Emerging markets may be about to change the superstar business

The traditional recorded music business was all about selling units, which naturally meant that the most important markets were not the most populous but the wealthiest. Throughout the late 20th century this created a ‘global’ market that was dominated by North America, Europe and a few others. This is why (among other political reasons) Japan became the biggest Asian music market, rather than China. 

Today’s music business is different. Streaming (particularly via ad-supported and bundles) can monetise large-scale audiences in lower per-capita GDP markets. Suddenly population size matters, and emerging markets become the world’s largest addressable music audience. The emerging markets opportunity has the western music and investment sectors salivating, but there is another layer many have missed: this shift is going to change how western record labels operate, not least by challenging the very notion of the global superstars which they trade in.

Anglo repertoire’s traditional dominance

Prosperity drives prosperity. Where music sales did well, music businesses did well. The music business did best in the US, as well as to a lesser degree in the other big English-speaking markets. These countries also benefited from English being the most exportable language for music. By the start of the 2000s (and excluding the US), of the top 10 music markets, domestic repertoire represented more than half of sales in only Japan and France. Anglo repertoire dominated the global music market and was extending its reach. Most countries across the globe were seeing their domestic repertoire shares falling year-on-year as we entered the new millennium. This of course meant less money feeding back into the local scenes, which meant more opportunity for international superstars to dominate. It was a cultural vicious circle. And then piracy happened.

A decade of piratical wilderness hit domestic repertoire hardest in many countries. For example, in Spain, the best way to keep track of domestic artists was ‘la manta’ chart. Literally ‘the blanket’, referring to the guys who would unfold a blanket on the street corner full of counterfeit CDs. So many local music scenes in lower-income emerging markets essentially remained largely organic and local for a decade. Then came along streaming, and suddenly artists can find their audiences in ways previously unimaginable. In geographically large countries like India and Brazil, touring the country was not a realistic option for most artists, so streaming enabled them to reach across their countries, and beyond, in an instant. 

Streaming, cultural catalyst for local scenes

Streaming’s cultural impact on local scenes was actually first seen at scale in Europe, with German, Dutch and French rap scenes fast emerging that found massive domestic popularity but that rarely export. In the old model, the lack of ‘exportability’ meant no record deal which meant no local scene. Streaming changed that. Another early milestone was the rise of Latin American music, especially Reggaeton. Although some Latin American artists have broken through on the global stage, the most important impact has been the rise of both domestic and regional superstars. This is the future that we are entering.

To expect emerging markets to lap up Anglo repertoire just because they are now streaming not only smacks of cultural imperialism, it also misses the underlying fundamentals of how music scenes and consumption are changing. The steady rise of Anglo repertoire up to the early 2000s has been replaced by a rise in local and regional music. Globalism is becoming replaced by internationalism, homogeneity with diversity. All of which means that global Anglo superstars will feel the pinch. The superstar business was already facing the headwinds of fragmenting fandom, so emerging markets are an accelerant to a pre-existing trend, along with multipliers such as the growth in the number of artists, releases and personalised recommendations. 

Build from within, not from without

None of this, however, necessarily means western labels cannot prosper in emerging markets. After all, they have the resources and expertise that decades of global success bring. They will need to shift their mindset from looking for export markets to territories where they can build new, domestic talent-centred business. A smattering of joint ventures from the western majors in Asia and Africa suggest the first steps are being made, but to succeed these strategies will have to be seen as the central plank of repertoire strategy for emerging markets, not a supporting strand. 

However, the western majors should not assume they will be able to out-perform local and regional labels. In Japan and South Korea, the western majors are minority players, having been unable to unseat the dominant local ‘majors’. Interestingly, both countries are long-term exceptions to Anglo repertoire dominance. Both are high per-capita markets with large economies that can sustain thriving domestic music businesses. Also, Anglo repertoire does not import as well to these markets (despite endless western acts trying to ‘break’ Japan), with international repertoire stuck at around a quarter of sales in both markets at the turn of the millennium. Now in the third decade of the millennium, it is South Korea that is exporting music to the world, from ’Gangnam Style’ through to Black Pink and BTS. This shows that global superstars will still be a long term-feature of the music business – though fewer will be Anglo artists. 

The outlook will thus be defined by:

  • Fewer Anglo global superstars
  • A rise in non-Anglo superstars
  • The rise of regional superstars
  • The rise of local scenes and domestic artists

It is an exciting time for music culture across the globe and we are most likely entering what will be the most culturally diverse era the global recorded music business has ever known.

