About Mark Mulligan

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

The Music Industry’s Next Five Growth Drivers

The risk with trying to imagine what the future might look like is to simply think it is going to be a brighter, shinier version of today. At this precise moment in time, this has perhaps never been truer.

The COVID-19 lockdowns were a seismic shock to the economy, one which will take months, possibly years to recover from. Entertainment consumption patterns have been transformed, with some need states becoming void states in an instant, while new ones have filled their place.

Whether COVID-19 goes for good in the coming months or whether it is with us for years to come, some behaviour patterns have changed for good, creating new opportunities, many of which (e.g. virtual events) have yet to be properly monetised. So at a time when it seems that the whole world is creating music forecasts, it is now the time to think about what comes next rather than just predicting how big the long established revenue streams will get.

With streaming growth slowing and creators feeling short changed, it is time to think about what plan B is, for the sakes of both the industry and the creator community.

At MIDiA we are currently compiling our music industry forecasts with a lot of detailed work being put into estimating how COVID-19 and the coming recession will impact a revenue growth. We’re modelling everything from ARPU, churn, net adds, and disposable income patterns through to store closures. We’re confident that this new methodology will make our already reliable forecasts even better (for the record our 2019 subscription forecasts with within 4.5% of the actual figures).

We’re also going to push ourselves out of our comfort zone and over the course of the year forecast some new revenue streams for which a comprehensive set of historical data does not exist. This means our chances of making incorrect calls is higher, but we’re doing it because we think it is crucial to start trying to frame what the future landscape will look like.

Here are the five emerging revenue sectors that we think could collectively be the music industry’s next growth driver

  1. Contextual experiences: Two big lockdown winners have been mindfulness / meditation apps and online fitness training. With it looking likely that consumers will be spending more time at home and away from public places for some time to come, the opportunity for these categories is twofold: 1) build audience now, 2) establish behaviour patterns that will outlive lockdown.

    Music is often a core part of these but it is not always licensed. The example of artists and rightsholders making music available to fitness trainer Joe Wicks illustrates the point. To date, streaming services have provided the soundtrack to such activities with contextual playlists (chill, study, workout). But it is of course far better for the context itself to deliver the music. We expect the next few years to see categories like online wellness and fitness to eat into the time that people were previously using streaming for the soundtrack. Instead of bring your own music, the trend will be the context will bring it. UMG’s Lego partnership is a case in point.

  2. Creator tools: There is an increasingly diverse mix of tools for music creators, including production, collaboration, sounds, reporting, mastering and marketing. The vast majority of the millions of independent artists will spend much more on creator tools than they will ever earn from their music. The revenue opportunity is clear, but there is more to it than that.

    Artist distribution platforms built a role as top of funnel tools, helping labels find the next big hit. But the music creation itself, enabled through online SAAS tools is in the fact the real top of funnel. Anyone who can establish relationships there does so before they release music. Right now, Spotify looks better placed to capitalise on this opportunity than labels. But labels should be paying close heed. Just in the way that distribution platforms came out of nowhere to become an established part of the label toolkit, so will artist tools. Simply put, creator tools will become part of what it is to be a music company.

  3. Virtual events: As we wrote about earlier this week, there is a huge opportunity to make virtual events (live streaming, listening sessions, avatar performances) a major income stream. The sector is in desperate need of commercial structure and product tiering, but it can happen. A freemium model with free, pay to stay, premium and super-premium tiers will enable this fast-growing sector to be more than a lockdown stop gap.
  4. Fandom: Regular readers will know that MIDiA has long argued that phase one of streaming was monetising consumption and that phase two will be about monetising fandom. Tencent Music Entertainment already does a fantastic job of this with live streams, virtual gifts and virtual currencies. So do K-Pop artists and Japanese Idol artists. Now is the time for western social and streaming platforms to wake up to the opportunity. Virtual merch, artist badges, premium chat, artist avatars—there are so many opportunities here waiting to be tapped.
  5. Social music: As an extension of fandom, the fact that the vast amount of music-centred social activity on Instagram, Facebook, Snapchat and TikTok has not yet been properly monetised is a gaping hole of opportunity. TikTok will be crucial. As my colleague Tim Mulligan wrote, TikTok is having its ‘Snapchat moment’, trying to identify what commercial route it will take. I’d go even further and frame it as a YouTube or Facebook moment. Both those platforms went on to massively expand their remit and build diversified business models.

    TikTok clearly has momentum that far exceeds that of previous similar apps. It can either choose to just carry on being good at one thing or instead become the next big social platform, growing as its audience ages. Just like Facebook did. TikTok now is where YouTube was back in the late 2000s. If rights holders can establish an entirely new monetisation framework then TikTok could become the biggest single driver of future revenue.

As with any future gazing, the odds are that not all of these opportunities will transpire, but what is clear is that the current dominant format is not enough on its own. Rights holders and creators alike need new future revenue streams to offset the impact of slowing revenue growth and royalty crises.

