same league as the pros, but they’re not. If they are good enough, do the right things and get the breaks then they can get into that league, but that will only happen for 0.05% of them.

Dreams just out of reach

Having dreams appear to be within touching distance but somehow never quite within grasp is fertile ground for breeding discontent and resentment. The parts of the music business that trade on this segment (artist platforms, digital distributors, streaming services, creator tools) have a duty of care that must move beyond its current remit of trading on artists’ dreams.

Fixing streaming royalties will not change things. Even if you doubled royalty rates, 100,000 streams would still only generate $1,000 for an independent artist. Meanwhile, it would result in streaming services losing 40 cents on every dollar earned, and that’s just to cover the royalty rates, i.e., not even considering things like having a product, staff, offices, marketing or operations.

Looking elsewhere for income

Streaming royalties are never going to add up for most independent artists, in the same way radio would never do so. And this is not just a self-released artist problem: most artists will never get paid ‘enough’ money from streaming, and trying to make streaming royalty mechanisms do so is tilting at windmills. As I have previously written about, the music business needs to build out its ancillary revenue streams for music creators. There are already lots of options, such as:

  • Selling song writing services on Soundbetter
  • Selling beats on Splice
  • Selling merch on Bandcamp
  • Selling subscriptions on Twitch
  • Selling royalty free music on Artlist
  • Sell live stream concert tickets with Driift
  • Selling artist subscriptions on Fan Circles
  • Selling digital collectibles on Fanaply

Record labels, management, distributors, streaming services, and creator tools companies all need to invest in helping their artists build their fan bases and income on such platforms. This investment in their creators’ incomes will ensure that they are better able to continue to make the music that fuels the business models that all those other entities have learned to make work in a way most individual creators have not and cannot.

Streaming services must fix the problem… or someone else will

Nevertheless, the market also needs something more – a platform glue that binds together creation, audience and consumption. Contrast a music artist with a games streamer. A games streamer creates, streams, finds and monetises their audience all within one platform (e.g., YouTube or Twitch). A music artist, however, creates music in one platform, takes it to another for distribution which then feeds it into streaming platforms where the artist has no direct relationship with their audience. There are exceptions to the rule (Bandlab, Soundcloud and YouTube especially) but they are just that: exceptions, not the rule.

Either streaming services need to start backing up their creator-first language with creator-first tools, or instead watch from the side lines as someone else does it for them. Whoever leads the charge, the paradox of small will finally become slightly less of a paradox.

We’re Hiring (again)

The pandemic rewrote the rules of digital entertainment, creating new opportunities and threats at an unprecedented rate while also intensifying competition for consumer attention. Never before has the interconnected nature of the digital entertainment landscape been more important, which also means that never before has MIDiA’s holistic, cross-industry view been more important. I am very pleased to say that this has resulted in a record period of growth for MIDiA, and even though we added three awesome new team members at the start of the year, we are now hiring again to keep up with demand.

These are three truly exciting roles which will play an important part in the next chapter in MIDiA’s story:

Music Industry Analyst and Consultant

The person in this role will join MIDiA’s four-person music analyst and consultant team. You’ll get to write analysis for all the biggest players in the global music business as well as work on exciting consulting projects to support the strategy of some of the most interesting and innovative companies in the industry. We’re looking for someone with a good amount of industry experience for this role; at least five to seven years ideally at a record label, music publisher, digital distributor, streaming service or management agency (but we’re open to experience in other parts of the music industry, too).

Podcast and Audio Analyst

MIDiA has established a reputation for high-impact podcast research and data. We are taking this a step further and will soon be launching a new Podcast and Audio service, covering podcasts, audiobooks and other emerging audio formats. The successful candidate for this role will lead our audio coverage within this new research service. We’re looking for someone with at least three years’ experience working within the podcast sector in a commercial, strategy or analysis role.

Forecast and Modelling Analyst

MIDiA’s industry models and forecasts are relied upon by global companies and investors to help inform strategy, understand where markets are heading and to assess market opportunity. We invest immense effort, time and resources into building our datasets which has helped us earn a reputation for authoritative, accurate market sizing and credible forecasting. We are now looking for an experienced Forecasting and Modelling Analyst to expand our data capabilities, supporting both our syndicated research service and our consulting team.

We’re super excited about these new roles and we’re looking forward to hearing from you if you think that you could be the right fit for one of them.

Full details of these positions are on the MIDiA website here; please carefully consider the stated requirements and whether you meet them or equivalent, as we have put a lot of thought into what we really need to support the rest of the team and continue growing in the right direction. Applications should be sent to info@midiaresearch.com.

