Filling music streaming’s Disney+-shaped hole

Back when Disney+ started its meteoric rise, there was a lot of thinking around what lessons the music streaming market could learn. Three years on from the launch of the subscription video on demand platform, the shine has come off it a little, registering its first ever subscriber loss, but not before becoming a major market player and changing the way in which the industry thinks about developing streaming shows. Disney+ was part of the ‘big bang moment’ of transformative change in the video streaming market. Meanwhile, the music streaming market basically stayed the same. This may have been tolerable during its time of plenty, but now, with global music streaming revenue growth looking set to have dropped to 7% for 2022, the lack of change leaves music streaming vulnerable in a time of scarcity. Never has there been more need for change and innovation. Disney+ might still just point us to the path forward.

There are many weaknesses in the Western music streaming market that are well known and that do not need to be relisted in their entirety here, but there are three that stand out above all others (and to be clear, we are talking about the services side of the market, not the remuneration side, which we previously covered here):

Unlimited, ungated access to everything, everywhere

Minimal differentiation (catalogue, pricing, value proposition, etc.)

A fandom void

Meanwhile, video streaming has long provided a ‘sliding doors’ view of what music streaming could have been if licensing had been done differently at the start:

Catalogue segmented across different services

Wide variety of price points and value propositions

Ability to target niches

Strong ARPU growth due to users having multiple subscriptions

But, just as music has been hit by economic scarcity, video has even more so. Expecting consumers to have multiple subscriptions (nearly three quarters have two or more) might fly in a time of plenty, but as household budgets tighten, the business case suddenly looks vulnerable. Cancelling one video subscription is a relatively pain-free decision. It reduces choice, but it does not mean losing everything. By contrast, the vast majority of music subscribers have just one account, giving them access to everything. Music streaming’s exceptional value for money is becoming a recession-busting asset that the TV industry may be looking at with envy at this stage.

It is all about growth

So, with all this said, why could there still be lessons to learn from Disney+? The simple answer is: growth. With subscriber penetration topping out in mature Western markets, music rightsholders and streaming services only have price increases as a realistic growth driver in these markets. But, if a new, additional service was to launch, then a very real chance of ARPU and revenue growth arises. To be clear, now would not be the time to launch it (for the very same reasons that Disney+ just lost subscribers). But now is the perfect time to plan and build, with a view to launch once the global economy returns to full health and consumer purse springs loosen. The challenge, of course, is how to build something that can deliver genuine additive value when all the other DSPs already have all the music. Here is a vision for how that particular circle can be squared.

Introducing music+

Let us call this concept ‘music+’ for now. Music+ would have to be something that is different from, and complementary to, the mainstream DSPs, in terms of both content and value proposition. It would need two key ingredients:

Community and identity: As MIDiA identified last year, scenes are the new growth opportunity for music and fandom. Fandom itself is simply a symptom of identity. Music has long played a crucial role in communicating and shaping identity. But Western streaming services are audio utilities that sacrificed fandom in favour of convenience. There is no meaningful way of communicating identity. This is why TikTok is the place that music fandom happens in the West, driven by gen Z, who sought something more meaningful than the convenience that was so valued by millennials. So, music+ would have community and identity at its core. User profile pages would be the core asset. A place where users can say who they are, what music they like, where they can connect and communicate with other users, curate radio shows, post playlists, etc. They would also display listening badges (e.g., “I am in the top 5% of fans of…”) and virtual artist merchandise, such as badges, limited-run digital artwork, etc. NFTs may yet prove to be the future of artist merch, but right now it lacks the crucial ingredient – context. Buying merch is about communicating identity. User profile pages would be the trophy cabinet for virtual merch and collectibles.

Content for fans not consumers: Streaming has commodified listening, even for music aficionados (half of whom stream passively). Music+ would be a place for aficionados (20% of all consumers), where fans go to deep dive on their favourite artists and connect with likeminded fans. Artists would provide content, such as sessions, cover versions, sneak previews, limited-availability live streamed concerts, Q+A sessions, photos, etc. That would provide much of the content, but even more would come from fans themselves. Aficionados are four times more likely than average consumers to lean forward and create content. Leaning through to create is the ultimate expression of fandom, and TikTok has proven the use case. So – and this is where things get controversial – music+ would need to operate under a user-generated content (UGC) license. The vast majority of music’s current UGC platforms (YouTube, SoundCloud, TikTok) followed the ‘do first, ask for forgiveness later’ approach. Music rightsholders would need to embrace, rather than tolerate, UGC in order to power the creation of an entirely new music catalogue. Their incentive would be to drive rather than respond, by seeding the platform with content, such as artist sound packs and stems.

