Making Free Pay

2018 was a big year for subscriptions, across music (Spotify on target to hit 92 million subscribers), video (global subscriptions passed half a billion), games (98 million Xbox Live and PlayStation Plus subscribers) and news (New York Times 2.5 million digital subscribers). The age of digital subscriptions is inarguably upon us, but subscriptions are part of the equation not the whole answer. They have grown strongly to date, will continue to do so for some time and are clearly most appealing to rights holders. However, subscriptions only have a finite amount of opportunity—higher in some industries than others, but finite nonetheless. The majority of consumers consume content for free, especially so in digital environments. Although the free skew of the web is being rebalanced, most consumers still will not pay. This means ad-supported strategies are going to play a growing role in the digital economy. But set against the backdrop of growing consumer privacy concerns, we will see data become a new battle ground.

Industry fault lines are emerging

Three quotes from leading digital executives illustrate well the fault lines which are emerging in the digital content marketplace:

“[Ad supported] It allows us to reach much, much deeper into the market,” Gustav Söderström, Spotify

“To me it’s creepy when I look at something and all of a sudden it’s chasing me all the way across the web. I don’t like that,” Tim Cook, Apple

“It’s up to us to take [subscribers’] money and turn it into great content for their viewing benefit,”Reed Hastings, Netflix

None of those quotes are any more right or wrong than the other. Instead they reflect the different assets each company has, and thus where they need to seek revenue. Spotify has 200 million users but only half of them pay.  Spotify cannot afford to simply write off the half that won’t subscribe as an expensively maintained marketing list. It needs to monetise them through ads too. Apple is a hardware company pivoting further into services because it needs to increase device margins, so it can afford to snub ad supported models and position around being a trusted keeper of its users’ data. Netflix is a business that has focused solely on subscriptions and so can afford to take pot shots at competitors like Hulu which serve ads. However, Netflix can only hike its prices so many timesbefore it has to start looking elsewhere for more revenue; so ads may be on their way, whatever Reed Hastings may say in public.

The three currencies of digital content

Consumers have three basic currencies with which the can pay:

  1. Attention
  2. Data
  3. Money

Money is the cleanest transaction and usually, but not always, comes with a few strings attached. Data is at the other end of the spectrum, a resource that is harvested with our technical permission but rarely granted by us fully willingly, as the choice is often a trade-off between not sharing data and not getting access to content and services. The weaponisation of consumer data by the likes of Cambridge Analytica only intensifies the mistrust. Finally, attention, the currency that we all expend whether behind paywalls or on ad supported destinations. With the Attention Economy now at peak, attention is becoming fought for with ever fiercer intensity. Paywalls and closed ecosystems are among the best tools for locking in users’ attention. As we enter the next phase of the digital content business, data will become ever more important assets for many content companies, while those who can afford to focus on premium revenue alone (e.g. Apple) will differentiate on not exploiting data.

Privacy as a product

So, expect the next few years to be defined as a tale of two markets, with data protectors on one side and data exploiters on the other. Apple has set out its stall as the defender of consumer privacy as a counter weight to Facebook and Google, whose businesses depend upon selling their consumers’ data to advertisers. The Cambridge Analytica scandal was the start rather than the end. Companies that can — i.e. those that do not depend upon ad revenue — will start to position user privacy as a product differentiator. Amazon is the interesting one as it has a burgeoning ad business but not so big that it could opt to start putting user privacy first. The alternative would be to let Apple be the only tech major to differentiate on privacy, an advantage Amazon may not be willing to grant.

The topics covered in MIDiA’s March 27 event ‘Making Free Pay’.The event will be in central London and is free-to-attend (£20 refundable deposit required). We will be presenting our latest data on streaming ad revenue as well as diving deep into the most important challenges of ad supported business models with a panel featuring executives from Vevo, UK TV and Essence Global. Sign up now as places are going fast. For any more information on the event and for sponsorship opportunities, email dara@midiaresearch.com 

Why Music and Video are Crucial to Apple’s Future

Apple’s downgraded earnings guidance represents its first profit warning in 10 years. This is clearly a big deal, and probably not as much to do with a weakening Chinese economy if Alibaba’s 2018 Singles’ Day annual growth of 23% is anything to go by. But it does not indicate Apple is about to do a Nokia and quickly become an also-ran in the smartphone business. Nokia’s downfall was triggered by a corporate rigidity, with the company unwilling to embrace — among many other things — touchscreens. Apple’s touchscreen approach, coupled with a superior user experience and its ability to deliver a vibrant, fully integrated App Store, saw it quickly become the leader in a nascent market. Apple’s disruptive early follower strategy is well documented across all its product lines and the iPhone was a masterclass in this approach. But the smartphone market is now mature and in mature markets, market fluctuations need only be small to have dramatic impact. That is where Apple is now, and music and video will be a big part of how Apple squares the circle.

