About Mark Mulligan

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

The Three Eras Of Paid Streaming

Streaming has driven such a revenue renaissance within the major record labels that the financial markets are now falling over themselves to work out where they can invest in the market, and indeed whether they should. For large financial institutions, there are not many companies that are big enough to be worth investing in. Vivendi is pretty much it. Some have positions in Sony, but as the music division is a smaller part of Sony’s overall business than it is for Vivendi, a position in Sony is only an indirect position in the music business.

The other bet of course is Spotify. With demand exceeding supply these look like good times to be on the sell side of music stocks, though it is worth noting that some hedge funds are also exploring betting against both Vivendi and Spotify. Nonetheless, the likely outcome is that there will be a flurry of activity around big music company stocks, with streaming as the fuel in the engine. With this in mind it is worth contextualizing where streaming is right now and where it fits within the longer term evolution of the market.

the 3 eras of streaming

The evolution of paid streaming can be segmented into three key phases:

  1. Market Entry: This is when streaming was getting going and desktop is still a big part of the streaming experience. Only a small minority of users paid and those that did were tech savvy, music aficionados. As such they skewed young-ish male and very much towards music super fans. These were people who liked to dive deep into music discovery, investing time and effort to search out cool new music, and whose tastes typically skewed towards indie artists. It meant that both indie artists and back catalogue over indexed in the early days of streaming. Because so many of these early adopters had previously been high spending music buyers, streaming revenue growth being smaller than the decline of legacy formats emerged as the dominant trend. $40 a month consumers were becoming $9.99 a month consumers.
  2. Surge: This is the ongoing and present phase. This is the inflection point on the s-curve, where more numerous early followers adopt. The rapid revenue and subscriber growth will continue for the remainder of 2017 and much of 2018. The demographics are shifting, with gender distribution roughly even, but there is a very strong focus on 25-35 year olds who value paid streaming for the ability to listen to music on their phone whenever and wherever they are. Curation and playlists have become more important in order to help serve the needs of these more mainstream users—still strong music fans— but not quite the train spotter obsessives that drive phase one. A growing number of these users are increasing their monthly spend up to $9.99, helping ensure streaming drives market level growth.
  3. Maturation: As with all technology trends, the phases overlap. We are already part way into phase three: the maturing of the market. With saturation among the 25-35 year-old music super fans on the horizon in many western markets, the next wave of adoption will be driven by widening out the base either side of the 25-35 year-old heartland. This means converting the fast growing adoption among Gen Z with new products such as unbundled playlists. At the other end of the age equation, it means converting older consumers— audiences for whom listening to music on the go on smartphones is only part (or even none) of their music listening behaviour. Car technologies such as interactive dashboards and home technologies such as Amazon’s echo will be key to unlocking these consumers. Lean back experiences will become even more important than they are now with voice and AI (personalizing with context of time, place and personal habits) becoming key.

It has been a great 18 months for streaming and strong growth lies ahead in the near term that will require little more effort than ‘more of the same’. But beyond that, for western markets, new, more nuanced approaches will be required. In some markets such as Sweden, where more than 90% of the paid opportunity has already been tapped, we need this phase three approach right now. Alongside all this, many emerging markets are only just edging towards phase 2. What is crucial for rights holders and streaming services alike is not to slacken on the necessary western market innovation if growth from emerging markets starts delivering major scale. Simplicity of product offering got us to where we are but a more sophisticated approach is needed for the next era of paid streaming.

NOTE: I’m going on summer vacation so this will be the last post from me for a couple of weeks.

 

 

YouTube And Latin America Are Taking Over The World

Unless you have been on Mars for the last couple of days you will have seen the news that Luis Fonsi’s ‘Despacito’ has become the most streamed track in history with 4.6 billion streams. The figure includes a couple of versions of the track (ie the one include a certain Justin Bieber) but is an impressive tally nonetheless. The landmark raises 2 key trends:

  1. The role of the Latin American market
  2. The role of streaming

Latin Takeover

On the first point, Latin America is becoming a streaming powerhouse. This is a trend we have long anticipated at MIDiA and it is why we have a Latin American analyst (Leo Morel in Brazil) and have been fielding consumer surveys in the region since we launched the company. ‘Despacito’ is not an isolated event. For example, Shakira’s ‘Chantaje’ became the first Latin American Spanish language track to reach 1 billion views earlier this year. But Latin America’s contribution to streaming is uneven. It accounts for 17% of all subscribers globally but 27% of all streaming video users. Indeed, Brazil and Mexico are Vevo’s 2nd and 3rd largest markets globally, after only the US. The socio-economic realities of Latin America mean that it will always over index towards free streaming compared to European and North American markets. But the streaming appetite is clear. With such large streaming appetite, expect Latin American audiences to increasingly shape future hits. Once enough Latin American fans get behind a track the snowball effect kicks in: once in Spotify’s global streaming chart it then finds its way into curated playlists and then volumes grow even faster. A similar effect is felt as the momentum kicks YouTube’s and Vevo’s algorithms into gear. But because the region skews towards YouTube and Vevo the regional revenue impact under indexes. Thus we have an emerging dynamic where Latin American audiences create the hits and European and North American audiences pay for them. This is the new normal.

