The Artist Marketing Playbook Needs Rewriting

The whole essence of fandom is being turned upside down. An emerging crop of streaming-native artists is finding its audience in a much more targeted and efficient way than via the traditional music marketing. Instead of blowing a huge budget on carpet bombing TV, radio, print, online artists and their teams are finding their exact audiences, focusing on relevance and engagement rather than reach and scale.

The traditional model is great at creating household brands but so much of that brand impact is wasted on the households or household members that are not interested in the artist. Niche is the new mainstream. Targeted trumps reach. But too many label marketers fear that unless they use the mass media platforms, they will not be able to build national and global scale brands. They might be right, at least in part, but this is how the future will look and new marketing disciplines and objectives are required. Here’s some brand new data to show why.

midia index music fandom

Since Q4 2016 MIDiA has been tracking leading TV shows every quarter for awareness, fandom, viewing and streaming. Since the start of 2019 we have been doing the same for artists, with viewing swapped out for listening. These metrics provide a rounded picture of an artist’s full brand impact and consumption, while the ratios between these metrics give a unique view of just how individual artists are performing and of the impact of their respective marketing strategies. Later in the year we will be feeding this data into Index for Music,a unique new dashboard tool to combine with data from social platforms, streaming, searches, reviews and other metrics that create an end-to-end view of artist impact. We have already built our Index for Video tool which you can find out more about here.

In the above chart, using the consumer data component of Index, we have taken a contiguous sample of the five artists that represent the mid-point of each third of the rankings (i.e. top, middle and bottom) for two of these ratios:

  • Fandom-to-streaming, which we call Streaming Conversion
  • Awareness-to-fandom, which we call Brand Conversion

The results show some very clear artist clusters with clear implications for artist success and marketing strategy (remember, these are ratios not rankings of how well streamed or popular they are):

Streaming Conversion

  • Rising streaming stars: These artists have twice as many people streaming them as they do fans. These artists are largely younger, frontline artists that are building their careers first and foremost on streaming platforms. These are artists that have not yet built their fanbases but are being pushed hard by their labels on streaming and elsewhere. Their listening is being driven by promotional activity. Pusha-T is the exception, a much longer established artist.
  • Established artists: These artists are largely well-established artists whose streaming audience penetration correlates with their fanbases. Their listening is largely organic. Dua Lipa is the exception, still relatively early in her career but already with an established fanbase driving organic streaming.
  • Low-streamed superstars: These are artists that built their careers in the pre-streaming era and while are household names, have streaming audiences smaller than their fanbases, not having managed to migrate large shares of their audiences to streaming

 

Brand Conversion

  • Heritage superstars: The majority of people who know these big heritage acts like them. In some ways brand conversion is an easier task for such artists than frontline artists. As they have been around so long, it tends to be the very bests of their catalogue that people know. The fact Queen outranks the Beatles is testament to the way in which the biopic Bohemian Rhapsody has created new relevance for the band.
  • Big brand artists:This eclectic mix of artists are – Julia Michaels excepted – well established artists that have benefited from years of label marketing support, with about half of all people that know them liking them.
  • Over-extended brands: One of the most important changes wrought by streaming and social is that fanbases no longer need to be built via mass media. However, big artists, especially major label ones, still rely upon mass media to become global stars. The result is a lot of wasted marketing budget. In this group, which is dominated by Hip Hop artists, more than half of the people who have been made aware of the artists do not like them. The marketing dollars spent on reaching those people has not converted.

We will be diving much deeper into this data in a forthcoming MIDiA client report and also at our next free-to-attend (depose required) event in central London: Managing Fandom in a Fragmented Content Landscape. Join us at the event to get a sneak peak of MIDiA’s artist data and our Index tool. All attendees will get a free copy of the presentation. In addition to the data key note there is a panel featuring people from Kobalt, TikTok, ATC and more to be confirmed. Sign up now, only limited places remain!

See you there!

Music Sync: A Market Ripe for Change

Florence and the Machine’s performance of Jenny of Oldstones, which appeared over the closing credits of the April 21st HBO’s Game Of Thrones episode, has registered the most Shazams in 24 hours ever.The placing of a song has always had the ability to transform its fortunes, and that has never been more the case than now. The music sync market is booming, with the number of syncs higher than ever and more platforms and productions seeking new music. It is also a market with a host of structural challenges, which is the focus of MIDiA’s latest major new report on the music sync market – Music Sync Market Assessment: A Market Ripe for Change. Clients can access here and non-clients can purchase here from our report store.

We interviewed senior sync market executives of labels, publishers, sync agencies, sync tech, TV, games etc. for the report to help create the definitive take on this important but problematic sector. Here are some brief highlights of the report.

midia music sync tech landscape

The music sync market has long been a source of high-margin income for rights holders as well as a means for helping break artists, with a well-placed, successful track having the ability to transform the career of an emerging artist. The growth of channels such as games, social video, and online video (like Netflix), and the corresponding renaissance in TV drama production, have combined to create an unprecedented volume of demand for the sync marketplace. A wave of tech start-ups has followed, each trying to fix parts of an otherwise very ad hoc and relationships-based industry.