Apple started its shift towards being a services-led business back in Q1 2016, issuing a set of supplemental investor information with detail on its services business and revenue. Fast forward to Q3 2018 and Apple reported quarterly services revenues of $10 billion—16% of its total quarterly revenue of $62.9 billion. So, services are already a big part of Apple’s business but the high-margin App Store is the lion’s share of that. App Store revenues will continue to grow, even in a saturated smartphone market, as users shift more of their spending to mobile. But it will not grow fast enough to offset slowing iPhone sales. Added to that, key content services are moving away from iTunes billing to avoid the 15% iTunes transaction fee. Netflix, the App Store’s top grossing app in 2018, recently announced it is phasing out iTunes billing, which is estimated to deliver Apple around a quarter of a billion dollars a year. That may only be c.1% of Apple’s services revenue but it is a sizeable dent. So Apple has to look elsewhere for services revenue. This is where music and video come in.

Streaming will drive revenue but not margin

Streaming is booming across both music and video. Apple has benefited doubly by ‘taxing’ third-party services like Spotify and Netflix, while enjoying success with Apple Music. With third-party apps driving external billing, Apple needs its own streaming revenue to grow. A video service should finally launch this year to drive the charge. However, the problem with both music and video streaming is that neither is a high-margin business. Apple’s residual investor value lies in being a premium, high-margin business. So it has a quandary: grow streaming revenues to boost services revenue but at a lower margin. This means Apple cannot simply build its streaming business as a standalone entity, but instead must integrate it into its core devices business.

Nokia might just have drawn Apple’s next blueprint

During its race to the bottom, Nokia launched the first 100% bundled music handset proposition Comes With Music (CWM). It was way ahead of its time, and now might be the time for Apple to execute another early (well, sort of early) follower move. CWM was built in the download era but the concept of device lifetime, unlimited music included in the price of the phone works even better in a streaming context. I first suggested Apple should do this in 2014. Back then Apple didn’t need to do it. Now it does. But rather than music alone, it would make sense for Apple to execute a multi-content play with music, video, newsand perhaps even monthly App Store credits. Think of it as Apple’s answer to Amazon Prime. To be clear, the reason for this is not so much to drive streaming revenue but to drive iPhone and iPad margins and in doing so, not saddle its balance sheet with low streaming margins. Here’s how it would work.

Streaming as a margin driver for hardware

Apple weathered much of the smartphone slowdown in 2018 by selling higher priced devices such as the iPhone X. This revenue over volume approach proved its worth. The latest earnings guidance shows that even more is needed. Apple could retail super premium editions of iPhones and iPads with lifetime content bundles included. By factoring in these bundled content costs into iPhone and iPad profits and losses, Apple can transform low margin streaming revenue into margin contributors for hardware. Done right, Apple can increase both hardware and services revenue without having a major margin hit. Add in Apple potentially flicking the switch on the currently mothballed strategy of becoming mobile operator, and the strategy goes one step further.

Free streaming without the ads

If reports that Apple is buying a stake in iHeart Media are true, then it will have another plank in the strategy. Radio is an advertising business, but Tim Cook hates ads so the likelihood is that any streaming radio content would be ad free. Given that consumers are unlikely to want to pay for a linear radio offering, Apple would need to wrap the content costs into hardware margins. This could either be part of the core content bundle, or could even be a lower priced content bundle, with Apple Music being available as a bolt-on, or as part of a higher priced bundle or, more likely, both. Ad-supported streaming becoming ad free would of course scare the hell out of Spotify.

Music to the rescue, again

2019 will probably be too soon for this strategy to finds its way into market, but do expect the first elements of it coming into place. Music saved Apple’s business once already thanks to the iTunes Music Store boosting flagging iPod sales. This paved the way for the greatest ever period in Apple’s history. Now we are approaching a similar junction and music, along with video and maybe games, are poised to do the same once again.

The Meta Trends that Will Shape 2019

MIDiA has just published its annual predictions report. Here are a few highlights.

