About Mark Mulligan

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

Creator tools: The music industry’s new top of funnel

For most of 2020, MIDiA has been working on a major piece of work around the fast-growing creator tools space. The themes we had already started working on became rocket propelled with the onset of the pandemic, with an unprecedented volume of artists starting to engage with music production tools, services and hardware. Even before COVID-19, the creator tools space was set to transform the entire music business; now that future has become the present. This landmark report ‘Creator Tools – The Music Industry’s New Top of Funnel’ is immediately available to MIDiA Research clients here (more details of the report can be found at the bottom of this post).

Music production used to be a siloed segment of the music industry that revolved around studios, hardware and packaged software – at best a cost centre for labels. Now that is all changing. A new wave of creator tools companies are meeting the needs of a new generation of artists with innovative and intuitive music production solutions. Adding to an already vibrant marketplace, this new breed of production tools and services, often subscription-based, are reinventing the creative process and will reshape the long-term view of what a music company is. 

This is set to be the most dramatic product strategy shift the music industry has experienced in decades catalysed by the COVID-19 pandemic. 68% of independent artists reported making more music and 36% doing more online collaborations during lockdowns.

There are 14.6 million digital music creators globally, of which 4.7 million are self-releasing ‘artists direct’, up 31% from 3.6 million in 2019.

The emergence of a subscription economy

In the same year, music software, sounds and services generated $884 million, with plugins and VSTs the largest single segment at 43%. Building on this ‘COVID bounce’ total revenues will reach $1.86 billion by 2027. Though music software is the most widely-adopted creator tools category among independent artists, sounds and services will be the two largest drivers of future growth. 

Subscriptions models will also be key, with new models, more self-sufficient tools and the rise of SAAS services making the market majority subscription by 2026, with subscription services reaching $870 million by 2027, up 477% from $151 million in 2019. The shift from software sales to SAAS models means these companies are collecting crucial creator data before they even get to the distribution or release stage, giving these companies the ability to identify the likely hits before they even get into streaming services. This is the music industry’s new top of funnel. Meanwhile at the other end of the funnel, Apple (Garage Band, Logic) and Spotify (SoundBetter, Soundtrap) are well placed to push up the funnel, with the foundations of what tomorrow’s record label will be. Sony Music’s move to invest in creation app Tully is the start of what will rapidly become a creator tools arms race. Expect Splice and LANDR to become sought after by both labels and streaming services. 

Creative feedback loops

The new breed of creator tools is also fostering creative feedback loops between other creators and in some cases with audiences—a dynamic MIDiA expects to become a mainstay of the future production landscape as digitally-native Gen Z and younger millennials mature in their production capabilities. The creator tools that build around such creative feedback loops will be those that resonate most with the young generation who will be the creators and fans of tomorrow’s music business. 

Snap’s acquisition of collaboration app Voisey illustrates how this is so much more than just a music tech play. We are on the cusp of a consumer revolution also. Just like TikTok made amateur video making a mainstream consumer activity as Instagram did photography, so this new generation of apps and games are aiming to do the same with music. Warner Music’s Tones and I making a soundpack available for fans to create music with inside Roblox’s Splash is an early indication of how music making is about to go mainstream.

Just as samplers and DAWs transformed music making, so this new approach to production will change the future of how music is made and in turn, how it sounds. Music production product strategy is at a pivot point, where a new breed of user experience-led propositions will rise to prominence. The smart services that have already empowered their users to go from zero to 100 more quickly than ever before, will grow their offerings in line with their user base’s growing capabilities. The business of music has always shaped the culture of music, but perhaps never more so than how the creator tools revolution will reshape the future of what it means to be a fan, an artist and a music company.