despacito midia 1

Just as important as the rise of Latin America, is the continued rise of YouTube. Value Gap or no Value Gap, YouTube’s role in breaking and making hits is clear. More so, it is becoming more pronounced. YouTube streaming growth might be slowing in the US but the same does not necessarily apply globally. Indeed, taking the time it takes for YouTube / Vevo music videos to reach 1 billion views we can see that the 2017 hits ‘Despacito’ and ‘Shape Of You’ got there 40% faster than the average for tracks from 2016, 2015 and 2012. Only Adele’s 2015 hit ‘Hello’ got there faster, and that was a highly anticipated event that is a unique case.

despacito midia 2

 

YouTube added 500 million users between 2012 and 2017. That is no mean feat but nor is it stellar growth. Over the same period Facebook added more than 1 billion users and WhatsApp came from next to zero to 1.2 billion. YouTube is a mature platform and so growth is not just measured in terms of users but also in terms of engagement, especially streams per user. And this is where YouTube really seems to be delivering. A way of relating the growth of 1 billion view music videos to the total user base is dividing the average number of monthly views each video had en route to 1 billion and dividing that by the total number of YouTube users. In 2012 this figure was 0.19, by 2017 it had fallen to 0.17. Thus, for the 1 billion club, more YouTube users are streaming these songs more times. Growth is coming both from audience and activity.

 

There are other mitigating factors. For example it is conceivable that YouTube and Vevo are simply becoming better at creating mega hits, concentrating the audience around big hits. Thus making YouTube/Vevo more of a superstar economy. Vevo’s recommendation algorithms and YouTube’s autoplay feature play a role too, contributing to more streams. The autoplay was negotiated, along with full albums, from the labels as part of YouTube’s Music Key service. A service that never even made it out of beta, but YouTube of course held onto the good parts of that deal. Spotify, that is how you do digital deals!

 

The fact that streaming records are now being broken with such regularity shows that we have arrived at a tipping point. Streaming is transitioning from fast growing digital revenue stream, to the centre of an entirely new business. As impressive as ‘Despacito’s numbers are, get used to these sorts of records being made and broken on a regular basis. And get used to Latin America and YouTube playing an ever bigger role.

 

Amazon Is Now The 3rd Biggest Music Subscription Service

At MIDiA we have long argued that Amazon is the dark horse of streaming music. That horse is not looking so dark anymore. We’ve been tracking weekly usage of streaming music apps on a quarterly basis since 2016 and we’ve seen Amazon growing strongly quarter upon quarter. To the extent that Amazon Music is now the 2nd most widely used streaming music app, 2nd only to Spotify which benefits from a large installed base of free users to boost its numbers. So, in terms of pure subscription services, Amazon has the largest installed base of weekly active users.

But it’s not just in terms of active users that Amazon is making such headway. It is racking up subscribers too. Based on conversations with rights holders and other industry executives we can confirm that Amazon is now the 3rd largest subscription service. Amazon has around 16 million music subscribers (ie users of Amazon Prime Music and also Amazon Music Unlimited subscribers). This puts it significantly ahead of 4th and 5th placed players QQ Music and Deezer and gives it a global market share of 12%.

subscriber market share

But Amazon’s achievement is even more impressive than it first appears. Amazon’s music streaming adoption is concentrated among 4 of its Amazon Prime markets: US, Japan, Germany and UK. In these markets 35% of Amazon Prime subscribers are Amazon Prime Music or Amazon Prime Music Unlimited users. Most music subscription services think about their addressable market in terms such as total smartphone users with data plans, or in Apple’s case in terms of iTunes account holders. In both those scenarios subscribers have to be converted into paying users. But all Amazon has to do is persuade its 40 million odd Prime subscribers to start using its music app. Many of you will have seen blanket Amazon Prime Music advertising recently. Think about it. All that those ads have to do is persuade existing Prime subscribers to start using the music app for free, no new payment, no new commitment. It is as easy a sell as you could wish for. So, expect that 16 million number to grow strongly over the coming months. And of course, Amazon has another tool in its kit: the Echo. Having sold an extra 3.3 million Amazon Echos on Prime day (Tuesday 12th) Amazon now has around 13 million Echos in consumers’ hands.

The CD Factor

Amazon has one further ace up its sleeve: CDs. In Japan and Germany, the world’s 2nd and 4th largest recorded music markets, physical music sales are the majority of revenues, with streaming still getting going. As those market develop, the physical-to-digital transition will leap frog downloads, skipping straight to streaming. What better way to do that than having an established billing and subscription relationship with CD buyers. Enter stage left, Amazon. Amazon already has a very strong Prime Music base in Germany and could well become the leading subscription service there within 12 – 18 months.

Amazon is a secretive company and is unlikely to either confirm or deny these numbers, but we are confident they are an accurate reflection of its standing in the market. Amazon can now discard its dark horse guise and be revealed for what it is: one of the top streaming music players. Game on!

The Art of Windowing: Why 4:44 is a Different Kind of Exclusive

This is a guest post from MIDiA’s Media and Music Analyst Zach Fuller.