2018 was another year of change, disruption and transformation across media and technology. Although hyped technologies – VR, blockchain, AI music – failed to meet inflated expectations, concepts such as privacy, voice, emerging markets and peak in the attention economy shaped the evolution of digital content businesses, in a year that was one to remember for subscriptions across all content types. These are some of the meta trends that we think will shape media, brands and tech in 2019 (see the rest of the report for industry specific predictions):

  • Privacy as a product: Apple has set out its stall as the defender of consumer privacy as a counter weight to Facebook and Google, whose businesses depend upon selling their consumers’ data to advertisers. The Cambridge Analytica scandal was the start rather than the end. Companies that can – i.e. those that do not depend upon ad revenue – will start to position user privacy as a product differentiator.
  • Green as a product: Alphabet could potentially position around environmental issues as it does not depend as centrally on physical distribution or hardware manufacture for its revenue. For all of Apple’s genuinely good green intentions, it fundamentally makes products that require lots of energy to produce, uses often scarce and toxic materials and consumes a lot of energy in everyday use. Meanwhile, Amazon uses excessive packaging and single delivery infrastructure, creating a large carbon footprint. So, we could see fault lines emerge with Alphabet and Facebook positioning around the environment as a counter to Apple and potentially Amazon positioning around privacy.
  • The politicisation of brands: Nike’s Colin Kaepernick advert might have been down to cold calculation of its customer base as much as ideology, but what it illustrated was that in today’s increasingly bipartisan world, not taking a position is in itself taking a position. Expect 2019 to see more brands take the step to align themselves with issues that resonate with their user bases.
  • The validation of collective experience: The second decade of the millennium has seen the growing success of mobile-centric experiences across social, music, video, games and more. But this has inherently created a world of siloed, personal experiences, of which being locked away in VR headsets was but a natural conclusion. The continued success of live music alongside the rise of esports, pop-up events and meet ups hints at the emotional vacuum that digital experiences can create. Expect 2019 to see the rise of both offline and digital events (e.g. live streaming) that explicitly look to connect people in shared experiences, and to give them the validation of the collective experience – the knowledge that what they experienced truly was something special but equally fleeting.
  • Tech major content portfolios: All of the tech majors have been building their content portfolios, each with a different focus. 2019 will be another year of content revenue growth for all four tech majors, but Apple may be the first to take the next step and start productising multi-content subscriptions, even if it starts doing so in baby steps by making Apple original TV shows available as part of an Apple Music subscription.
  • Rights disruption: Across all content genres, 2019 will see digital-first companies stretch the boundaries and challenge accepted wisdoms. Whether that be Spotify signing music artists, DAZN securing top tier sports rights, or Facebook acquiring a TV network. These are all very different moves, but they reflect a changing of the guard, with technology companies being able to bring global reach and big budgets to the negotiating table. Expect also more transparency, better reporting and more agile business terms.
  • GDPR sacrificial lamb: In 2018 companies thought they got their houses in order for GDPR compliance. Most consumers certainly thought they had, given how many opt in notifications they received in their inboxes.
    However, many companies skirted around the edges of compliance, especially US companies. In 2019 we will see European authorities start to police compliance more sternly. Expect some big sacrificial lambs in 2019 to scare the rest of the marketplace into compliance. They will also aim to educate the world that this is not a European problem, so expect some of those companies to be American. Watch your back Facebook.
  • Big data backlash: By now companies have more data, data scientists and data dashboards than they know what to do with. 2019 will see some of the smarter companies start to realise that just because you can track it does not mean that you need to track it. Many companies are beginning to experience data paralysis, confounded by the deluge of data, with management teams unable to decipher the relevance of the analysis put together by their data scientists and BI teams. A simplified, streamlined approach is needed and 2019 will see the start of this.
  • Voice, AI, machine learning (and maybe AR) all continue on their path: These otherwise disparate trends are pulled together for the simple reason that they are long-term structural trends that helped shape the digital economy in 2018 and will continue to do so in 2019. Rather than try to over simplify into some single event, we instead back each of these four trends to continue to accelerate in importance and influence. 

For music, video, media, brands and games specific predictions, MIDiA clients can check out our report here. If you are not a client and would like to get access to the report please email arevinth@midiaresearch.com.