Total sync revenues grew by 11% in 2017, but remain a minority component of music publisher revenue and have even less value for labels. Despite a boom in demand, much of the opportunity remains untapped. This is largely because the sync market is a complex, interconnected web of closely guarded personal relationships that operate on tradecraft, reputation and personal connections. It is a marketplace that technology has only brushed the edges of – but when it has, the results have been mixed. For example, streaming playlists have quickly become an established tool used by music supervisors, but on the other hand, many of the new start-ups addressing the space have failed to gain meaningful traction. In part this is because it is a sector that has modest appetite for change. Indeed, with personal reputations an industry currency, and lack of pricing transparency a well-used tool for securing price premiums, there is more internal incentive to remain in stasis than to embrace innovation.

A host of technology companies have come to market attempting to improve the music sync workflow, but many require pre-cleared rights. This is something that would undoubtedly accelerate the market but that rightsholders are typically unwilling to agree to because:

  1. They need individual creator approval
  2. They do not want to cede negotiating power

The music sync market has managed to remain strong by changing far less than most other parts of the music business. However, strategic shifts by newer, large-scale buyers such as Netflix, coupled with wider technology shifts, mean that the sync market will not be able to resist change for much longer.

Micro licensing (e.g. YouTube content) represents a major opportunity, especially if Facebook manages to execute on its thus-far underwhelming social music strategy. However, that requires a technology solution (e.g. Qwire, OCL) and simply cannot work on the same highly-manual and very slow mechanisms that mainstream sync operates with. Unless a tech solution is created, it will be royalty-free music providers like Epidemic Sound that will take most of the scale opportunity.

To read much more on the music sync market, check out the report here (Clients)   (Non-clients).

Companies and brands mentioned in the report:A+G Sync, Amazon, Beggars Group, Cue Songs, DISCO, Electronic Arts, Epidemic Sound, HBO, Jingle Punks, Jukedeck, Lickd, Musicbed, Music Gateway, MXX, Netflix, OCL, Proctor and Gamble, Qwire, Reverbnation, Songtradr, Sony/ATV, Soundvault, SyncFloor, Synchtank, Tunefind, Universal Music, Warner Chappell, YouTube

Creator Support: A New Take on User Centric Licensing

User-centric licensing (i.e. stream pay-outs based on sharing the royalty income of an individual user split across the music they listen to) has stimulated a lot of debate. I first explored the concept of user-centric licensing back in 2015and stirred up a hornet nest, with a lot of very mixed feedback. The big issue then, as now, was that it is a very complex concept to implement which may well only have modest impact on a macro level but may also have the unintended consequence of worsening income for smaller artists. Fans of smaller artists tend to be more engaged listeners who generate a larger number of streams spread across a larger number of artists. The net result could be lower average income for smaller indie artists, and higher income for mainstream pop acts who have listeners with lower average streams spread across a smaller number of artists. Since then, Deezer has actively explored the concept and it continues to generate industry discussion. It is unlikely there will ever be consensus on how user-centric licensing should work, but the underlying principle of helping artists earn from their fans remains a valid one. So, here is an alternative approach that is both pragmatic and far simpler to implement: creator support. A new way to solve an old problem.

Creator support is gaining traction across the digital content world

In the on-demand world, monthly streaming income for creators can be both modest and unpredictable. Amuse’s Fast Forward,YouTube’s channel memberships and Patreon are illustrations of how the market is developing solutions to give content creators (especially artists, podcast creators, YouTubers and Twitch streamers) an effective way to supplement income. But it is Epic Game’s ‘Support-A-Creator’ model that provides the best example of an alternative to user-centric licensing. Epic Games enables Fortnite players to choose a favourite creator to support (which typically means YouTube and Twitch Fortnite players). Epic Games then contributes the equivalent of around 5% of all in-app purchases that the gamer makes to that creator.

How creator support can work for music streaming

Using Spotify and a selection of artists as an illustration, here is how a creator support approach could work for streaming music:

  • All Spotify subscribers get given the option to ‘support’ up to two of their favourite artists
  • For each artist that a subscriber supports, 1% of the record label royalties derived from that subscriber’s subscription fee goes directly to the artist, regardless of how many streams that user generates
  • The label of each artist then pays 100% of this ‘support’ income

creator support midia streaming model

To illustrate how creator support can work, we created a model using Spotify and a selection of diverse artists. We assumed that 75% of Spotify subscribers support an average of 1.5 artists. In the above chart we took five contemporary frontline artists across major labels and label services, and we assumed that 10% of their monthly Spotify listeners support them. Factoring the different types of deals and royalty rates these artists have, as well as the ratios between average monthly streams and monthly listeners, there is an intriguing range of revenue impact that creator support delivers. For Taylor Swift (on a major deal, but one in which she held the negotiating whip hand), Lauv and Rex Orange Country (both on Kobalt label services deals) the creator support income is between 18% and 22% of their existing streaming royalties from Spotify. For Billie Eilish and Circa Waves, both on their first major label deals, creator support income would represent a much larger 78% and 65% of streaming royalties. The rate is higher for Billie Eilish as she has a higher streams-to-listeners ratio.

