IFPI First Take: Declining Legacy Formats Continue To Hold Back Growth

 

ifpi midia 1

This post has been updated following a conversation with the IFPI

The IFPI today announced its annual assessment of the size of the global recorded music business.  For the first time in a long time the music industry has been able to announce a significant growth in revenue: 3% up on 2014 to reach $15 billion. Except that the growth isn’t quite what it first appears to be. In fact, the IFPI reported $15 billion last year for 2014, and for 2013 too. So on the surface that appears to actually be three years of no growth.

The IFPI has done this before. For example, it had previously announced a small 0.2% growth in 2013 (which was the big headline of the numbers that year). But it then downgraded that to a small decline the following year before then upgrading it to a small growth again in 2015.

The IFPI explained that they have retrospectively downgraded their 2014 number to $14.5 billion to reflect some changes in the way they report performance royalties (a minor revenue impact) and, more importantly, to create ‘constant currency’ numbers i.e. to try to remove the impact of currency exchange fluctuations. That approach works well for company reports but less well for the macro picture. The IFPI have to report this way as they are essentially summing up company reports, however when we are talking about global macro markets we run into difficulties, for example looking at music revenue as a % of GDP etc.

The approach also has the effect of generating very different growth rates. For example, if we assume that the top 10 music markets each grew at 3% in local currency terms in 2015, using the exchange rates the years took place (i.e. 2014 USD to local currency and 2015 USD to local currency) there would only have been 0.48% growth in US dollar terms. If, however, we take the constant currency approach we see 3.2% growth. When we are talking about individual companies there is a lot of value in reporting at constant currency rates as those companies are dealing with repatriating and recording revenue from across the world into their local reporting HQs. But when we are talking about global markets comprised of many local companies (e.g. the vast majority of South Korean and Japanese revenues stay in local companies so are not directly shaped by currency fluctuations) the methodology is less useful. The cracks really begin to show when you take the long view. For example if we went back 5 years with constant currency rates the value of the music business as a % of the global economy would be over stated.

So, with all that said, for the purposes of this analysis I am going to use as my baseline for comparison the IFPI’s previously reported 2014 numbers stated in its ‘Recording Industry In Numbers, 2015 Edition’.  Here are some of the key takeaways (further charts at the end of this post):

  • Revenue was flat: Despite all of the dynamic growth in streaming declining legacy formats (CDs and downloads) offset their impact, keeping revenues flat. Also, once performance and synchronization revenues are removed from the mix, revenue fell slightly. This highlights the industry’s transition from a pure sales business into a multi-revenue stream model. It also emphasises the fact that we are still some way from a recovery in consumer spending on music
  • Downloads and physical still both falling: Download revenue was down 16% while physical was down 4.5%. The physical decline was lower than the 8% decline registered in 2014 and played a major role in helping total revenues grow. If physical revenue had fallen at the same rate as 2014 there would have been $0.25 billion less revenue which in turn would have brought total revenues down into decline. The Adele factor can once again be credited for helping the industry out of a sticky patch. The download decline was more than double than in 2014 (6.6%) and that drop is accelerating in 2016, with Apple Music playing a major role in the cannibalization / transition trend (delete as appropriate depending on your world view). What is clear is that downloads and subscription growth do not co-exist. Though it is worth noting that the move away form purchase and ownership is a bigger trend that long preceded Spotify et al.
  • Streaming growth accelerating, just: Total streaming revenue was up 31% in 2015, growing by $0.69 billion compared to 39% / $0.62 billion in 2014. This is undeniably positive news for subscriptions and a clear achievement for the market’s key players. However, it is worth noting that over the same period the number of subscribers by 63%, up from 41.4 million to 68 million (for the record MIDiA first reported the 67.5 million subscribers tally last week based on our latest research). So what’s going on? Well a big part of the issue is the extensive discounting that Spotify has been using to drive sales ($1 for 3 months) coupled with 50% discounts for students from both Spotify and Deezer and finally the surge in telco bundles (which are also discounted).  The number of telco partnerships live globally more than doubled in 2015 to 105, up from 43 the prior year. But even more significant was…
  • Ad supported revenue fell: Ad supported streaming revenue was just $0.634 billion in 2015, down very slightly from $0.641 billion in 2014. YouTube obviously plays a role, and that was a key part of the IFPI’s positioning around these numbers. You’ll need to have been on Mars to notice the coordinated industry briefings against YouTube of late, and these numbers are used to build that narrative.  But YouTube is far form the only ad supported game in town, with Soundcloud, Deezer and Spotify accounting for well over a quarter of a billion free users between them. Also, the IFPI doesn’t count Pandora as ad supported, one of the most successful ad supported models. Then there are an additional quarter of a billion free users across services like Radionomy, iHeart and Slacker. So the music industry doesn’t just have a YouTube problem, it has an ad supported music problem.
  • Streaming ARPU is up but subscription ARPU is down: The net effect of streaming users growing faster than revenue is that subscriber Average Revenue Per User (ARPU) fell to $2.80, from $3.16 in 2014, and $3.36 in 2013. Ad supported ARPU was down from $0.10 to $0.08 while subscription ARPU was down. The fall in subscriber ARPU is down to a number of factors including 1) discounting, 2) bundles, 3) churn, 4) growth of emerging markets services such as QQ Music (monthly retail price point $1.84) and Spinlet (monthly retail price point $1.76). For a full list of emerging markets music service price points check out the MIDiA ‘State Of The Streaming Nation’ report. The irony is that the major record labels are increasingly sceptical of mid tier price points yet they have inadvertently created mid tier price points via discounted pricing efforts. Total blended monthly streaming ARPU for record labels was $0.37 in 2015. And if you’re wondering how ad supported and subscription ARPU can both be down but total ARPU up, that is because subscriptions are now a larger share of total streaming revenue (up to 78% compared to 71% in 2014).

