About Mark Mulligan

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

Guess Who’s The Leading Headphone Brand?

Headphones have been centre stage of the digital music market since the launch of the iPod in 2001. Portable music started more than two decades earlier with Sony’s Walkman, but it was digital’s ability to fill a device with catalogues of music, rather than just one album that empowered music listeners to cut the cord from their home stereos. The mass market home audio sector lurched into a resultant decline that it has only just started to pull itself out of thanks to connected speakers.

Without headphones, streaming music would not have the biggest driver of subscriber adoption: smartphone listening. Back in the peak of the Walkman era of portable audio, headphone listening was still a comparatively niche activity and skewed heavily towards younger consumers. Now though, only 30% of consumers do not have a pair of headphones, and smartphone listening is the second most widespread way of listening to music – behind the car and ahead of home speakers.

Smart speakers and interactive dashboards are both competing for consumer ear time, but will never claim back the same share of listening from headphones that speaker-based listening enjoyed in the 80s and 90s. We live much more itinerant and connected lives now, with the smartphone our eternal companion. Headphones represent a marketplace with an unprecedented scale and ubiquity.

MIDiA has just published a new report exploring this marketplace and one of the key findings may surprise you: Apple is the market leader in headphone ownership.

headphones

Just as Apple stole Sony’s leading position in portable audio players, it is now doing the same with headphones. When its three headphone brand categories are combined (EarPods, AirPods, Beats – an Apple company) Apple has the leading market share in headphone ownership with 24%. Sony is second with 22%, followed by fellow traditional CE stalwarts Panasonic and Bose. The top four corporate-level headphone brands represent 61% of the total, illustrating just how fragmented the rest of the market is, with countless brands competing for share. Interestingly, Apple is the only top 20 headphone brand whose owners are not majority male.

For this and much more detail, including ownership by streaming service user, demographics etc, MIDiA clients can check out the full report here. If you are not a MIDiA client but would like to learn more about this report and MIDiA’s Business Intelligence Platform, email stephen@midiaresearch.com.

Spotify May Already Be Too Big for the Labels to Stop it Competing With Them

Spotify’s Daniel Ek is betting big on developing a ‘two sided marketplace’ for music. With the company’s market cap on a downward trend despite strong growth metrics, Ek might find himself having to play up the disruption narrative more boldly and more quickly than he’d planned. Investors are betting on a Netflix-like disruptor for the music industry, rather than a junior distribution partner for the labels. And this is where it gets messy. Whereas Netflix can play individual TV networks off each other and can even afford to lose Disneyand Fox, each major record label has enough market share to have the equivalent of a UN Security Council Veto. So when Spotify announced it was going to let artists upload music directly and thenadded distribution to other streaming services via DistroKid,the labels understandably smelt a rat. To the extent they threatened to block access to India. Spotify’s balancing act may be reaching a tipping point (mixed metaphor pun intended), but it may already be too late for the labels to act. Here’s why…

In search of market share

If Spotify is able to become more competitive (and therefore threatening) to labels and keep hold of them, it will all be down to market share. The less market share the big labels have on Spotify, the more negotiating power Spotify has. It is a classic case of divide and rule. If Spotify really wants to play the role of market disruptor (and so far we have strong hints rather than outright statements), it will need to whittle down the power of the majors before they call it and pull their content. Here’s a scenario for how Spotify could achieve that.

1 – Direct indie label deals

The first step is detangling embedded indie label market share from the majors that distribute them and therefore wield their market share as part of their own in licensing negotiations. There are two ways to measure market share:

  1. By distribution (this includes indie labels distributed via major labels being included in the share of the bigger labels)
  2. By ownership (this measures based on the original label, so does not count any indie labels as part of major labels)

By the first measure, the major labels had an 82% market share in 2016 and 79% market share in 2017. By the second measure, according to the WINTel report, major label market share was 62% in 2016 (the 2017 WINTel number is not yet out but will be shortly). So, if Spotify does direct deals with the larger indies currently distributed by majors or major-owned distributors (or persuades them to join Merlin), it unpacks up to more than a fifth of major label market share.

2 – More artists direct

DIY artists uploading directly to Spotify is a long-term play, aimed at harnessing the potential of tomorrow’s stars. In the near term, these artists will generate a smallish amount of streams, even with a helping hand from Spotify’s algorithms and curators. There are about 300 artists right now; let’s say Spotify gets to 2,500 next year, it could potentially deliver around a third of a percent of share of Spotify streams.

3 – Library music

Fake artist gatesaw a lot of people getting very hot under the collar, but nothing that was done was against any rules. Instead library music companies like Epidemic Sounds were – and still are – serving tracks into mood based playlists. The inference is that Spotify is paying less for Epidemic Sounds tracks than to labels. Whether it is or isn’t, this still eats away at label market share on Spotify. With a bit more support from Spotify’s playlist engine, these could account for around 0.7% of streams.  Coupled with artists direct, that’s a single point of share. Not exactly industry changing, but a pointer to the future, and a point of share is a point of share.

4 – Top 20 artists

Where Spotify could really move the needle is doing direct deals with top tier, frontline artists, probably on label services deals, as Spotify doesn’t appear to want to become a copyright owner – not yet at least. Netflix is funding its original content investments with around $1.5 billion of debt every two years, which it raises against its subscriber growth forecasts. No reason why Spotify couldn’t do the same, paying advances that other labels couldn’t compete with. The top 20 artists on Spotify account for around 22% of all Spotify streams. If Spotify could do direct deals with each of them and promote the hell of out of their latest releases, they could contribute up to 15% of all streams. Of that top 20, Taylor Swift is on the lookout for a new label, and Drake is putting out ‘albums’ so frequently that he must be pushing up close to the end of his deal.

spotify streaming repertoire shares midia research

When we add all these components together we end up in a situation where the major labels’ share of total streams would be just 47%. Spotify would have the second highest individual market share, while regional repertoire variations mean that SME and WMG could drop towards 10-11% in a couple of regions.