444.originalFor a brief moment last year, windowing seemed like the future of music streaming. Already common practice in the film-industry, the strategy was being touted as a way of utilising artist fan engagement to drive registrations (both freemium and paid) to streaming services, thus engendering the payment behaviours that would ultimately grow the industry. Yet, as MIDiA addressed last year, Frank Ocean’s bait-and-switch manoeuvre with Universal in August 2016 sent shockwaves through an industry still acclimatising to streaming economics. Arriving on the coat-tails of a windowing gold-rush that had seen releases by Beyonce, Kanye West and Chance the Rapper all utilising the strategy, Ocean’s move effectively put the brakes on the practice, leaving Universal CEO Lucian Grainge allegedly so infuriated that he ordered a company-wide halt to any further windowing projects.

Fast forward to 2017 and Jay-Z’s 4:44 has brought windowing back to the fore. Whilst numerous personal revelations (as well as receiving Jay-Z’s best critical response since 2003’s The Black Album) have meant blanket press coverage across social and traditional media, it is also notable that 4:44 is the first major windowing project to arrive this year. This is despite 2017 presenting two substantial windowing  opportunities with Ed Sheeran’s new album and Harry Styles’ self-titled debut  – however neither were windowed on any service. Jay-Z however, is in a very different position to most artists. Aside from owning his own streaming service, Jay-Z’s control over his artistic output extends back to the very beginning of his career. He co-founded his own label, Roc-A-Fella Records (distributed through Universal), to release his debut back in 1996, and as was reported last year, he is now in full control of his own master rights. Such self-determination over one’s career at the scale of his audience is rare, thus enabling 4:44’s window release while the rest of the industry retreats from such practices.

Audience reticence can also be attributed to the unlikelihood this is a move to build TIDAL’s user base. Kanye West claimed his 2016 release ‘The Life of Pablo’, ‘My album will never never never be on Apple. And it will never be for sale… You can only get it on Tidal.’ This position lasted around a week, with Kanye now allegedly having left TIDAL over unpaid royalties. Similarly, Beyonce’s TIDAL exclusive lasted just 24-hours. It is therefore fair to assume that music fans have become naturally suspicious about the nature of windowing and how long they will have access to exclusive content should they subscribe to a particular service. This accounts for the trend of free-trial hopping between streaming services as well as the fact that Jay-Z’s album has already been subject to high levels of piracy.

Streaming services themselves also continue to exhibit agnostic positions on windowing. Apple Music’s Jimmy Iovine earlier this year seemed to infer the company would move away from such practices, stating ‘We’ll still do some stuff with the occasional artist. The labels don’t seem to like it and ultimately it’s their content.’ Spotify on the other hand, having previously stated they were against windowing, have in recent months suggested they may transition towards windowing certain releases on their premium tier. For these reasons, 4:44’s window should be considered less about swelling the subscriber base, as was the intention of windowing efforts last year, but rather reaching his most engaged audience first. Jay-Z’s fanbase are likely to be already on the platform when taking into account the immediate rush of subscribers that followed its release last year. Interestingly MIDiA Research’s consumer survey data shows that Tidal subscribers over-indexing as older and more prominently male than on other competing streaming music services. Whilst TIDAL’s problems are therefore unlikely to subside with this release, 4:44 could at the very least resume the dialogue on how windowing will be employed going forward in growing streaming’s paid users.

How Soundcloud Could Transform Deezer’s Market Narrative

deezer soundcloud

News has emerged of Deezer being a potential buyer of troubled Soundcloud. This follows on from Spotify’s prolonged but ultimately abortive courting last year. Soundcloud was once a streaming powerhouse, with 175 million Monthly Active Users reported in October 2014. Though that number is still widely cited whenever Soundcloud is mentioned in the media, in truth its user base is now much smaller. Spotify, which now has around 150 million MAUs has a Weekly Active User penetration rate of 16% while Soundcloud’s WAU rate is just 6%. With the caveat that multiple additional variables impact WAU vs MAU rates, this would imply that Soundcloud’s MAU number is now closer to 70 million. Despite this shift in its public narrative, Soundcloud remains a uniquely valuable asset in the streaming landscape, one that would give another streaming service a distinct competitive advantage. Here’s why.

A Streaming Service Unlike Any Other (Except YouTube That Is)

Soundcloud first rose to prominence as a platform for artists before it rocketed into the stratosphere as a consumer destination with its new VC-powered mission statement ‘to be the YouTube of audio’. The legacy of its unique starting point is that Soundcloud:

  • Has a catalogue unlike any other streaming service, except YouTube (and to a lesser extent, Mixcloud)
  • Gives artists a direct connection with fans unlike standard streaming services
  • Gives up and coming artists a global platform for reaching fans with no intermediary

That unique combination of assets makes Soundcloud a highly valuable commodity despite its diminished user base and similarly reduced valuation (now said to be around $250 million from a high of $1 billion). Soundcloud has two crucial attributes that will enrich any streaming service:

  • A service tailor-made for Gen Z (ie those consumers currently aged 19 or under)
  • A crowd sourced platform for artist discovery