Music+ would not be a mainstream proposition, but that is entirely the point. It would be an additive proposition for fans. If priced at a modest cost (say $4.99) and got enough support and input from artists and rightsholders, then it would have a good shot at developing a content library that would deliver real value to fans, and in doing so, plug the fandom hole that Western streaming has never seemed to be able to fill. 

Will the recession change Big Tech’s view on entertainment?

Music start up Utopia just announced a round of layoffs, fitting into a much bigger dynamic that may reshape the entertainment landscape. There are many reasons why the coming global recession will be unique, but the one that is most relevant to the digital entertainment sector is that it is going to be the first one since modern consumer tech has been truly mainstream. This matters, not just because of the unchartered territory this reflects, but also because tech companies (even the biggest) operate differently than traditional companies, placing much bigger bets on future growth. A strategy that works well in times of plenty, but that is undergoing rapid re-evaluation in the face of an onrushing recession. Big tech firms are reducing headcount, especially in the bets that plan to make profit in the future, but not yet. Most forms of digital entertainment fall in this bracket. Streaming music and video have long been loss leaders for the tech majors, but can that continue in a recession? 

2007 was the year the last recession started and the consumer tech world looked very, very different to today. The first iPhone was not sold until June 2007; Facebook started the year with 14 million users; Netflix launched its streaming service; but Spotify was still a year away from launch; Instagram would not be launched for another three years; and Snapchat for another five. So, when the next recession most likely hits in 2023, it will be the first one in which consumer tech has been mainstream.

All of those companies, and most of the rest that drove the consumer tech revolution, grew fast because they aggressively invested in future potential, rather than wait to fund it organically. It is a mindset that has its origins in the VC world view of: build product and customer base first, worry about profit later. Without that approach, it is probable that the consumer tech sector would not be anywhere near as big and developed as it is now. But the strategy requires the basic premise of next year bringing more growth, otherwise the model falls down. Which is why we are now seeing retractions across big tech. Meta laid off 11,000 employees, many from its VR Labs division; Stripe cut 1,000 jobs because it overexpanded during its lockdown-boom; Apple froze hiring outside of R+D; and 10,00 layoffs look on the cards for Amazon. 

Out of all this redundancy mayhem, one particularly interesting figure emerged: Amazon is on track to lose $10 billion a year from its ‘Worldwide Digital’ team, which includes Alexa, Echo, and its streaming businesses. Amazon makes its money from Cloud services and commerce, devices and content are growth categories that it is investing in, both for future growth and because they help its core business. Very similar arguments can be made for Apple’s streaming businesses (video and music) and, at the very least, for YouTube Music and YouTube Premium.

Which raises the question, if the tech majors start reigning in their non-core expenditure, where does this leave streaming? Practically speaking, it is highly unlikely that the tech majors are going to face such difficulties that they will have to think about shuttering their streaming services, but they may well have to trim spending. And if that happens, it is video that is far more exposed than music, because streaming video requires large investments in original content, whereas music rights costs are fixed. All that said, any music rights deals that are up for negotiation with tech majors from this point on will almost certainly see the licensees pushing for reductions anywhere they can find them.

Web 3.0 is a lane, not a highway

Facebook was not the first web 2.0 company, but it was the one that took it mainstream to a global audience. Consumers’ digital lives would never be the same again. Whereas web 1.0 had enabled them to visit and read websites, much like a digital evolution of newspapers and magazines, Facebook enabled consumers to participate, to comment, upload photos, converse, etc. It was a total transformation of the internet and enabled much of the digital world in which we live now. But it did not mean the end of web 1.0. Indeed, 18 years after Facebook’s launch, web 1.0 is alive and well, with websites being an integral part of our everyday digital lives. Sure, many of those have adopted web 2.0 components, such as comment fields, but they are still fundamentally web 1.0. With all the hype, or even, post-hype of web 3.0, it is tempting to think that our entire future digital lives will be lived in VR glasses and on the blockchain. But the actual future will be more prosaic, with web 3.0 being another lane to the internet’s highway, rather than an entirely new road to replace the old one. And that is no bad thing, nor does it undermine the vast potential that web 3.0 has. Nonetheless, it does warrant a reassessment of just what role web 3.0 will play.