Of course, this is a hypothetical scenario, and one on steroids: the odds of Spotify signing up all the top 20 artists in the next 12 months is slim, to put it lightly, but it is useful for illustrating the opportunity.

Prisoners’ Dilemma

At this stage we move on to a prisoners’dilemma scenario for the majors:

  • All of the majors help Spotify’s case by over prioritising Spotify as a promotional tool in light of its share of total listening compared to radio, YouTube, other streaming services etc
  • WMG and SME probably couldn’t afford to remove their content from Spotify but would be watching UMG, the only one that probably feel confident enough to do so
  • However, UMG would be thinking if it jumps first and removes its content, each of the other two majors would benefit from it not being there (and would probably be secretly hoping for that outcome)
  • Each other major would be thinking the same, and regulatory restrictions prevent the majors from discussing strategy to formulate a combined response
  • But even if UMG did pull its content, this would hurt Spotify but would not kill it (Amazon Prime Music launched without UMG and spent 15 months growing just fine until UMG came on board)
  • Spotify could easily tweak its curation algorithms to minimise the perceived impact of the missing catalogue, making it ‘feel’ more like 10%
  • So, the likely scenario would be each major paralysed by FOMO and so none of them act

Thus, maybe Spotify is already nearly big enough to do this, and could do so next year. And the more that Spotify’s stock price struggles, the more that Spotify needs to talk up its disruption. History shows that when Spotify makes disruptive announcements, its stock price does better than when it delivers quarterly results. Maybe, just maybe, the labels have already missed their chance to prevent Spotify from becoming their fiercest competitor. The TV networks left it too late with Netflix…history may be about to repeat itself.

Spotify, DistroKid and the Two Sided Marketplace

distrokid spotify

Spotify has taken a minority stake in DistroKid. In itself, it may be a slightly left field but relatively insignificant move, except that it is in fact one small but important step on a much bigger journey. Back in September, Spotify announced that it was enabling artists to upload their music directly to Spotify, simultaneously aggravating record labels, distributors, DIY platforms and Soundcloud all in one fell swoop. This raised an intriguing possibility of a ‘coalition of the willing’ forming against Spotify from slighted partners and competitors. But that’s another blog post. Right now, though, DistroKid’s role in this performance is as an enabler for Spotify in its path to becoming a next generation label / creating a two-sided marketplace (delete as appropriate depending on how all this affects your business).

Bringing efficiencies into the supply chain

Spotify’s DistroKid deal will enable Spotify’s direct artists to “seamlessly distribute their music to other platforms through DistroKid”.So, instead of putting all their streaming eggs in one basket, Spotify’s direct artists now get to stream their music on Apple, Amazon, Deezer and the rest too. What wasn’t made clear in the announcement is whether Spotify will have visibility of the streaming data from those other platforms and / or whether the revenue will be recognised as Spotify revenue and then distributed to its artists. If these statements were to be the case, then Spotify’s competitors would be feeding it data and revenue…

UPDATE: A Spotify spokesperson clarified that “Spotify has no rights to see data from other digital service providers and DistroKid will not share confidential information.”

Why this relatively small announcement matters, is that it is another piece of Spotify’s strategy of shifting its way up the value chain by a) removing some of the distribution component and b) entering into direct relationships with artists. It’s what west coast tech firms call ‘bring efficiencies into the supply chain’. If it all works, Spotify will get more margin, artists will get more margin, but middle players (labels, distributors etc.) will get squeezed.

Treading a subtler path

This is how Spotify can edge quietly towards becoming a record label without going nuclear from the get go. It is a strategy we predicted by in April ahead of Spotify’s DPO:

“As much as the whole world appears to be saying Spotify needs to do a Netflix (and it probably does) it just can’t, not yet at least. In TV, rights are so fragmented that Netflix can have Disney and Fox pull their content and it’d still be a fast growing business. If UMG pulled its content from Spotify, the latter would be dead in the water. So, Spotify will take a subtler path to ‘doing a Netflix’, first by ‘doing a Soundcloud’ i.e. becoming a direct platform for artists and then switching on monetisation etc.”.

The challenge for Spotify is whether it can execute on the strategy quickly enough to excite investors (and thus drive up the share price), but slowly enough to keep record labels on board…so that when they realise where things are heading then it is too late for them to do anything about it.

 

Looking for the Music in Tencent Music

The Tencent Music Entertainment (TME) F1 filingmakes for highly interesting reading, but don’t expect copious amounts of data to give you an inside track in the way that Spotify’s F1 filing did. Instead TME’s F1 bears much closer resemblance to iQyi’s F1, namely a basic level of KPIs, lots of market narrative and even more space assigned to explaining all of the risks associated with investing in a Chinese company. But, perhaps the most significant thing of all is that TME isn’t really a music company or investment opportunity, but is instead a series of social entertainment platforms, of which music – and much of it not even streaming music – is one minor part.