So the end of term report card is: an ok year, with the years of successive decline behind us, but long term questions remain about sustainability and the longer term impact of incentivized growth tactics.

ifpi midia 2

ifpi midia 3

Streaming Hits 67.5 Million Subscribers But Identity Crisis Looms

MRM1601-fig1 for blog

For our recently published MIDiA report ‘State of the Streaming Nation’ we conducted an exhaustive programme of research to assess the global streaming music market, from each of the consumer, market and service perspectives. In pulling together subscriber numbers for each of the music services (there’s a full table in the report) we found that there were 67.5 million subscribers globally in 2015. That was 24 million more subscribers compared to 2014 (also nearly double the number of new subscribers in 2014). It is clear that global subscriptions are gathering pace. However, all is not as it may at first appear:

  • Zombies still walk the streaming streets: Back in 2013 I ruffled a few feathers highlighting the issue of zombie subscribers, music subscribers that are recorded in the headline numbers but that are actually inactive, normally because they are on telco bundles. Fast forward to 2016 and the issue is more firmly in the public domain due to Deezer’s IPO filings. Zombies coupled with overstating by music services accounted for around 12 million subscribers in 2015 so the active ‘actual’ subscriber number was nearer 55 million.
  • Emerging markets are gaining share: Emerging markets will play a key role for streaming over the next few years. They are already driving growth for Apple and Spotify and they will collectively bring the most dynamic growth with western markets nearing saturation for the 9.99 price point. Much of the growth though will come from indigenous companies, such QQ Music (China), KKBOX (Taiwan), MelOn (South Korea) and Saavn (India).
  • Free still dominates: For all the scale of of subscriptions, free still leads the way with free streaming services accounted for nearly 600 million unique users (1.3 billion cumulative users if you add together the user counts of all the services). Free thus outweighed paid by a factor of 10-to-1.

Streaming’s Identity Crisis

Streaming must overcome its identity crisis. Depending on where you sit in the music industry, streaming is either the future of retail or the future of radio. It can be both, but there is increasing pressure for it to be retail only. That would see only a fraction of the opportunity realised. Throughout its history, a small share of people have accounted for the majority of spending. Casual buyers and radio accounted for the rest.

17% of music buyers account for 61% of spending. These are the people who are either already subscribers or that will become subscribers over the next couple of years. Which leaves us with the remaining 83% of consumers. The majority of these listen to radio while a growing minority use free streaming (mainly YouTube). The question the music industry must now answer is how seriously does it want to treat the opportunity represented by these consumers? Does it want to only serve its super fans or does it also want to be global culture? Radio enabled music to be global culture in the 20th century, free streaming will enable it to be in the 21st.

The Free Streaming Debate Is As Complex As It Is Nuanced

This is why the free streaming debate is important but also so complex. Yes, too much free music will curtail the opportunity for paid subscriptions, but too little could consign music culture to the margins. With streaming there is an opportunity to monetize a bigger audience at higher rates than radio ever enabled. At the moment free streaming bears the burden of being all about driving sales (either subscriptions or music purchases) but that misses the far bigger opportunity for free in the streaming era: mass monetization.

What we have now is a dysfunctional system. Freemium services have licensing minimas (the minimum that must be paid per stream) that effectively prevent them from building profitable ad supported businesses, while YouTube has licenses unlike any other but is the industry’s bête noire. Only Pandora has a model that is both (largely) acceptable to the industry and (theoretically) profitable. I say, ‘theoretically’ because Pandora could get towards a 20% margin if it wasn’t investing so heavily in ad sales infrastructure and other companies.

Out of those three disparate models an effective middle ground can and should be found so that the streaming debate becomes one of free AND paid rather than free VERSUS paid. Then we will have the foundations for creating a market that enables subscriptions to thrive within their niche and for global audiences to be monetized like never before.

Spotify’s Billion Dollar Challenge

26-spotify.w1200.h630

Spotify just changed the rules of the game, raising an unprecedented $1 billion in convertible debt. I’ll leave the financial analysts to pore over the financial permutations (and there are plenty) but there are a few key strategic implications:

  • This is an IPO war chest: Spotify is effectively priced out of trade sales for two reasons 1) it has received so much funding that its valuation is astronomic (somewhere close to $10 billion) and 2) the competitive market has changed so much that most companies that were potential buyers 3 years ago no longer are. Samsung neither has the growth story nor the music focus any longer, Microsoft is almost out of the game, Sony is out of the game, Apple couldn’t admit defeat so soon, Amazon is focused on the mass market and Google is focused on YouTube. So an IPO is the only realistic option and for that….
  • Spotify needs a growth story: To achieve an IPO valuation as high as Spotify needs, it is not enough to just be the leading player, it needs to be seen to be growing at a healthy clip, especially with Apple constantly making up ground and still odds on to be the long term market leader. Wall Street needs growth stories. Just look at what has happened to Pandora, a company with stronger fundamentals and a more secure licensing base. Yet Pandora has lost billions of market cap because Wall Street hasn’t warmed to the long term mature company story.
  • Growth will come from three key areas: The $9.99 model only has finite opportunity. The top 10% of music buyers only spend $10 a month on music. So to grow beyond that beachhead Spotify has to grow where the market isn’t yet mature (emerging markets), make the offering feel like free (telco deals) and make the offering feel super cheap ($1 for 3 months promos). All, in different ways, cost, which is where much of this money will be spent, along with hefty marketing efforts.
  • Some of it will be spent on strategic acquisitions: Small music services around the globe will be hastily editing their investor decks, pitching for an acquisition or hoping Spotify will come calling uninvited. But there aren’t too many realistic targets. Soundcloud would probably cost most of the raise, and Spotify would have the same problem Soundcloud now has of trying to force a 9.99 model on a user base it doesn’t fit. TIDAL wouldn’t be cheap either and besides a bunch of exclusive rights for some super star artists, would only add 10% to Spotify’s user base, less after all those users who came in for ‘Life of Pablo’ churn out. A more realistic bet would be for Spotify to target a portfolio of niche services that would add little to its user base but would communicate to the street that it is set up for super serving niches to grow its user base.
  • All bets are on Spotify: For the last 2 years the recorded music industry, the majors in particular, has been holding its collective breath. If Spotify has a successful IPO it will likely spur an inflow of much needed investment to the space. If it doesn’t then it is back to the drawing board. In many respective that should happen anyway. The 9.99 subscription model is incredibly difficult (perhaps impossible) to run profitably at scale.

The next 6 months will be ones of hyper activity for streaming, and don’t expect Apple to take this lying down. Await the battle of the gargantuan marketing budgets. Even if no one else does well out of this, the ad agencies will make hay.

 

Quick Take: Soundcloud Goes Premium

 

SoundCloud_logo.svgFollowing weeks of licensing announcements, Soundcloud has finally launched its premium subscription service, a $9.99 tier ($12.99 on iOS), currently only in the US. The move is both encouraging and disappointing. Soundcloud has a truly unique market footprint and has the potential to be a platform for an entirely new approach to monetizing streaming music. But it is also a poor fit for a cookie cutter $9.99 freemium model.

Soundcloud has a whole set of unique challenges and characteristics that make it so different than the rest of the pack:

  • Artist-first experiences: Unlike its now-direct streaming competitors Spotify and co, Soundcloud is an artist-to-fan platform. Most streaming services are effectively a music-store-meets-HBO hybrid. A place you go to get music. Music as a service, or even a utility. Soundcloud is that as well of course, but it is first and foremost it is a place where artists connect directly with their fans. A $9.99 All You Can Eat (AYCE) is not the right model for a place where fans go to engage with artists rather than looking to turn on the water tap.
  • This is a pivot for Soundcloud: Unlike Spotify and Deezer, whose free tiers have long been geared towards driving subscriptions, for Soundcloud this is not a funnel tweak, it is a pivot. It is a complete change in strategy.
  • Competing against free: The problem with giving something away for free for years is that its really difficult to convince people to start paying for it. It is the same challenge YouTube faces with YouTube Red Which is why instead of simply whacking a pay wall around previously free content, YouTube is investing so much in creating new original content only available on Red. In short, Soundcloud needs to explore how it can deliver new, unique value to paid users rather than simply charging them for what they already get (plus a few convenience features).
  • Non-traditional content: Soundcloud’s strength lies in the music that you just don’t find elsewhere, much of which also happens to be dance music. All of the mash ups, bootlegs, un-authorized remixes, 2 hour long mixes are what make Soundcloud such a valuable component of the music landscape. The only problem is that most of them are not covered in standard major label licenses. In fact, many of them aren’t covered at all. Even Dubset, which is trying to build a business around this type of non-traditional content, hasn’t yet been able to get a full suite of licenses in place. For now, it appears that the majors are willing to turn a blind eye to that content. Which raises an interesting question: who gets paid for the revenue generated by unlicensed tracks?
  • Major labels are shaping an indie platform: Major label content is a massive part of Soundcloud but not the majority. In fact, in dance mixes majors typically account for only 30% of the tracks. Yet it is the major labels that are shaping the future of Soundcloud, forcing it down a road that works well for majors on the AYCE services but could skew Soundcloud against its indie community.

No doubt, Soundcloud had to get licenses in place. It had traded on label good will for long enough. But the current model will not maximise Soundcloud’s vast potential. Instead of Spotify-like 15-20% conversion rates instead expect King and Supercell-like 1.5-5% rates. Let’s hope this is simply a hygiene release, preparing the way for a set of products that fit Soundcloud like a glove rather than odd boots. What could a next iteration look like? Well for a start it could be artist focused and secondly it could be cheaper. Imagine a $4 a month, 5 artist subscription that gives you everything by your favourite artists, including premium-only exclusives. Every month you can swap any number of those artists for different ones for the next month. That is the sort of thinking that needs to be applied to Soundcloud’s subscription business if it is going to live up to its capabilities. The alternative is being condemned to being a freemium also-ran.