The last time the music industry had one dominant format and no successor was the CD and we all know what happened then. The music industry is not about to enter a decade of freefall this time, but it is at risk of stagnating, especially as its leading music service is now so eager to diversify away from music that it offers a podcaster more money in one deal than most artists will ever earn in their lifetime from it. Let’s make this next chapter of the industry’s growth about innovation, growth, new opportunities and fresh thinking.

The Future of Live

The almost total cessation of live music has sent shockwaves throughout the wider music industry. Though live companies are clearly at the epicentre, labels and streaming services are the in the blast radius too as the gaping hole left in most artists’ income is causing them to question their other income sources, streaming especially – with both labels and DSPs in the sights.

Finding both near- and mid-term fixes for live are therefore crucial for the wider music industry and artist community. There is a big opportunity here that goes far beyond lockdown era. This is more than the future of games and music, it is in fact an alternative future for live music. It is the ultimate lockdown legacy.

future live events midia researchMIDiA’s latest subscriber report ‘Recovery Economics: Music, Games, Live Streams and the Future of Concerts’ has just been published and subscribers can read it here. In this blog post I am going to highlight some of the key themes.

Live streaming’s teething pains

From a value chain perspective, Lockdown came too early for live streaming; it is under-developed, under-monetised, under-licensed, under-professionalised. Unfortunately, the live-streaming surge is showing all the signs of a goldrush with a lack of clear structure and the first signs of artist backlash, with some artists feeling that some platforms are relying on them to build their audiences while performing for free.

Furthermore, quality is patchy and artists are becoming concerned with the impact on their brand image. Saturation is another Achilles heel: with traditional performances saturation is negated by artists moving from one city to another. Live streaming has no geographical constraints so the effect of multiple performances is analogous to playing repeated concerts in the same small town.

Virtual concerts, not live-streamed concerts

Arguably the biggest single mistake the music industry made with music streaming was to think of it as a format rather than a paradigm. As a consequence, the (western) streaming services lack differentiation and true feature innovation. We must think of the live opportunity as something that goes beyond live streams. Live streams are just one part of the mix. The true opportunity is virtual experiences, that can range from 100 attendee super-premium intimate sessions, through mass scale ad-supported YouTube streams, to avatars performing in games.

If we start this journey thinking narrowly, the scale of opportunity will be constrained. And right now, the industry needs to get as many virtual event innovations going as it can, because it will have to continue to carry the baton for live for some time yet.

In a best case scenario COVID-19 recedes later this year and we have a small number of limited capacity concerts happening before year end. Alternatively, we may see recurring waves of COVID-19 denting consumer confidence with fewer people wanting to go to concerts even if they could. Either way, artists are not going to get most of their live revenue this year.

future of live midia

It is this post-lockdown opportunity that virtual events need to meet. But there is a lot of work yet to be done. The biggest problem to fix is monetisation.

Fans pay around 80 times more per minute for a real-world live performance than they do for listening to music on paid streaming services. The value exists in the shared moment. The problem with live streaming in its current manifestation is that it is abundant and is delivered in a ubiquitous format that is implicitly low value. If this sector is to become a serious income stream for artists then we have to stop giving it all away for free. What is needed is a sophisticated freemium monetisation model that can cater both to large free audiences and better monetise fans.

A set of principles for virtual events

There is also a lot more that can be fixed. Here are some meta principles that virtual events should adhere to:

  • Scarcity (fewer gigs, geo-restricted – Laura Marlin has just announced geo-restricted live streams – let’s make that the trailblazer not an isolated initiative)
  • Better production qualities
  • More sophisticated monetisation (freemium, pay-to-stay, super premium / VIP etc)
  • More sophisticated segmentation of types of shows (not all live streams are the same, but we currently only have a one-size-fits all product
  • Better platform segmentation (e.g. big tech platforms can play the role of stadiums and arenas while off-portal destinations like artist apps can host smaller, scarcer, super-premium events)
  • Better discovery (the equivalent of the TV EPG needs creating for virtual concerts, Bandsintown has made a decent start but much more needs to be done)
  • Better alignment between what artists want and what the platforms want

The birth of a new industry

COVID-19 will likely be a mid- to long-term part of life, so the traditional live sector will face a ‘cost of confidence’ as portions of artists and fans alike will initially stay away. Virtual concerts (live streaming and generative virtual performances) can become an important component of the live music sector as it builds out of lockdown. But it will not get there without concerted efforts to fix the problems that currently define this nascent sector.

A new virtual concert value chain is starting to emerge that traditional live companies are not – yet – well embedded in. The future market will be one defined by both incumbents and insurgents. The big live companies will bet big on virtual but we’ll also see new types of companies like virtual booking agents and avatar agencies. The whole concepts of what a concert is and what a venue is, can be turned on their heads. Fortnite’s Party Royale island is now hosting regular live streamed concerts. With 350 million users, Fortnite can lay claim to being arguably the biggest capacity venue on the planet. This may be the birth of an entire new ecosystem.