Risk factors – there’s a lot of them

As with iQiYi’s F1 filing, a lot of the document is taken up with outlining the risks associated with investing in a Chinese company, particularly with regard to the various ways in which the Chinese government can potentially put the business out of existence. Evidence of just how real this threat is for Tencent is very close to home. The Chinese authorities are currently refusing to authorise any new Tencent games – and have not done so since March,  while it brings in new restrictions on game playing for kids.Tencent’s shares tumbled as a result. The problem for Chinese companies providing due diligence for overseas investors is that they have to admit that they might not be compliant with all Chinese laws. With the PRC (People’s Republic of China) government not having democratic checks and balances, Chinese companies have to face the real possibility of unpredictable, unchallengeable, draconian intervention, such as is happening with games.

Two particular areas of potential difficulty that the TME F1 highlights are social currency and overseas interests:

  1. TME makes much of its money from social gifting and virtual items. TME argues this does not constitute virtual currency, so should not be subject to tight PRC regulations. The PRC government may disagree.
  2. TME is registered in the Cayman Islands and does not actually own many of its Chinese streaming services but instead has shareholdings in, and contractual relationships with, them. This is a risk-laden approach at the best of times, but is given extra spice by the fact the PRC could determine TME to be a foreign interest, which would put it in breach of a whole bunch of PRC regulations.

Other notable risk factors are:

  • UGC:TME explains: “Under PRC laws and regulations, online service providers, which provide storage space for users to upload works or links to other services or content, may be held liable for copyright infringement”. It goes on to say: “Due to the massive amount of content displayed on our platform, we may not always be able to promptly identify the content that is illegal.” There are two potential outcomes: 1) things carry on as they are 2) rights holders get itchy feet and TME needs to find someone to help it monitor and police copyright infringement.
  • ADS: TME is not offering shares for sale but instead American Depositary Shares (ADS), which in heavily simplified terms means that investors’ money is deposited in US banks in USD and then can in principle be converted into RMB shares at the prevailing currency exchange rate, which may be higher or lower than when the ADS was purchased.

What’s in a number?

Prior to this filing, Tencent had only released one audited music subscriber number – back in Q1 2016 it announced 4.3 million QQ Music subscribers. After that came a succession of press cited numbers that got a lot bigger, but nothing audited. Finally we have a whole collection of numbers to play around with (though see the PS at the end of this post for a health warning on interpreting Chinese company numbers reported in SEC documents).

TME 1

In 2016, TME was very much a music company, with music accounting for nearly half of its RMB 4.4 billion revenues. But by 2017 that picture had changed…and some…with just 29% of its revenues classified as ‘online music services’. Online music revenues grew by 47%, which is impressive enough in isolation, but is much slower growth than the rest of the Chinese paid content market. Video, which parent company Tencent is a key player in, is a major growth area. One sub strand of this is social video, where TME is also market heavyweight. Luckily for TME, it has eggs in many baskets. Social video, which largely comprises live streaming in China, contributed to TME’s social entertainment services revenue growing by 253% (i.e. five times more quickly than online music) in 2017 to reach RMB 7.8 billion – 71% of TME’s total RMB 10.9 billion.

This revenue was driven in large part by live streaming services Kugou Live and Kuwo Liveand by social karaoke app Quanmin K Ge, known as WeSing in the west. WeSing is arguably the biggest ‘music’ app many people don’t know about. Music doesn’t play the same cultural role in China as it does in western markets, thanks in part to the legacy of the oxymoronically named Cultural Revolution, which limits the potential opportunity for music services in China. Karaoke, however, is huge, and WeSing does a fantastic job of converting this demand. By putting social centre stage, TME is able to monetise social in a way that would make Facebook green with envy. As TME explains:

“We provide to our users certain subscription packages, which entitle paying subscribers a fixed amount of non-accumulating downloads per month and unlimited “ad-free” streaming of our full music content offerings with certain privilege features on our music platforms.

We sell virtual gifts to users on our online karaoke and live streaming platforms. The virtual gifts are sold to users at different specified prices as pre-determined by us.” 

Putting social centre stage

But TME’s social skills are not limited to WeSing. Social seeps from virtually every pore of its music services, with features such as likes, comments, shares, ability to create and share lyrics posters from a song, ability to sing along to songs, see local trending tracks, get VIP packages etc. TME has worked out how to bake true social behaviour into the centre of its music services in a way few western companies have (YouTube and Soundcloud are rare exceptions). Both Soundcloud and YouTube built their services without having to play by the record label rule book. Read into that what you will.

The social power of TME’s end-to-end social music offering is illustrated by this case study:

Ada Zhuang (  ). Ada started out as a talented singer on our live streaming platform. A few months later, she released her debut album on Kugou Music. Since then, Ada has released over 200 songs that have won numerous music awards. Her popularity continued to grow through concerts held across China. A single released by Ada in October 2015 has since then been played over three billon times on our platform. 

TME2

Through its acquisition of competitor services Kugo and Kuwou, TME has built a music empire, giving it a 76% music subscriber market share and leaving two key competitors: Apple Music and NetEase Cloud Music. TME pointedly makes no reference to Apple Music, despite it having 2.6 million Chinese subscribers in 2017. NetEase, however, does get a name check.

TME reported its combined (net) mobile music MAUs to be 644 million in Q2 2018, though defining its users as unique devices rather than unique users. (Interestingly, it defines its social users on an individual basis.). What is clear is that TME’s music users and social users are mirror opposites in user tally and the revenue they generate; social users are just 26% of users but account for 71% of revenues. Clearly, TME has identified there is a lot more money to be made from social experiences than streaming music. Few western companies saw this opportunity. Musical.ly, founded by Alex Zhu and Luyu Yang, did, and was predictably bought for $1 billion by Chinese company Bytedance, home to Douyin (known as TikTok in the west).