If you are not yet a MIDiA client and would like to learn more about how to get access to the ‘Creator Tools – The Music Industry’s New Top of Funnel’ then email stephen@midiaresearch.com

Report details

Pages: 48

Figures: 15

Words: 7,500

Vendor profiles: 12

Products tracked: c.2,000

Excel includes:

Music Software, Sounds and Services Revenue

Creator Tools Value Chain

Software Tracker Summary

Software Tracker – Plugins

Software Tracker – VSTs

Software Tracker DAWs

Software Tracker – Rent-to-own

Software Tracker – Platforms

Software Tracker – DJ Tools

Creator Tools Company Directory

Methodology Statement

Time to move beyond the song economy

The UK parliament is currently running an inquiry into the streaming music economy, having called for evidence from across the music business. Earlier this week were the first verbal submissions, from a number of UK artists including Tom Gray (Gomez), Guy Garvey (Elbow), Ed O’Brien (Radiohead) and Nadine Shah.MPs heard impassioned but balanced submissions that shone a light on the reality of what it means to be an artist in the streaming era. Mercury Prize-nominated Shah explained that she makes so little money from streaming that she is struggling to pay her rent. Clearly, the demise of live during the pandemic has created a uniquely difficult period for artists, but it has spotlighted that streaming on its own is not working for artists. The fact that policy makers are hearing this viewpoint (albeit later rather than sooner) suggests that change will be coming. But, while the focus is understandably on how to ‘fix’ streaming, it might be that efforts would be better placed building a complementary alternative.

Direct action

In Steve McQueen’s new film Mangrove, there is a intense scene in which Darcus Howe implores café owner and community leader Frank Crichlow that after Frank’s fruitless attempts to fix the problem via the system that direct action is the only way to change things: “self-movement – external forces acting on the organism”.

The equivalent of direct action in the commercial world is innovation – it comes from the ground up. In 2008 Spotify came up with an innovation that made the problem of the time –piracy – effectively redundant. What’s required now are new innovations that make the current streaming model look like an alternative, not the only choice – to enjoy music. 

Now is the time

Now is the right time to be assessing the long-term impact of streaming. It is a mature business model and is the largest revenue driver in most of the world’s leading music markets. Whatever streaming is now, is pretty much how it is going to be. The future of what streaming can be is already here, today. Assessments must be on what the model delivers now, not some future potential. 

Streaming’s current performance can be assessed as follows:

  • Record labels and publishers have experienced strong revenue growth and improving margins. Their businesses have been improved
  • Artists and songwriters have more people listening to their music than ever before and more creators are able to earn income than ever before 

However, beyond the superstars, most do not earn a sustainable income from streaming alone and cannot see a pathway to this ever changing. This is Guy Garvey’s reference to the lack of any new (financially viable) music artists in the future. 

A model for rights holders more than creators

Streaming benefits rights holders more than it does creators. It is far easier to enjoy the benefits of scale if you have scale. Here is a simple illustration: if a label has 100,000 tracks played 10 times each in a month (i.e., a million streams) it will earn around £/$5,000. But a self-released artist with just 100 tracks with 10 plays each (i.e., 1,000 streams) will only earn £/$5. Though this is the product of simple arithmetic, the first amount is the foundation of a small business, the other buys you a cup of coffee.

Record labels and publishers with large catalogues benefit from scale in a way that artists and songwriters do not, unless they have a megahit – and although streaming is great for megahits, they are few and far between. Changes to licensing (and there are many ways to do that) may make things better – but they will not change the underlying dynamic; it is simply how the model is.

We have a model that works for rights holders that is fuelled by artists and songwriters. Now we need an additional, parallel, model that works for artists.

Streaming music services are incentivised to drive consumption. What we need are additional models, incentivised to drive fandom. Streaming is a song economy, and we now need a parallel fan economy

Music used to be all about fandom. It was the way in which people identified and expressed themselves – a badge of honour and a symbol of personality. Streaming has industrialised music, turning it into a convenient utility that acts as a soundtrack to our everyday life. That may be fine, but it has simultaneously supressed those ways to express fandom. It’s not easy to express your fandom on a streaming platform, while on a social platform money must change hands. 

Music fandom hasn’t died, but it just has fewer places to live. 

The fan economy

So, what is a fan economy? A fan economy is one in which the value resides in the artist-fan relationship. Currently this model is pursued actively in Asia (e.g., Tencent Music in China, K-Pop in Korea) but far less so in the West. The fan economy will be defined by diversity but what its constituents will have in common is being built around micro-communities of fans.