Artists get paid more with minimal impact on the wider royalty pot

Putting aside the irony that this approach would help put many major label artists more on par with what label services and independent artists earn from streaming, the clear takeaway is that creator support can be an effective way of fans ensuring that some of their streaming spending directly benefits their favourite artists. Because we have structured the model to be just 1% per artist (rather than Fortnite’s 5%) the net impact on the total label royalty pot is minimal. Applying the above assumptions to Spotify’s 2018 label payments, the royalty pot (and therefore per-stream rates) would reduce by just 1.13%, meaning that non-supported artists would feel negligible impact.

We think the creator-approach model enables labels and streaming services to deliver on the ambition of user-centric licensing without the complexities and unintended inequities. But perhaps most importantly, it helps put artists and fans closer together, bringing the pledging model to the mainstream.

Let us know what you think. Also, we’ve added the excel model to this post for you to download and test your own assumptions against it.

MIDiA Research Streaming Creator Support Model 4 – 19

Here’s How Spotify Can Fix Its Songwriter Woes (Hint: It’s All About Pricing)

Songwriter royalties have always been a pain point for streaming, especially in the US where statutory rates determine much of how songwriters get paid. The current debate over Spotify, Amazon, Pandora and Google challenging the Copyright Royalty Board’s proposed 44% increase illustrates just how deeply feelings run. The fact that the challenge is being portrayed as ‘Spotify suing songwriters’ epitomises the clash of worldviews. The issue is so complex because both sides are right: songwriters need to be paid more, and streaming services need to increase margin. Spotify has only ever once turned a profit, while virtually all other streaming services are loss making. The debate will certainly continue long after this latest ruling, but there is a way to mollify both sides: price increases.

spotify netflix pricing inflation

When Spotify launched in 2008, the industry music standard for subscription pricing was $9.99. So, when its premium tier was launched in May 2009, it was priced at $9.99. Incidentally, Spotify racked up an initial 30,000 subscribers that month – it has come a long way since. But now, nearly exactly ten years on, Spotify’s standard price is still $9.99. Its effective price is even lower due to family plans, trials, telco bundles etc., but we’ll leave the lid on that can of worms for now. Over the same period, global inflation has averaged 2.95% a year. Applying annual inflation to Spotify’s 2009 price point, we end up at $13.36 for 2019. Or to look at it a different way, Spotify’s $9.99 price point is actually the equivalent of $7.40 in today’s prices when inflation is considered. This means an effective real-term price reduction of 26%.

Compare this to Netflix. Since its launch, Netflix has made four major increases to its main tier product, lifting it from $7.99 in 2010 to $12.99 in 2019. Crucially, this 63% price increase is above and beyond inflation. An inflation-adjusted $7.99 would be just $10.34. Throughout that period, Netflix continued to grow subscribers and retain its global market leadership, proving that there is pricing elasticity for its product.

Spotify and other streaming services are locked in a prisoner’s dilemma

So why can’t Spotify do the same as Netflix? In short, it is because it has no meaningful content differentiation from its competitors, whereas Netflix has exclusive content and so has more flexibility to hike prices without fearing users will flock to Amazon. If they did, they’d have to give up their favourite Netflix shows. Moreover, Netflix has to increase prices to help fund its ever-growing roster of original content, creating somewhat circular logic, but that is another can of worms on which I will leave the lid firmly screwed.

If Spotify increases its prices, it fears its competitors will not. Likewise, they fear Spotify will hold its pricing firm if any of them were to increase. It is a classic prisoner’s dilemma.  Neither side dare act, even though they would both benefit. Who can break the impasse? Labels, publishers and the streaming services. If they could have enough collective confidence in the capability of subscriptions over free alternatives, then a market-level price increase could be introduced. Rightsholders are already eager to see pricing go up, while streaming services fear it would slow growth. Between them, there are enough carrots and sticks in the various components of their collective relationships to make this happen.

However – and here’s the crucial part – rightsholders would have to construct a framework where streaming services would get a slightly higher margin rate in the additional subscriber fee. Otherwise, we will find ourselves in exactly the same position we are now, with creators, rightsholders, and streaming services all needing more. When Netflix raises its prices it gets margin benefit, but under current terms, if Spotify raises prices it does not.

The arithmetic of today’s situation is clear: both sides cannot get more out of the same pot of cash. So, the pot has to become bigger, and distribution allocated in a way that not only gives both sides more income, but also allows more margin for streaming services.

Streaming music in 2019 is under-priced compared to 2009. Netflix shows us that it need not be this way. A price increase would benefit all parties but has to be a collective effort. Where there is a will, there is a way.

Kobalt is a Major Label Waiting to Happen

Disclaimer: Kobalt is a label, a publisher as well as a Performing Rights Organisation (PRO). This post focuses on its label business, but does not presume to overlook its other aspects.