Image credit: Wikipedia https://en.wikipedia.org/wiki/Gartner_hype_cycle#/media/File:Gartner_Hype_Cycle.svg

Many of you will be familiar with Gartner’s iconic hype cycle. The premise is brilliantly simple. When a new technology arrives, the world becomes obsessed with its transformative potential. The tech press builds it up, investors pour in money, and the world is awash with innovative new start-ups, from one-person passion projects to heavily funded companies with lavish booths at tech trade fairs and conferences. This is the peak of inflated expectations. Then, inevitably, the technology’s progress cannot keep pace with those elevated expectations. The tech press starts to turn, with stories emerging at an accelerating rate about failing start-ups and how they have overpromised and underdelivered. The image of well-funded Magic Leap’s AR prototype being the size of a backpack is a perfect example. As the hype turns into derision and doubt, the technology slips into the trough of disillusionment (which I always think sounds like a Radiohead album title). Sometimes this is the graveyard of new tech, but, most often, it is simply a recalibration. With the fierce gaze of the tech world no longer there, the new tech sector can start to grow at a more sustainable, organic pace. Eventually it will start to fulfil its true potential and steadily build up the slope of enlightenment, before fulfilling its original promise. 

This is the path that most new tech is destined to follow. This is because, when thinking about new technology, it is easy to underestimate the near-term potential but overestimate the long-term potential. And this is due to humans adopting new tech in depressingly predictable ways. The early adopters (who are most often also the ones who first make the new tech) can see the potential and adopt immediately, despite all of its bugs and teething problems. It is only when the tech is ready for primetime that early followers come on board, eventually opening up adoption from the mainstream and even the tech-hesitant laggards.

Web 3.0 is now shifting from the inflated peak to the trough. Just look at all of the stories about undersold NFT auctions, falling crypto prices, etc. But we have been here before, many times, even in recent years. Just think about how VR and 3D printers were hyped to change the world. Once the hype subsided, both sectors started to build sustainable futures.

With this considered there are four major factors that will define the future of web 3.0:

• Recalibration: Web 3.0 is neither dead nor dying – it is recalibrating. Will there be a wave of failed start-ups and investors losing money? Yes. But that is part of a long-proven pattern.
• Realism: We need to be realistic about what web 3.0 will be when it does finally reach the slope of enlightenment. Yes, it will change our digital lives, but it will not be all of our digital lives. Just like web 2.0, it will run alongside the rest of the internet. Will it replace some of it? Yes – but not all of it. Instead, the internet highway will have a third, new lane.
• User interface: Web 3.0 is still missing a crucial component: a user interface. Facebook succeeded not because it was a set of revolutionary protocols, but because it was a transformative user experience, allowing consumers to create, share and participate. Web 3.0 needs its interface. We have the building materials for web 3.0 but we do not have the building. Heck, you could argue that we do not yet even have the architectural plans.
• Focus: Web 3.0’s scope and remit are so vast that, in truth, it represents a collection of entirely different propositions that may have an underlying technology link but, to consumers, are entirely separate. Fortnite and Ethereum are as far apart as consumer experiences as a football and a credit card are. An overdependence on reaching for commonality may help get investors on board, but it makes it harder to build the necessarily diverse consumer messages if widespread adoption is to ever happen.

Web 3.0 will change the internet, but it will need to change itself first.

2021 Predictions: The year of the immersive web

As we approach the end of 2020 it is time to look forward to what 2021 may bring. MIDiA has published the fifth edition of our Annual Predictions report which clients can read here. There are 27 predictions in the report, but I am sharing a few of them here. MIDiA has a pretty good track record with its predictions; 79% of our predictions for 2020 were correct.