Recovery economics

The lockdown lag will create a whole new set of economics across all industries. Driving a recovery during this transition period will require innovation and a willingness to downplay old ways of doing things. For music it will be about exploring new income streams to recast a new music business. The first step is for live streaming to have a product refit that delivers a genuine value exchange for fans if it is to ever get out of its free / charity / tip cul-de-sac and become a genuine income stream of scale.

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

If you are a client and would like to talk to us about the themes covered in the report then schedule an enquiry via enquiries@midiaresearch.com

Artists – Have Your Voice Heard

MIDiA Research Artist Survey Q2 2020MIDiA is fielding its third biannual Artist Survey. Our two surveys last year were very successful and got hundreds of artist responses. MIDiA’s artist surveys takes the pulse of the artist community and provides this information back to the artist community. We do this in two ways: a) we post a blog outlining the top level findings and b) we provide the complete results to all artists that take part.

It is a great way for artists to get heard and to benchmark how they are doing, as well as their hopes and concerns with the rest of the artist community. Or surveys are truly global – our last one had respondents from as far afield as Algeria, Australia, Chile, Madagascar, South Africa and the United Arab Emirates.

This year, in addition to tracking topics such as which online tools artists are using, where they are making their money and where they want their careers to go, we are also deep diving into how Coronavirus has affected artist careers and what they are doing in response.

As with all MIDiA surveys, the results are 100% confidential and we NEVER share any details of respondent-level responses. We only ever show the aggregate, survey-level data. Hopefully the success of or last two surveys stand as testament to our dedication to respondent confidentiality.

If you are an artist and would like to take part in our artist survey, simply follow this link.

As soon as the survey has finished fielding we will send you the complete results by email.

What is the value of exposure when exposure is all there is?

There is an existential debate going on at the moment, around whether streaming is paying artists enough. It may feel like a rerun of old debates but it is catalysed by COVID-19 decimating artist income. These are some of the key narratives: here, here and here.

In this piece I lay out the underlying economics of the argument. I also focus wholly on artist income as songwriter income is another topic entirely.

COVID-19 has reset the debate

The latest streaming royalty debate is not an isolated event. It is happening because COVID-19 has decimated live income, leaving many artists worrying about how to make ends meet. Last week, just before this whole debate kicked into gear I wrote:

“Live’s lockdown lag may have the knock-on effect of making artists take a more critical view of their streaming income. When live dominated their income mix, streaming’s context was a meaningful revenue stream that built audiences to drive other forms of income. It was effectively marketing artists got paid for. Now that artists are becoming more dependent on streaming income, the old concerns about whether they are getting paid enough will likely come back to the fore. It is in the interests of both labels and streaming services, that labels use this as an opportunity to revisit their streaming splits with artists. Labels cannot afford to have artists united against the labels’ primary income stream.”

None of this makes the debate any less important, but it explains why it is happening now, and with live revenue potentially set to take years to fully recover, it is a reality that streaming services and labels need to adjust to. It is in the interests of both labels and streaming services that artists feel like they are being treated fairly. But it is crucial that this debate is grounded in a firm understanding of streaming economics and that we do not return to the mudslinging of more than half a decade ago. A debate which, by the way, did not result in any fundamental change to how artist royalties are paid and was eventually followed by labels negotiating smaller revenue shares with Spotify and others.

Where streaming has got us to

Firstly, let’s lay some ground markers:

  • Streaming has driven half a decade of recorded music revenue growth, with the market now 42% bigger than it was in 2014
  • The wider streaming economy has globalised fandom and engagement
  • More people are listening to more music now than before

Streaming has been the change agent that turned around 15 years of decline. But it also completely reframed artist income from recorded music. In the old sales model artists would get a large sum of money in a relatively short period of time. Streaming income is more like an annuity, a longer-term return where the music keeps paying long after release. In the old model artists had smaller but high-spending audiences. With streaming they have larger but lower-value audiences.

For example, a recouped independent artist might expect to earn $4,500 for selling 1,500 copies of an album. That is roughly how much an artist would get from 5,000 people streaming the album 20 times each. The average revenue per user (ARPU) has gone from $3.00 to $0.90 for streaming. The artist has traded ARPU for reach.

This model worked fine when live and merch were booming because more than three times as many monetised fans meant three times more opportunity for selling tickets and t-shirts. This of course is the ‘exposure’ argument streaming services are fond of, which works until it does not. Now that live and merch have collapsed, as the trope goes ‘exposure does not pay the rent’. The previously interconnected, interdependent model has become decoupled.

Put simply, artist streaming economics do not work without live.

midia streaming royalty payments

The question is: what levers can actually be pulled and what effect can they have? In the above chart I have used Spotify’s 2019 premium revenues to illustrate how changes in royalty shares can impact what artists earn. I have used a total per stream rate of $0.06 as the base case, which could look on the high side for some artists, but the purpose is to show the relative change. Whatever amount the base rate is, it will increase by the same percentages.