Lauv Kobalt

News has emerged of Kobalt potentially looking to raise an additional $100 million of investment, following a 2017 round of $89 million and a 2015 $60-million round led by Google Ventures. Kobalt has been the poster child for the changing of the guard in the music business, helping set the industry agenda by pursuing a creators-first strategy while

building an impressive roster of songwriters and artists at a scale that would have most indies salivating. But it does not have its sights set on being the leading player of the indie sector, instead playing for the big game: Kobalt is the next major label waiting to happen.

So, what makes Kobalt so different? In some respects, nothing. Most of what Kobalt is doing has been done before, and there are others plotting a similar path right now (e.g. BMG, United Masters, Hitco). What matters is how it is executing, how well backed it is and the scale of its ambitions:

  • Moving beyond masters: In the old model, artists signed away their rights in perpetuity to record labels, with nine out of ten of them permanently in debt to the label not yet having paid off their advances. The new model (i.e. label services) pursued by the likes of Kobalt, reframes the artist-label relationship, turning it one more akin to that of agency-client. In this rebalanced model artists retain long-term ownership of their copyrights and in return share responsibility of costs with their label. This approach, coupled with transparent royalty reporting, lower admin costs and continual tech innovation has enabled Kobalt to build a next-generation label business.
  • Laser focus on frontline: In a label services business the entire focus is on frontline, as there isn’t any catalogue. An artist signed to such a label therefore knows that they have undivided attention. That’s the upside; the downside is that the label does not have the benefit of a highly-profitable bank of catalogue to act as the investment fund for frontline. This means that a label like Kobalt often cannot afford the same scale of marketing as a major one, which helps explain why Kobalt is looking for another $100 million. However, there is a crucial benefit of being compelled to spend carefully.
  • Superstar niches: In the old model, labels would (and often still do) carpet-bomb TV, radio, print and digital with massive campaigns designed to create global, superstar brands. Now, labels can target more precisely and be selective about what channels they use. Kobalt’s business is based around making its roster superstars within their respective niches, finding a tightly-defined audience and the artists they engage with. The traditional superstar model sees an artist like a Beyoncé, Ed Sheeran or a Taylor Swift being a mass media brand with recognition across geographies and demographics. The new superstar can fly under the radar while simultaneously being hugely successful. Take the example of Kobalt’s Lauv, an artist tailor-made for the ‘Spotify-core’ generation that hardly registers as a global brand, yet has two billion audio streams, half a billion YouTube views and 26 million monthly listeners on Spotify. By contrast, heavily-backed Stormzy has just three million monthly Spotify listeners.
  • Deep tech connections: The recent WMG / Spotify spat illustrates the tensions that can exist between labels and tech companies. Kobalt has long focused on building close relationships with tech companies, including but not limited to streaming services. This positioning comes easier to a company that arguably owes more to its technology roots than it does its music roots. The early backing of Google Ventures plays a role too, though with some negative connotations; some rights holders fear that this in fact reflects Google using Kobalt as a proxy for a broader ambition of disrupting the traditional copyright regime.
  • A highly structured organisation: One of the key differences between many independent labels and the majors is that the latter have a much more structured organizational set up, with large teams of deep specialisation. This is the benefit of having large-scale revenues, but it is also a manifestation of ideology. Most independents focus their teams around the creative end of the equation, putting the music first and business second. Major labels, while still having music at their core, are publicly-traded companies first, with corporate structures and a legal obligation on management to maximise shareholder value. Kobalt has undoubtedly created an organisational structure to rival that of the majors.

Earned fandom

Kobalt is a next-generation label and it is plotting a course to becoming a next generation-major. That success will not be reflected in having the rosters of household names that characterise the traditional major model, but instead an ever-changing portfolio of niche superstars. The question is whether the current majors can respond effectively; they have already made big changes, including label services, JV deals, higher royalty rates, etc.

Perhaps the most fundamental move they need to make, however, is to understand what a superstar artist looks like in the era of fragmented fandom. The way in which streaming services deliver music based on use behaviours and preferences inherently means that artists have narrower reach because they are not being pushed to audiences that are relevant. This shifts us from the era of macro hits to micro hits ie songs that feel like number one hits to the individual listener because they so closely match their tastes. This is what hits mean when delivered on an engagement basis rather than a reach basis. Quality over quantity.

Majors can still make their artists look huge on traditional platforms, which still command large, if rapidly aging audiences. But what matters most is engagement, not reach. It is a choice between bought fandom and earned fandom. In the old model you could build a career on bought fandom. Now if you do not earn your fandom, your career will burn bright but fast, and then be gone.

What the 2018 Success of the Beatles for UMG Tells Us About Where Streaming is Heading

Universal Music Group recorded an impressive €6 billion in revenue in 2018, bolstering a JP Morgan valuation of $50 billion. No doubt, UMG is enjoying a purple patch, riding and driving the wave of recorded music industry growth. But as with an any industry transition, progress is not linear and the past can have a lingering embrace. In UMG’s earnings report lies a small but crucial detail that point to the fact that the music industry’s path ahead may not be quite as straight as it first appears: the continued success of the Beatles.