What’s Going On With Free Streaming?

Earlier this week Soundcloud’s financials revealed that the company was haemorrhaging cash (even before it had to start worrying about content license fees). Now news comes that Pandora is working with Morgan Stanley to meet with potential buyers. Back in Q4 2014 free streaming got a stay of execution when the majors decided to put their weight behind freemium after a period of many executives seriously considering canning the model. In 2015 free streaming was the growth story, with YouTube out performing everyone. Now though free streaming looks to be in seriously troubled waters. So what gives?

Pandora’s Problem Is Wall Street

Probably the biggest problem of all that Pandora has is the story it tells Wall Street. Every year Pandora accounts for a little bit more of total US radio listening, builds ad revenue and steadily strengthens its business. But that’s not the sort of story Wall Street expects from a streaming media company. Investors expect dynamic growth. But Pandora is, along with Rhapsody, the granddaddy of streaming and had 10 million users before Spotify was even launched in Sweden, let alone the US. Pandora long since passed its dynamic growth stage in the US and is now a mature business that is going about sensibly building a sustainable business.

The standard thing to do at this stage for streaming companies is to roll out internationally and find new markets where you can start a new dynamic growth story. This is exactly what Netflix is doing now that US subscriber growth has slowed. The approach has also served Spotify well. But the unique compulsory licensing structure in the US the underpins Pandora’s business model does not exist elsewhere. There is no global landscape of SoundExchanges for Pandora to plug into. With the exception of Australia and New Zealand Pandora has not been able to negotiate rates that it launch internationally with.

Actually, Slowing Growth Is A Problem Too 

All of which explains why Pandora has gone down the acquisition route, buying Next Big Sound, Ticket Fly and Rdio in a bid to become a full stack music company. The problem is that Wall Street either does not buy it, or simply does not get it. In fact, Wall Street does not really make much of a distinction between semi-interactive radio or on-demand streaming. The pervasive view among the investor community is that Pandora is being out competed by Spotify, regardless of the fact that there is only partial competitive overlap in terms of value proposition, target audience and business model. The net result is that Pandora’s market capitalization has fallen from $7bn to $1.8bn and to make matters worse it had to raise $500 million in debt, with revenue growth slowing.

Pandora Needs A New Wall Street Narrative

In just the same way Apple needs a new Wall Street narrative, so does Pandora. Even if just to maintain some market value while it finds a buyer. The full stack music strategy should be central to that narrative, even though the real story is that Pandora is the future of radio. Unfortunately that story will take a decade or more to play out and most investors do not have that kind of patience. (Spotify, these are the sorts of problems you’ll be having to worry about this time next year). And, to be precise, it is the Pandora model that is the future of radio, not necessarily Pandora itself.  Though the odds are still on Pandora playing that role, in the US at least.

If Pandora really does not have the stomach for seeing out the long game it should not find it too difficult to find a buyer, if the price is right. Exactly because Pandora is the future of radio, some of those big radio incumbents are likely buyer. Hello iHeart Media.

 

The Labels Still Don’t Get YouTube And It’s Costing Them

This is the fifth post in my YouTube economy series. You can read the other posts here, here,here and here

2015 was the year that streaming came of age across global markets (it had already got there in the Nordics and South Korea of course). In the UK and the US stream volumes grew by 85% and 93% respectively in 2015. These markets matter because they are the 1st and 4th largest recorded music markets and between them account for 40% of global revenue. But as strong as a validation of the music streaming model as those numbers might be, the real success story here isn’t Spotify, Deezer or Apple Music…it’s YouTube. In both the US and UK YouTube outgrew audio streaming services. With YouTube delivering so much less back per stream to rights holders than freemium audio services and the whole issue of safe harbour and un-monetized tracks (however good Content ID has gotten) it is little wonder that the record labels are having an identity crisis over YouTube. Indeed, as I wrote last year, the YouTube discovery journey has become the consumption destination. The advert has become the product. But there’s even more to it than this. Not only is YouTube outperforming the audio pure plays, music is being outperformed on YouTube by its growing body of native creators, the new generation of YouTubers.

youtube economy

YouTube started out as a place simply to watch (and upload) videos but has evolved into a sophisticated entertainment platform that supports a multitude of diverse use cases, both in terms of content and audience. Nowhere is this more pronounced than in channel subscriptions. In many respects ‘channel’ isn’t the most appropriate term as they are in effect talent feeds rather than channels in a traditional video / TV sense. Nonetheless, or perhaps because of this, they have become the lifeblood of native YouTube creators as diverse as Michelle Phan, PewDiePie, Zoella, SMOSH, stampylongnose and IISuperwomanII.

These are creators who often do everything from writing, filming, production through to front-of-camera. DIY superstars if you like. And they are fast becoming the lifeblood of YouTube. Of the 330 million subscriptions in the top 50 YouTube channels, YouTubers account for 34%. Compare and contrast with the measly 15% music artist and label channels have. And despite all the excitement around the increased subscribers Adele and Justin Bieber have racked up these last few months – they gained 8 million subscribers between them, making them the two fastest gainers across all of YouTube – music artists as a whole lost ground, accounting for just 31% of the top 50 gains during the last 90 days compared to 53% for YouTubers.