If you are interested in emerging markets themes, then keep an eye out for a free report MIDiA will be publishing next week. Watch this space!

Assessing the streaming opportunity: You’re doing it wrong

Buoyed by lockdown, streaming enjoyed another strong year in 2020, up 17.1% on 2019 according to MIDiA’s recorded music market shares report. But the revenue slowdown will come in 2021, driven by the maturation of the big music markets (e.g. US, UK, Australia) and the growth of emerging markets. Identifying emerging markets growth as a slowdown factor might sound oxymoronic but the lower ARPU in these markets means that subscriber growth and revenue growth are becoming uncoupled. Look no further than Spotify’s earnings: subscribers were up 25% in 2020 but premium revenue was up just 17%, driven by a premium ARPU decline of -9%. Despite the dampening effect of emerging markets, they will be crucial to future growth – yet much of their potential may go untapped. The reason is all to do with how the music industry measures the opportunity, and that approach needs to change.

Anyone who has seen, or prepared, an investor presentation will be familiar with the total addressable market (TAM) concept. It is the big number that is used to impress investors with just how big the market opportunity is. The framework is also widely used in the music business to illustrate how much growth remains for streaming. But it only tells part of the story, and crucially it can be highly misleading – especially so for the streaming music market.

When MIDiA works on market opportunity projects for clients we always take the next two steps in the TAM approach: serviceable addressable market (SAM) and serviceable obtainable market (SOM). Here’s how it works:

  • TAM is how big the pond you are fishing in is
  • SAM is how many fish there are in the pond
  • SOM is how many fish you are likely to catch

TAM: you’re doing it wrong

The obsession with the TAM can be problematic because, while it results in impressive-sounding numbers, it is not a useful measure for understanding what a company or sector can actually do. If you are one person fishing in a lake, it does not matter how big the lake is nor how many fish there are; you and your fishing rod can only catch so many fish. When Spotify announced its extra 85 markets in February it said it was bringing its service to ‘more than a billion people’. That might give the impression of representing massive future growth, but it is simply the TAM. In fact, the figure is more than the TAM because only a sub-component of that one billion have mobile data plans – the industry’s principal TAM measure. In order to understand where the streaming market can really go, we need to go deeper and lay out the SAM and SOM.

The SAM and SOM layers are even more important for emerging markets than developed markets. There is a tendency to assume that because most people listen to music in some way or another, they are all addressable by music. But this is not the case. Most people, at least in developed markets, read – but that does not mean they all buy books, magazines or newspapers. The same applies for music.

Going beyond the TAM hype

In order to get beyond the TAM hype, MIDiA is building a new TAM, SAM, SOM model for music and we are for the first time going to use it to drive our forecasts (we have previously used a weighted scorecard methodology). One of the key reasons for the shift is to better understand just how much, or little, opportunity can be tapped in emerging markets with currency pricing strategies. Although subscriptions are much cheaper in emerging markets in dollar terms, when they are looked at in affordability terms, a very different picture emerges. Take India: the average headline cost of a subscription is just 15% of what it costs in the US. But when looked at on a purchasing power parity (PPP) basis (i.e. a measure of relative affordability) it is five times more expensive. Therefore in India, one of the world’s lower per-capita GDP markets, music streaming has been priced for the well-off, urban elites. And that is fine, as there are plenty of them. But it means that streaming subscriptions are out of reach for the majority of the population, which means that it is irrelevant to refer to India’s 1.4 billion people when talking about the opportunity, unless prices are reduced by a fifth – something music rights holders, at least Western ones, are currently loathe to do.

To better determine the market opportunity, MIDiA is using the following approach:

  • TAM: A hybrid measure of people with smartphones and data plans (including assessing the ratios between them)
  • SAM: The share of the TAM that is interested to some degree in paying for music
  • SOM: The SAM with additional discounts for factors such as a PPP measure of streaming pricing and urbanisation rates

Although this approach results in much smaller end figures, it is a much more useful way of understanding where music subscriptions are likely to get to in the next five to ten years. It also helps us better segment the emerging market opportunity, with some regions, such as the Middle East and North Africa, coming out much stronger – in large part because of better affordability in relation to per-capita GDP.