The tl;dr of the chart is the most radical of the options (label rate returns to 55%, podcast dilution is removed from the royalty pot, a 25% increase in retail price and therefore royalties) results in a very meaningful uplift of 42% in royalties for artists from today’s current state. But, the three problems here are:

  1. Such measures could damage the commercial sustainability of streaming
  2. It does not change the underlying annuity model shift that streaming represents
  3. We are about to enter a recession. Music subscriptions are at risk, increasing the prices right now could accelerate subscriber churn. Meaning a bigger slice of a smaller cake for artists.

Let’s take the first two points in turn.

1) Spotify lost $184 million in 2019. With this royalty model it would have lost more than $1 billion. Spotify would have to reduce its operating costs by a fifth just to get back to losing $184 million. Critics would argue this represents trimming the fat. It might, but it would also likely lead to Spotify:

  1. Cutting back on product development
  2. Cutting back on growing its subscriber base
  3. Finding new ways to charge labels and artists for additional services

None of these are reasons not to pursue the strategy but they are prices that labels and artists have to be willing to take. Spotify revenue growth will slow. Furthermore, it will skew the market towards Apple, Amazon and Google who can afford to make music loss leading. In the mid term this may benefit artists, but in the longer term (i.e. when Spotify is sufficiently squeezed) these tech majors are likely to follow their MO of ‘reducing inefficiencies in the supply chain’. So be careful what you wish for.

2) Taking an artist straw person, with 20% of her total income coming from streaming, if live and merch only gets to 25% of its previous level, the 41% increase in streaming income would still see her total annual income fall by 40%.

No streaming lever can be pulled hard enough to offset the decline in live revenue.

So, let’s pull together all the pieces:

  1. Streaming royalties can be increased meaningfully if prices are increased and rates revisited but it may slow the streaming market
  2. Now is probably not the best time to be increasing streaming prices for consumers
  3. Even a big increase is not going to offset the fall in live income

There is not a simple, single answer to fixing the current crisis in artist income. A blended, pragmatic solution would be:

  1. Increase royalties at a middle option rate (do not increase prices until after the recession)
  2. Artists push their fans to buy their music at destinations like Bandcamp
  3. Professionalise and commercialise the livestreaming sector, with a strong focus on charging for events in order to create some live income
  4. Innovate virtual fandom products to drive new, additional income streams

It is not going to be easy for artists for some time yet. The hard truth is that income levels will not return to full strength until live does, and that is a way off yet. Streaming is more important now than ever so any solution must balance maintaining its momentum and scale with sustaining artist careers.

The IFPI Confirms 2019 was the Independents’ Year for Streaming

UPDATE: this post has been updated to correct an erroneous data point. Previously it stated that independent market share was 41%. It has been corrected to 29%

Recently I wrote about how a little-known Spotify statistic revealed that independents (labels and artists) outperformed the majors on its platform in 2019. The IFPI’s latest global revenue estimates provide further evidence of 2019 being a stellar streaming year for independents. As we have two sets of fixed reported figures (major label reports, and the artists direct sector reported by MIDiA) we can simply deduct these figures from the IFPI’s streaming figures to reveal what the IFPI estimates independent label revenues to be. The tl;dr: Independents grew by 39% while majors grew by 22%, which means that the independents’ global share of streaming revenue increased by two whole points from 27% to 29%.

ifpi midia 2020 streaming

The IFPI reported global streaming revenues of $11.2 billion, however these figures include YouTube but not Pandora ad supported revenues. So, to match up the IFPI’s definition with how the record labels report the revenue we need to add in Pandora ad revenue which takes us to $11.9 billion which is almost exactly what MIDiA reported two months ago.

Although independent labels and artists grew fastest in relative terms in 2019, the majors grew most in absolute terms, adding nearly twice as much net new revenue ($1.5 billion compared to $0.8 billion). The majors remain the powerhouse of the streaming economy but independents are rapidly making this space their own. If they were to add another four or five points of share across 2020 and in 2021, then independents would be represent a third of the entire streaming market. But a crucial consideration is that these figures are on a distribution basis, so the major revenue includes independents they distribute. According to the last WIN study, the independent market share went up another c12%. On that basis, by 2021, the independent label share of streaming could be approaching 50%. That would be a genuine paradigm shift, the clear announcement of a newly aligned music business.

Soon we’ll be writing on how the majors can turn this around. Watch this space.

Travis Scott has Only Scratched the Surface of Music Games Tie Ups

travis-scott-fortnite-concert-1280x720In February 2019 Marshmello caused ripples of almost tidal proportions across the music business when 10.7 million Fortnite fans watched him perform a ‘concert’ in the game. Then in April 2020 Travis Scott followed in his shoes with his own Fortnite concert, pulling in 12 million players. Given that this was in the COVID-19 lockdown the 1.3 million increase was a relatively modest increase. However, Fortnite publisher Epic Games had learned its lessons from the Marshmello event and rather than limit audience demand to one event, turned it into a residency with a further 15 million players watching over four subsequent replays of the event. This took the total to 27 million, though there will be a substantial number that attended multiple performances.