Music Is Losing Ground To Native YouTubers

Music does fare better in terms of views with 36% of the 41 billion top 50 views in the last 90 days. However it still plays second fiddle to YouTubers who account for 45%. But it is the direction of travel that reveals the most telling trend. Over the last 90 days 42% of the 50 top 50 growing channel views compared to 39% for music. In itself that may sound like a modest difference, but this is just the latest 90 day chapter in a much longer story. Music used to be the clear focal point of YouTube but that is changing. In terms of all time views music actually outpaces YouTubers with 42% compared to 41%. But at current rates that lead will be wiped out in the next 90 days. And here’s the paradox: music’s hold on YouTube is slipping even though YouTube is outperforming music services.

Part of driving force is out of the hands of the labels: video is eating the world, with more than 5 trillion short form views in 2015 alone. Music is always the first mover in digital content consumption, the trailblazer for other media. Once distribution, bandwidth and consumer sophistication all improve, video moves in.

Time To Stop Using YouTube Like School Kids Use Instragram

But record labels and artists can seize some control of their destiny, by taking a more sophisticated view of YouTube and exploring how to build strategies that work for YouTube in 2016 not for YouTube in 2010.  Right now record labels are using YouTube like school kids use Instagram, obsessing with vanity metrics such as views rather than thinking more deeply about how to build lasting relationships with YouTube audiences. A new generation of music artists is emerging that have created and nurtured audiences on YouTube, often with little or no help from labels. Artist like Dave Days, Tyler Ward, Boyce Avenue and Hannah Trigwell have built their fanbases on YouTube, often starting with covers but also crucially often non-music content such as parodies and vlogs. Raised in YouTube these artists are entirely native to the platform. They understand what audiences want because that’s where they come from.

If the big traditional artists and labels want to start making up some ground on the YouTuber revolution they could do worse than take a few hints from this new breed of YouTube artist.

The Three Things You Need To Know About The UK Music Sales Figures

As most people expected, the UK recorded music industry returned to growth in 2015. The UK now follows an increasingly familiar European narrative of strong streaming growth helping bring total markets back to growth. Sales revenue increased 3.5% to reach £1.1 billion while total streams increased by 85% to reach 53.7 billion, with audio stream representing 49.9% of that total. There is no doubt that these are welcome figures for the UK music industry but as is always the case, a little digging beneath the surface of the numbers reveals a more complex and nuanced story. Here are the three things you need to know about UK music sales in 2015.

1 – Streaming Growth Accompanied A Download Collapse

Long term readers will know that I’ve long argued the ‘Replacement Theory’, that streaming growth directly reduces download sales. It is a simple and inevitable artefact of the transition process. Indeed a quarter of subscribers state they used to but no longer buy more than one album a month since they started paying for streaming. There have been plenty of opponents to this argument, normally from parties with vested interests. But the market data is now becoming unequivocal. While streams increased by 257% between 2013 and 2015 download sales decreased by 23%. And of course the vast majority of that streaming volume came from free streams, not paid.

bpi 1

2 – The Transition Follows A Clear Defined Path

The download to streaming transition is an inevitability, whatever business models are wrapped around it. It is part of the fundamental shift from ownership to access of which streaming music is but single component. It comprises consumers progressively replacing one behaviour with another. In fact, the evolution is so deliberate and predictable that it manifests in a clear numerical relationship: the Transition Triangle.

The UK music industry trade body the BPI has created a number of additional classifications for music sales and consumption. These include Stream Equivalent Albums (1,000 streams = 1 album) and Track Equivalent Sales (10 track sales = 1 album). Using these classifications and adding in actual album download sales we see a very clear relationship between the growth of streaming and the decline of downloads. The difference in volumes between downloads and streams each year is almost exactly the same as the amount by which downloads decreased the previous year. At this point even the most ardent replacement theory sceptic might start suspecting there’s at least some degree of causality at play.

BPI 2

3 – Thanks Are Due To Adele, Again

Back when Adele’s ‘21’ was setting sales records, music markets across the globe owed her a debt of gratitude for helping slow the incessant decline in sales. Global revenue decline fell to less than 1% and US revenue actually grew by 2.9% (falling back down the following year). Now she’s done it again with ’25’, giving album sales enough of a boost to ensure that the growth in streaming revenue lifted the entire market. For although album sales actually declined in 2015 and streaming volumes had grown more strongly in 2014, it was the combined impact of slowed album decline and streaming growth in 2015 that enabled the total market to grow so strongly.

Adele generated around £25 million of retail sales revenue in 2015, which was equivalent to 70% of the £36 million by which UK music sales revenue increased that year. While of course a portion of that £25 million would have been spent on other repertoire if ‘25’ had not been released, the majority would not. With ‘21’ and now with ‘25’ Adele has been able to pull casual music consumers out of the woodwork and persuade them to buy one of the only albums they’ll buy all year, often the only one.

Without that £25 million UK music sales would have increased by just 1%.  So in effect streaming services have Adele to thank for ensuring their growth lifted the whole market even though she famously held ‘25’ back from each and every one of them. Sweet irony indeed.

BPI 3

As a final postscript, the role of YouTube, while underplayed in the official figures, is crucial. While audio streams grew by an impressive 81% in 2015, video streams grew by 88%. So however good a job the streaming services might be doing of growing their market, YouTube is doing an even better one.