Tech Majors Market Shares Q2 2018

The tech world has no shortage of acronyms for the big tech companies (GAFA, GAAF, Fang, the four horsemen…). At MIDiA we like to keep things simple, just like the major record labels and major TV studios we call the big four tech companies the Tech Majors. Each quarter the MIDiA team deep dives into the financial filings of Alphabet, Amazon, Apple and Facebook to create our quarterly Tech Majors Market Shares reports. (The Q2 edition is available to clients here.). In these reports we focus on the metrics that are most important for media and content companies. Here are some highlights of our latest report.

tech majors market shares q2 2018 midia research

Tech major Q2 2018 revenue totalled $152.1 billion, down from Q1 2018 – $155.3 billion –  but up 28% from Q2 2017 and 51% from Q2 2016. These growth rates mirror the year-on-year Q1 growths for 2016, 2017 and 2018. The tech majors are thus as a group growing at a consistent rate, despite seasonality and differences as a company level.

Q2 2018 was a quarter of winners and losers for the tech majors. All four companies reported strong revenue growth but Facebook missed some Wall Street estimates and saw $119 billion wiped of its stock value, the single biggest one day loss in US stock market history. Meanwhile Apple beat analyst estimates, in part due to booming services revenues, and ended up becoming the first ever company to have a market capitalization $1 trillion. Amazon and Alphabet both had solid quarters but it is the extremes of Apple and Facebook that provide salutary evidence of the risks that lie ahead for the tech majors. All four companies continue to grow at highly impressive rates despite already being of vast global scale and the dominant player in each of their respective core markets. But the potential of the consumer tech marketplace is finite and growth will slow. Even though Silicon Valley eagerly awaits the next billion digital consumers, these consumers will be lower spending and predominately in markets where most tech majors are not strong, such as India and sub-Saharan Africa.

Services revenue on the up

Tech major advertising and services revenue – the two revenue streams that most directly impact the businesses of media and content companies – totalled $60.7 billion in Q2 2018, up 32% YoY. Tech major advertising and services revenue growth is accelerating and becoming a progressively larger share of total tech major revenue, growing five points, up to 40% in Q2 18.

Services is still the junior partner by some distance, representing 29% of combined advertising and services revenue in Q2 18, but growing one point a year. Nonetheless, tech major services revenue for the 12 months up to Q2 18 was $64.8 billion which was 3.7 times more than global recorded music revenue in 2017 and 19% of global TV revenues in 2017.

Read the full report hereor email stephen@midiaresearch.comto find out how to get access.

From Ownership to Access

MIDiA PanelLast Wednesday we held the third MIDiA Quarterly forum, exploring the shift from ownership to access across different media industries. In addition to MIDiA analyst presentations we had panellists from Sky, The Economist, Beggars Group, Reed Smith and Readly. The event was held at The Ministry in London and was a great success. Be sure to make it to our next one! Here are some of the key themes we explored.

Change is a coming

We opened with three quotes that summarise the tensions and transformations taking place in the digital content marketplace:

 ‘The fine wines of France are not merely content for the glass making industry’, Andrew Lloyd-Webber

‘We’re competing with sleep…sleep is my greatest enemy’, Reed Hastings, Netflix

‘Content may still be king but distribution is the queen and she wears the trousers’, Jonah Peretti, BuzzFeed

All three quotes represent very different worldviews and illustrate how different things can look from the perspective of the companies being disrupted, those doing the disruption and those building businesses to harness the disruption. All three viewpoints are simultaneously valid, but the media landscape is changing at rapid pace, and fighting a rear-guard action against change only gives the disruptors a freer rein to, well, disrupt.

access slide 1Across most media industries – music, video and news especially, the future of content monetisation will be built around advertising for the mass market and subscriptions for the aficionados, while additional opportunities exist for one-off transactions within both environments (e.g. Tencent live streaming  Chinese boyband TFBoysand Epic Games selling $100 million a month of virtual items in Fortnite). What is going as a mainstream proposition is selling physical media, though niche markets for collectables will thrive—ironically exactly because of the demise of physical media. In an age without shelves full of CDs, DVDs and games, collectors want a physical manifestation of their tastes.