Soundcloud Is Built For The Era Of Mass Customization

As DJ Spooky put it:

“Artists no longer work in the bub­ble of a record­ing stu­dio. The stu­dio is the net­work.” … “The 20th cen­tury was the era of mass pro­duc­tion. The 21st cen­tury is the era of mass cus­tomiza­tion…”

Artist creativity is no longer a creative full stop, we are now in a phase of Agile Music. Even though the number of people that upload music is small (7% of consumers upload music to Soundcloud or YouTube, of which half upload their own music) their impact on the broader market is multiplied many times over as they provide the music others listen to. But even more importantly, the blurring of the line between audience and creator is the fuel in the engine of Gen Z experiences such as Snapchat and Instagram. Other than lip syncing apps like Musical.ly and Dubsmash, Soundcloud and YouTube are pretty much all the music business has in this space. That, coupled with a highly shareable, highly social UI makes Soundcloud tailor-made for Gen Z. The importance to the segment is clear: among 16-19 year olds, Soundcloud penetration is higher than Apple Music, Amazon Prime Music, Tidal and Deezer, with only Spotify boasting higher penetration for audio services.

Crowd Sourced Discovery

The other key asset Soundcloud brings is the bridge it provides between fans and artists. A host of diverse services like Tunecore, BandLab, Bandcamp and Reverb Nation provide an unprecedented range of tools to up-and-coming artists. But Soundcloud (along with YouTube) is still the only place where artists can reach such a large audience directly, without an intermediary. Layer on its massively social functionality and discovery algorithms and you have an unrivalled audio platform for new artist discovery.

Soundcloud Needs An Ecosystem

Unfortunately for Soundcloud, it has found it impossible to effectively monetize these assets (and aping Spotify’s freemium model has done little to move the dial). What Soundcloud needs is an ecosystem into which it can slot, bringing all of the great functionality but relying on another part of the ecosystem to do the monetization. Slotting Soundcloud into Deezer, Spotify or even Apple Music would create an entirely new layer in each of those propositions and would massively enhance market positioning.

It would also enable the service to start behaving more like a label, identifying and testing artists before moving them up into the main service. If done by Spotify or Apple Music, this would look highly disruptive to labels as it really would be a precursor to becoming a next-gen label. But for Deezer, the story is a little different. As part of the Access Industry potfolio, Deezer sits alongside talent management agency First Access Entertainment, live discovery platform Songkick and, last but most certainly not least, Warner Music. By acquiring Soundcloud, Access Industries would be rounding out the most complete Full Stack Music Company in the business.

YouTube Is Not For Sale But Soundcloud Is

YouTube might do most of what Soundcloud does, and at much larger scale, but Soundcloud is up for sale and YouTube is not. Right now, Soundcloud represents the best opportunity in the marketplace for an audio streaming service to make up the ground in user experience innovation that the streaming market lost over the last few years in comparison to Gen Z apps. And with Deezer at the front of the queue, the French streaming service could be about to transform its market narrative in an instant.

 

Guess Who Gen Z Prefers For Music: Spotify Or YouTube?

It is still common to hear people talk about Millennials as if it is one amorphous group. In actual fact, Millennials are now 2 entirely distinct generations, not 1. In addition to the core Millennials we now have a new generation of younger consumers born on or around 2000. This is Generation Z, the ‘true Millennials’ if you like. MIDiA recently deep dived into the behaviours and characteristics of this group in a piece of research for the BPI and ERA. In it we explored technology and media trends for 0-11 year olds, 12-15 year olds and 16-19 year olds. You can download the full report here. I’m going to deep dive into 1 key idea here: YouTube vs Spotify.

YouTube emerges as the dominant theme throughout all of the age groups of Gen Z, as both a social and an entertainment platform. And of course, as a music platform. Indeed, a staggering 94% of UK 16-19 year olds use YouTube monthly, even among 12-15 year olds the rate is 87%. But it is not just music that people are using YouTube for, indeed it is only by the time Gen Z gets to late teens that music becomes the most widely penetrated content watched on YouTube (to be clear, that is not the same as saying the most frequently watched or most time spent). YouTube is the world’s most widely used music app and its reach among younger audiences is clear to all.

spotify uk

All of which makes the next finding all the more remarkable: Spotify has overtaken YouTube as the primary music app for 16-19 year olds in the UK. In December 2016, 53% of UK 16-19 year olds used Spotify weekly compared to 47% for YouTube. As the chart shows, no other streaming service, paid or free, comes anywhere close to Spotify and YouTube. Of the countries we surveyed in this piece of research (US, Canada, Australia and UK) it is only in the UK that Spotify is ahead of YouTube and, crucially, only in this age group.

An Aspirational Youth Brand

So, what’s going on here? Spotify has become an aspirational brand for Gen Z. It has, for teens, become a byword for streaming in the same way the iPod became synonymous with the MP3s and Netflix has with streaming video. Spotify is not exactly an old brand but neither has it been a youth brand, instead prospering within its core demographic of 25-34 year olds. Now a new generation of youth, many of which were only just starting school when Spotify first launched, have seized the brand as their own.