TME3

TME’s ARPU numbers hammer home the scale of success for its social segment versus its music side. In Q2 2018 TME was earning RMB 122 a month from social users, against a paid user base of 9.5 million, while its paid music base of 23.3 million was generating an ARPU of just RMB 9.

 

Interestingly, international expansion is not mentioned once in the 198,984 words of the TME F1 filing. TME explains exactly how it intends to spend the money from the IPO but international is not spelt out. Our bet though, is that TME is playing its cards close to its chest and will indeed go west.

Wildcard

TME is one of a number of Chinese tech firms listing a portion of their stock on US exchanges. Should the US economy topple into a downward trend at some stage, for example as a resulting of an escalating trade war with China, then stocks like TME could give US investors a seamless way of transferring their holdings out of US companies into Chinese ones, without having to change their portfolio mix (ie one tech stock for another) and without having to change jurisdiction. And with China sitting on $3 trillion of foreign currency reserves – with USD the largest part – China could even hasten things along by flooding US currency into the markets, triggering a tumbling exchange rate.

PS

There is an international jurisdictional loophole between the SEC in the US and the CSRC in China. Which in overly simplified terms means that Chinese companies can falsely report numbers in SEC filings,withtheSEC unable to prosecute Chinese miscreant companies and the CSRC unable to take action over the SEC filing.This has resulted in a significant number of fraudulent filings by Chinese companies reverse listing onto US exchanges via dormant US companies, with SEC filings showing numbers up to 10 times higher than their CSRC filings. The only watertight way to validate Chinese company SEC filed numbers, is to corroborate them with CSRC filings. Unfortunately, TME is not a separate entity in China so has not filed any numbers, and, as stated above, Tencent has rarely reported any numbers for its music division. This does not mean that TME’s should not inherently be taken at face value, but it does suggest extra scrutiny might be wise.

Making Free Pay: Finetuning Freemium

Streaming is transforming music and TV business models, driving growth in both audiences and revenue. A balance between free and paid tiers and services has been key to this success, but, growth is not always balanced, and as we approach maturity in many western markets, more may be needed of free, ad supported options. Likewise, for unlocking longer-term, larger-scale growth in emerging markets.

MIDiA Making Free Pay

We know these issues matter, but we also know it can be hard to plan for the next phase when there is so much activity and resource requirement being delivered by the current phase. Therefore, to help media companies and streaming services alike, we have put together a curated insight event to provide the definitive evidence base for setting the balance between free and paid.

Join us for this free event, to see exclusive, previously unseen MIDiA data presented by our Research Director Tim Mulligan and a panel of industry experts tackle the burning questions. This event will help you understand:

  • Just how big will streaming music and video advertising get?
  • What is the right balance to strike between free and paid?
  • How will this balance vary across different regions across the globe?
  • How many more consumers will make the path from free to paid?
  • Why are streaming audiences so interesting to advertisers and how can they reach them?
  • What impact will the tech majors’ domination of global ad revenues have on streaming services?

The event is free to attend, and will be in central London on the 17thOctober. Places are limited though and going fast, so be sure to sign up soon if you plan to come.

As a sneak peak, here is one snippet from Tim’s presentation:

midia making free pay data

TV and music have a long history in ad supported via broadcast TV and radio. Both also have had the opportunity to convert an unprecedented volume of consumers to subscription relationships through streaming. The focus right now is all on subscriber growth, but the flatten out phase of the s-curve will come and when it does, ad supported can, and should, pick up the baton and run with it. The challenge is how to do that without unravelling subscription revenue.

Both music and video will follow a similarly shaped growth trajectory over the coming years in terms of advertising’s share of total revenue. However, music will lag far behind with just 38% of streaming revenue coming from ad revenue in 2025, compared to 56% for video. This will reflect both the positive and the negative. On the plus side, music will be generating strong subscription revenue in 2025, thus commanding much of the revenue share. However, it will also be generating much less annual ad revenue per user (ARPU) in 2025 than video: $4.69 compared to $20.37. In fact, video will see ad supported ARPU nearly double by 2025 from 2017, while music will add just one dollar.

This reflects multiple factors, including:

  1. Social video (YouTube, Instagram, Snapchat, Facebook) will generate far more ad supported video revenue than it will ad-supported music revenue
  2. Video ads command a higher ad rate than audio ads
  3. TV ad budgets are much bigger than radio ad budgets, and their transition to streaming will accelerate video ad revenue growth
  4. Few music services have scaled their ad sales outside of the US (though some encouraging signs are occurring there)
  5. Emerging markets will be key drivers of ad-supported music audiences, but digital ad markets will take time to get established

Ultimately, streaming ad growth will be shaped in equal measure by traditional ad market dynamics, and the tech and ad sales capabilities of the streaming services in each and every respective market. This means that in many markets we will see free audience growth far outstrip ad revenue growth. Just one of the many challenges posed by a growing ad supported streaming sector.

Join us on the 17thfor this and much more – see you there!

Spotify’s Tencent Risk

NOTE: a previous version of this post referred to a non-compete clause with Spotify detailed in this SEC filing. I have been advised that the scope of this clause is narrower than I had originally interpreted. I have therefore updated this post to remove reference to that clause but the essence of the post remains intact due to the potential role of the major labels which, as outlined below, could have the same effect as a non-compete clause.

On Thursday (September 20th) Spotify grabbed the headlines with its announcement that it is launching a free-to-use direct upload service for artists. While it is undoubtedly a big move, and one that will concern Soundcloud among others, it was not a surprising move. In fact, in April we predicted this would happen soon:“Spotify will take a subtler path to ‘doing a Netflix’, first by ‘doing a Soundcloud’, i.e. becoming a direct platform for artists and then switching on monetisation”. Will labels be concerned, sure, because although Spotify might not be parking its tanks on their lawn yet, it is certainly slowly reversing them in that general direction. However, they may just have a way of clipping Spotify’s wings and waiting in, er, the wings…Tencent.