Music and video are plotting the most directly comparable paths towards access-based models, though there are also some very telling differences:

  • Scale:Globally there were 206 million music subscribers at the end of 2017, compared to 452 million video subscribers. But while subscriptions represented 45% of retail music revenues, it was just 12% of pay-TV revenues. Music though is a far smaller industry than pay-TV (11% of the size), so like-for-like comparisons aren’t always that useful.
  • Concentration:What is worth comparing though, is the degree of market concentration. In music, the top four subscription services account for 72% of subscribers, compared to just 54% for video. And while the long tail for music services isn’t very, well, long, in video there is a vast number of smaller services: there are around 60 different services in the US alone.
  • Variety:While music services largely offer the same catalogue, with the same usage terms at the same price, video is defined by diversity and exclusives. Using the US as an example again, more than half of the services are niche – such as Korean drama, 4K nature, horror, reality – and there are 23, yes 23, different price points.

Aside the different heritages of these industries – consumers are used to paying for different slices of TV content, there is another key reason for the differences: rights holder distribution. In music three big companies account for the majority of revenues; in TV there are dozens of key studios and networks. This means that in video, the distribution companies can play rights holders off each other and effectively set the pace of change. In music, the major record labels shape the market.

This dynamic is what Clayton Christensen outlined in the Innovator’s Dilemma. There are two key types of innovation:

  1. Sustaining innovations:the smaller, more evolutionary changes that companies make to improve their existing products. Every company does this if they can, it’s how to maintain the status quo and grow revenues predictably
  2. Disruptive innovations:these are dramatic, industry-altering changes that rarely come from the incumbents but instead from disruptive new entrants. P2P file sharing was the big one that shook the TV and music industries. TV responded by fighting free with free, by launching services like iPlayer, ABC.com and Hulu. The music industry responded by licensing to the iTunes Music store. One embraced disruption, one fought it.

Talking of disruption, the big existential threat media companies will have to face over the coming decade, is ceding power, willingly or otherwise, to the tech majors (Alphabet, Amazon, Apple and Facebook). Europe’s Article 13aims to offset some of the growing reach of the tech majors, but ultimately these companies will shape the future of media, across both ad supported and subscription models.

The tech majors generated $40.7 billion in ad revenue in Q1 2018 alone, including around $2 billion for Amazon, the global advertising revenue powerhouse that many still aren’t paying enough attention to. The tech majors have already sucked away much of the news industry’s audience and ad revenues; with assets such as YouTube and IGTVthey are competing for radio and TV too. But it is the content and services revenue that media companies need to pay most attention to. With $16.9 billion in Q1 alone – nearly the same as the recorded music market for the entirety of 2017, this is a sector that all four tech majors are taking seriously, very seriously. And even though Facebook is a late arrival to the party, it is making up for lost time with its new music offeringand evolving video strategy.

The reason all this matters for media companies is that the strategic objectives of the tech major are rarely aligned with those of media companies. The tech majors each use media as a means to an end, a tool for driving their core strategy. Access based models underpin the content strategies of these companies who often control distribution and access to consumers via tools such as app stores, mobile operating systems, search and social platforms. Thus, the shift from ownership to access could also translate into a shift towards a tech major dominated media world.

Could Spotify Buy Universal? 

Vivendi is reported to be proposing to its board a plan for spinning out Universal Music. It is certainly the right time for a spin off (always sell before the peak), but a full divestment would leave Vivendi unbalanced and a shell of its former self. Canal+ is facing the same Netflix-inspired cord-cutting pains as other pay-TV operators (and is relying heavily on sub-Saharan Africa for subscriber growth), while other assets such as those in Vivendi Village have failed to deliver. With CEO Vincent Bolloré having invested heavily in Vivendi, he would be devaluing his own wealth. For a man who is not shy of saying that he’s in the game to make money, this scenario simply doesn’t add up. As one investment specialist recently suggested to me, this talk of a spin-off is probably exactly that, talk. Talk aimed at driving up Vivendi’s valuation by association and, at most, potentially resulting in a partial spin-off or partial listing. However, it is not beyond the realms of possibility that a big enough offer for Universal would persuade Bolloré to sell. So, let’s for a moment assume that Universal is on the market and have a little fun with who could buy it.

The Chinese option

It is widely rumoured that Alibaba was in advanced discussions with Vivendi to buy some size of stake in Universal. Those conversations derailed when the Chinese government tightened up regulations on Chinese companies buying overseas assets, which is why we now see Tencent buying a growing number of minority stakes in companies rather than outright acquisitions. So, an outright Chinese acquisition is likely off the table. This doesn’t rule out other Asian bidders (Softbank had an $8.5 billion bid rejected in 2013), though perhaps Chinese companies are the only ones with the requisite scale and access to cash that would meet a far, far higher 2018 price point.