What is clear is that a format has been established and that Epic Games is honing its promoter skillset. Fortnite events are labour intensive efforts to put on and currently do not scale well (hence only two events in 14 months). But there is a much bigger opportunity here for artists and one that gains new significance in the lockdown era.

The impact of COVID-19 recurring

With the cessation of live music in lockdown, artists have seen a dramatic fall in income. Established artists can expect to earn between 50% and 70% of their total income from live—that just disappeared. However fast lockdown measures are eased, live entertainment is going to take a long time to return to normal. Indeed, it may never do so.

Virologists point to the Spanish Flu outbreak after the First World War as the relevant precedent for understanding how the COVID-19 pandemic may play out. That was a far deadlier outbreak, infecting a third of the world’s population and killing up to 50 million. But crucially, it was not a single event. It had four major outbreaks over two years. It is likely that COVID-19 will not simply go away but instead will return, either in waves or as a continual background oscillation of infection.

As of May 1st 2020 less than half a percent of the world’s population has been infected with COVID-19. Even allowing for that being just a tenth of the actual cases, that means that 95% of the population has not had COVID-19. Consequently, the majority of consumers are going to be concerned about returning to potentially infectious environments.

The combination of easing lockdown measures and weak consumer confidence means that live is not going to return to normal anytime soon. Social distancing measures will likely see rows of empty seats in larger venues and smaller, standing-only venues may struggle to operate at all. Reduced, spaced-out crowds will both harm the live experience and prevent many live events from being commercially viable to operate. Consumer concern may even make it hard for reduced capacities to be met. So, artists are not going to be able to reasonably expect a strong return of traditional live income in the mid-term future.

Lockdown lag

Live’s lockdown lag may have the knock-on effect of making artists take a more critical view of their streaming income. When live dominated their income mix, streaming’s context was a meaningful revenue stream that built audiences to drive other forms of income. It was effectively marketing artists got paid for. Now that artists are becoming more dependent on streaming income, the old concerns about whether they are getting paid enough will likely come back to the fore. It is in the interests of both labels and streaming services, that labels use this as an opportunity to revisit their streaming splits with artists. Labels cannot afford to have artists united against the labels’ primary income stream.

Live streaming is not yet ready for prime time

Live streaming of concerts is gaining traction but lockdown came a little too early for the sector. It is under developed, under monetised, under licensed, under professionalised and lacks the discovery layer crucial to make it ready for prime time (perhaps an opportunity for streaming services). On top of this, it does not create the same scarcity of experience that live music does and the rise of virtual festivals with artists playing just a few songs makes live more like a playlist experience, which favours the platforms over the artists. Enter stage left games.

top ranked games for artist fanbases

Travis Scott fans are 2.3 times more likely to play Fortnite than overall consumers, but there are 80 other artist fanbases that are more likely to play Fornite than Scott’s. How do we know this?

Every quarter MIDiA fields a music brand tracker that – among many other things – tracks which games artists’ fans play. Looking across the 10 artist fanbases most likely to play three of the top games reveals a huge amount of untapped opportunity. The old model for games and music was sync. That is still a major opportunity but in the lockdown era the potential scope is so much wider.

Not every game is well suited to hosting virtual, gameplay concerts, but the console ecosystems can support so much more. Imagine if Flohio, Ben Howard, Koffee or Slowthai were to do put on exclusive performances live streamed to FIFA players via Xbox Live followed by a gaming session to which players would pay for a premium ticket to play against their favourite artists in an eSports type set up. Tickets would be limited, to create scarcity.

Lockdown economics

The lockdown lag will create a whole new set of economics across all industries. For music it will be about exploring new income streams to recast a new music business. Games will play a major part. No longer simply a place to sync music, games will become platforms for driving artist-fan engagement.

In the Attention Economy everything is connected. In lockdown economics those connections become productised and monetised, with benefits for all. Think of this like the K-Pop and Japanese Idol models, with superfans paying for extra access to their favourite artists. Instead of handshakes and meets and greets, we have gaming sessions and exclusive concerts. Artists benefit by connecting with fans and driving income; labels get to be participants in new revenue streams and help offset growing artist concern about streaming pay-outs; games companies get to add new revenue sources and products.

A dystopian virtual future

A final thought to leave you with. Tim Ingham’s recent piece suggested that Epic Games’ long view might be to create virtual artists, with the thinking being that the Marshmello and Travis Scott concerts were already in practice virtual artists. What if Epic Games is using these concerts to learn the ropes so that it could create its own roster of virtual artists. It could follow the Japanese and Korean music agency model of building rosters of employee artists, that operate under a work for hire basis. Epic Games would own 100% of all rights while the artists perform under stage names and as game avatars. Epic Games could make these virtual artists part of the Fortnite game itself to help build tribalism and fandom, and it of course already has a highly effective virtual merch store.