Still waiting for IPO metrics

Tencent is prepping its music division (TME) for a partial US IPO but announced earlier this week that it will be reducing the amount it is seeking to raise from $4 billion to $2 billion, though still against a reported valuation of around $25 billion. Regular readers will know I have a healthy scepticism of Tencent’s music numbers. It has only ever reported one subscriber number officially – 4.7 million for QQ Music in Q1 2016, therefore it has plausible deniability over all the non-official numbers it puts out via the press. So, the fact there still isn’t an F1 filing revealing TME’s metrics is intriguing to say the least.

Go west

The likelihood is that the numbers will show a relative flattening in music subscriber growth (though other areas of its business should be robust). If so, they fit a wider narrative of Tencent nearing the limits of its potential in China. Video subs, which have grown superfast, will soon slow, messaging is saturated and the Chinese government is curtailing Tencent’s games operations. The title of our April report says it all: “Tencent Has Outgrown China: Now Comes the Next Phase of Growth”. Until last year’s change in Chinese regulations, Tencent could quite happily have spent its time strolling across the globe buying up companies to spread its global wings. But now, operating under limits of how much it can spend on overseas companies, Tencent is restricted to taking minority stakes in companies like Gaana and Spotify. But those efforts do not deliver Tencent the scale of global growth it needs. You can probably see where this is heading: to grow its music business TME will have to roll out internationally, which is quite possibly part of the story it will use to justify its $25 billion valuation.

Ring fencing Spotify’s global reach 

Should TME decide to use the $2 billion it raises via IPO as a war chest, it could then go on a global roll out to all the markets where Spotify is currently not present. Getting their first, with the backing of Tencent and of the $2bn IPO windfall would put Spotify on the back foot. Especially if, and here’s the crucial part, the major record labels took this as an opportunity to knock Spotify down a peg because of its increasingly competitive behaviour. They’ve been relying on Indian licenses already, that could prove to be a template, with Tencent the grateful beneficiary.  This would have the effect of ring-fencing Spotify’s global roll out plans. For fans of the board game Risk, the board would look something like this:

Spotify tencent risk 1

But Risk’s map doesn’t really do it justice. Using a political global map, the respective footprints would look more like this:

Spotify tencent risk 2

The major labels have proven unwilling to license Spotify for India because they weren’t happy with Spotify offering direct deals for a small number of artists. Imagine how they are going to feel with this latest move. With TME waiting patiently on the side lines, they may just see it as an opportunity to carve up the global streaming landscape into two halves, creating a cold war stalemate. Your move Spotify.

Article 13 – Laws of Unintended Consequences

I do not normally add disclaimers or qualifiers at the start of blog posts, but given how divisive the whole Article 13 debate has become, there is a big risk that some readers will make incorrect assumptions about my position on Article 13. The emerging defining characteristic of popular debate in the late 2010s has been the polarization of opinion e.g. Brexit, Trump, immigration. Article 13 follows a similar model, leaving little tolerance for the middle ground. You are either anti-copyright / pro-big tech or you’re pro-big government / anti-innovation.

Such extremes are the inevitable result of multi-million-dollar lobby campaigns by both sides. Reasoned nuance doesn’t really play so well in the world of political lobbying. My objective, and MIDiA’s, from the outset has been to strike an evidence-based, agenda-free position, that considers the merits of all aspects of both sides’ arguments. So, before I embark on a blog post that will likely be viewed by some of being pro-Google and anti-rights holder (it is not, nor is it the opposite), these are some ‘value gap’ principles that MIDiA holds to be true:

  • YouTube has misused fair use and safe harbour provisions against the legislation’s original intent
  • YouTube’s ‘unique’ licensing model creates an imbalance in the competitive marketplace
  • YouTube’s free offering is so good that it sucks oxygen out of the premium sphere
  • Google has rarely demonstrated an unequivocal commitment to, nor support of current copyright regimes
  • YouTube being able to license post-facto rather than paying for access to repertoire, gives it a competitive advantage over traditional licensed services
  • There is too big a gap between YouTube ad-supported payments and Spotify ad-supported payments, meaning too little gets to rights holders and creators
  • Take down and stay down is a feasible and achievable solution (albeit within margins of error)
  • The current situation needs fixing in order to rebalance the streaming market

Nonetheless, for each one of these positions from the rights holder side of the debate, we also see an equally long and compelling list of points from YouTube’s side. Rather than list them however, I want to explain how ignoring some of the counterpoints could unintentionally create a far bigger problem for the music industry than the one it is trying to fix.

Value gap or control gap?

What really riles labels is that they cannot exercise the same degree of control over YouTube that they can over Spotify and co. This is very understandable, as they rightly want to be able to determine who uses their music, how it is used and how partners pay for usage. However, taking a very simplistic view of the world, the label-licensed approach has created: a few tech major success stories that don’t need to wash their own faces (Apple Music, Amazon Prime Music); a collection of smaller loss-making services (e.g. Deezer, Tidal); and one big break out success story that can’t turn a profit (Spotify). In short, the label-led model has not (yet at least) resulted in the creation of a commercially sustainable marketplace. Rights holders want to pull YouTube into this controlled economy model. YouTube is understandably resistant. After all, YouTube is a crucial margin driver for Alphabet. It cannot afford it to be loss leading. Alphabet’s core ad businesses generate the margin that subsidises Alphabet’s loss-making bets such as space flight, autonomous cars and curing death (I kid you not). Ad revenue has to be profitable.