Micro-communities that are built around an artist’s 1,000 true fans (or even fewer) allow the artist’s most loyal and dedicated fans to drive revenue that is small to the industry but large to the artist. For example, an artist with 1,000 subscribers paying $5 a month would generate the same $5,000 a month that a million streams would deliver a record label.

There are a number of platforms that are making a start, but now is the time for this to become a central music industry focus. Music rightsholders have a model that works well for them, so now they need to ensure that their artists and songwriters have models that work for them too. There is thus an onus on rights holders helping drive the fan economy, but to drive creator income rather than simply be another rights holder income.

A multi-pronged approach

This is the three-pronged approach we propose:

  • Governments, support new, innovative companies building fan economy models and ensure that they provide equitable remuneration for creators
  • Record labels, build teams geared at helping their artists find fan economy income streams (and take a service fee or revenue share)
  • Streaming services, allow artists more real estate to showcase where fans can find other content and experiences

None of this is to say that efforts to make streaming more equitable should not be pursued; they absolutely should. However, it should be done with a clear understanding of the ‘art of the possible’. Even if rates were doubled, the self-released artist with 1,000 streams would still only earn £/$10. For an artist with a million streams a month on a big label it would change monthly income from £/$1,250 a month to £/$2,000, i.e., £/$24,000 a year. Not a sustainable annual income. 

Our case is that streaming should indeed be made more equitable, but alongside proactive investment in a new generation of innovative fan economy apps. This is an opportunity to make UK Plc the innovation driver for the global music business. A unique opportunity that is there for the taking with the right strategy and support, from all vested interests.

The opportunity for the UK streaming inquiry

With the streaming inquiry, the UK government has an unprecedented opportunity to set a global standard for building a vibrant and viable future for music creators, but it is an opportunity that needs seizing now. In partnership with music creators and rightsholders, it can create a structure that supports the innovation and change the industry needs. Now that streaming has come of age, we can see both its strengths and weaknesses. Let’s use the weaknesses as a foundation for building something new, exciting and equitable. It is time to bring ways to allow music fans to express themselves and their support to artists more directly. That will keep music the uniquely valuable product it is, and not just the grease in the wheels. 

Mark Mulligan and Keith Jopling, MIDiA Research 

Snapchat buys Voisey to enter the music market

Snapchat parent company Snap Inc is reported to have acquired music collaboration tool Voisey. Voisey is a relatively new start-up, having raised its first major round mid-2019 and launching later the same year. Snap has acquired Voisey not for what it has achieved, but for what it can be. We are on the cusp of a revolution in music making, with a host of new tools and services set to create the fastest growth in music creativity ever seen. Snap wants to be a part of that.

There is more activity, inward investment and innovation in the music creator tools space than ever. Companies like Splice, LANDR, Output and BandLab are changing the face of music making, empowering creators to go from zero to one hundred faster than ever before. But in many respects, these companies are the second chapter in the original story. The first phase belongs to a growing body of apps that give consumers intuitive tools to be able to make high quality music via gamified experiences. It is all part of a broader trend of audiences being empowered with creative tools that let them achieve with one swipe what in the past would have taken years of experience and complex control panels to achieve. TikTok enables consumers to create high quality videos; Instagram, high quality photos. The new generation of creator tools are enabling consumers to make music quickly and easily. Snapchat sees itself being able to be at the centre of that.

Voisey joins a growing body of consumer-facing music creator tools, with Popgun’s Splash sound pack game in Roblox racking up 21 million players earlier this week. While the majority of these gamers will not go on to make music in a more structured way, many will who would not have otherwise done so. This is not actually the point, however. The point is that just like TikTok made amateur video making a mainstream consumer activity as Instagram did to photography, so this new generation of apps and games are aiming to do the same with music.

In the history of music, only a minority of people could ever actually express themselves through playing an instrument. That has now changed. These are truly exciting times for music, with the emergence of an industry that goes far beyond the confines of the way it is defined today, and the companies that function in it today. 