The productisation of music rights

News that New York-based Pershing Square Tontine Holdings is planning to acquire 10% of UMG is the latest in a wave of financial transactions in the music rights space. Alongside this, Believe’s impending IPO has the potential to be one of the biggest things to happen to the independent music sector in some time, and comes as part of a wave of IPOs (e.g. WMGUMG), SPACs (e.g. AnghamiReservoir) and no end of catalogue funds and acquisition vehicles. This trend, with good cause, has been referred to as the ‘financialisation of music’ but that only captures part of what is at play here. This is more than simply an influx of capital and debt; financial institutions are now becoming part of the plumbing of the music business, and in turn they are changing the definition of what constitutes success. This shift in objectives and desired outcomes has the potential to rebalance how the music industry operates.

Though the strategies and aspirations of financial entities that are investing in music are diverse, they are usually very different to those held by music companies, particularly those of traditional music rights holders. What constitutes success for one may not matter much for the other. For example, a credible music industry objective (e.g., get playlisted) might have little immediate relevance to asset class value. Even the macro market trends illustrate the disconnect: the value of publicly announced music catalogue transactions grew by 14% in 2020, while global music publisher and label revenues each grew by just 8%, i.e., the financial value of music catalogues grew faster than their ability to generate revenue. 

Music rights have become established as an asset class, with their value defined differently than how the music industry typically measures value. The value of a song to the music industry resides in its commercial and cultural performance. A hit is a hit. But that same song’s value as part of a catalogue as a financial asset is also defined by a wider range of factors, including the relative value of music as an asset class compared to other financial asset classes. When entities such as pension funds and investment managers acquire music rights, they add them to diverse portfolios of assets, with music representing a particular tier of risk and return. Those financial institutions accrue value by repackaging the assets in derivative financial products that they then sell on. A pension plan is a straightforward example. This is the productisation of music rights.

This all matters because the strategic objectives of the financial entities will inevitably shape those of the music rights company. For example:

  • The Tencent-led consortium that acquired 20% of UMG has made a bet on rights versus a bet on distribution (e.g. Spotify) and as such will have a set of views about what UMG’s relationship with streaming services should be. Right now, those views most likely align closely with those of UMG leadership, but if at some stage they were to diverge then UMG’s strategy itself could be affected. 
  • The Ontario Teachers’ Pension Plan’s investment in Anthem Entertainment forms part of an investment strategy that will expect an increase in asset value and return. Depending on the specifics of the strategy, this could, for example, favour Anthem focussing on catalogue acquisition over riskier creative investments in specific songwriters.

Neither of these examples are inherently positive or negative, they simply illustrate that the scale and nature of the investments coming into music rights are also changing how the music business operates. In some instances that will result in conservatism, in others bold opportunism. But the determining factors will be less about the music ethos of the music company and more about the investment thesis of the financial backer. 

External finance has long played an important role in the music business, but never before at this sort of scale. Music catalogue M&A transactions (not including IPOs, SPACs etc.) have already 74% of what was a record level in 2020. The scale of this inward investment shows no sign of slowing. So, whatever your views on the productisation of music rights, this is a market dynamic that is going to help shape the future of the music business.

Music and podcasts are competing for the same time

The pandemic changed media consumption. Consumers acquired an extra 12% of entertainment time and though everything was up, some categories grew much faster than others. One of the biggest gainers was spoken word audio, with podcasts and audiobooks seeing dramatic rises and while music hours grew too, the increase was below 12%, which means that music lost share. In the current entertainment environment of plenty this may be an academic concern, but when life returns to some form of normality (commutes, going out, gyms etc.) some or all of that extra 12% of entertainment time will go, which means that growing by less than the market average could translate into decline.

The data in MIDiA’s latest podcast report (Podcasts audiences: Competing for Attention) shows that the audience behaviour is lighter touch than either music or radio, with the majority of users listening to a smallish number of episodes and subscribing to relatively few podcasts. This matters because if this growing audience sticks with podcasts, then they will listen to more podcasts content as their habits deepen. So podcasts will have two key growth drivers:

  1. More listeners
  2. More time per listener

This is a very different story than for streaming music, especially in developed markets, where growth is slowing in both consumption and audience. Music is just one lane in the audio market and its fortunes ever more intertwined with podcasts and audiobooks. Which means that spoken word audio plays a role in slowing audio consumption. To illustrate the point, here is what is happening on Spotify:

  • European and North American MAUs grew by just 1.4% (Q1 2021)
  • In some emerging markets consumption levels had not only fallen during the pandemic but remained below pre-COVID levels (Q1 2021)
  • Global consumption hours continued to ‘grow meaningfully’ (Q1 2021)
  • Podcast hours reached an ‘all time high’ (Q1 2021)
  • Total content hours per MAU fell by 1% (FY 2020)

In short, Spotify’s total consumption is relatively flat on a per user basis, with podcast growing fast, which means the average Spotify user is listening to less music. As Spotify is both the leading music streaming platform globally and the most widely visited podcast platform, what happens on Spotify has a big impact on the wider market.