These are the seven meta and cultural trends that we believe will shape 2021: 

1. The immersive web
2. Recessionary impact
3. The great reaggregation
4. The return of synchronous experiences
5. Social consumption and micro communities
6. Video streaming as a cultural catalyst 
7. The end of influencers

The immersive web

Web 1.0 was an information dump; web 2.0 added multimedia and social. Now we are entering the third phase, which MIDiA terms the immersive web. As is usually the case with big epoch shifts, this will not be a clear and sudden change but instead a steady change – a change that is, in fact, already happening. The immersive web is characterised by environments in which we do not simply conduct extensions of IRL activity (e-commerce, video calls) but ones that create behaviours and relationships that only, and can only, exist within these environments. Apps and platforms like Roblox, TikTok and Discord are early iterations of the immersive web, but merely hint at what will come. The trend will be driven by Gen Z, who have grown up with social apps from the playground onwards. Gen Z relies more than any previous generation on such apps for social interaction and expression, forming muscle memory for digital-first relationships. The COVID-19 lockdown measures have accentuated this shift, further solidifying Gen Z’s receptivity to future immersive web experiences.

Music

Here is a short version of some of the trends we expect to shape music in 2021:

• The start of an artist economy: Streaming is a song economy of which the scale benefits rights holders far more than creators. The industry needs to work towards a collection of models that work for artists. Components could be micro-communities (see below), sounds platforms, ticketed live streams, skills marketplaces, and virtual merch. 
  
• The rise of micro-communities: Niche is the new mainstream. The next phase of this market dynamic is the emergence of micro-communities; small audiences of dedicated fans who almost consider it an honour-bound duty to support their artists. 
  
• The creator tools revolution: Creator tools, particularly music production and collaboration, will be one of the most important market shifts in 2021. Companies like Splice, LANDR and Output will continue to build scale in 2021, changing both the culture and business of music. 
  
• Live streaming professionalises: With live unlikely to be anything close to full capacity until the latter part of 2021, live streaming will be used by a growing body of artists as a genuine revenue driver, rather than the audience engagement role it played in much of 2020, driven by increased professionalisation, better distribution and more sophisticated monetisation.
  
• Music continues to deliver as an asset class: Although the pandemic dented music publishing’s long-term growth story, music catalogues retain strong appeal as an asset class, not least because they are performing better in relation to many asset classes that have been hit hard by the pandemic and that look vulnerable to the coming recession. The imbalance between supply and demand remains, so expect prices paid to continue to accelerate. 
  
• UGC continues to accelerate: User-generated content (UGC) music revenues reached $4 billion in 2020 and will push up to $4.9 billion in 2021. The crucial difference between UGC music now compared to five years ago, is that the focus is on genuine user creativity rather than users simply uploading others’ music.

2020 was a year like no other in modern times, with the impact on digital entertainment both pronounced and creating the foundations for accelerated innovation in 2021. Whatever may happen to the global economic and health outlook, digital entertainment will go through further dramatic change in 2021.

Just what is Tencent’s Endgame?

Tencent’s combined $200 million investment in WMG follows on the heels of its $3.6 billion joint investment in Universal Music. It is hardly Tencent’s first investments in music, having spent $6.2 billion on music investments since 2016. But music is just one part of a much larger, supremely bold and undoubtedly disruptive strategy that is making the Chinese company an entertainment business powerhouse in the East and West alike.

Tencent is a product of the Chinese economic system

Tencent being a Chinese company is not incidental – it is pivotal. The Chinese economy does not operate like Western economies. Rather than following free market principles, it is a controlled economy in which everything – in one way or another – ultimately comes back to the state. In China, the economy is an extension of the state. The state takes an active role in the running of successful Chinese companies, sometimes very openly, sometimes in less direct ways, such as ensuring party nominees end up in management positions.

Chinese companies are used to working closely with the state – in its most positive light – as a business partner. When a company’s objectives align with those of the state, an individual company may gain preferential treatment at the direct expense of competitors. This is exactly the opposite way in which state involvement happens in the West (or is at least supposed to) – i.e. regulation. Tencent has benefited well from this approach, not least in music.

Tencent Music is the leading music service provider in China (78% market share in Q1 2020) and is also the exclusive sub-licensor of Universal, Sony and Warner in China. This means that Tencent’s streaming competitors have to license the Western majors’ music directly from it. Tencent clearly has a market incentive to ensure terms are less favourable than it receives itself. Netease’s CEO call the set up ‘unfair’ and regulatory authorities are at the least going through the motions of investigating. But the fact this set up could ever exist illustrates just how different the Chinese regulatory worldview is.