If Radiohead was releasing its debut album in 2020 perhaps it would have contained the single ‘Anyone can play gamified AI beats and sounds’.

MIDiA has been working on a major new report on the music creator tools space which we will be announcing next week. The report is already available to MIDiA clients. If you would like to find out more about MIDiA’s creator tools research email stephen@midiaresearch.com

YouTube at two billion: Still much more music opportunity to be had

YouTube just announced its milestone of reaching two billion music users on the platform. YouTube has long been the largest music service on the planet, and it has just extended that lead. In 2019, its official total user number was two billion. Lockdown has proven to be a growth driver of epic proportions. 

Nicely timed to (accidentally!) coincide with YouTube’s announcement is third edition of MIDiA’s biannual ‘State of the YouTube Music Economy’ report. This report, which provides a detailed analysis of YouTube’s contribution to the music business, put YouTube’s music user number at 1.2 billion for the end of 2019. Of course, all this comes at a time when European legislators are discussing how Article 17 of the European Copyright Directive will be implemented and therefore impact YouTube’s business (potentially a very convenient time to release a stat of this magnitude?). 2020 has proven to be a big year for YouTube – but equally, make no mistake: YouTube and music rightsholders are still not on the same page. 

One of the biggest issues regarding the YouTube music economy is that music, while performing and growing strongly, still underperforms commercially compared to other content genres on the platform. This is because music videos are not as well suited to YouTube’s monetisation mechanics as genres such as games. For example, the videos are too short to have mid-roll video ads and most music channels (Asian and Latin American ones excepted) are artist-centric, so simply do not have enough content to drive channel engagement. While there are constraints on what can be done with a music video, there is nonetheless a lot of scope for innovation and increasing music’s share of YouTube revenue.

Google is now the second largest global payer of music royalties, with $5.2 billion across free and paid as well as masters and publishing. Spotify is comfortably ahead, but the scale of Google’s royalty contribution is pronounced.

In 2019, YouTube generated $15.2 billion in ad revenue with $4 billion of that music related (this figure includes income for labels, publishers and YouTube etc.). While that was an impressive increase of 18% on 2019 it was much slower than the 36% growth in overall ad revenue. Consequently, music’s share fell from 31% to 26%. Music rightsholders might point to this being evidence of YouTube not paying enough for music, but it pays pretty much the same revenue share to all of its creators. So, there is clearly more that music can be doing to ensure that it can grow at a rate closer to that of other content genres. 

Currently, YouTube is becoming more important to music than music is to YouTube. The one billion views club is becoming the de facto Platinum ‘sales’ award for the streaming era, and there are now 208 music videos that have reached the milestone with 74 videos reaching it in 2019/20 alone. YouTube continues to dominate the global music streaming market, with 47% music weekly active user penetration, ahead of Spotify in second place at 29%. Being the most widely used music streaming app across all ages, with weekly active usage highest among 16-19 year olds at 70% penetration, YouTube is simultaneously a key ad-supported, premium, marketing and discovery asset for artists and labels. Against this setting, the debate around rights holder royalty rates continues to rage. 

Are rights holders missing the point with Twitch?

Twitch has apologised to its users for the growing volume of rights holder takedown notices for music used in Twitch videos. Twitch is in an awkward transitionary phase with music rights holders, not dissimilar to where YouTube was when it was acquired by Google. 14 years on from that acquisition, YouTube’s relationship with rights holders is in a better place but short of where it should be. Article 17, weaving its way between the competing lobbying efforts of rights holders and tech platforms, is just the latest mile marker on a long and winding rocky road. Twitch, like YouTube, does not fit the licensing norms of most streaming services, resulting in repeated stand offs. But just like the music industry still hasn’t grasped the full potential of YouTube, it may be making a similar mistake with Twitch.