I appreciate we are giving away some of MIDiA’s ‘secret sauce’ here, but we think that this is such an important issue that we want to highlight it to as many people as possible. If your research provider (internal or external) is providing you with TAM figures to assess the market opportunity, then they are simultaneously under-selling you and over-selling the market opportunity.

Why Spotify needs Russia

Spotify’s delayed Russia launch finally happened this week. While it did not drive a stock price growth like the Josh Rogan deal did (the stock closed just 1 cent higher than the previous day’s close) it will actually prove much more important in the medium term.

Podcasts are Spotify’s long-term bet, the moon shot that keeps investors excited and that points to a future where Spotify is better able to plot its own destiny without being constrained by record labels. But that future destination does not mean anything if Spotify is unable to maintain strong growth in its core business in the interim. Which is where Russia comes in.

Spotify has an Apple-like problem but chose a very non-Apple solution

Global streaming revenue growth was 22% in 2019 and growth will slow significantly in the COVID-19 impacted 2020. Growth rates however were already slowing due to the maturation of developed western markets, while subscriber numbers were growing faster than revenues, pushing down ARPU. Spotify has the same challenge as Apple.

Apple is the market leader in smartphones but does not own the majority of the market and the overall smartphone market is slowing, which means that iPhone sales have slowed. Apple could have decided to go ‘down market’ and created cheaper devices for less affluent consumers and emerging markets. It decided not to, and instead to start pushing its top-end devices even higher up the market with higher price points. Spotify has taken the opposite approach. Rather than increase prices in high-value markets, it is prioritising lower ARPU emerging markets. Spotify has done so because a) it does not have a diversified product like Apple so is less able to risk slowing sales, and b) its product is not sufficiently differentiated from other streaming services to prevent churn if prices went up.

Betting big on emerging markets

Instead of focusing on maximising revenue growth among existing subscribers, Spotify is rolling the dice on subscriber growth. It keeps telling investors to measure it on growth and market share, and that is exactly the game Spotify has chosen to play. Which is where Russia comes in.

Emerging markets are where the subscriber growth lies: Asia Pacific, Latin America and Rest of World combined will drive 71% of global music subscriber growth between 2019 and 2027. Spotify is already committed to this strategy and is already seeing results. In its Q1 2020 earnings, Latin America and Rest of World were the workhorses of Spotify’s growth during the quarter, accounting for 73% of all new subscribers; one year previously the share was just 30%.

But emerging markets take time to convert, users need to get familiar with the service via ad supported and extended trials before slowly converting to paid, though always at lower rates than in developed markets due to lower spending power. So, Spotify needs to keep expanding the user acquisition funnel which means launching in populous new markets such as Russia.

Russia’s contribution to the global picture is what matters for Spotify

The question many are asking is, has Spotify left it too late for Russia? There is no doubt that 2019 was a big year for streaming in Russia, with revenues growing at 79% to reach $249 million in retail terms, which makes it a sizeable, but not (yet) a large market. By way of comparison, Brazil’s streaming revenues are comfortably more than double that. As of Q1 2020 there were 7.4 million subscribers with Vkontakte and Yandex commanding a combined market share of 80%, so Spotify is entering an established market with well-established indigenous players.

This is not Spotify’s modus operandi and the last time it took this approach was India, which is yet to deliver results. So Russia is unlikely to be a runaway success for Spotify, but it is entirely reasonable for it to expect to pick up three million subscribers there over the next three years, which in turn will help sustain Spotify’s global subscriber growth. This is not about winning in Russia but instead winning globally. Or put another way, Spotify needs Russia more than Russia needs Spotify.

Just what is Tencent’s Endgame?

tencent logoTencent’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.

Spotify Q4 2019: First Signs of the New Spotify

Spotify’s Q4 2019 results reflect another strong quarter and a good year for Spotify. Look a bit deeper, however, and there are the first signs of the new company that Spotify is building – and they point to a very different and much bolder future.