The Beatles were UMG’s fourth best seller in 2018 

On page 13 of Vivendi’s year-end financial report, the Beatles’ ‘White Album’ is listed as UMG’s fourth best seller in 2018. It finished ahead of frontline artists including XXXTentacion, Migos and Ariane Grande. Above it were Drake’s ubiquitous ‘Scorpion’, Post Malone’s ‘Beerbongs & Bentleys’ and the soundtrack to ‘A Star is Born’. On the one hand this reflects the continued importance of the Beatles as a revenue driver for UMG. The Beatles, along with Abbey Road, were among the ‘crown jewels’ that UMG gained when it acquired EMI in 2012, so it is encouraging for UMG that the Beatles continue to deliver top tier revenue. However, Beatles revenue is not only a very different thing from Drake revenue, it also highlights the earnings divide between physical sales and streaming.

Streaming’s twin promise

The long-term promise of streaming is the combination of:

  1. Delivering larger audiences
  2. Replacing near-term, large volume revenue for a longer-term, annuity-like income model

Item number two happened very quickly; item number one is still in progress, but moving sufficiently enough to ensure many artists are now able to earn meaningful streaming income. However, we are not yet at our streaming destination, which is illustrated by the prominence of the Beatles in UMG’s 2018 sales. A ranking that owes little to streaming.

The Beatles are not a streaming powerhouse

According to the BPI, music from the 1960s accounted for just 3.6% of catalogue streams in the UK, which represents about 2% of all streams. Let’s assume the Beatles account for 40% of those streams – which is probably a generous assumption, this would mean the Beatles represented 0.8% of the $9.6 billion of streaming revenue in 2018, which translates as $79 million, which in turn equates to 2.7% of UMG’s 2018 streaming revenue. A meaningful amount for sure for a single artist, but not that significant in the greater streaming scheme of things. Therefore, the Beatles did not get to be UMG’s fourth biggest seller through streams. Instead, it did so through physical sales.

midia beatles umg

The main release in 2018 was the 50th Anniversary edition of the White Album. This premium physical release includes a $25 edition, right through to a $145 deluxe box set. With such high-unit prices, only small numbers need be sold to generate meaningful revenue.

To illustrate the point, let’s assume UMG collects around $15 of the $25 retail price and $100 of the $145 edition. To generate $7.5 million of label revenue, UMG would need to sell just half a million copies of the $25 edition and only 75,000 of the Boxsets. To generate the same $7.5 million from streaming UMG would need to have 62.5 million people each streaming 15 tracks from the album. $7.5 million is incidentally also roughly the amount a label would earn from selling a million copies of a standard priced album.

Streaming cannot yet match CD-era album revenue metrics

This gets to the heart of the matter of why streaming is creating, alongside a welcome growing body of middle-tier artists, a small handful of megastars. To replicate physical sales success, an artist must have exceptional streaming success. To replicate standout physical success requires as yet ungraspable streaming success.

For example, the number one album in the US in 2000 – NYSNC’s ‘No Strings Attached’ – sold over nine million copies, which would require 600 million people each streaming it all once — roughly 8.5 billion streams — to generate the same income. That is more streams than the entirety of Drake’s 2018 Spotify streams across the entire planet – Drake was Spotify’s most streamed artist. In short, streaming is currently large enough to make record labels grow, but not yet vast enough to create artist-level revenue on the same scale that that the CD peak once did.

Longer-term revenue may, or may not, add up.

The counter argument is that over a number of years the revenue will add up to the equal. But even with that assumption, an album would need to generate around a billion streams a year over eight years to replicate the success of NSYNC’s ‘No Strings Attached’. No easy task when you factor in the dynamics of streaming consumption i.e. playlists replacing albums, new music being pushed over catalogue etc.

None of this is to suggest that streaming is failing, nor that UMG’s revenues are in question. Both are doing well. Instead, it is evidence that we still have much distance to go with streaming before we can start seeing artist-level successes on a par with the peak of the industry. Though of course streaming-level success needs measuring differently than CD-era success, so these comparisons provide context rather than performance targets.

Will there ever be another Beatles’ greatest hits?

One intriguing post-script to all of this is that with download revenue falling by 15% in 2018, and physical by 7%, the days of large-scale album sales are long gone. When this is considered alongside the Beatles’ under-representation on streaming, the elephant in the room is whether UMG would ever risk releasing a Beatles greatest hits album for fear of underwhelming sales numbers damaging the Fab Four’s legacy. The last greatest hits was ‘1’ back in 2000 during the EMI years. Might it just be that UMG bought the Beatles too late ever to release their last ever greatest hits?

Just Who Would Buy Universal Music?