Pandora’s Rate Ruling Reveals The Cracks In Streaming Economics

The much anticipated outcome of yesterday’s Copyright Tribunal decision was a 20% increase of Pandora’s ad supported stream rate from $0.0014 per non-interactive stream to $0.0017. The result was roughly equidistant between the two parties’ preferred rate: Pandora wanted $0.0011, SoundExchange (the body that collects the royalties on behalf of the labels) wanted $0.0025. As with any good compromise neither party will be truly happy, though on balance Pandora probably came out slightly better. Both the rate and the whole rate setting process shine a bright light on the economics of streaming, especially when contrasted against on-demand services.

pandora dec 15 - 1

Pandora’s semi-interactive radio service operates under statutory rates in the US that are set by the Copyright Royalty Board for a few years at a time, with inflation baked in. This means a continual rise in rates (see figure). It also gives Pandora a degree of certainty over its mid term future but prevents record labels from negotiating for better rates (publishers however are able to strike direct deals with Pandora). Spotify, and other on-demand streaming services, negotiates deals directly with multiple record labels, publishers and rights bodies. Deals typically come up for renewal every couple of years, involve large upfront payments and Minimum Revenue Guarantees (MRGs). They also run the risk of core product features being threatened in renegotiations – as we saw with the labels’ dalliance with killing off freemium this time last year.

The most significant difference between the models is how the per stream rate works. For on-demand services a royalty pot as a % of revenue is determined. This is then divided between rights holders based on plays in a given period and allocated on a per stream rate basis. Thus royalty payments remain a comparatively constant share of revenue, assuming of course that the service hits the MRG targets – if it doesn’t the share increases, often above 100% of revenue. This model also implies a clear ceiling to the potential profit an on-demand service can earn. By contrast Pandora pays out on a (largely) pure per stream basis. The direct consequence of this is that Pandora is able to increase it revenue per play faster than its rights cost per play which in turn creates the potential to grow margin (see next figure).

pandora dec 15 - 2

Between 2009 and 2014 Pandora’s content acquisition costs per listener hour increased by 27% from $17.52 to $22.29. This reflects both the CRB set rate as well as deals with rights bodies and publishers. But over the same period Pandora’s revenue per listener hour increased by 114% from $21.48 to $45.97. Now clearly, an increase in revenue per hour does not inherently mean increased profitability, or even profitability at all. Indeed, Pandora’s continued losses have been a perennial bugbear for investors. But Pandora has chosen to invest its increased revenue to grow its business, building out regional ad sales teams and making acquisitions such as Next Big Sound, Ticket Fly and Rdio. In short, Pandora could have been profitable for some time now if it had so chosen. Instead it is chasing a bigger prize, namely to become the single biggest revenue driver in US radio. To get big it needs to spend big.

Pandora’s Core Strength Is Being Able Increase Profitability Per User

The underlying principle is clear: while on-demand services have little meaningful way of increasing revenue per user with the current model, Pandora has more than doubled revenue per user in 6 years while rights costs have declined in relative terms. Content acquisition costs fell from a high of 82% of revenue in 2009 to 48% in 2014. That rate will increase in 2015 due to direct deals struck with publishers and the $90 million pay out for the pre-1972 works ruling. But it still remains well south of Spotify’s 70%+.

On Demand Services Have Similar Fixed Costs But Tighter Margins Because Of Royalties

While there is a clear case for semi-interactive radio rates being markedly lower than on-demand rates many of the fixed costs of both types of streaming business are the same.  Both have to commit similar amounts to product development and tech, bandwidth, data analysis, reporting marketing, customer care, management. This puts on-demand services at an operational disadvantage compared to webradio services.

If paid-for streaming services are going to become commercially sustainable there is going to need to be pricing and product innovation to both reach more mainstream users (cheaper tiers) and to drive more revenue from high value users (more expensive tiers and bolt ons). Right now there is relatively little commercial incentive for on-demand services to innovate upwards as profitability will remain largely the same. There is an opportunity for labels to offer Spotify and co a Pandora-style pure per-play license structure for all products launched above and beyond the standard 9.99 tier. This would give the services the ability to follow Pandora’s path of growing revenue per user faster than rights costs per user, thus improving commercial sustainability and allowing them to invest more in product innovation.

Rights Frameworks Need To Engender Commercial Sustainability

Pandora is one of the few stand out, independent success stories of the entire history of digital music. It has become one of the world’s biggest music services despite being largely constrained to the US, it has built a commercially viable model and it has delivered a big return for investors via its IPO. Only Last.FM, Beatport and Beats Music can genuinely lay claim to having delivered big returns for their investors. There are many mitigating factors, but the unique licensing structure Pandora operates under is the single most important one. Do songwriters and labels feel that they’re getting short changed? Absolutely. But it is in the interest of every music industry stakeholder that the economics of digital music are structured in a way that enables standalone companies like Pandora, Spotify and Deezer to thrive. Otherwise there can be no complaints when the only options left on the table are companies like Apple, Amazon, Facebook and Google whose interest in music all stems from trying to sell something else. That’s when artists and songwriters are really at risk.