The Spotify metrics present a clear correlation but are not evidence of causality, i.e., are podcasts directly cannibalising music streaming? Which is where we get to turn to MIDiA’s latest podcast data again. Although more than a third of music streaming users are listening to more audio overall because of podcasts, more than a quarter are listening to less music directly because of podcasts and a slightly higher share the same for radio (again, because of podcasts).

There are only so many hours in the day and while the pandemic gave many consumers more hours for entertainment, even in that environment, music hours lost out to podcast hours. Right now that will not feel like much of a problem because there are more people listening to and paying for streaming now than before the pandemic. So everything is bigger than before. But with the slowdown coming, the beneath-the-surface, per user metrics are going to start translating into much more obvious, above the line trends. Audio is booming, of that there is no doubt. The question is whether there is enough space for streaming, podcasts and audiobooks to all grow?

Hi-Res audio: It’s all about a maturing market

Apple and Amazon made a splash this week by integrating Hi-Res Dolby Atmos audio into the basic tiers of their streaming services. The timing, i.e. just after Spotify started increasing prices, is – how shall we put it, interesting. It also struck a blow against the music industry’s long-held hope that Hi-Res was going to be the key to increasing subscriber ARPU. While that might be true, for now at least, the move is an inevitable consequence of two streaming market dynamics: commodification and saturation.

Music streaming contrasts sharply with video streaming. While the video marketplace is characterised by unique catalogues, a variety of pricing and diverse value propositions (including a host of niche services) music streaming services are all at their core fundamentally the same product. When the market was in its hyper-growth phase and there were enough new users to go around, it did not matter too much that the streaming services only had branding, curation and interface to differentiate themselves from each other. Now that we are approaching a slowdown in the high-revenue developed markets, more is needed. Which is where Hi-Res comes in.

Now that streaming is, as Will Page puts it, in the ‘fracking stage’ in developed markets, success becomes defined by how well you retain subscribers rather than how well you acquire them. As all the key DSPs operate on the same basic model, they need to innovate around the core proposition in order to improve stickiness and reduce churn. Spotify started the ball rolling with its podcasts pivot, but the fact that its podcasts can be consumed by free users means it is not (yet) a tool for reducing subscriber churn.

On top of this, when podcasts are mapped with other positioning pillars, Spotify’s competitive differentiation spread is relatively narrow. Because Apple and Amazon now both have Hi-Res as standard, they not only boost audio quality but value for money (VFM) as well. Bearing in mind, both companies already scored well on VFM because they have Prime Music and Apple One in their respective armouries. 

It is Amazon, though, that looks best positioned of the four leading Western streaming services. In addition to audio quality and VFM, it is building out its podcasts play (as compared to the Wondery acquisition) and it has the potential to bundle in the world’s leading audiobook company, Audible. Given that spoken-word audio consumption grew at nearly twice the rate music did during 2020, being able to play in all lanes of audio will be crucial to competing in what will become saturated streaming markets. 

Immersive audio storytelling 

Finally, Dolby Atmos is more than simply Hi-Res audio; it is an immersive format that enables the creation of spatial audio experiences. If we are truly on the verge of a spoken-word audio revolution, then immersive audio may have a central role to play. Surround sound has been a slow burner for home video, but that may be because the video experience itself has improved so much (bigger screens, HD, more shows than ever) that the audio component has been less important (though the growing soundbar market suggests that may be beginning to change). However, in audio formats there is only the audio to do the storytelling. This could mean that tools like immersive audio become central to audio storytelling, which means, you guessed it, Amazon and Apple would then have a competitive advantage in podcasts and audiobooks that Spotify would not.

Growth drivers – what comes after streaming

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

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

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

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

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

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

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

Spotify pushes prices up, but do not expect dramatic effects

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

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

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

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

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

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

The music industry’s centre of gravity is shifting

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

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

The publishing renaissance

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

When growth isn’t growth

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

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

The creator tools gold rush

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

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

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

Assessing the streaming opportunity: You’re doing it wrong

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

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

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

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

TAM: you’re doing it wrong

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

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

Going beyond the TAM hype

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

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

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

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

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

Creator tools platforms could become social networks

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

Artists have a branding problem 

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

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

Ecosystem plays

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

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