In doing so, Epic Games would create a games-centric music division that operates entirely outside of the confines of the traditional music industry. Dystopian perhaps, but also entirely feasible, which is why artists and labels should probably think less about becoming integrated into the games themselves and focus more on connecting their real selves with their gaming fans.

If you are a MIDiA client we will be publishing a report on this topic shortly with thousands of data points. If you are not yet a MIDiA client and would like to learn how to get access to this data email Stephen@midiaresearch.com

Spotify Q1 2020: Choppy Waters Ahead

Spotify’s first quarter earnings were a mixed bag, with a largely positive picture for Q1 but some warning signs for the remainder of the year:

  • Subscribers: Spotify’s Q1 earnings may not have matched Netflix’s for over-performance but subscriptions did show over performance, reaching 130 million, one million above MIDiA’s pre-COVID forecasts. This represented six million net new subscribers in the quarter. Netflix expected seven million and reached 15.8 million. COVID-19 has been more of a boon for video than music, largely because key music listening slots (commute, the gym) have been wiped out by lockdown. Whereas video has seen the opening up of new viewing slots.
  • Active users: With audio streams down across the board in early-to-mid March, active usage was always going to be at risk. Although monthly active users (MAUs) held up, daily active users (DAUs) were down in early lockdown markets Spain and Italy. MAU is in effect a reach measure rather than an engagement metric. Checking an app once a month is not active usage. So DAU and WAUs are where scrutiny needs applying. As Spotify does not regularly report these figures we have to interpret its narrative: “the ratio of daily active users relative to monthly active users was strong in the quarter. We did see a bit of a decline over the last few weeks of March…[and] higher than in Q1 of 2019.” Strong does not mean up, and the fact it was reported as higher than 12 months ago but no reference to last quarter, suggests ‘strong’ may not be that useful an adjective here. Also, the dip in the latter weeks of March is concerning as by this stage lockdown behaviours were normalising and streams as a whole were picking up. So, Spotify should have been seeing an uplift in the MAU/DAU ratio, not a dip. Something to keep an eye on for Q2.
  • Advertising: A global recession is now more an inevitability rather than a possibility. Advertising spend is an early indicator and this is reflected in Spotify’s earnings. Ad revenue has been Spotify’s Achilles’ heel in recent quarters, with targets often missed and tech rollouts dragging. Spotify says it was on course to beat its targets for Q1 but then missed them, falling 20% below target in the latter months of March. So, the COVID-19 drop off was quick and dramatic. Do not expect this to recover anytime soon. Weakening digital ad spend is going to be a secular trend. Even Alphabet reported slowing Google ad revenue in Q1.
  • Revenues: Premium ARPU continued to slip, down €0.23 from Q4 2019 to €4,42. This was the single biggest quarterly decline since Q1 2018. Meanwhile in revenue terms, premium was higher than expected (due to the subscriber over performance) so even with the under-performance of advertising, total revenues (€1,848 million) were in line with expectations. Nonetheless, Spotify has downgraded its annual revenue forecast by 5.5% from an average of €8.48 billion to €8.05 billion, with the top end of its revised guidance now lower than the bottom end of its previous guidance. This largely reflects the weak outlook for digital advertising but if the coming recession persists for long then growing subscriber churn is a real risk. A fifth of consumers state that they would consider cancelling their music subscriptions if faced with having to reduce their entertainment spend in a recession.
  • Podcasts: Whereas most media experienced a COVID-bounce, podcasts did not. Google searches for podcasts declined throughout the lockdown period, though there was a small uplift mid-April. Spotify stated that “the current environment has shifted listening patterns temporarily” which is likely code for consumption is down. Although Spotify added that “nothing we have seen changes our long-term view of the potential”. What is particularly interesting about the podcast impact at a market level is that COVID-19 hit mid-way through the format transition process. Radio has enjoyed a resurgence during lockdown, reversing, if even only temporarily, the format transition.

Independents Grew Fastest on Spotify in 2019, But There’s a Twist

Tomorrow (Wednesday 29th April) Spotify announces its Q1 2020 results, at which point we will find out whether it had a COVID-bounce like Netflix did (adding 15.8 million subscribers in Q1) or whether growth slowed. But before that, there is one little detail from Spotify’s 2019 Annual Report which warrants a closer look. Hidden away in the commentary there is this innocuous looking line:

“For the year ended December 31, 2019 [Universal Music Group, Sony Music Entertainment, Warner Music Group, and Merlin] accounted for approximately 82% of music streams.”

The same line is in Spotify’s 2018 Annual Report with the figure at 85%. So, the majors and Merlin indies saw their share of Spotify streams decline by three percentage points in 2019. That in itself is interesting and builds on the narrative of the streaming tail getting longer and fatter, with the superstars losing share. But with a little creative thinking we can do a lot more with this three percentage points shift.