Investing in reach and influence

Why this all matters, is that when Tencent views overseas markets it does so with a very different worldview than most Western companies. Taking investments in two of the world’s three biggest record labels might feel uncomfortable from a Western free-market perspective, but to Tencent it just makes good business sense to have influence over as much of the market as it can get. What better way to help ensure you get good deals in the marketplace? Such as, for instance, exclusive sub-licensing into China.

Music is not Tencent’s main priority. For example, its combined $6.2 billion spent on music investments is less than the $8.6 billion that Tencent spent on acquiring 84% of gaming company Supercell in 2016). Nonetheless, music – along with games, video, messaging and live streaming – is one of the central strands of Tencent’s entertainment portfolio strategy.

Just as Apple, Amazon and Alphabet are building digital entertainment portfolios designed to compete in the ‘attention economy’, so is Tencent. In fact, it is fair to say that Tencent is prepping itself as a direct competitor to those companies. But while each of the Western tech majors compete in familiar (Western) ways, Tencent is taking a more Chinese approach.

If you don’t like the rules of the game, play a different game

Tencent’s entertainment investment strategy can be synthesised as follows:

• Take (predominately) minority stakes in companies to get the benefit of influence without having to shoulder the burden of ownership
• Invest end-to-end across the supply chain, from rights through to distribution
• Systematically invest in direct competitors so that they are all each other’s enemies but are all Tencent’s friend

This strategy has given Tencent access to and / or control of:

• Audience (e.g. QQ, WeChat, Weibo, Snapchat (12%), Kakao (14%), AMC Cinemas – via its stake in Wanda Group),
• Distribution (e.g. Tencent Music, Tencent Video, Tencent Games, Joox, Spotify (10%), Gaana, KuGou, Kuwo, QQ Music, Tencent Video, Tencent Games, Epic Games (40%)
• Rights (e.g. UMG (<10%), WMG (1.6%), Skydance (5%–10%), Supercell (84%), Glumobile (15%), Activision Blizzard (5%), Ubisoft (5%), Tencent Pictures)

The Western tech majors have built similar ecosystems, acquiring the audience and distribution parts of the supply chain (e.g. iOS, YouTube, Instagram, Twitch, Apple Music) but only rarely getting into rights (e.g. Apple TV+ originals) and never systematically investing in competing rights holders.

The Western tech majors may have often tetchy relationships with rights holders but their strategic focus (for now at least) is to be partners for rights holders. Tencent’s strategy is one of command and control: vertical supply chain integration secured through the sort of behind-closed-doors influence that billions of dollars’ worth of equity stakes get you.

Tencent may be the future of digital entertainment

Tencent is building the foundations of being one of – perhaps even the – global digital entertainment powerhouse. By taking stakes in two of the Western major labels, Tencent broke the unspoken gentleman’s agreement that streaming services and rights holders would remain independent of each other in order to ensure the market remains open and competitive. Now the Western tech majors have to choose whether to continue playing the old game or to get a seat at the table of the new game. Back in 2018 MIDiA predicted that over the coming decade Apple, Amazon or Spotify would buy a major record label. Maybe that prediction is not quite so outlandish anymore.

Take Five (The Big Five Stories and Data You Need To Know)

Spotify, price hike: Pricing is streaming’s big problem. With premium revenue growth set to slow and ARPU declining due to family plans, discounts, bundles etc., the business needs another way to drive revenue. Unlike video, where pricing has increased above inflation, music has stayed at $9.99 so has deflated in real terms. On the case, Spotify is reported to be experimenting with increasing family plan pricing by 13% in Nordic markets. An encouraging move, but falls short of what is needed.

Viacom and CBS, old flames: Back in 1999 Viacom and CBS merged in a deal valued at $35.6 billion. Things didn’t work out and the companies parted ways in 2005. Now, 20 years on, they’re at it again. This time CBS is buying Viacom in an all-stock deal valued at $28 billion that would consolidate 22% of US TV audience share. It is a very different move from 1999, when the deal saw the companies on the offensive. This is a defensive move against digital disruption. As Disney and Fox have shown, media companies need to be really big to take on tech companies. Expect more media company strategic mergers and acquisitions over the coming years.