Fixed costs / variable revenue

As we explained in our recent State of the YouTube Economy 2.0 report, YouTube went double or quits during the last two years, doubling down on music, making music over index across its user base, in order to try to make it an indispensable hit-making partner for labels. That bet now looks to have failed. So, the question is, will YouTube acquiesce to the new command economy approach to streaming or do something else—perhaps even walk away from music?

The fundamental commercial imperative for YouTube is as follows:

  • Spotify pays a fixed minimum fee to rights holders for each ad supported stream, even if it does not sell any advertising against it. The rate is the same for every song, every day of the year.
  • YouTube pays as a share of ad revenue. This means it is always paying rights holders a consistent share of its income, including all the up side on revenue spikes. But ad inventory is not worth the same 365 days a year. There are seasonal variations meaning a song can generate less rights holder income in December say, than January. Also, not all songs are worth the same to advertisers: they are willing to pay much more to advertise against a Drake track than they are for an obscure 1970s album track.

This revenue share approach without minimum per stream rates is why YouTube has a profitable, scalable ad business, but Spotify does not (as recently as Q1 2018 Spotify had a gross margin of -18% for ad supported, compared to a +14% gross margin for premium). Remember, that’s gross margin, imagine how net margin looks…

The walk away scenario

Minimum per-stream rates could break YouTube’s business model, especially in emerging markets where it usage is strong, but digital ad markets are not yet developed. It would also set a precedent that other YouTube rights holders and creators would want the same applied to them.

So, it is not beyond the realms of possibility that YouTube could simply opt to walk away from music, applying take down and stay down its way (i.e. every piece of label content stays down). It could feasibly continue to provide ad sales support and audience to Vevo, but if YouTube gets to this point, then relationships are likely to be fractured beyond repair, meaning Vevo would likely have to decamp to Facebook and build a new audience there, one which is crucially not accessible to under 13s.

A YouTube shaped hole

So, what? you might ask. The so what, is the YouTube shaped hole that would exist in the music landscape. Readers of a certain vintage will remember the long dark years of piracy booming and corroding the recorded music business. It was YouTube that killed piracy, not enforcement. Okay, I’m exaggerating a bit, but the ubiquitous availability of all the world’s music on demand, on any device, nullified the use case for P2P in an instant. Add in stream rippers and ad blockers, and you’ve got a like-for-like replacement. Piracy created and filled a demand vacuum. YouTube (and Spotify, Soundcloud, Deezer etc.) have all since filled that same space, pushing P2P to the margins. YouTube, however, has had by far the biggest impact due to its sheer global scale. If YouTube pulls out from music, that YouTube shaped hole will be filled because the demand has not changed. Kids still want their free music, as in fact so do consumers of just about every age.

Piracy could be the winner

The most likely mid-term effect of YouTube shuttering music videos would be piracy in some form or another raising its head, filling the demand vacuum. Probably a decentralised, end-to-end encrypted, streaming interface built on top of a torrent structure, sort of like a Popcorn Time for music. Then it really would be back to the bad old days.

Is this the most likely scenario? Perhaps not. But perhaps it is. I suppose a just-as-possible outcome is that YouTube sticks up the proverbial middle finger and creates its own parallel music industry, using a unified music right and ‘doing a Netflix’. Yes, YouTube could be a next-generation record label, with more reach and bigger pockets than any major record label. If the labels are worried about Spotify disintermediation, YouTube could make that threat look like a children’s tea party.

As one YouTube executive said to me a couple of years ago: “This is how we are as friends. Imagine how we’d be as enemies.”

Too much to handle?

‘Couldn’t Spotify, Deezer and Soundcloud fill the potential YouTube shaped hole?’ I hear you ask. If these companies did take on YouTube’s 1.5 billion music users on the current financial agreements they have with rights holders, and with their currently far inferior ad sales infrastructure, they would be out of money in no time. It would literally kill their businesses. Based on YouTube’s likely music streams for FY 2018 and, say, a minimum per stream rate of $0.002, Spotify and co would need pay nearly $3 billion in rights revenue, regardless of how much revenue it could generate. Let alone the unprecedented bandwidth costs for delivering all that video. Of course the flip side, is that in the mainstream streaming model, that is how much potential revenue is up for grabs. So, more money would flow back to rights holders. But the extra revenue could come at the expense of the survival of the independent streaming services, ceding more power to the tech majors.

The artist and songwriter value gap

Throughout all of this you’ll have noted I haven’t said much about artists and songwriters. That’s because the value gap isn’t really about how much they get paid, even though they get put front and centre of lobbying efforts. It’s about how much labels, publishers and PROs get paid. And none of them are talking about changing the share they pay their artists and songwriters once Article 13 is put into action. That particular value gap isn’t going to be fixed. Even if Spotify picked up all of YouTube’s traffic, on say a $0.002 minimum per stream rate, a typical major label artist would still only earn $300 for a million streams, while a co-songwriter would earn just $150. The new boss would look pretty much like the old boss.

Be careful what you wish for

The laws of unintended consequences tend to proliferate when legislation tries to fix commercial problems without a clear enough understanding of the complexities of those very commercial problems.

It is of course in the best interests of YouTube and rights holders to carve out a workable commercial compromise, and I truly hope they do. But there is a very real risk this may not happen if Article 13 is successfully enacted into national member state legislation. Perhaps the phrase that rights holders should be considering right now is ‘be careful what you wish for’.