First, here are the headline metrics:

  • 124 million subscribers (exactly in line with MIDiA’s forecast built earlier in the year. In fact, we’ve been pretty good with our quarterly subscriber forecasts throughout the year – see the chart at the bottom of this post).
  • Six million inactive subscribers (flat from Q3 2019).
  • 271 million monthly average users (MAUs) and 153 million ad-supported MAUs, which is a paid conversion rate of 45.8%, down a little from Q3 2019 and Q4 2018 with Rest of World the fastest-growing ad-supported region. This fits with early-stage growth for Spotify in new markets. Unlike markets in Europe and the Americas, Spotify will likely see ad supported remaining a much larger share of the user base long term in markets like India, with less ability to monetise via ad revenue. Spotify needs some big telco deals, especially in India.
  • Subscriber churn was down to 4.8% from 5.2% one year earlier. This is slow but steady progress that helps stabilise Spotify’s business and helps net adds grow faster.
  • Subscriber average revenue per user (ARPU) was €4.65, down 5% on Q4 2018. Spotify stated that much of this decline was down to “the extension of the free trial period across our entire product suite in the quarter”.
  • Total revenue was €6.8 billion, up 29% from 2018 with ad supported just 10% of that.

So much for the old, now in with the new…

Spotify’s uphill journey towards profitability is well documented (net margin fell into negative territory again in Q4 2019, to -€77 million). The circa-70% rights costs base is the core issue here, and rights holders have little (no) desire to go any lower – in fact, publishers want increases. Spotify has had to explore where else it can grow its business with cost bases that are less than 70%. Podcasts, marketing and creator tools are the three publicly stated places where Spotify has placed its bets, and the Q4 results show small and early – but nonetheless crucially important – movements in each:

  • Podcasts: As MIDiA reported last month, Spotify has been growing its audience very quickly and is now the second-most widely used podcast platform. 44.8 million Spotify users now listen to Spotify podcasts, with total usage up 200% year-on-year (YoY). Though podcast revenue is still only around 1% of Spotify’s total revenues, this reflects Spotify’s overall relative underperformance in ad revenue. This needs to be fixed – at least in a few of the bigger digital ad markets – but podcasts have the additional benefit for Spotify of diluting the royalty pot and thus improving gross margin. Current license agreements have a strict cap on how much the pot can be diluted (and labels have no intention of increasing that cap). But by MIDiA’s estimates, even within the current deals, Spotify could potentially shave off up to seven points of music royalty payments. Little wonder, then, that Spotify said this in its earnings report: “Any decision to accelerate our investment in podcast and technology spend should be viewed as an indication of our belief that our strategy is having tangible results. We have gained even more confidence in the data, particularly around the benefits from podcasts, and as a result, 2020 will be an investment year.”

  • Marketing: Spotify launched its paid ad tools for labels and artists in beta in Q4 2019. Early results are positive: +30% click-through and listener conversion rates, and on the sponsored recommendations side, Caroline Music’s Trippie Redd’s fourth album was helped to #1 with sponsored recommendations. Though there has been some pushback from labels feeling that they shouldn’t have to pay to reach their own audiences, Spotify is not doing anything particularly unusual here. The strategy is directly comparable to what Facebook and YouTube do. In fact, record labels spend about a third of what they earn from YouTube on YouTube advertising. The impact of that sort of revenue exchange on Spotify’s commercial model cannot be understated.
  • Creators: 2020 is going to be a massive year for creators. Our early estimates are that artists direct generated around $820 million in 2019, growing more than twice as fast as the overall market. 2019 was another big year for the top of the funnel, but we think the even more interesting space is one step earlier: creator tools. Creator tools are the new top of the funnel, before music even makes it onto streaming services. In fact, we think this might be the music industry’s next big growth area – and Spotify is already betting big, with acquisitions like online collaboration tool Soundtrap and artist marketplace SoundBetter. The music industry was, understandably, preoccupied with Spotify competing with it by signing artists and ‘becoming a label’. Spotify backed off from this strategy, but by focusing its efforts on the creator end of the spectrum it is building the foundations for what a record label of the future will look like. Spotify may just be competing with the labels’ future business before they have even realised it. Spotify’s quote says it all (at least to those who are listening for it): “We will continue to grow and expand the marketplace strategy, including with services such as Soundtrap and Soundbetter.As an example, while still early days, Soundtrap doubled its paying subscriber base in Q4. Expect more innovation of products over the coming years.”

 The margin impact of these three business areas is already being felt: “The largest driver of outperformance stemmed from slight improvement in the non-royalty component of Gross Margin, including payment fees, streaming delivery costs, and other miscellaneous variances.” 