Firstly, for sake of clarity, MIDiA firmly believes that copyrighted work should be used correctly and remunerated. We are not, in any way, suggesting that a platform should be able to use music without permission. However, the current licensing structures are:

  1. Not flexible and agile enough to truly capitalise on user-generated content (UGC) music (a market which will be worth $4 billion by year end – download our major new FREE report on UGC music here)
  2. YouTube and Twitch represent an opportunity to create new growth drivers, especially for artists, that can help fix the ‘broken record’

A lack of sync in sync

Let’s address the first point, well, first. Platform-native creators on YouTube, Twitch and TikTok create content so frequently they make the music industry’s volume and velocity problem look like child’s play. Usually, creators who want music in their videos have a choice: 1) get sync licenses, 2) get library music, 3) use music without permission and get taken down or demonetised. 

The problem with option one is that sync clearance is a lengthy process that can take weeks and cost a lot. Not a great fit for creators who create and upload videos the same day. Companies like Lickd are trying to fix this with catalogues of pre-cleared music, but the industry as a whole is moving too slowly. For the record, MIDiA’s preferred solution is for platforms securing large ‘sandboxes’ of pre-cleared tracks for creators and developers to work with. An early example of this is the NFL making all of its soundtracks available for creators on a Synchtank powered site.Unless music rights holders want to cede the growth in the music UGC space (which will be worth $5.9 billion by end 2022) to library music companies, they need to put alternative approaches at the core of their licensing strategy, not simply pursue them as interesting ‘edge’ experiments.

Going beyond the stream

However, the biggest music industry opportunity is not licensing music. It is monetising fandom. The #brokenrecord debate has shone a light on how streaming’s scale benefits do not trickle down at a sufficient rate to creators. Artists compete for tiny bits of highly valuable ‘real estate’ – playlists, artist profiles etc – but most often do not get enough to earn a living. While efforts like user-centric licensing and better songwriter rates will help, they will not change the underlying fundamentals of streaming economics. The counter argument is that scale will change everything, but:

  • Average revenue per user (ARPU) is falling. Spotify’s premium ARPU fell 34% between Q1 2016 and Q3 2020, a 34% decline
  • Streaming growth is slowing in developed markets
  • Consumption is slowing – last quarter Spotify reported an increase in consumption hours to pre-COVID levels but as there were 49 million new monthly active users (MAUs) compared to pre-COVID this implies a reduction in hours per user
  • Emerging markets are growing but a) ARPU is lower and b) domestic repertoire will drive most of the long-term consumption – so this means only a small uplift for Western creators

Before live stopped, streaming existed in a mutually beneficial ecosystem, giving artists more fans for concerts and merch. Now that live is out of the equation, streaming isn’t enough. 

This is where platforms like YouTube and Twitch can come in. They enable creators to build loyal fanbases of which they can monetise the loyal core to build sustainable careers. The idea of ‘1,000 True Fans’ was first put forward years ago by Kevin Kelly but now the dynamics of social platforms have made this a realistic possibility for any creator. Nevertheless, music artists are still way off the pace. 

Micro-communities

Twitch and YouTube enable creators to build (often small) loyal fanbases that can generate them income that far exceeds what artists get from streaming. MIDiA terms this dynamic ‘micro-communities’ and we think it will be one of the trends that will shape the music business in 2021 and beyond. As part of our creator tools research we will be exploring how platforms like Splice and Landr will be able to build their own artist-fan communities that can be as valuable to artists as Bandcamp is to many already. 

Streaming created a superstar economy where even within the non-superstars, superstars exist. For example, Tunecore states it has ‘thousands’ of artists that make more than $100,000 a year. A simple bit of arithmetic shows that this means the remainder make less than $100.

Micro-communities represent an opportunity for artists to fill the income gap that streaming leaves without live in the mix. This probably does not reflect a direct revenue opportunity for rights holders – indeed, that would be missing the point. Instead, they can ensure those platforms are supported to empower artist monetisation without speed bumps. Why? Quite simply, rights holders have a model that works for them (streaming), so now they need to support a model that works for their creators so that they can in turn continue to support the streaming model that works for rights holders. 

If the industry does not support this new virtuous circle ecosystem, then it could bring the streaming model crashing down due to creator discontent. 