Vivendi continues to look for a buyer for a portion of Universal Music. Though the process has been running officially since May 2018, the transaction (or transactions) may not close until 2020. In many instances, dragging out a sale could reflect badly, suggesting that the seller is struggling to find suitable buyers. But in the case of UMG it probably helps the case. A seller will always seek to maximise the sale price of a company, which means selling as close to the peak as possible. It is a delicate balance, sell too early and you reduce your potential earnings, sell too late and the price can go down as most buyers want a booming business, not a slowing business. In the case of UMG, with institutional investors looking for a way into the booming recorded music business, UMG is pretty much the only game in town for large scale, global institutional investors.

In this sellers’ market, banks have been falling over themselves to say just how valuable UMG could be, with valuations ranging from $22 billion to $33 billionand Vivendi even suggesting $40 billion. Meanwhile, recorded music revenues continue to grow — up 9.0% in 2017, and up 8.2% in 2018 according to MIDiA’s estimates. 2019 will likely be up a further 6%, all driven by streaming. With UMG’s market share (on a distribution base) relatively stable, the market growth thus increases UMG’s valuation. This in turn increases Vivendi’s perceived value, and that is the crux of the matter.

The role of Bolloré Group

Vivendi board member and major shareholder Vincent Bolloré was Vivendi chairman until April 2018, when he handed power to his son Yannick, one month before he was reportedly taken into police custody for questioning as part of an investigation into allegations of corrupt business practices in Africa. Bolloré senior remains the chairman and CEO of Bolloré Group, which retains major shareholdings in Vivendi. Bolloré Group’s Vivendi holdings will inherently be devalued by a sale of prize asset UMG, which is a key reason why only a portion of the music group is up for sale. But, even selling a portion of UMG will have a negative impact on Vivendi’s valuation and thus also on Bolloré Group’s holdings. So, the sale price needs to be high enough to ensure that Bolloré Group makes enough money from the sale to offset any fall in valuation. Hence, dragging out the sale while the streaming market continues to boom. All this also means the sale is of key benefit to Bolloré Group and other Vivendi investors. It is perhaps as welcome as a hole in the head to UMG. Little wonder that some are suggesting UMG is markedly less enthusiastic about this deal than Vivendi is.

vivendi umg potential buyers

All of which brings us onto which company could buy a share of UMG. These can be grouped into the four key segments shown in the chart above. Normally, higher risk buyers (i.e. those that could negatively impact UMG’s business by damaging relationships with partners etc.) would not be serious contenders but as this is a Vivendi / Bolloré Group driven process rather than a UMG driven one, the appetite for risk will be higher. This is because the primary focus is on near-term revenue generation rather than long-term strategic vision. Both are part of the mix, but the former trumps the latter. Nonetheless, the higher-risk strategic buyers are unlikely to be serious contenders. Allowing a tech major to own a share of UMG would create seismic ripples across the music business, as would a sale to Spotify.

Financial investors

So that leaves us with the lower-risk strategic buyers, and both categories of financial buyers. Let’s look at the financial buyers first. Private equity (PE) is one of the more likely segments. We only need to look back at WMG, which was bought by a group of investors including THL and Providence Equity before selling to Len Blavatnik’s Access Industries in 2011 for $3.3 billion. Private equity companies take many different forms these days, with a wider range of investment theses than was the case a decade ago. But the underlying principle remains selling for multiples of what was paid. Put crudely, buy and then flip. The WMG investors put in around half a billion into the company, but a six-fold increase is less likely for UMG, as the transaction is taking place in a bull market while WMG was bought by Providence and co in a bear market. Where the risk comes in for UMG is to whom the PE company/companies would sell to in the future. At that stage, one of the current high-risk strategic companies could become a potential buyer, which would be a future challenge for UMG. The other complication regarding PE companies is that many would want a controlling stake for an investment that could number in the tens of billions.

Institutional investors such as pension funds are the safest option, as they would be looking for long-term stakes in low-risk, high-yield companies to add to their long-term investment portfolios. This would also enable Vivendi to divide and rule, distributing share ownership across a mix of funds, thus not ceding as much block voting power as it would with PE companies.

Strategic investors

The last group of potential buyers is also the most interesting: lower risk strategic. These are mainly holding companies that are building portfolios of related companies. Liberty Media is one of the key options, with holdings in Live Nation, Saavn, SiriusXM, Pandora, Formula 1 Racing and MLB team Atlanta Braves. Not only would UMG fill a gap in that portfolio, Liberty has gone on record stating it would be interested in buying into UMG.

Access Industries is the one that really catches the eye though. Alongside WMG, the Access portfolio includes Perform, Deezer and First Access Entertainment. On the surface Access might appear to be a problematic buyer as it owns WMG. But compared to many other potential investors, it is clearly committed to music and media, and is likely to have a strategic vision that is more aligned with UMG’s than many other potential suitors.