I recall a meeting with the strategy team of one of the world’s biggest consumer electronic companies in the mid 2000s when the iPod was reaching its apogee. The team explained that they knew there was nothing they could do to compete with the iPod because it had become an aspirational brand, with an appeal so strong that it didn’t matter whether other products were better or cheaper, the iPod was the brand people wanted to be associated with. This company had done its homework and knew exactly how the trend was playing out because it had benefited from the exact same effect for the previous 2 decades.

Teens Have Made Spotify Their Own

It is hard to exaggerate the potential of this development. Teenagers have taken the Spotify brand and made it their own. Unless Spotify totally screws up somehow, which is unlikely, it has a platform for future growth that could make its current success simply look like the warm up act. Although the UK is the only one of the 4 markets in this study where Spotify has taken the lead, it is on track to do the same in the 3 other English speaking markets surveyed. And it has also taken the lead in other markets we track: Sweden (where national sentiment plays a major role) and Germany (where YouTube offers a much more restricted music range due to rights issues).

And Spotify’s Lead Is Growing Further Still

But there’s more… In a more recent survey in the UK that we fielded in March, the lead extended even further. Now 71% (yes, 71%!) of 16-19 year olds are using Spotify weekly, though YouTube is also up slightly to 52%. Our June survey is in the field now, so watch this space for an update on Spotify’s progress. It could potentially break the 80% mark.

Now to be clear, 71% of 16-19 year olds using Spotify weekly does not mean that anything like that share is actually paying for it. Most are streaming for free while some are on family plans and others are on the half-priced student plan. But even with that caveat, the scale of adoption is inarguable. While the music industry has been locked in an existential angst over the perceived YouTube ‘value gap’, Spotify has created the best possible riposte for rights holders and creators.

As Spotify edges towards its overdue public listing, it now has the evidence of foundations for truly sizeable future growth. The future is bright, bright green.

 

 

Spotify Earnings: Growth Comes At A Cost

spotify metrics

Spotify has published its much anticipated 2016 revenues. Because the company is under so much analytical scrutiny, there is little that is particularly surprising but there is still plenty we can learn from the results:

  • Growth maintains momentum: Spotify recorded revenues of €2.9 billion in 2016, up 51% from €1.9 billion in 2015. Although that was a lower growth rate in % terms (80% for 14/15), it was a bigger net add in revenue terms (€989 million net new revenue in 2016 compared to €863 million in 2015). Spotify still has some way to go before it challenges Netflix’s $8.2 billion streaming revenue, but it is making clear progress.
  • Spotify is getting ready for public reporting: The 2016 accounts featured heavy restating of previous year figures and many line items from last year’s accounts were no longer reported. All of which points to an organization getting its reporting structures in place for a public listing of some kind.
  • ARPU is a mixed story: Spotify’s total monthly user ARPU increased from €1.82 in 2015 to €1.94, driven by a small increase in ad supported user APRU and, more importantly, a higher share of paid users (38% in 2016 compared to 31% in 2015). However, that increased paid conversion has come at the price of lower paid ARPU, with $1 for 3-month trials etc., pushing down paid ARPU from €5.16 in 2015 to €4.58 which in turn is more than an entire dollar a month less than the €5.85 paid ARPU figure Spotify enjoyed in 2014.
  • Losses are widening again: Spotify reported losses before tax of €539 million against revenues of €2.9 billion (i.e. 18% of revenue). This was up from 12% in 2015 although it had been as high as 17% in 2014. In order to keep up with the market, Spotify is having to spend heavily, and this is all without any major product or territory launch in 2016. You need deep pockets to play at streaming’s top table.
  • Rights costs may be on a positive trajectory: Spotify’s Cost of Sales (previously reported as Royalty Distribution and Other Costs) were €2.5 billion, or 84.6% of revenue, down slightly from 85.5% in 2015. The shrinking share of the loss-making ad supported user base is most likely the key contributor here. Though the new UMG and Merlin deals will help sustain this path.

In Search Of A Margin

So, what do Spotify’s results say about the economics that we didn’t already know. In truth, not much. The market has lots of growth in it yet; competing is expensive, growth has to be incentivized and rights are the main cost component.

As Spotify nears a public listing or an acquisition by Alibaba or Tencent, it remains the benchmark for the health of the streaming economy. With the underlying fundamentals remaining largely unchanged in 2016 despite stellar growth, here are a few thoughts on how the economics of streaming might change:

An often repeated argument from record labels is that streaming services will hit profitability when they reach scale. So, when does that happen? 48 million subscribers can lay a good claim to being ‘scale’, but it isn’t driving profit. While the market establishes itself, streaming services have to overspend on product innovation and marketing (and then, later, on user retention). So, these costs will likely rise in relative terms. Meanwhile, rights are always going to remain largely in line with revenue (though the UMG and Merlin deals reward growth with some discounting, which is a welcome innovation). But even these deals will not change the fact that rights will be large enough to challenge margins and will largely scale with growth. Which means no truly meaningful scale benefits. So here are a few alternative ways in which streaming margins might be improved:

  • Doing a Netflix: Because Netflix owns much of its own content, it is able to use its recommendation algorithms to ensure that content over-indexes, improving margin. It also amortizes costs against those content assets to help it register a profit. Spotify could do the same but is unlikely to do so anytime soon. It cannot afford to antagonize its major label partners, each of whom has a UN Security Council type power of veto (Spotify would falter if any one of them pulled out). Someday, Spotify probably will become a label, though not in the way most people would understand the term. However, it will wait for more scale and confidence before flicking the switch on that strategy.
  • Ecosystems: Apple has long demonstrated the value of competing right across value chains. Now Amazon is following suit (e.g. Amazon Video covers rights, infrastructure and distribution). Exercising control across the value chain gives a company more places to extract margin. Perhaps Alibaba or Tencent (or some other Chinese giant) could buy a major label and a streaming service? Access Industries is already on this path, wholly owning WMG and more than half of Deezer (though there doesn’t seem to be much in the way of dots being joined yet). And then the wildcard is a streaming service becoming so big that it can buy a major or a collection of big indies. Or of course Apple deciding to any of the above. Should this feel like wild conjecture, do not forget that it was not so long ago when an ISP (AOL) bought WMG, and a water and sewage conglomerate (Vivendi) went on a media company acquisition spree and bought UMG.
  • Ancillary revenue streams: The most pragmatic solution though is not a silver bullet, but instead a blended strategy of new revenue streams. These can range from B2B (e.g. Spotify selling its data to live companies like Live Nation and AEG to help them get more cost effective with better targeting), through premium user add-ons to new formats such as limited capacity, pay-per-view artist live streams.

Spotify played the starring role in streaming’s biggest year yet and looks well on track to do the same in 2017. But at some stage, the losses need to narrow. The industry needs to help ensure this happens, unless it wants the market to end up being dominated by companies that simply do not have to have streaming turn a profit because they are making money elsewhere.

 

Do Not Assume We Have Arrived At Our Destination

Forbes has released its annual Celebrity 100, its list of the top earning media stars. The healthy share of music artists hints at the continued ability to build highly successful music careers. The presence of younger, streaming era artists like Drake and the Weeknd goes further, hinting at how streaming can now be the foundation for superstar commercial success. However, although the superstars are clearly making very good money from streaming in its own right, the dominant school of thought is that streaming is a conduit for success, helping drive artists’ other income streams, live in particular. The ‘don’t worry about sales, make your money from touring’ argument is an old one, but it is as riddled with risk now as when it first surfaced, perhaps more so.

Here are 2 key quotes from Forbes that encapsulate the way in which many artists are now viewing streaming:

“We live in a world where artists don’t really make the money off the music like we did in the Golden Age…It’s not really coming in until you hit the stage.” The Weeknd

“The reason the Weeknds of the world and the Drakes of the world are exploding is a combination of a global audience that’s consuming them freely at a young age [and that] they just keep dropping music…They’re delivering an ongoing, engaged dialogue with their fan base.” Live Nation CEO Michael Rapino

Both quotes imply that live is the place you’re going to make your money. They also argue that streaming can be used intelligently to engage fans because it is not constrained by old world limits such as shelf space and physical distribution considerations. In the old model, artists could go years between album releases, leaving fans hanging, while touring would often be a loss-leading effort to help sell the album. The roles are now reversed.

music industry total revenue midia

The rise of live music revenue in 2000s mirrored the decline of recorded music, replacing each lost dollar and adding another one on top. In 2000, recorded music represented 53% of the global music industry, that share is now just 38% while live went from 33% to 43%, though recorded music revenue is now growing again, winning back market share. On this basis, the ‘stream to gig’ argument makes a lot of sense. But things are never as simple as they first appear: 

  • Not all live music revenue is created equally: On average, around just 29% of live music revenue makes it back to the artist (after agents, costs etc are factored in) while many artists don’t make any money on live until they’ve reached a certain level of scale. And that’s before considering that the top 1% of live artists (many of whom are aging heritage acts) account for 68% of all live revenue.
  • Streaming has fewer middlemen: With streaming there can be relatively few middlemen (e.g. just TuneCore and the streaming service, though in practice many labels use 3rd party distributors etc). Meanwhile in live there is a multitude of middlemen, many of whom are highly protective of their roles. In streaming, artists have a wealth of data and insights such as Spotify’s artist dashboard and Pandora’s Artist Marketing Programme (AMP). All of which means that artists have to share revenue with more parties in live and they also have less transparency than they do with streaming.
  • Resselling is causing friction: All of this is without even considering the corrosive impact on live of ticket resellers such as ViaGoGo and GetMeIn. These business models are incredibly smart from a VC perspective, meeting huge market demand for a comparatively scarce product. But that doesn’t make them good for fans, the live business nor for artists. Most often, though not always, artists do not see a penny of resell revenue. It is money that is taken from music fans and sucked straight out of the industry. Artists lose out, fans lose out. Ticketing companies gain. All that hard work invested in building fan relationships goes out of the window.