Discovery Mode: Understanding how Spotify thinks

Spotify’s Discovery Mode announcement looked at the very best a poorly timed announcement, coming at a time when artists and songwriters are more concerned about their income than at any other since the music business returned to growth more than half a decade ago. If the initial responses of the creator community are anything to go by, the announcement has had the effect of taking the broken record debate, breaking it some more, and turning it into the pulverised record debate. Yet, judging the impact of the announcement on the creator community alone misses the wider strategic worldview that Spotify operates within, and understanding why Spotify would make such a move now.

Spotify has three competing interest groups:

1 – Investors

2 – Audiences

3 – Rightsholders and creators (a group which it sometimes splits, for example with its temporarily aborted Direct Artists move)

It has to keep all three happy or it does not have a business. As it gets bigger and more established, however, it feels that it can afford to make moves that may antagonise rightsholders / creators and audiences but that will keep investors happy. The logic is that Spotify is getting so big that those two audiences cannot do without it (the ‘too big to fail’ stage) but that investors have many other places to put their money. So, investors are more ‘at risk’ than the others.

The new normal 

As we discussed last week, since going public Spotify has told investors to measure it on growth and market share rather than margin or average revenue per user (ARPU). This clearly serves the investor segment better than rightsholders and creators. Now, however, as it embarks on a long-term podcast strategy that will not see full return on investment for many years, Spotify needs to show investors that it is able to turn its core music business into a profitable one. Price increases, which it kicked off last week and Daniel Ek trumpeted in his investor note, are key to this. The strategy delivers benefits for both investors and rightsholders / creators, though goes against the interests of the audience, which will always prefer to pay less, not more.

Audiences are at the back of the queue 

Though they are very different propositions, Discovery Mode, along with Marquee, have the similar effect of improving profitability but have the consequence of reducing the net amount of income that goes back to rightsholders because they are spending more of their income on marketing. They shift the ‘balance of trade’ between Spotify and rightsholders  and creators. This will also mean more deductions for creators, which in turn means less streaming income. 

Thus, these tactics are primarily focused on appeasing the investor segment. Interestingly, both are actually negative for the audience, damaging the user experience by delivering music that has paid its way into a user’s listening rather than solely because it matches the user’s tastes. Spotify has long positioned itself as an alternative to radio but is becoming ever more like the very thing it is trying to replace. It is making the assumption that it is so entrenched with its users that it can afford to make such moves without risking losing audience. Apple, Amazon, Google and Deezer will be running their hands with glee.

The next Spotify chapter

We are entering the next chapter in Spotify’s story. Podcasts will take centre stage, while the core music business is treated as a mature subscription business rather than a growth category – at least in Western markets. The underlying tactics are aimed at improving investor sentiment but will deliver long sought benefits to rightsholders / creators, not least improved ARPU and per-stream rates. Interestingly, podcasts could improve per-stream rates too: if podcasts steal music time (which they will) but the royalty pot remains set at its current share, then there will be fewer streams to share the royalty pot between. Hence, higher rates.

Increased royalty income but a bumpy road

The net impact of this new strategic direction will be beneficial for investors first and rightsholders / creators second. On balance, the impact of increased prices, fewer promotions and increased lifetime value should offset the impact of efforts like Marquee and Discover Mode. Rightsholders and creators should see a steady increase in rates in Western markets. However, they should not expect to be happy with everything Spotify does, as this is first and foremost about pleasing investors. Do not expect Discover Mode to be an isolated event.

Post-Pandemic Programming

COVID-19 caused dislocation and disruption to the global entertainment business. Now, the recession and the prospect of further pandemic peaks create an unprecedented outlook for entertainment companies. Many of the shifts that occurred during lockdown will define the new market dynamics. The old rule books are being rewritten and new approaches to entertainment business models and experiences will be crucial to move from the holding pattern of survive to the growth mode of thrive. Approaches that worked for decades will no longer work while new innovations will gain traction in a mid-term market that will necessitate an entirely new approach for players across the entertainment industries. MIDiA has kicked off a new programme of research, analysis and insight around these dynamics. We call it Post-Pandemic Programming.