There is of course the possibility of being blocked by regulators on anti-competitive grounds. However, at year end 2017 WMG had an 18% market share, while UMG had 29.7% (both on a distribution basis). If Access acquired 25% of UMG, respective market shares would change to 25.4% for WMG and UMG for 22.2% (still slightly ahead of Sony on 22.1%). It would mean that the market would actually be less consolidated as the market share of the leading label (WMG) would be smaller than UMG’s current market leading share. While the likes of IMPALA would have a lot to say about such a deal, there is nonetheless a glimmer of regulatory hope for Access. Especially when you consider the continued growth of independents and Artists Direct. All of which point to a market that is becoming less, not more, consolidated.

The time is now

Whatever the final outcome, Bolloré Group and Vivendi are currently in the driving seat, but they should not take too much time. 2019 will likely see a streaming growth slowdown in big developed streaming markets such as the US and UK, and it is not yet clear whether later stage major markets Germany and Japan will grow quick enough to offset that slowdown in 2019. So now is the time to act.

Artists Direct and Streaming the Big Winners in 2018

With less than two weeks of 2018 left, the die is largely cast for the year, but we’ll have to wait at least a couple more months for the major labels to announce their results (though WMG still hasn’t declared its calendar Q3 results), and then another month or so for the IFPI numbers. So, in the meantime, here are MIDiA’s forecasts for 2018 based on the first three quarters of the year and early indicators for Q4.

midia research 2018 music revenues and market shares

To create our end of year revenue estimate, we collected data from record labels, national trade associations and also confidential data from the leading Artist Direct / DIY platforms. We plugged this data into MIDiA’s Music Market Share model and benchmarked against quarterly and full year 2017 growth.

The headline results:

  • Recorded music revenue will hit $18.9 billion this year: This represents an increase of 8.2% on 2017 which is a slight lower growth rate than 2016–2017, which was up 9%. However, net new revenue ($1.4 billion) – is almost exactly the same amount as one year previously. The recorded music market appears to be settled into a steady, strong growth pattern.
  • Streaming revenue up to $9.6 billion: The 41% growth rate of 2017 may be gone, replaced by 29%, but the absolute amount of new revenue generated was, as with the recorded music total, the same as 2017 $2.2 billion. There was enough growth in the big mature streaming markets – the US especially – to ensure that streaming continued to plot a strong course in 2018. Though the fact that total revenues grew by $0.8 billion less than streaming revenue, indicates the pace at which legacy formats continue to decline.
  • Artists Direct the big winners: MIDiA was the first to quantify the global revenue contribution of the Artists Direct (i.e. Independent Artists, DIY etc.) last year when we published our annual market shares report. Now we can report that the spectacular growth registered by this segment continued in 2018. Total Artist Direct revenue was $643 million, up an impressive 35% on 2017, i.e. more than three times faster than the market. Unlike the rest of the market, Artists Direct revenue growth is accelerating in both percentage and absolute terms, with market share up from 2.7% in 2017 to 3.4% in 2018. (It’s worth noting that only a portion of Artists Direct revenue is measured by the IFPI. Categories such as at-gig CD sales aren’t captured by either the labels or measurement companies that national trade associations depend upon to measure the market. So, expect the IFPI’s global recorded music total to come in closer to $18.6 billion).

It was another great year for the recorded music business, with streaming consolidating its role as industry engine room. Here are the key takeaways for 2019:

  • Global recorded revenues will grow once again in 2019 – this rebound has a good number of years left in it. Even if label revenues hit $25 billion (where the market was at in 2000 before the decline) in real terms (i.e. factoring in inflation etc.), that would actually be around half the actual value. While it is not realistic to expect a $50 billion market, getting towards the inflation-reduced $25 billion is certainly a realistic target.
  • Streaming growth will slow in the big mature markets (US, UK), but impact will be offset by growth in markets such as Japan, Germany, Brazil, Mexico. Overall market growth, though still strong, will be slower.
  • 2019 will be a coming of age year for Artists Direct, label services companies, JVs and other alternative models that have been establishing themselves in recent years. It’s never been a better time to be an artist, as long as you and / or your management are clued up enough to know what to ask for.

Independent Labels Grew Global Market Share to 39.9% in 2017

The global independent label trade body WIN has just published the third edition of the Worldwide Independent Market report. You can download the entire report for free here. As regular readers will know, MIDiA Research has conducted this study on behalf of WIN for each of the three editions, collecting an unparalleled volume of data from many hundreds of independent record labels right across the globe. This highly detailed, company-level data is provided to us on a strictly confidential basis and enables us to create a precise and authoritative view of the global independent sector. Think of it as the IFPI Recorded Industry in Numbers for the independent sector, but with the additional benefit of greater detail on how the labels operate. This year MusicAlly wrote the text of the report.

‘Why is this report necessary?’ you may ask, ‘surely you can just deduct the major record labels’ revenue from the IFPI global total. There are two key reasons why this is essential:

  1. There is additional Artists Direct revenue that the IFPI cannot and does not track, such as CDs and vinyl sold directly at gigs by bands, and artists selling directly to fans on DIY platforms such as Bandcamp and Pledge Music
  2. Large portions of independent label revenue are distributed via major record labels, or wholly owned major record label distributors, such as the Orchard (which is owned by Sony Music). This revenue appears in the major labels’ financial statements and thus appears as major record label revenue

In the Worldwide Independent Market report, we add in the portion of Artist Direct revenue that is not tracked by the IFPI and we additionally carve out the independent label revenue that is distributed via majors and allocate this back to the independent sector. We are able to do this because the independent labels tell us how much of their revenue is distributed via majors, and which companies they use for the distribution. This added up to $1.5 billion in 2017.