Picks and Shovels

These are the three pillars of the new Spotify – one that will continue to be powered by music, but with profit coming from ancillary services. In the California Gold Rush in the 19th century, the first person to make a million dollars was a man called Samuel Brannan. But he wasn’t a miner; he sold mining equipment. If there is a gold rush, you want to be selling picks and shovels. Spotify has found its picks and shovels.

spotify subscribers by quarter 2019

Music Subscriber Market Shares H1 2019

Music Subscriber Market Shares 2019 MIDiA Research

The global streaming market continues to grow at pace. At the end of June 2019 there were 304.9 million music subscribers globally. That was up 34 million on the end of 2018, while the June 2018 to June 2019 growth was 69 million – exactly the same rate of additions as one year earlier.

Spotify remained the clear market leader with 108 million subscribers, giving it a global market share of 35.6%, EXACTLY the same share it had at the end of 2018 AND at the end of 2017. In what is becoming an increasingly competitive market, Spotify has continued to grow at the same rate as the overall market.

Meanwhile both Apple and Amazon have grown market share, though Apple is showing signs of slowing. At the end of 2017 Amazon (across all of its subscription tiers) had 11.4% global market share, pushing that up to 12.6% by end June 2019 with 38.3 million subscribers. Apple went from 17.3% to 18% over the same period – hitting 54.7 million subscribers, but while Amazon added share every quarter, Apple peaked at 18.2% in Q1 2019 before dropping slightly back to 18% in Q2 2019. Though at the same time, Apple increased market share in its priority market – the US, going from 31% in Q4 2018 to 31.7% in Q2 2019 with 28.9 million subscribers.

Google has been another big gainer, particularly in recent quarters following the launch of YouTube Music, going from just 3% in Q4 2017 to 5.3% in Q2 2019. Google had a well-earned reputation for being an under-performer in the music subscriptions market, a company that did not appear to actually want to succeed. Now, however, Google appears to be far more committed to subscriptions, pushing both YouTube Premium and YouTube Music hard, with a total of 16.9 music subscriptions in Q2 2019, compared to just 5.9 million at the end of 2017.

With the big four all gaining market share, the simple arithmetic is that smaller players have lost it. The share accounted for by all other services fell from 32.8% end-2017 to 28.4% mid-2019. This of course does not mean that all of these services lost subscribers; indeed, most grew, just not by as much as the bigger players. Of the other services, most are large single-market players such as Tencent (31 million – China), Pandora (7.1 million – US) MelOn (5.3 million – South Korea) with Deezer now the only other global player of scale (8.5 million).

In summary, 2019 was a year of growth and consolidation, with the global picture dominated by the big four players and Spotify retaining market share despite all three of its main competitors making up ground. 2020 is likely to be a similar year, though with a few key differences:

  • Key western markets like the US and UK will likely slow from Q4 2019 through to 2020. Meanwhile, emerging markets will pick up pace
  • This could shift market share to some regional players. For example, in Q3 Tencent’s subscriber growth accelerated at an unprecedented rate to hit 35.4 million subscribers. Tencent could be entering the hockey stick growth phase, and at just 2.6% paid penetration there is a LOT of potential growth ahead of it
  • Bytedance could create a new emerging market dynamic with its forthcoming streaming service. Currently constrained to India and Indonesia, Western rights holders may remain cautious about licensing it into Western markets. The unintended consequence is that the staid western streaming market could by end 2020 be looking enviously upon a more diverse and innovative Asian streaming market

These figures and findings are taken from MIDiA’s forthcoming Music Subscriber Market Shares, which includes quarterly data from Q4 2015 to Q2 2019 for 23 streaming services across 30 different markets. The data will be available on MIDiA’s Fuse platform later this week and the report will follow shortly thereafter.

If you are not yet a MIDiA client and would like to know how to get access to this report and dataset, email stephen@midiaresearch.com

Why the Music Industry Needs Bytedance to Disrupt It

Back in September 2018 I suggested that Spotify faced a Tencent risk,with the potential of Tencent launching a competitive offering in markets that Spotify is not yet in. This would effectively divide the world between Spotify in Europe, Americas and some of Asia, and Tencent potentially everywhere else. Since then, Tencent has been distracted by acquiring a 10% stake in Universal Music. The fact it is now reportedly looking for partners to share the investment could point to Tencent getting spooked by slowing streaming growth in the second half of the year, something MIDiA predicted in November last year. Meanwhile, as all this was happening, Bytedance’s TikTok has become a global phenomenon – adding 500 million users in 2019 to reach 1.2 billion in total. On the back of this success, Bytedance has picked up Tencent’s dropped baton and has been working on a subscription service that now looks set for a December launch. The streaming market desperately needs a breath of fresh air; the only question is whether music rights holders feel bold enough to let Bytedance launch something truly market changing.