COVID-19 created a mini-recession via lockdown measures, stifling many businesses in an instant, paving the way for the onset of a more traditional, wider recession. All recessions though have uneven impact, affect many companies adversely but some positively. The early signs are that while there were many lockdown losers there were also plenty of companies that fared well, even thrived during lockdown. What was definitely going on, was a reallocation of spend. For example, in Q2 2020 Live Nation and Disney lost $9.9 billion between them compared to Q2 2019. Meanwhile Home Depot increased its revenue by $7.2 billion over the same period. While the comparisons are not perfect, they do illustrate the underlying dynamic well. What is crucial to understanding the post-pandemic period is identifying which of these shifts persist and which revert.

Before that though, the combined impact of the second wave and the coming recession needs to be mapped. To do this, we created a risk framework, looking at what characteristics make entertainment businesses low or high risk, both during a recession and during a pandemic. To understand the coming months, these then need to be overlayed. Companies that have both low recession risk and low pandemic risk will prosper while the adverse is also the case. So, if a company is virtual / online, is scalable, has unique content and is part of a bundle, then it is set to fare well. Enter stage left, Amazon Prime. 

Standalone digital subscriptions (e.g. Netflix, Spotify, Xbox Live) are low risk from a pandemic perspective (as the last nine months have illustrated) but the fact they are non-contract based means that they are more vulnerable to churn than say a pay-TV subscription which is contract based and therefore a subscriber has to buy their way out of a commitment (which has the exact opposite of the desired effect of cancelling to save money).

If you are interested in learning more about this research and understanding how music, video, games, sports and media companies will be affected in the coming months, there are two things you can do:

  1. Check out our subscriber report
  2. Sign up to our free-to-attend webinar on the 10th November

You may need to hurry for the webinar, we are already nearing capacity since promoting it to our clients and newsletter subscribers, but there are still some spaces left. 

Spotify Q3 2020: What price growth?

Spotify reported another strong quarter in Q3 2020, with subscriber growth up 27% year-on-year (YoY) and ad-supported user growth up 21%. Spotify continues to set the pace for the global streaming market and has demonstrated that streaming has proven resilient to lockdown. (Spotify finished the quarter with 144 million subscribers, just above MIDiA’s 143 million forecast – we maintain our end of year forecast for 154 million.) Further evidence of Spotify’s lockdown resilience is that global consumption hours surpassed pre-COVID levels and that churn levels fell. However, Spotify’s premium revenue growth continues to trail subscriber increases, which raises the question: what price is growth coming at for rightsholders and creators?

Spotify’s Q3 2020 premium revenue was €1,790 million, up 15% YoY – notably lower than the 27% subscriber growth. This is a long-term trend for Spotify, resulting in a steady erosion of premium average revenue per user (ARPU). Q3 2020 ARPU fell to €4.19, down from €4.67 in Q3 2019 and €5.76 back in Q3 2016.

There are multiple factors underpinning this shift:

Growth of emerging markets where ARPU is lower

Growth of family and duo plans

Use of promotional offers

Growth of low-priced tiers (telco bundles, student plans)

Spotify emphasised that ‘product mix’ was the core driver of lower ARPU in Q3 2020 and pointed to price increases for family plans across four Latin American markets, Australia, Belgium and Switzerland. Rightsholders and creators will be hoping that this is the start of a wider strategy. 

‘Measure us on growth’

Spotify continues to tell the markets to measure it on growth and market share rather than margin or ARPU. That serves Spotify better than rightsholders and creators. However, this may be about to change. Spotify’s big growth bet is podcasts, which it is monetising via advertising. Although Spotify had a decent quarter for ad revenue (after many weak ones) it is still just 9% of total revenue. Podcasts have the potential to be bigger than music for Spotify but it is going to take a long time to realise the potential, especially as the coming recession will likely dent the global ad market. 