Mid-Year 2018 Streaming Market Shares

Music subscribers grew by 16% in the first half of 2018 to reach 229.5 million, up from 198.6 million at the end of 2017. Year-on-year the global subscriber base increased by 38%, adding 62.8 million subscribers. This represents strong but sustained, rather than strongly accelerating, growth: 60.8 million net new subscribers were added between H1 2016 and H1 2017. This indicates that subscriber growth remains on the faster-growth midpoint of the S-curve. MIDiA maintains its viewpoint that this growth phase will last through the remainder of 2018 and likely until mid-2019.

midia mid year 2018 subscriber mareket shares

This will be the stage at which the early-follower segments will be tapped out in developed markets. Thereafter, growth will be driven by mid-tier streaming markets such as Japan, Germany, Brazil, Mexico, and Russia. These markets have the potential to drive strong subscriber growth, but, in the case of the latter three, will require aggressive pursuit of mid- tier products – including cut-price prepay telco bundles, as seen in Brazil. Without this approach, the opportunity will be constrained to the affluent, urban elites that have post-pay data plans and credit cards. These sorts of products though, will of course deliver lower ARPU in already lower ARPU markets. All of this means: expect revenue to grow more slowly than subscribers from mid 2019.

The key service-level trends were:

  • Spotify:Spotify once again maintained global market share of 36%, the same as in Q4 2017, with 83 million subscribers. Spotify has either gained or maintained market share every six months since Q4 2016. Spotify added more subscribers than any other service in H1 2018 – 11.9, which was 39% of all net new subscribers across the globe in the period.
  • Apple Music:Apple added two points of market share, up to 19%, and up three points year-on-year, with 43.5 million subscribers. Apple Music added the second highest number of subscribers – 9.2 million, with the US being the key growth market.
  • Amazon:Across Prime Music and Music Unlimited Amazon added just under half a point of market share, stable at 12%. Amazon experienced the most growth within its Unlimited tier, adding 3.3 million to reach 9.5 million in H2 2018. In total Amazon had 27.9 million subscribers at the end of the period.
  • Others:There were mixed fortunes among the rest of the pack. In Japan, Line Music experienced solid quarterly growth to reach one million subscribers, while in South Korea MelOn had a dip in Q1 but recovered in Q2 to finish slightly above its Q4 2017 figure. Elsewhere, Pandora had a solid six months, adding 0.5 million subscribers, while Google performed strongly on a global basis

The mid-term report card for the music subscriptions market in 2018 is strong, sustained growth with a similar second half of the year to come.

How Streaming is Changing the Shape of Music Itself [Part I]

[This is the first of two thought pieces on how streaming is reshaping music from creation to consumption] 

The streaming era has arrived in the music business, but the music business has not yet fully arrived in the streaming era. Labels, publishers, artists, songwriters and managers are all feeling – to differing degrees – the revenue impact of a booming streaming sector. However, few of these streaming migrants are fundamentally reinventing their approach to meet the demands of the new world. A new rule book is needed, and for that we need to know which of today’s trends are the markers for the future. This sort of future gazing requires us to avoid the temptation of looking at the player with the ball, but instead look for who the ball is going to be passed to.

Where we are now

These are changes that represent the start of the long-term fundamental shifts that will ultimately evolve into the future of the music business:

  • A+R strategy: Record labels are chasing the numbers, building A+R and marketing strategies geared for streaming. The bug in the machine is the ‘known unknown’ of the impact of lean-back listening, people listening to a song because it is in a pushed playlist rather than seeking it out themselves. Are labels signing the artists that music fans or that data thinks they want?
  • Composition:Songwriters are chasing the numbers too. The fear of not getting beyond the 30 second skip sees songs overloaded with hooks and familiar references. The industrialisation of song writing among writing teams and camps creates songs that resemble a loosely stitched succession of different hooks. Chasing specific playlists and trying to ‘sound like Spotify’delivers results but at the expense of the art.
  • Genre commodification:The race for the sonic centre ground is driving a commodification of genres. The pop music centre ground bleeding ever further outwards, with shameless cultural appropriating par for the course. Genres were once a badge of cultural identity, now they are simply playlist titles.
  • Decline of the album:iTunes kicked off the dismembering of the album, allowing users to cherry pick the killer tracks and skip the filler. The rise of the playlist has accentuated the shift. Over half of consumers aged 16–34 are listening to albums less in favour of playlists. The playlist juggernaut does not care for carefully constructed album narratives, nor, increasingly, do music listeners.
  • Restructuring label economics:Achieving cut though for a single takes pretty much the same effort as for an album. So, it is understandable that label economics still gravitate around the album. But streaming is rapidly falsifying the ROI assumption for many genres, with it being the tracks, not the albums that deliver the returns in these genres.
  • Decline of catalogue:Streaming’s fetishisation of the new, coupled with Gen Z’s surplus of content tailored for them, deprioritises the desire to look back. Catalogue – especially deep catalogue, will have to fight a fierce rear-guard action to retain relevance in the data-driven world of streaming.
  • Audience fragmentation: Hyper targeting is reshaping marketing and music is no different. While the mainstream of A+R chases the centre ground, indies, DIY artists and others chase niches are becoming increasingly fragmented. Yet, most often, this is not a genuine fragmentation of scenes, but an unintended manifestation of hyper- focused targeting and positioning.
  • End of the breakthrough artist:Fewer artists are breaking through to global success. None of the top ten selling US albums in 2017 were debut albums, just one was in the UK. Just 30% of Spotify’s most streamed artists in 2017 released their first album in the prior five years. Streaming’s superstars – Drake, Sheeran etc. – pre-date streaming’s peak. Who will be selling out the stadium tours five years from now?
  • Massively social artists:Artists have long known the value of getting close to their audiences. Social media is central to media consumption and discovery, and its metrics are success currency. Little wonder that a certain breed of artist may appear more concerned with keeping their social audiences happy than driving streams.
  • Value chain conflict:BuzzFeed’s Jonah Peretti once said “content may still be king but distribution is the queen and she wears the trousers”. Labels fear Spotify is out to eat their lunch, Spotify fears labels want to trim its wings. Such tensions will persist as the music industry value chain reshapes to reflect the shifts in where value and power reside.