The Tide Is Turning

More than all this though, the tide is turning. The 2016 results of Live Nation (parent company of Ticketmaster and one of the largest live companies) point to an industry that, while it is still growing, has cracks appearing. Revenue grew by 15% from $7.3bn to $8.6bn (more than the entire GDP of Haiti) but increased ticket prices drove much of the growth. Ticket prices were up 5% overall and by 10% in stadiums and other big venues. Revenue growth was also driven by in-venue merch spending (up 9%) and sponsorship and advertising (up 13%). Live Nation’s number of ‘fans’ was up 4% in the US but was flat internationally. To be clear, these are strong results for Live Nation but they also reflect a highly mature industry that is squeezing out every last drop of growth through price increases and additional revenue streams. And it is nothing new: Pollstar reports that average ticket prices increased by 22% between 2006 and 2015. Total live revenues grew by 37% over the same period which means that nearly half of all live revenue growth came from ticket price inflation.

Streaming Is Today, Not Tomorrow, Start Treating It That Way

All this comes with streaming revenue growing by $2.5m in 2016 (in retail terms) and overall recorded revenues growing by nearly a billion. The live music business has strong growth left in it, but that revenue is not evenly distributed, will likely slow in the near-ish future and has an underlying core spending trend that is largely flat. Streaming, on the other hand, is booming and will break the $10bn mark this year.

So why are superstar artists still looking to live to pay the bills. Firstly, it’s easier to make really good live money if you’re a superstar, and secondly, streaming still isn’t big enough yet for really strong streaming revenue. The Weekend’s 5.5bn cumulative streams (including YouTube) will have generated the artist around $4 million while if he’d instead sold 5 million copies of Starboy he’d have netted around $10 million.

Streaming simply needs more monetized users in the pot, especially paid subscribers. That will come but rather than just wait, more needs to be done now to help artists get more income from streaming, such as:

  • Better rates for artists (many only earn 15% of the label share, which is around 70% of the $0.008 blended rate for freemium services)
  • More ways for artists to monetize on streaming services (e.g. artist subscriptions, pay per view live streams and gigs)
  • More artist-centric experiences

Add together all the pieces and you start to create an environment in which artists can see a more immediate direct return from streaming. That is how we get to stop artists simply viewing streaming services as a way to market their wares. It is great that streaming can play that marketing role but sooner or later, labels and artists need to focus more on streaming being the destination not just the journey. With so much market momentum, it is tempting to think of streaming as ‘mission accomplished’. In reality we’re just getting going. To move streaming to that next stage, much more work needs to be done and the time to do that is now, not when the market starts to mature (which will happen some time in 2019). It is not in the interest of streaming services to simply be seen as a tool for getting more bums on seats. Nor is it in the interest of labels as they only participate in a small share of live revenue. Is streaming going to become a bigger revenue stream than live for big artists? No, but it can be a much bigger source than it is right now, but only if the model evolves. If streaming cannot break out from its beachhead of being the discovery journey then it will never reach its destination.

 

Announcing MIDiA’s State Of The Streaming Nation 2 Report

2016 was the year that streaming turned the recorded music business into a good news story, with revenue growth so strong that it drove nearly a billion dollars of total growth. Leading streaming services spent the year competing with ever more impressive metrics while playlisting and streaming exclusives became cornerstones of the wider music market both culturally and commercially. 2017 is set to be another year of growth and the coming decade will see the music industry become a streaming industry in all but name. In this, MIDiA’s 2nd annual benchmark of the global streaming business, we present a definitive assessment of the global market, combining an unprecedented breadth and depth of supply side, demand side and market level data, as well as revenue and user forecasts out to 2025. This is quite simply the most comprehensive of assessment of the streaming music market available. If your business is involved in the streaming music market this is the report you need.

Key features for the report:

  • 32 pages
  • 4,650 words
  • 17 charts
  • 9,000+ data point dataset

At the bottom of this post is a full list of the figures included in the report. The report is immediately available to all paid MIDiA music subscribers.

To find out how to become a MIDiA client or to find out more about the report email Stephen@midiaresearch.com

Selected Key Findings

  • YouTube and Spotify lead Weekly Active User penetration with 25.1% and 16.3%
  • There were 106.4 million paid subscribers in 2016, rising to 336 million in 2025
  • Global streaming music revenue was $7.6 billion in 2016 in retail terms
  • 55% of subscribers create streaming music playlists
  • Universal music had 44% of major label streaming revenue in Q1 2017
  • 79% of streaming services globally have standard pricing as their lead price point

Companies And Brands Mentioned In The Report: 7Digital, Alibaba, Amazon, Anghami, Apple, Apple Music, CDiscount, Cstream, CÜR Media, Deezer, Echo, Google, Google Play Music All Acccess, Hitster, IFPI, KKBox, KuGou, Kuwo, MelON, Merlin, Mixcloud, MTV Trax, Napster, Pandora, QQ Music, Radionomy, Saavn, Slacker, Société Générale, So Music, Sony Music, Soundcloud, Tencent, The Echo Nest, Tidal, TIM Music, Universal Music, Vivo Musica, Warner Music, Worldwide Independent Network, YouTube, Vevo