A new growth story

Why this matters for music stakeholders is that Spotify may find it hard to convince investors to start backing yet another ‘measure us on growth’ story when it already has one. As streaming starts to mature in Western markets, Spotify may now be on a path to shift its music subscriptions narrative to one of turning around the ARPU decline, focusing on increasing “lifetime value”, reducing churn and improving margins. It can then make podcasts the ‘growth story’ and music the ‘margin and ARPU story’.

Music rights holders may be concerned that podcasts threaten their share of Spotify revenue, but they may also end up thanking Spotify’s podcasts strategy for indirectly resulting in a stronger focus of improving music monetisation. This in turn will mean higher per-stream rates – something that artists and songwriters in particular will appreciate.

How YouTube can be a music industry growth driver

In the coming weeks MIDiA will be presenting the third edition of its biannual YouTube music report, State of the YouTube Music Economy 3.0: End of the Beginning. This is a major report that presents the definitive traits of the YouTube music economy, including revenues, royalty payments, streams, subscribers, user behaviour and user demographics. One of the key themes in this report is how the music industry, or at least the Western music industry, is failing to capitalise on the revenue potential of YouTube. Royalty rates play a part, and Europe’s Article 17 will have some role (exactly what is yet to be determined) in changing this. However, music rightsholders can also get more out of YouTube by better utilising the dynamics of the YouTube economy. As subscription growth slows in developed markets, YouTube has the potential to be a major revenue growth driver.

Music does not naturally fit YouTube’s channel template. YouTube’s ‘channels’ are better considered talent and content feeds; they perform the same role as following a creator on TikTok or Instagram, ensuring that the subscriber gets immediate access to all the latest content without having to go looking for it. Most artist channels on YouTube deliver content infrequently and, crucially, only sporadically. YouTube audiences expect more from YouTube channels. This approach implicitly treats YouTube channels as fan clubs rather than the content feeds that they are designed to be. 

Treat channel subscribers like you would friends

It does not need to be this way. In fact, an emerging breed of non-Anglo music channels are finding success by doing things differently. Across the top 10 most subscribed music channels on YouTube, one is Brazilian, two Indian and one Korean. Unlike the Anglo artists that make up the remainder of the top 10, these four channels deliver a frequent, regular flow of content. The contrast between the two approaches to content is clearly visible. The top three non-Anglo channels had uploaded more than one video a day for the first 10 days of October. Of the Anglo artists, however, only Marshmello had uploaded a new video recently, while most of the others had not uploaded in months. Ed Sheeran was the worst culprit, with nine months having passed since his last video, his ‘BRB’ logo notwithstanding. Taking nine-plus months off and then simply expecting the audience to still be there, waiting, is little short of arrogant. YouTube subscriber bases need treating like friends. How would you feel if a good friend went dark for nine months and then got back in touch and asked you for something? A similar dynamic is at play here.

Label-led curation and programming

A unifying factor of these top performing non-Anglo music channels is that they are ‘label’ led rather than artist led. Artist-led YouTube strategy is a natural extension of label marketing strategy but it falls short on YouTube because most artists deliver far too little content. Of course, a label-led approach flies against how music fandom has worked for decades (niche afficionado labels excepted) but a genre or label approach alongside artist channels can be a way of driving subscriber engagement and pushing up ad revenues. Yes, Indian music companies are dramatically different entities to Western labels, but the principles can still be translated – and KondZilla (the second-most subscribed music channel) is Brazilian.

Innovating the format 

Then there is the issue of format innovation. MIDiA has been arguing for years that labels should be considering longer formats to complement the core music videos. One way is stitching together curated collections of tracks with chapter markers between each one to create more video ad inventory opportunities. This is something the non-Anglo channels are already doing. For example, in the 10-day sample period, Zee Music Company posted an extended video the ‘Best of Amitabh Bachchan’ that featured ten separate music videos spliced together with chapter breaks.

Despite being so well established, YouTube is growing fast in terms of revenue, audience and views. Yet, music monetization is not growing at the same (watch out for the report for exactly what this divergence looks like). Now is the time to start experimenting with new formats and content strategy. Done right, YouTube monetization can grow strongly for music rightsholders, regardless of what happens with Article 17.