Next week: where these trends will go.

To paraphrase Roy Amara:“It is easy to overestimate the near-term impact of technology and underestimate the long-term impact.”

State of the YouTube Music Economy 2.0: A Turning Point for All Parties

YouTube is the most widely used streaming music app globally but it is also the most controversial one, locked in a perpetual struggle with music rights holders, with neither side quite trusting the intent of the other. 2018 has already seen YouTube’s renewed focus on subscriptions as well as a European Parliament vote that could potentially remove YouTube’s safe harbour protection. Meanwhile, oblivious to these struggles, and despite the rise of audio streaming services, consumers are flocking to YouTube in ever greater numbers and, crucially, using it for music more than ever before. Back in 2016, at the height of the value gap / grab debate, MIDiA published its inaugural State of the YouTube Music Economy report. Now two years on we have just released the second edition of this landmark report. MIDiA clients have immediate access to the ‘State of the YouTube Music Economy’ report, which is also available for purchase on our report store. Here are some of the highlights from the report.

state of the youtube music economy midia research

2016 proved to be a pivot point for YouTube. Rights holder relationships were at an all-time low with value gap / value grab lobbying reaching fever pitch. Meanwhile, vlogger hype was also peaking and longer-form gaming videos were beginning to get real traction. If there was ever a point at which YouTube could have walked away from music, this could have been it. The picture though, has transformed, with YouTube doubling down on music and in doing so, making itself an even more important partner for record labels.

With young consumers abandoning radio in favour of streaming, YouTube is the biggest winner among Gen Z and Millennials; penetration for YouTube music viewing peaks at 73% among 16–19 year olds in Brazil. But its reach is even wider: YouTube is the main way that all consumers aged 16 to 44 discover music.

Doubling down on music

YouTube has responded by improving its discovery and recommendation algorithms and gearing them more closely to music. The combined impact of demographic shifts and tech innovation is that YouTube is making hits bigger, faster. Billion-views music videos used to be an exceptional achievement, now they are becoming common place. By end July 2018, Vevo reported that there were already ten 1 billion views music videos for tracks released that year, accounting for 17.2 billion views between them. One billion view music videos that were released in 2010 took an average of 1,841 days to reach the milestone. Videos released five years later took an average of just 462 days, while those from 2017 took an average of just 121 days to get to one billion views. Over the course of eight years, YouTube has become more than ten times faster at creating billion-view hits.

Under indexing

The impact on revenue is less even. Music videos are the single most popular video category on YouTube, accounting for 32% of views but a smaller 21% of revenue. Music is still the leading YouTube revenue driver with $3.0 billion in 2017 but many other genres, gaming especially, over index for revenue. (Many YouTube gamers have multiple video ads placed at chapter markers throughout their videos. Because music videos are shorter they get a smaller share of video ads.) Emerging market audiences are also pulling down ad revenues. The surge in Latin American markets has pushed artists like Louis Fonsi to the fore, but the less-developed nature of the digital ad markets there means less revenue per video. This trend is accentuated with the rise of emerging markets music channels like India’s T-Series becoming some of the most viewed YouTube channels globally.

The net result is that effective per stream rates are going down on a global basis, but are going up in developed markets like the US, where the digital ad market is robust. This brings us to one of the existential challenges for YouTube. What does the music industry want YouTube to be? After years of nudging by labels, YouTube is now embarking on a serious premium strategy, but is that really what YouTube is best at? What YouTube does better than anyone else in the market is monetise free audiences at scale on a truly global basis (China excepted).

A turning point

2018 is a turning point for YouTube. The accelerated success it and Vevo have enjoyed since 2016 over indexes compared to YouTube as a whole, which means that music is a more central component of the YouTube experience than it has ever been. However, driving impressive viewing metrics was never YouTube’s problem, convincing music rights holders that it is a good partner is. The value gap war of words may have died down a little but that is as much a reflection of the rise of audio streaming and a return to growth for record labels than anything else, as the European Parliament’s Article 13 vote highlighted. Safe harbour was never designed to be used the way YouTube does for music, and the fact it does so creates a commercial disincentive for other streaming services to play by music rights holders’ rules. The fact that YouTube can get a greater volume of rights and more cheaply than other services andbe the largest global streaming service unbalances the streaming market. Though against this must be set the fact that YouTube has been able to create a more rounded value proposition without operating within the same confines as other streaming services.

The music industry needs the YouTube-Vevo combination, especially while Spotify scales its global free audience. The road ahead will be rocky, especially if Article 13 is eventually passed and also if rights holders continue to be disappointed by engagement growth out accelerating revenue growth due to the growing role of emerging markets. But it is in the interests of all parties to make the relationship work because neither side wants a YouTube shaped hole in the streaming marketplace, even if a Facebook / Vevo partnership was to try to fill some of it.

Screen Shot 2018-08-24 at 16.54.06Click here to see more details of the 29-page, 6,000 word, 11 chart reporton which this blog post is based. The report is based upon months of extensive research, industry conversations, MIDiA data and proprietary company data and represents the definitive assessment of the YouTube Music Economy.