Why Moving Video Centre Stage Is About More Than Just Doing Deals With YouTube Stars

 

 

This is the fourth post in my YouTube economy series. You can read the other posts here, here and here

The music industry has a long history of underplaying the role of video, insisting on seeing it as merely a tactic for driving sales.  In doing so it let two businesses that understood the wider value of music video become global superpowers.  MTV and YouTube knew that music fans, especially younger ones, could connect with their favourite artists via video in way that they could not with audio alone.  The labels were able to put MTV and YouTube down as an irritating mistake (albeit the exact same one made twice) because for a long while they were still selling units of music product, albeit in reducing numbers by the time YouTube arrived on the scene.  Now though, as we accelerate into the consumption era all bets are off.  Consumers want to pay for access to content – either with money (subscription) or with attention (ads).  With revenue generated by streams rather than up front transactions, both access models demand increased engagement.  This means that video must shift from marketing tactic to revenue bearing product.  Slowly but surely labels are waking up to this new reality and Sony Music’s deal with YouTube star Kurt Hugo Schneider hints at what the future may hold.

maxresdefault

Sony’s Schneider Deal Is A Nod To The Future Music Economy

Sony’s partnership with Schneider will see the creation of a 10 episode series of shows featuring Sony artists performing their songs with him.  Crucially the shows will be distributed via Schneider’s YouTube channel which has 6 million subscribers and 40 million monthly views.  5 years ago, even trying to build the business case for such a project around a frontline Sony artist would have been nigh-on impossible with production costs failing to justify likely TV licensing revenue.  But with YouTube Sony can both spend less on production and cut out the TV network middleman, going direct to the audience. Whilst a big part of the internal business case justification at Sony will likely centre around the ‘exposure’ Sony’s artists will get, there will be no small number of Sony execs who know that the real value of this is the video series itself, both in terms of audience engagement and revenue.

As I explained in my previous YouTube posts, the platform is emerging as the single most important content destination for Millennials and their younger siblings Generation Edge (i.e. those born since 2000).  Right now traditional music artists are at a marked disadvantage to native YouTube creators: they put out 1 music video maybe once every 3 months while a YouTuber will put out that many videos a week.  A middle ground exists between those two extremes, one that can provide the vital ingredients for helping music artists get more viewing time and help transition music video from low income marketing tool into a meaningful revenue generating product in its own right.

Universal’s KSI Deal Only Scratches The Surface

Universal Music have taken a more traditional approach to tapping YouTube, picking a successful YouTuber and turning him into a pop star.   The YouTuber in question is British gamer KSI who numbers 2 billion YouTube views, 11 million subscribers and $4.5 million in annual YouTube earnings, making him the fifth highest YouTuber globally.  So far his cross over pop/Grime singles have had modest success though Island will be hoping his latest collaboration with JME, ‘Keep Up’ will make bigger sales waves.  But even if it does that will be missing so much of KSI’s potential.  By his own admission KSI is a YouTuber first and a rapper second.  Island should be exploring all the ways they can make that distinction blur into insignificance.  Partnering with YouTubers like KSI is an invaluable first step, but the real opportunity for Universal is to explore how KSI can take them on a journey into the YouTube industry not for them to take KSI on a journey into the music industry.

Online Video Momentum Is Acclerating, And Some

The direction of travel of the video market is hard to discount.  Short form video is growing at an unprecedented rate: there were 5.9 trillion short from video views in in the first three quarters of 2015 with growth more than doubling from Q4 2014.  (See the MIDiA report ‘Short Form Video Growth’ for more).  Meanwhile the glut in online display ad inventory driven by content farms like Outbrain and Taboola is making video advertising an increasingly sought after commodity.  Will video revenue ever be enough to offset lost music sales revenue at an industry level? Perhaps not, but it certainly can at an artist level.  Not too many artists can boast KSI’s $4.5 million annual income.

The Business Case For YouTube’s Music Economy Role Needs To Be More Rounded

We need to take a realistic view of YouTube’s current role in the music ecosystem.  It can no longer be justified as a loss leader for driving sales and ‘exposure’.  The number one activity that consumers do after they discover a new artist on YouTube is….watch them on YouTube some more.  65% of under 25’s say they use YouTube this way. So more value needs to extracted from those users when they are on YouTube, rather than hoping for them to pop over to Spotify or iTunes to do something that creates bigger chunks of direct music industry revenue.  Sure some of that is still going to happen but it will do so in dwindling numbers over the next 5 years, with music sales revenue declining by 39% by 2020.

The business case for YouTube has to be much more rounded and nuanced while the industry continues through its transition phase. Sales and access will coexist for many years, occasionally giving the impression of a schizophrenic nature. Adele encapsulates the twin-speed nature of the music industry as it transitions between eras.  As impressive as Adele’s sales figures are they are an anomaly, a temporary high tide while the music sales waters continue to irretrievably recede.  Plotted against the longer music sales trend it is clear that ‘21’ followed exactly the same path – a dramatic stand out success that was a blip on the downward curve.  Adele is also unique in having such strong audience reach among older consumers that still buy music and younger ones that stream. So while she’s been busy breaking sales records she has also excelled on streaming, racking up half a billion views of her ‘Hello’ video.