MRM1707-infographic-promo.png

List of Figures In The Report

  • Figure 1: Penetration Of Key Streaming Music Segments (Subscriptions, Ad Supported Audio, YouTube/Vevo), April 2017
  • Figure 2: Overlap Of Key Streaming Music Consumer Segments (Subscriptions, Ad Supported Audio, YouTube/Vevo), April 2017
  • Figure 3: Key Streaming Adoption Behaviours Of All Consumers, Paid Streamers And Free Streamers (Including, family plans, trials, telco bundles), April 2017
  • Figure 4: Key Streaming Adoption Behaviours Of All Consumers, Paid Streamers And Free Streamers (Including playlist creation, curated playlists, radio impact, spending impact), April 2017
  • Figure 5: Weekly Time Spent Listening To Music And To Streaming Music (Streamers, Overall Consumers), April 2017
  • Figure 6: Age And Gender Distribution Of Streaming Music Consumers By Category (Subscriptions, Ad Supported Audio, YouTube/Vevo), April 2017
  • Figure 7: Average Number Of Tracks Streamed Per Week By Segment (All Consumers, Spotify, Apple Music, Subscribers)
  • Figure 8: End Subscriber Numbers For Individual Streaming Subscription Services, 2014 – 2016, Global
  • Figure 9: Weekly Active User Penetration For Selected Streaming Music Services, Q4 2016
  • Figure 10: Quarterly Major Label Streaming Music Revenue, Q1 15, Q1 16, Q1 17, Global (Millions USD)
  • Figure 11: Number Of Streaming Subscription Services Available By Country, April 2017
  • Figure 12: Key Pricing, Product And Trial Features For Music Subscription Services Across 22 Markets, April 2017
  • Figure 13: Streaming Music Revenue And Streaming Share Of Total Recorded Music Revenue, 2008-2025, Global
  • Figure 14: Global Streaming Music Revenue Split By Subscriptions And Ad Supported, 2008 to 2025
  • Figure 15: Streaming Music Revenue For 10 Largest Streaming Markets And Top 10 Share Of All Streaming Revenue, 2016 And 2025
  • Figure 16: Music Subscribers By Region (North America, Latin America, Europe, Asia Pacific, Rest Of World), 2013-2016
  • State Of The Streaming Nation 2 Infographic

Who’s Leading The Streaming Pack?

At MIDiA Research we are currently in the final stages of producing the update to our annual landmark report: The State Of The Streaming Nation, a report which compiles every streaming market data point you could possibly need.

In advance of its release in June we want to give you a sneak peak into a couple of the key areas of focus: streaming app usage and major label streaming revenue.

music apps slide

Subscriber numbers only tell part of the streaming story. They are solid indicators of commercial success, but can often obscure how well a service is doing in terms of engaging its user base. That’s why we track the main music services’ active user bases every quarter. But rather than tracking Monthly Active Users (MAUs), we track Weekly Active Users (WAUs). The MAU metric is past its sell by date. In today’s always on, increasingly mobile digital landscape, doing something just once a month more resembles inactivity rather than activity. The bar needs raising higher. Companies like Snapchat, Facebook and Supercell measure their active user bases in terms of Weekly Active Users (WAUs) and Daily Active Users (DAUs). It is time for streaming services to step up to the plate and employ WAU as the benchmark.

Using this approach, YouTube and Spotify emerge as the leading services with 25.1% and 16.3% WAU penetration respectively. However, at the other end of the spectrum, Deezer swaps its top half of the table subscriber count ranking for the bottom ranking for WAUs with just 2.3%. Google Play Music All Access does not fare much better on 5.5% and even this likely reflects survey respondent over-reporting for what has proven to be a lacklustre effort from the search giant.

Streaming music finally returned recorded music revenue to sizeable growth in 2016, driving the year-on-year growth of 6%, increasing revenues by $0.9 billion. Label streaming revenue was up $1.6 billion, finally offsetting the impact of declining revenue from the legacy formats of the CD and downloads.

label streaming revenues midia

The growth continued in Q1 2017, albeit at a slightly slower rate. Among the major labels, streaming revenue grew by 35% to reach $1.1 billion in Q1 2017, up from $0.8 billion in Q1 2016. The major labels respective share of cumulative revenue in streaming largely reflects that of total revenue. Streaming was the lynchpin of 2016’s growth and will be even more important in 2017.

Streaming represented 33% of major label revenue in 2016. That share rose to 42in Q1 2017. Streaming is now the stand out revenue source, far outstripping physical’s $0.6 billion. Though a degree of seasonality needs to be considered, the streaming trajectory is clear. Record labels are now becoming streaming businesses. The independent label sector experienced strong streaming growth also, powered in part by licensing body Merlin. Merlin paid out $300m to its independent label members over the last 12 months, leading up to April 2017, to an increase of 800% on the $36m it paid out in 2012. The streaming business is no longer simply about the likes of Spotify and Apple Music, it is the future of the labels too.

These findings and data are just a tiny portion of the State Of The Streaming Nation II report that will additionally include data such as: streaming behaviour, YouTube, role of trials and family plans, playlist trends, average tracks streamed, subscriber numbers for all leading music services, service availability, pricing and product availability, revenue forecasts and user forecasts. The report includes data for more than 20 countries across the Americas, Europe and Asia and forecasts to 2025.

To reserve your copy email Stephen@midiaresearch.com