Twitch, user revolt: Amazon’s games video streaming platform Twitch finds itself in an awkward spat with top Fortnite gamer Ninja. Twitch promoted other channels on Ninja’s channel, including inadvertently promoting porn. Ninja promptly left Twitch, lured by Microsoft’s deep pockets to switch allegiance to Mixer. Ironically, the big-pay-for-smaller-audience move is similar to the Top Gear presenters’ switch from the BBC to Amazon. Now Amazon knows how it feels. Before it happens again, it needs to decide whether streamers own their own channels – or whether it does.

Tencent, bleeding edge: Though the impending 30X EBITDA purchase of 10% of UMG has got the world’s attention right now, music has always been something of a side bet for Tencent. Games are more central to Tencent’s strategy. Still smarting from the Chinese authorities suddenly playing regulatory hardball on its domestic games business, Tencent is finding its stride again, including a partnership with chipmaker Qualcomm to innovate on the ‘bleeding edge’ of (mobile) games.

Nike, sneaker revolution: Who said subscriptions had to be digital? Nike has just launched a trainer / sneaker subscription aimed at kids. Well, it’s actually aimed at the parents of kids, with a monthly fee for quarterly, bimonthly or monthly purchases that results in net savings on trainers. Fast-growing kids constantly need new shoes, and this move reduces the risk of brand churn with cost-conscious parents. Footwear business economics aside, the growing legacy of digital content is familiarising consumers with subscription relationships.

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.

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.

How Spotify Can Become A Next Generation “Label”

One of the themes my MIDiA colleague Tim Mulligan (the name’s no coincidence, he’s my brother too!) has been developing over in our online video research is that of next generation TV operators. With the traditional pay-TV model buckling under the pressure of countless streaming subscriptions services like Netflix (there are more than 50 services in the US alone) pay-TV companies have responded with countless apps of their own such as HBO Go and CBS All Access. The result for the consumer is utter confusion with a bewildering choice of apps needed to get all the good shows and sports. This creates an opportunity for the G.A.A.F. (Google, Apple, Amazon, Facebook) to stitch all these apps together and in doing so become next generation TV operators. Though the G.A.A.F. are a major force in music too, the situation is also very different. Nonetheless there is an opportunity for companies such as these to create a joined up music experience that delivers an end-to-end platform for artists and music fans alike. Right now, Spotify is best placed to fulfil this role and in doing so it could become a next generation “label”. I added the quote marks around the word “label” because the term is becoming progressively less useful, but it at least helps people contextualise the concept.

Creating The Right Wall Street Narrative

When news emerged that Spotify was in negotiations to buy Soundcloud I highlighted a number of potential benefits and risks. One thing I didn’t explore was how useful Soundcloud could be in helping Spotify build out its role as a music platform (more on that below). As I have noted before, as Spotify progresses towards an IPO it needs to construct a series of convincing narratives for Wall Street. The investor community generally looks upon the music business with, at best, extreme caution, and at worst, disdain. To put it simply, they don’t like the look of low-to-negative margin businesses that have little control over their own destinies and that are trying to sell a product that most people don’t want to buy. This is why Spotify needs to demonstrate to potential investors that it is working towards a future in which it has more control, and a path to profitability. The major label dominated, 17% gross operating margin (and –9% loss) 9.99 AYCE model does not tick any of those boxes. Spotify is not going to change any of those fundamentals significantly before it IPOs, but it can demonstrate it is working to change things.

The Role Of Labels Is As Important As Ever

At the moment Spotify is a retail channel with bells and whistles. But it is acquiring so much user data and music programming expertise that it be so much more than that. The role of record labels is always going to be needed, even if the current model is struggling to keep up. The things that record labels do best is:

1. Discover, invest in and nurture talent
2. Market artists

Someone is always going to play that role, and while the distribution platforms such as Spotify could, in theory at least, play that role in a wider sense, existing labels (big and small) are going to remain at the centre of the equation for the meaningful future. Although some will most likely fall by the wayside or sell up over the next few years. (Sony’s acquisition of Ministry Of Sound is an early move rather than an exception.) But what Spotify can do that incumbent labels cannot, is understand the artist and music fan story right from discovery through to consumption. More than that, it can help shape both of those in a way labels on their own cannot. Until not so recently Spotify found itself under continual criticism from artists and songwriters. Although this has not disappeared entirely it is becoming less prevalent as a) creators see progressively bigger cheques, and b) more new artists start their career in the streaming era and learn how to make careers work within it, often seeing streaming services more as audience acquisition tools rather than revenue generators.