The tech major option

The most likely scenario (if Universal were for sale) is that one of the tech majors (Apple, Alphabet, Amazon, Facebook) swoops in. Given Google’s long-held antipathy for the traditional copyright regime, Alphabet is not the most likely, while Facebook is too early in its music journey (though check back in 18 months if all goes well). Apple and Amazon are different cases entirely. Both companies are run by teams of older executives whose formative cultural reference points were shaped by traditional media companies. These are companies that, even if they may not state it, see themselves as the natural evolution of media, moving it from the physical era of transactions to the digital era of access. Thus far, Apple and Amazon have focused principally on distribution, although both have invested in rights too. Apple less so, (e.g. Frank Ocean, Chance the Rapper) but Amazon much more so (e.g. Man in the High Castle, Manchester by the Sea). Acquiring a major media company is a logical next step for Amazon. A TV studio and, or network would likely be the first move (especially as Netflix will likely buy one first, forcing Amazon’s hand), but a record label wouldn’t be inconceivable. And it would have to be a big label – such as UMG, that would guarantee enough share of ear to generate ROI. Apple though, could well buy a sports league, which would use up its budget.

The Spotify option

While the tech majors are more likely long-term buyers of Universal, Spotify arguably needs it more (and is certainly less distracted by other media formats). Right now, Spotify has a prisoner’s dilemma; it knows it needs to make disruptive changes to its business model if it is going to create the step change investors clearly want (look at what happened to Spotify’s stock price despite an impressive enough set of Q1 results). But it also knows that making such changes too quickly could result in labels pulling content, which would destroy its present in the hope of building a future. Meanwhile, labels are worried Spotify is going to disintermediate them but can’t risk damaging their business by withdrawing content now – hence the prisoner’s dilemma. Neither side dares make the first move.

That’s the problem with the ‘do a Netflix’ argument: do it too fast and the whole edifice comes tumbling down. Moreover, original content will not be the same silver bullet for Spotify as it was for Netflix. This is mainly because there is a far smaller catalogue of TV content than music, so a dollar spent on original video goes a lot further than a dollar spent on original music. It is not beyond the realm of possibility that Spotify will get to a tipping point, where the labels see a shiny-toothed wolf lurking under the lamb’s wool, and with its cover blown it will be forced to go nuclear. If this happened, buying a major label would become an option. And, as with the tech majors, it would have to be a major label to deliver enough share of ear.

But that scenario is a long, long way off. First, Spotify has to prove it can be successful and generate enough revenue and market cap to put itself in a position where it could buy a major. And that is still far from a clear path. For now, Spotify’s focus is on being a partner to the labels, not a parent company.

All of this talk might sound outlandish but it was not so long ago that an internet company (AOL) co-owned Warner Music and a drinks company (Seagram) owned Universal Music, before selling it to a water utilities company (Vivendi), and, long before that, EMI was owned by a light bulb company (Thorn Electrical Industries). We have got used to this current period of corporate stability for the major record labels, but this situation is a reflection of the recorded music business being in such a poor state that there was little M&A interest. Nonetheless it is all changing, potentially heralding a return to the past. Everything has happened before and will happen again.

MIDiA Research Predictions 2018: Post-Peak Economics

With 2017 drawing to a close and 2018 on the horizon, it is time for MIDiA’s 2018 predictions.

But first, on how we did last year, our 2017 predictions had a 94% success rate. See bottom of this post for a run down.

Music

  • Post-catalogue – pressing reset on the recorded music business model: Revenues from catalogue sales have long underpinned the major record label model, representing the growth fund with which labels invested in future talent, often at a loss. Streaming consumption is changing this and we’ll see the first effects of lower catalogue in 2018. Smaller artist advances from bigger labels will follow.
  • Spotify will need new metrics: Up until now Spotify has been able to choose what metrics to report and pretty much when (annual financial reports aside). Once public, increased investor scrutiny on will see it focus on new metrics (APRU, Life Time Value etc) and concentrate more heavily on its free user numbers. 2018 will be the year that free streaming takes centre stage – watch out radio.
  • Apple will launch an Apple Music bundle for Home Pod: We’ve been burnt before predicting Apple Music hardware bundles, but Amazon has set the precedent and we think a $3.99 Home Pod Apple Music subscription (available annually) is on the cards. (Though we’re prepared to be burnt once again on this prediction!) 