Change, but remain the same

TikTok has undeniable scale, even though the 1.5 billion figure likely refers to installs rather than active users. While it is certainly bigger than previous music messaging apps, the tech graveyard is full of once-promising, now-dead or near-obsolete ones (Musical.ly, Flipagram, Dubsmash, Ping Tunes, Music Messenger etc). In order to ensure it does not go the way of its predecessors (i.e. burn bright but fast) TikTok must learn how to expand and evolve its content offering but remain true to its users’ core use cases. The smart digital content businesses do this. Facebook and YouTube have both dramatically changed their content mixes since launch, yet fundamentally meet the same underlying use cases they started out with. It is essential for TikTok to ensure it grows with its young audience in the way Instagram has – otherwise it risks following the unwelcome path of its predecessors.

Do first, ask forgiveness later

The three global-scale consumer music apps which are genuinely differentiated from the rest of the streaming pack are YouTube, Soundcloud and TikTok. All three have one thing in common: they did first and asked forgiveness later. Rather than coming to music rightsholders to acquire rights and then building platforms around whatever rights they were able to secure, they built apps, built scale and then entered into serious licensing conversations. Crucially, they did so from a position of strength. The rest managed to secure fundamentally the same sets of rights, resulting in a marketplace of streaming services that lack differentiation. They all have the same catalogue, pricing and device support. They are even competing largely in the same markets. They are forced to differentiate with extras, such as playlists, personalisation and branding. This contrasts sharply with the highly-differentiated streaming video market and is the equivalent of the automotive market telling everyone they have to buy a Lexus but can choose what colour paint they want. Those three disruptors did exactly that: they disrupted, and in doing so fast-forwarded the rate of innovation.

The music market needs Bytedance to do something transformational

This is the context in which Bytedance is building a music subscription service. What the music market really needs is for this to be something that builds on the ethos and use cases of TikTok rather than becoming a cookie-cutter “all you can eat” service. Soundcloud and YouTube both found themselves dumbing down their core propositions in order to launch music subscriptions. Now, with streaming growth slowing, the market needs a disruption more than ever. It needs a Plan B to reinvigorate growth.

It is all too easy to say that rights holders have held back the market, and in some respects they have. But they also have an obligation to protect their rights and core revenue source: streaming. Indeed, there is an argument that YouTube is currently holding back streaming potential by delivering such a compelling free proposition – something that would not have happened if it had licensed first and launched later.

Emerging markets testbed

Music experiences from China, Japan and South Korea look very different from the ones that have come from the West, whether you are looking at Tencent’s music apps or K-pop artists. While there is a temptation to say that these reflect the unique cultural make ups of their respective markets, in all probability much of it will export. Indeed, we already see this happening with the success of BTS and of course TikTok in Western markets. What unifies these experiences is monetising fandom rather than consumption (which is what Western services do). The problem is that it is difficult for music rightsholders to agree with digital service providers (DSPs) on how much of the assets monetised in fandom platforms should bear royalty income, and just how much. This is one of the main stumbling blocks in monetising fandom.

Emerging markets may be the perfect testbed. We have already seen this approach in Brazil, where Deezer launched a prepay carrier-billing-integrated 60% discounted music bundle with local carrier TIM and has enjoyed strong subscriber growth as a result. The fact that Bytedance may launch first in emerging markets such as India, Indonesia and Brazil suggests that this approach may be being followed. If so, there is a chance that we might see something genuinely innovative coming to market.

While this may not yet constitute the Tencent risk model, there nonetheless remains a chance that Bytedance could end up being an emerging market counterweight to the Western market incumbents. The streaming market needs something new to up the innovation ante; let’s hope Bytedance can take on that mantle…

State of the Streaming Nation 3.0: Multi-Paced Growth

MIDiA Research State of the Streaming Nation 3Regular followers of MIDiA will know that one of our flagship releases is our State of the Streaming Nation report. Now into its third year, this report is the definitive assessment of the streaming music market. Featuring 16 data charts, 37 pages and 5,700 words, this year’s edition of the State of the Streaming Nation covers everything from user behaviour, weekly active users of the leading streaming apps, willingness to pay, adoption drivers, revenues, forecasts, subscriber market shares, label market shares, tenure and playlist usage. The consumer data covers the US, Canada, Brazil, Mexico, Australia, Japan, South Korea, Sweden, Denmark, Germany, Austria and the UK, while the market data and forecasts cover 35 markets. The report includes the report PDF, a full Powerpoint deck and a six sheet Excel file with more than 23,000 data points. This really is everything you need to know about the global streaming market.