The Balance Of Power Is Shifting Away From Recorded Music

In 2000 record music represented 60% of the entire music industry, now it is less than 30%. Live is the part that has gained most, and the streaming era artist viewpoint is best encapsulated by Ed Sheeran who cites Spotify as a key driver for his successful live career, saying “[Spotify] helps me do what I want to do.” Spotify’s opportunity is to go the next step, and empower artists with the tools and connections to build all of the parts of their career from Spotify. This is what a next generation “label” will be, a platform that combines data, discovery, promotion (and revenue) with tools to help artists with live, merchandise and other parts of their career.

How Spotify Can Buy Its Way To Platform Success

To jump start its shift towards being a next-generation “label” Spotify could use its current debt raise – and post-IPO, its stock – to buy companies that it can plug into its platform. In some respects, this is the full stack music concept that Access Industries, Liberty Global and Pandora have been pursuing. Here are a few companies that could help Spotify on this path:

• Soundcloud: arguably the biggest artist-to-fan platform on the planet, Soundcloud could form a talent discovery function for Spotify. Spotify could use its Echo Nest intelligence to identify which acts are most likely to break through and use its curated playlists to break them on Spotify. Also artist platforms like BandPage and BandLab could play a similar role.
• Indie labels: Many indie labels will struggle with cash flow due to streaming replacing sales, which means many will be looking to sell. My money is on Spotify buying a number of decent sized indies. This will demonstrate its ability to extend its value chain footprint, and therefore margins (which is important for Wall Street). It could also ‘do a Netflix’ and use its algorithms to ensure that its owned-repertoire over performs, which helps margins even further. But more importantly, indie labels would give Spotify a vehicle for building the careers of artists discovered on Soundcloud. Also the A&R assets would be a crucial complement to its algorithms.
• Tidal: Spotify could buy Tidal, taking advantage of Apple’s position of waiting until Tidal is effectively a distressed asset before it swoops. Though Tidal is most likely to want too much money, its roster of exclusives and its artist-centric ethos would be a valuable part of an artist-first platform strategy for Spotify.
• Songkick: In reality Songkick is going to form part of Access’ Deezer focused full stack play. But a data-led, live music focused company (especially if ticketing and booking can play a role) would be central to Spotify driving higher margin revenues and being able to offer a 360 degree proposition to artists.
• Musical.ly: Arguably the most exciting music innovation of the decade, Musical.ly would give Spotify the ability to appeal to the next generation of music fans. The average age of a Musical.ly user is 20, for Spotify it is 27. Spotify has to be really careful not to age with its audience and music messaging apps are a great way to tap the next generation in the same way Facebook did (average age 35) did by buying up and growing messaging apps. (e.g. Instagram’s average age is 26).
• Pandora: A long shot perhaps, but Pandora would be a shortcut to full stack, having already acquired Ticket Fly, Next Big Sound and Rdio. If Pandora’s stock continues to tank (the last few days of recovery notwithstanding) then who knows.

In conclusion, Spotify’s future is going to be much more than being the future of music retail. With or without any of the above acquisitions, expect Spotify to lay the foundations for a bold platform strategy that has the potential to change the face of the recorded music business as we know it.

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Watch Out Access, Liberty Media Is Building A Full Stack Music Company

Access Industries’ full stack music company has, ahem, company: Liberty Media. With a combined market market cap of $37 billion John Malone’s Liberty group of companies is by anyone’s standards is a serious player. In the world of media and telecoms it is one of the biggest. Liberty grabbed the headlines this week with its $2.7 billion acquisition of a 15% stake in Formula One, with an option to acquire the entire company, possibly by year’s end. It is a typically bold move for a company that makes a habit of acquiring companies and consolidating markets. Over the past 11 years Liberty Media and Liberty Global have spent around $50 billion on acquiring companies such as UK TV operator Virgin Media, Dutch cable company Ziggo and (indirectly via a holding company) major league baseball team Atlanta Braves. So far so good, but where’s the music angle I hear you ask. Well, just a few weeks ago Liberty made a bid for a certain Pandora Media to add to its already extensive collection of music assets.

Read the full post on the MIDiA Blog here.