For Better Or For Worse, YouTube Is Generation Edge’s Punk

Music fans exist in multimedia, on demand environments where video, social engagement are the norm and authentic connections with stars are the gold dust that they seek out.  YouTube is the punk movement of Generation Edge.  It is an antidote to the over-produced, generic, middle of the road, overtly commercialism of traditional media.  YouTube creators may still be finding their creative voices but the fact Sid Vicious couldn’t really play bass was part of the entire point of the Sex Pistols.  It was a big fat two fingers up at the establishment.  Sure, most YouTubers are hardly rebels without a cause but they are outside the traditional media establishment and therein lies the real power of video that the music most learn how to participate in without ending up looking like a dancing dad.

Pandora Buys Rdio To Become A Global Streaming Powerhouse

 

pandora rdioPandora today announced that it was acquiring the assets of now failed subscription service Rdio.  While the whispers about Rdio’s future had been building for some time, the deal is more interesting for what it says about Pandora’s plans than what it says about the state of the subscription business.

 

Rdio Battled Bravely And Set Innovation Standards But Fell Short

For what Rdio lacked in subscriber numbers it made up for in innovation.  It continually set product and feature precedents that Spotify and others subsequently aped, and its $75 million dollar ad inventory deal with US radio giant Cumulus sets a business model blueprint that other streaming services will follow. But for all its efforts and extensive marketing efforts Rdio was simply not able to get to the same sort of level as Spotify’s 2nd tier competitors, let alone to seriously challenge Spotify itself.  The music subscription business is not a winner-takes-all market.  But it is one in which some degree of meaningful scale is required to trigger the telco partnerships and brand advertiser deals that are necessary to achieve sustainability.  Eventually a company transitions from ‘bright new hope with potential’ to an ‘also ran that isn’t ever going to make it’.  Once that imperceptible line of market perception has been crossed it is only a matter of time before the end comes.

Pandora Will Use Rdio’s Assets To Go Global

Crucially Pandora is not acquiring Rdio as a going concern but only its assets, which won’t include licenses (as they have to be renegotiated when a music service changes corporate hands).  What those assets represent, or at least the bits that matter to Pandora, are teams, product and tech, licensing know how and an international footprint.  That last bit is particularly pertinent.  Rdio’s 100 markets contrasts sharply with Pandora’s 3 (US, Australia and New Zealand).  Indeed Pandora CEO Brian McAndrews stated “We seek to be the definitive music source for music discovery and enjoyment globally”.  While 100 markets is probably a step too far for Pandora, expect a healthy selection of top tier and emerging markets to feature in Pandora’s roadmap.  And if you’re eager to identify which ones, just take a look at the bigger radio markets globally (Japan possibly excepted).

Pandora’s Success Is Built On Lean Back Not Lean Forward

Pandora’s success is firmly rooted in delivering a high quality, lean back experiences to largely mainstream audiences.  That’s how it reaches 78 million monthly listeners, more than a quarter of US adults.  That positioning has served Pandora well and made it one of the few success stories of digital music.  In fact, other than Beatport and Last.FM, it is one of the very few music start ups that had an exist that considered to be a true financial success. Crucial to that success has been the fact Pandora has operated under statutory licenses for semi-interactive radio, which leaves it with dramatically higher (potential) operating margins than on demand services.  Which begs the question, just why is Pandora getting into the subscription business?

This Is The Latest Part Of A Major Strategic Pivot

The answer is that it forms part of a much bigger, much bolder plan.  Pandora has spent the last couple of years quietly amassing the assets that will transform it into a music platform super power.  In 2015 it acquired music data company Next Big Sound (c.$50 million), then came ticketing company Ticketfly in October ($450 million) and now Rdio ($75 million).  The combined $0.6 billion is a truly sizeable investment in a streaming-centred business model by anyone’s standards.  It also accompanies a concerted and costly investment in Pandora’s regional ad sales teams across the US to compete on a level footing with traditional radio’s sales teams.  Couple all that with November announcements to become the exclusive streaming outlet for popular podcast series ‘Serial’ and the landmark direct deal with Sony/ATV Publishing and a picture of something truly ambitious starts to emerge.

Pandora was fortunate to be able to IPO at a time when public offerings were still a highly viable option for digital start ups.  Spotify and Deezer (which just cancelled its IPO) will look on with no little jealousy at the power that a market capitalisation of nearly $3 billion gives you.  Now it is using this financial firepower to take the next step on its streaming journey.  Whatever that will prove to be, expect it to be a platform in its truest sense, rather than simply a streaming service with a few loosely attached ‘alternative revenue’ models, which is a mistake some of the subscription incumbents have made thus far.

Discovery Doesn’t Lead Anywhere Anymore, At Least Not To Sales

Pandora may aspire to be the definitive source of ‘music discovery’ but streaming discovery is becoming streaming consumption.  i.e. it is increasingly not leading to sales.  Live music sales is one alternative way to make money from ‘discovery’ but if ‘free music to sell tickets’ is Pandora’s end game then some difficult conversations with songwriters (who of course often don’t play live) will need to be had.

Pandora has just thrown its hat into the ring as a top tier player in the global streaming business.  By some measures you could say it is poised to become the biggest.  McAndrews left no room for doubt by stating “We plan to substantially broaden our subscription business.”  But in doing so Pandora will have to look itself in the mirror and ask itself “what am I now?”.