The report is immediately available to MIDiA clients and is also now available for purchase from our report store here. And – for a very limited-time offer, until midnight 31stJuly (i.e. Wednesday) the report is discounted by 50% to £2,500. This is a strictly time-limited offer, with the price returning to the standard £5,000 on Thursday.

Below are some details of the report.

The 20,000 Foot View: 2018 was yet another strong year for streaming music growth, with the leading streaming services consolidating their market shares. Consumer adoption continues to grow but as leading markets mature, future growth will depend upon mid-tier markets and later on emerging markets. Disruption continues to echo throughout the market with artists direct making up ground and Spotify spreading its strategic wings. Utilising proprietary supply- and demand-side data, this third edition of MIDiA’s State of the Streaming Nation pulls together all the must-have data on the global streaming market to give you the definitive picture of where streaming is.

Key findings: 

THE MARKET

  • Streaming revenue was up $X billion on 2017 to reach $X billion in 2018 in label trade, representing X% of total recorded music market growth
  • Universal Music consolidated its market-leading role with $X billion, representing X% of all streaming revenue
  • There were X million music subscribers globally in Q4 2018 with Spotify, Apple and Amazon accounting for X% of all subscribers, up from X% in Q4 2015
  • With X% weekly active user (WAU) penetration YouTube dominates streaming audiences, representing X% of all of the WAU music audiences surveyed

CONSUMER BEHAVIOUR

  • X% of consumers stream music for free, peaking at X% in South Korea and dropping to just X% in Japan
  • X% of consumers are music subscribers, peaking in developed streaming markets Sweden (X%) and South Korea (X%)
  • Free streaming penetration is high among those aged 16-19 (X%), 20-24 (X%) and 25-34 (X%) while among those aged 55+ penetration is just X%
  • Podcast penetration is X% with pronounced country-level variation, ranging from just X% in Austria to X% in Sweden

ADOPTION

  • 61% of music subscribers report having become subscribers either via a free trial or a $1 for three months paid trial
  • Costing less than $X is the most-cited adoption driver for music subscriptions at X%
  • Today’s Top Hits and the Global Top 50 claim the joint top spot for Spotify playlists among users, both X%
  • As of Q1 2019 there were X YouTube music videos viewed one billion-plus times, of which X were two billion-plus view videos and X were three billion-plus

OUTLOOK

  • In retail terms global streaming music revenues were $X billion in 2018 in retail terms, up X% on 2017, and will grow to $X billion in 2026
  • There were X million music subscribers in 2018, up from X million in 2017 with Xmillion individual subscriptions

Companies and brands mentioned in this report: Alexa, Amazon Music Unlimited, Amazon Prime Music, Anchor, Anghami, Apple, Apple Music, Beats One, CDBaby, Deezer, Deezer Flow, Echo, Gimlet, Google, Google Play Music, KuGou, Kuwo, Loudr, MelOn, Napster, Netflix, Pandora, Parcast, QQ Music, RapCaviar, Rock Classics, Rock This, Sony Music, Soundcloud, SoundTrap, Spotify, Tencent Music Entertainment, Tidal, Today’s Top Hits, T-Series, Tunecore, Universal Music, Warner Music, YouTube

New MIDiA Latin American Streaming Report, in English, Spanish and Portuguese

MIDiA Latin America Streaming reportMIDiA has just published its latest report on the Latin American streaming music market, and we have versions available in English, Spanish and Portuguese.

MIDiA has been tracking the Latin American music market for over five years, including annual consumer data and market metrics.

Our latest report ‘Latin America Streaming Music Market: YouTube and Spotify Take Hold’is written by our long term Latin American music analyst Leo Morel and features data on Mexico, Brazil and the region as a whole.

 

 

The report includes analysis and data on:

  • Consumer adoption of YouTube, Spotify, Apple Music, Deezer and other streaming services
  • Playlist penetration
  • Wider consumer music behaviour eg downloads, CDs
  • Streaming revenues (subscriptions, ad supported music ad supported video)
  • Streaming users (subscriptions, ad supported music ad supported video)

Companies and brands mentioned in the report: Apple, Deezer, Google, iPhone, iTunes, Movistar, Spotify, TIM, Virgin Mobile, Vevo, Vivo, YouTube

The reports are immediately available to our clients, while you can purchase the individual reports here:

The reports each come with PDF, Slides, Excel and infographic.