Video

  • Savvy switchers – SVOD’s Achilles’ heel: Churn will become a big deal for leading video subscription services in 2018, with savvy users switching tactically to get access to the new shows they want. Of course, Netflix and co don’t report churn so the indicators will be slowing growth in many markets.
  • Subscriptions lose their stranglehold on streaming: 2018 will see the rise of new streaming offerings from traditional TV companies and new entrants that will deliver free-to-view, often ad-supported, on-demand streaming TV.

Media

  • Beyond the peak: We are nearing peak in the attention economy. 2018 will be the year casualties start to mount, as audience attention becomes a scarce commodity. Smart players will tap into ‘kinetic capital’ – the value users give to experiences that involve their context and location.
  • The rise of the new gate keepers part II: In 2018 Amazon and Facebook will pursue ever more ambitious strategies aimed at making them the leading next generation media companies, the conduits for the digital economy.

Games

  • The rise of the unaffiliated eSports: eSports leagues emulate the structure of traditional sports, but they may have missed the point. In 2018, we’ll see more eSports fans actually seeking games competition elsewhere, driving a surge in unaffiliated eSports.
  • Mobile games are the canary in the coal mine for peak attention: Mobile games will be the first big losers as we approach peak in the attention economy – there simply aren’t enough free hours left in the day. Mobile gaming activity is declining as mainstream consumers, who became mobile gamers to fill dead time, now have plenty of digital options that more closely match their needs. All media companies need to learn from mobile games’ experience.

Technology

  • The fall of tech major ROI: Growth will come less cheaply for the tech majors (Alphabet, Apple, Amazon, Facebook) in 2018. They will have to overspend to maintain revenue momentum so margins will be hit.
  • Regulation catches up with the tech majors: Each of the tech majors is a monopoly or monopsony in their respective markets, staying one step ahead of regulation but this will change. The EU’s forced unbundling of Windows Media Player in the early 2000s triggered the end of Microsoft’s digital dominance. 2018 could see the start of a Microsoft moment for at least one of the tech majors. 

2017 Predictions

For the record, here are some of our correct 2017 predictions:

  • Digital will finally account for more than 50% of revenue
  • Spotify will still be the leading subscription service
  • eSports to reach $1 billion
  • Streaming holdouts will trickle not flood
  • AR will have hype but not a killer device.
  • VR players will double down on content spend
  • Google doubles down on its hardware ecosystem plays
  • 2017 will not be the year of Peak TV
  • Original video content to arrive on messaging apps

Here are some that we got wrong or were inconclusive:

  • Tidal finally sells ($300 million stake from Softbank was a partial sale – full sale likely in 2018)
  • Apple will launch an Apple Music iPhone – didn’t happen but the Home Pod may be the bundled music device in 2018 (see below)
  • Spotify will be disrupted – it actually went from strength to strength with no meaningful new competitor, yet

Disney, Netflix and the Squeezed Middle: The Real Story Behind Net Neutrality

Unless you have been hiding under a rock this last couple of weeks you’ll have heard at least something about the build up to the decision over turning net neutrality in the US, a decision that was confirmed yesterday. See Zach Fuller’s post for a great summary of what it means. In highly simplistic terms, the implications are that telcos will be able to prioritize access to their networks, which could mean that any digital service will only be able to guarantee their US users a high quality of service if they broker a deal with each and every telco. As Zach explains, we could see similar moves in Europe and elsewhere. If you are a media company or a digital content provider your world just got turned upside down. But this ruling is in many ways an inevitable result of a fundamental shift in value across digital value chains.

net neutrality value chains

Although the ruling effectively only overturns a 2015 ruling that had previously guaranteeing net neutrality, the world has moved on a lot since then, not least with regards to the emergence of the streaming economy across video, music and games. In short, there is a lot more bandwidth being taken up by streaming services and little or no extra value reverting to the upgraded networks.

Value is shifting from rights to distribution

Although the exact timing with the Disney / Fox deal (see Tim Mulligan’s take here) was coincidental the broad timing was not. The last few years have seen a major shift in value from rights companies (eg Disney, Universal Music, EA Games) through to distribution companies (eg Facebook, Amazon, Netflix, Spotify) with the value shift largely bypassing the infrastructure companies (ie the telcos).