Using MIDiA’s label market shares data for FY 2019 we can do a full breakdown of Spotify’s streaming revenue. Applying shares for streaming volumes to streaming revenue, and shares for the total streaming market to Spotify is not methodologically pure and has margins of error, but it is a broadly sound approach and lets us do the following:

  • First we apply the percentage share to Spotify’s annual revenue
  • Next, we take the majors’ share of streaming revenues for 2019 and apply them to Spotify’s streaming revenue
  • We can then deduct the majors from the majors + Merlin total to leave us with Merlin’s revenue
  • Then we apply the independent artists streaming share to the Spotify revenue which leaves us with one remaining segment: ‘other independent labels’

spotify streaming griowth by label type

What emerges is a hierarchy of dramatically different growth rates, ranging from just 11% for Merlin labels through to a dramatic 48% for independent artists and an even more impressive 58% for ‘other independent labels’. This provides further evidence of the way in which (much of) the independent sector continues to thrive during streaming’s continuing ascendancy.

spotify streaming growth by label type

Most intriguing is the 58% growth for ‘other independent labels’. I am using the quote marks because this is essentially an ‘all others’ bucket and so captures music entities that don’t fit the traditional classification of ‘label’. This includes AI generative music and of course library music companies like Epidemic Sound.

It is of course important to consider that growth rates are not absolute growth – the majors still added much more new Spotify revenue in 2019 (€1 billion) than all of the rest put together. Nonetheless, the difference in growth rates is stark and only Spotify will be able to answer questions about how much of this is organic versus how much of this is driven by the way that it engineers its recommendations and programming.

Whatever the causes, the effect is clear: streaming benefits everyone but it benefits some more than others.

Lockdown Listening and the Independent Artist

After an initial lockdown lull, streaming levels are – on the surface – beginning to normalise. Underlying the macro-level normalisation, ‘lockdown listening’ is in fact resulting in dramatic shifts in listening behaviour, from using the commute time for activities other than listening to music, through using smart devices to listen at home to spending more time on YouTube. (MIDiA clients can access our latest data on these trends in our latest report COVID-19: Lockdown Listening).

Some of these shifts will have long-term effect while some will last little longer than the lockdown, but now that many artists are losing between 50%-70% of their income with the cessation of live, no artist can afford not to jump on the unique opportunities lockdown listening is throwing up, however fleeting they may be. Moreover with recording studios closed, projects getting put on hold, releases pushed back, not enough music is getting to market when it is needed most. This disruption to music’s supply chain is not going away until lockdown is and independent artists are beginning to look like they could be best placed to respond.

A COVID bounce for independent artists

In 2019 artists direct (i.e. those without record labels) was the fastest growing segment of the total recorded music market, growing by 32.1% in 2019 to reach $873 million, representing 4.1% of the total market, up from just 1.7% in 2015. Momentum was already with independent artists before lockdown, now there is a growing body of evidence that they are prospering in the lockdown listening era too. In Sweden – streaming’s bellwether – indie distribution platform Amuse saw one of its independent artists get 19 of the Top 50 tracks on Spotify’s daily chart in Sweden on March 11th and overall DIY user uploads rose 300% year-on-year for the whole month. Although daily Spotify charts need treating with some caution – especially the Swedish one which seems to routinely throw up disruptive outliers – the underlying trend is clear: independent artists can get a seat at the top table, in fact they can get a lot of the seats. Frequently this then results in majors snapping up artists, such as Lil Nas X and Arizona Nervas.

Release schedule disruption

What is unique about lockdown listening is that we are going to start to see gaps in release schedules. The longer that studio and mastering facilities remain closed, the wider the release schedule gaps will become. Right now, labels still have schedules filled with music that was written, recorded and mastered prior to lockdown. As more lockdown time passes, the more that stockpile will be eaten into. Big label artists have big label sounds. They are teamed up with top-tier writers, session musicians, producers and production facilities. This pre-lockdown advantage becomes a hindrance during lockdown. In contrast, independent artists that are accustomed to doing some or all of their recording and production themselves, lockdown listening is an opportunity to get ahead by releasing music more frequently and consistently than big label artists can. Independent artists platform CD Baby noted it had seen a 30%-50% increase in the amount of music being released since mid-March.

Live streaming to connect with fans

Lockdown may have seemed to have thrown the dynamics of artist careers upside down but in many ways, it is in fact compelling artists to get back to basics of the most important thing: the relationship with their fans. One of the growing failings of the streaming environment has been the demise of places where artists and fans can truly connect. Facebook became a place for labels and managers to sell stuff, Instagram a place for filter-perfect artificiality and streaming just a place for listening. Although there are platforms that nobly break these new rules – Bandcamp especially, fans increasingly relied on live as the place to connect. The immediate cessation of live has seen a surge of live streaming as artists look to maintain that connection. Bandsintown data shows that the number of live streamed shows continues to accelerate, up from less than 400 per day in late-March to more than 2,000 a day by mid-April.