For any questions please email info@midiaresearch.com

Why India Matters to Spotify, and Why it May Not Deliver

Warner Music and Spotify have been involved in a rather unseemly and very public spat this week over Spotify’s India launch. I’ll leave for someone else, the discussions of the potential implications of a blanket license for songwriter rights in India for an on-demand streaming service. Suffice to say, the words ‘can of worms’ come to mind. Instead, I am going to focus on why India matters so much to Spotify.

The next one billion, perhaps…

Spotify’s Daniel Ek has made much of addressing the next one billion internet users as part of Spotify’s long-term opportunity. Given the fact that China is effectively off the table for now and that sub-Saharan Africa is probably a generation away from being a major streaming market, India is the key component of that next one billion.

Europe and North America accounted for 69% of Spotify’s subscriber growth in 2018. While this was hugely positive for those regions and delivered high-value subscribers – declining ARPU notwithstanding, growth in those regions will slow down towards the end of this year. Next tier markets – Brazil, Mexico, Germany and ideally, though probably not, Japan – will pick up much of the slack. But to sustain the growth rates its shareholders require, Spotify needs other large markets to start building real momentum by 2020/2021. India and the Middle East represent the best options. However, the Middle East already has a strong incumbent – Anghami – and a potentially resurgent Deezer, newly empowered by its exclusive deal with leading local label Rotana. So, India is effectively the last bet on the table.

India is a very competitive but problematic market

India, however, is a problematic market. It has a host of well-backed incumbents – Jio Music, Saavn, and Tencent-backed Gaana – as well as solid performances from Apple and Google. Yet despite all this robust supply, the market heavily underperforms, registering only 1.7 million subscribers in 2018 with a monthly label ARPU of just $0.74. 1.7 million may sound like a solid enough base, but it represents just 0.1% of the total Indian population. There are two key reasons for such weak uptake to date:

  1. Music plays a different role in India:Bollywood and devotional are two of the most widely listened to music genres, neither of which are mainstays of subscription services, nor streaming music consumption in general.
  2. Income levels are low:the average per capita income is $553 a month, with the luxury of a music subscription far out of reach for most Indians, other than urban elites. Spotify’s $1.80 price point in India may sound cheap, but relative to average income, it is 9.3 times more expensive than $9.99 is in the US. So, Spotify would need to be priced at $0.19 to be the same relative affordability as in the US, which coincidentally is the price for its day pass.

The ARPU challenge

The realistic ambition for Spotify should be to drive five to 10 million subscribers over the next five years or so, primarily pulling from urban elites (essentially a re-run of what has been happening in Latin America). While more credible, this falls way short of denting the ‘next one billion’ opportunity. To unlock the scale opportunity, streaming has to look beyond subscriptions, and also beyond ad supported (India’s 270 million free streamers only generated a monthly ARPU of $0.006 in 2018). The scale opportunity is telco bundles. Reliance Communications’s prioritisation of Jio Music makes it the most likely player to capitalise on this in the mid-term.

Spotify needs to find a similar scale partner and somehow convince label partners to accept an ARPU of say $0.08, which would be roughly in line with US telco bundle ARPU on a Purchasing Power Parity (PPP) basis. This would unlock scale without having to tolerate the catastrophically lower ad-supported ARPU rates. But the odds of that happening anytime soon are miniscule. When, and it is a case of when, not if, that time does come, the scale of adoption could be transformative for the global market. In fact, this is exactly where MIDiA thinks the market is heading. In our just published music forecasts, we predict that by 2026 India will have the fourth largest installed base of music subscribers, anywhere in the world.

What matters most, revenue or scale?

The question is whether Spotify can be a major part of the ‘Indian adoption’. Even if it can, the ARPU will be so small that all the current concerns about Spotify’s falling ARPU will look like a storm in a teacup when compared.

Have no doubt, India can, and perhaps will, become a major player in the global streaming market, even helping reshape global music culture. It can also play a major role in Spotify’s future, but the rules of engagement will need to change to unlock that growth, and in doing so Spotify will be sacrificing ARPU. All of this means, Spotify’s investors and partners need to ask themselves, what do they want Spotify to deliver most: strong revenue growth or strong subscriber growth, because India cannot deliver both.