The accelerating revenue growth and valuations of the tech majors and the streaming giants have left media companies trailing in their wake. The Disney / Fox deal was two of the world’s biggest media companies realising that consolidation was the only way to even get on the same lap as the tech majors. They needed to do so because those tech majors are all either already or about to become content companies too, using their vast financial fire power to outbid traditional media companies for content.

The value shift has bypassed infrastructure companies

Meanwhile telcos have been left stranded between rock and a hard place. Telcos have long been concerned about becoming relegated to the role of dumb pipes and most had given up any real hope of being content companies themselves (other than the TV companies who also have telco divisions). They see regulatory support for better monetizing their networks by levying access fees to tech companies as their last resort.

In its most basic form, this regulatory decision will allow telcos to throttle the bandwidth available to streaming services either in favour of their favoured partners or until an access fee is paid. The common thought is that telcos are becoming the new gatekeepers. In most instances they are more likely to become toll booths. But in some instances they may well shy away from any semblance of neutrality. For example, Sprint might well decide that it wants to give its part-owned streaming service Tidal a leg up, and throttle access for Spotify and Apple Music for Sprint users. Eventually Spotify and Apple Music users will realise they either need to switch streaming service or mobile provider. Given that one is a need-to-have, contract-based utility and the other is nice-to-have and no contract and is fundamentally the same underlying proposition, a streaming music switch is the more likely option. Similarly, AT&T could opt to throttle access for Netflix in order to give its DirecTV Now service a leg up. Those telcos without strong content plays could find themselves in the market for acquisitions. For example, Verizon could make a bid for Spotify pre-listing, or even post-listing.

The FCC ruling still needs congressional approval and is subject to legal challenges from a bunch of states so it could yet be blocked. If it is not, then the above is how the world will look. Make no mistake, this is the biggest growing pain the streaming economy has yet faced, even if it just ends up with those services having to carve out an extra slice of their wafer-thin margins in order reach their customers.

Shazam Is Apple’s Echo Nest

apple music shazam midia

Shazam finally found a buyer: Apple. Ever since its affiliate sales revenue model crumbled with the onset of streaming (there’s no business in an affiliate fee on a $0.01 stream), Shazam has been trying to find a new business model. It doubled down on providing tools for TV advertisers but never got enough traction for that to be a true pivot. Shazam’s problem has always been that it was a feature rather than a product – as so many VC funded tech companies are. The fact that it sold for $400 million – just 2.8 times its total investment ($143 million) and well below its previous pre-money valuation of $1 billion, illustrates how much value has seeped out of Shazam’s business. The Apple acquisition though, is one of the few ways that Shazam’s ‘hidden’ value can be realised.

Cool tech without a business model

Shazam was a digital music pioneer. I remember getting a demo from one of the founders back in the early 2000s, and I was blown away by just how well the tech worked. However, quality of tech was never Shazam’s problem, and once the app economy appeared it also had a very clear and compelling consumer use case. Despite competition from challengers in more recent years – especially Soundhound, which has also been compelled to pivot but may now decide to double back down on its core competences – Shazam continued to be the standout leader in music recognition. The irony is that its use case is stronger now than it was back in the download era because people are listening to a wider array of music than ever before. The problem was a lack of revenue model.

Shazam tried to position itself as a tastemaker, with its charts becoming useful heat indicators for radio stations and streaming companies. Labels soon learned to game the system with ‘Shazam parties’ but even without that challenge, this still did little to help Shazam build a business model. Apple however, saw beyond the music recognition and Shazam now gives Apple a music recognition engine. Shazam is Apple’s answer to Spotify’s Echo Nest.

Apple Music needs growth and engagement

Apple, which recently passed 30 million subscribers, continues to lag behind Spotify’s growth. Apple Music is adding around half a million new subscribers a month, while Spotify was adding close to two million a month up until it announced 60 million subscribers in July. The fact Spotify hasn’t announced since then may point to slowing growth, but my money is on a big number being announced in the next five weeks.

Apple’s weekly active user (WAU) penetration is far behind Spotify’s, indicating that Apple needs to do a better job of engaging its users. Better playlists, recommendations and algorithm driven curation all help Spotify stay ahead of the curve. Now, Apple will be hoping that Shazam will provide it with the tools to start playing catch up. And that’s not even mentioning the user acquisition potential Shazam could have when it switches to exclusively pointing to Apple Music. Game on.

Announcing MIDiA’s State Of The Streaming Nation 2 Report

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

Key features for the report:

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

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

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

Selected Key Findings

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

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

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List of Figures In The Report

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