A new artist-fan relationship

With so many live streams and no ‘programming guide’ or meta-schedule, artists have had to double down on social media activity to keep their fans informed. They have also realised – superstar missteps aside – that during these times, fans value seeing their favourite artists without the production values, without the Instagram filters, as people just like them getting through this. This taps into the psychological phenomenon where our brains respond in a particular way when we see someone that we are used to seeing in professional media contexts suddenly looking like someone just like us.

There is a real opportunity here for artists big and small to take these newly redefined relationships into the post-lockdown world. There is a dilemma though: if they don’t, they may face fan backlash, but if they do, they will have to rebuild a new artist persona that trades less on the enigma of star quality than their human qualities. This would mean an entire rewriting of the nature of fame and fandom.

Throughout the history of recorded music, artists have been one step removed, with air of mystique and otherness. The last decade has seen this softened but lockdown may be catalysing a far more dramatic shift. If it does, what we may see may actually be a normalization of fan relationships. Newer, independent artists usually depend on a deeper, loser connection with their fanbases, so many of them already arrived at this point before lockdown. Lockdown is pushing the independent artist rulebook for fan engagement mainstream.

Streaming Services Are Going to Have to Change Their MO

New music is the fuel in the streaming engine, creating a virtuous circle of increased label and artist output to meet DSP-stimulated user demand. Now though, with COVID-19 disrupting the production of music, everything is set to change. The streaming services haven’t realised it yet, but their underlying modus operandi (MO) is going to need to change, too.

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When new music is all you have to position around

Disney launched Disney+ into a crowded video subscription marketplace and hit 50 million subscribers after just five months. This could not have happened in the music streaming market for the simple reason that all music services carry pretty much the same catalogue. There is no Mandalorian effect possible for music. Content differentiation is a non-starter. Worse still, music streaming services all look the same, so differentiating on user experience is out of the picture too. They also all cost the same and largely work on the same devices. Consequently, they have to differentiate on how they deliver music via algorithms and curation. This in turn has led to the weaponisation of new music discovery. The MO is simple: our value to you, the user, is delivering relevant new music at high volume and velocity. Record labels fed the beast, increasing the amount of new releases. Then came COVID-19. Suddenly studios closed down, releases got pushed back, projects put on hold. How do you continue to position and differentiate around the quantity of new music you deliver if that quantity is going to lessen?

Music’s lockdown ‘feelgood’ factor

Streaming services – and labels – are going to be able to offset some of the impact of reduced output by promoting older music. In fact, this is exactly what consumers want right now. In MIDiA’s latest COVID-19 Impact survey, more than a third of consumers stated that they are listening to music that makes them feel more positive. Meanwhile they are listening less to new music and instead more to songs the already know. Although new releases have every chance of making you feel positive, familiar music with positive memories guarantees the feelgood factor in a way that unfamiliar music cannot. Consumers are turning to radio because they value the connection with the presenters during lockdown. In these troubled, isolated times, music plays an invaluable role and in turn streaming services do also.

Preparing for a recession

The problem is not with streaming services per se. Instead it is the question of what streaming services stand for in a mini-era of catalogue renaissance after years of expensively building brand values centred on new music. Fixing the curation and the programming is the (relatively) easy part. But if lockdown measures persist into the latter part of the year – which could easily happen, despite the hopes of Donald Trump and Jair Bolsanaro – then new music will be an ever-smaller part of the streaming offering. And if lockdown measures do persist for that long, then we will likely be feeling the impacts of a recession by then. MIDiA’s March Recession Impact report revealed that around a fifth of consumers would consider cancelling their music subscription if they had to cut entertainment spending. This may seem like a subtle nuance, but if by then streaming users have become accustomed to listening to old, familiar tunes then as they are faced with the difficult decision of where to cut spending, they will know that streaming is not delivering on its original new music promise. Add into the mix that being able to listen to music on the go is a crucial subscription value add, but in lockdown phone listening is losing ground to smart device listening as mobility is discouraged.

Communicating new brand values

Streaming music, and recorded music more generally, is in a really good place right now. It is bringing much-needed light into the locked-down homes of hundreds of millions. Moreover, it is actually better placed to deal with the disruption to content production than the streaming video space because listening to older music is central to music consumption, while watching reruns of old TV shows is something you do when there is nothing better to watch. So, the coming catalogue shift is not an existential challenge for streaming. Rather than a product or programming problem, it is about brand positioning and communicating core values. Nonetheless, these soft tools are crucial and unless the groundwork is laid now, a serious problem could manifest in six months or so if the economy enters a recession. Time for those marketing and branding teams to earn their crust.

Note: If you were wondering why I haven’t discussed how all this might affect independent artists – that’s next week’s post!