So, methodology out of the way, here are the headlines.

midia wintel indie market share

Independent revenue grew by 11.3% in 2017 to reach $6.9 billion, which compares to a total growth of 9.7% for the major labels, which in turn meant that the independents’ share of global revenue grew from 39.6% in 2016 to 39.9% in 2017.

midia wintel indie market share

Growth was not evenly distributed though. For example, Brazilian independent revenue grew by 30% while in Japan it fell by 1%, which resulted in a slight growth in major share in Japan, a market in which the western majors have long been a minority player (market share was just 36.6% in 2017).

As with the total market, streaming was the engine room of growth, increasing by 46% to reach $3.1 billion, representing 44% of all revenues (the share was 34% in 2016). Physical and downloads both fell, by -2% and -22% respectively. As for major labels, independent labels are on path to becoming streaming-first in revenue terms.

midia wintel indie market share

One of the really interesting themes to emerge from this year’s work was the loyalty that independent labels enjoy from their artists. When offered, 77% of artists choose to renew their contracts with their independent labels, with that rate above 90% in Spain, Brazil, the Netherlands and Denmark.

A nuanced, but crucial takeaway from this year’s research is that the independent sector is booming, but that the major record labels are important partners in that growth, providing independent labels with the global scale tools and teams that they need to compete in this increasingly global music market.

Taylor Swift, Label Services and What Comes Next

universal-music-group-logoTaylor Swift has done it again, striking a deal with UMG that includes a commitment from the world’s largest label group to share proceeds from Spotify stock sales with artists, even if they are not recouped (ie haven’t generated enough revenue to have paid off the balance on their advance so not yet eligible to earn royalty income). This follows Swift’s 2015 move to persuade Apple to pay artists for Apple Music trials. That Swift has influence is clear, though whether she has that much influence is a different question. Let’s just say it served both Apple and Universal well to be seen to be listening to the voice of artists. But it is what appears to be a label services part of the deal that has the most profound long-term implications, with Swift stating that she is retaining ownership of her master recordings.

The rise of label services

The traditional label model of building large banks of copyrights and exploiting them is slowly being replaced, or at the very least complemented, by the rise of label services deals. In the former model the label retains ownership of the master recordings for the life time of the artist plus a period eg 70 years. In label services deals the label has an exclusive period for exploiting the rights, after which they revert to full ownership of the artist. Artist normally cede something in return, such as sharing costs. Companies like Kobalt’s AWAL and BMG Music Rights have led the charge of the label services movement. However, Cooking Vinyl can lay claim to being the ‘ice breaker’ with its pioneering 1993 label services deal with Billy Bragg, negotiated between his manager Pete Jenner and Cooking Vinyl boss Martin Goldschmidt. It may have taken a couple of decades, but the recording industry has finally caught up.

Major labels in on the act

The major labels remain the powerhouses of the recorded music business in part because they have learned to embrace and then supercharge innovation that comes out of the independent sector. Label services is no exception. Each of the major labels has their own label services division, including buying up independent ones. Label services are proving to be a crucial asset for major labels. The likes of AWAL and BMG have been mopping up established artists in the latter stages of their careers, with enough learned knowledge to want more control over their careers. By adding label services divisions the majors now have another set of options to present to artists. This enables them to not only hold onto more artists but also to win new ones – which if of course technically what UMG did with Swift, even though it had previously been Swift’s distributor. As with all new movements, examples are often few and far between but they are there. The UK’s Stormzy is a case in point, signing a label services deal with WMG before upgrading it to a JV deal between WMG’s Atlantic Records and his label #MERKY. For an interesting, if lengthy, take on why Stormzy and WMG took this approach – including the concept of secret ‘Mindie Deals’ that allow more underground artists maintain some major label distance for appearances’ sake, see this piece.

The early follower strategy 

In August 2018UMG’s Sir Lucian Grainge called out the success of UMG’s label services and distribution division Caroline, noting it had doubled its US market share over the previous year. UMG was already not only on the label services deal path but had identified it as a key growth area and wanted the world – including investors – to know. UMG has stayed ahead of the pack by pursuing an early follow strategy of identifying new trends, testing them out and then throwing its weight behind them. Before you think of that as damning with faint praise, the early follower strategy is the one pursued by the world’s most successful companies. Google wasn’t the first search engine, Apple wasn’t the first smartphone maker, Facebook wasn’t the first social network, Amazon wasn’t the first online retailer.

What comes next

The label services component of the UMG deal was actually announced by Taylor Swift herself rather than UMG, writing:

“It’s also incredibly exciting to know that I own all of my master recordings that I make from now on. It’s really important to me to see eye to eye with a label regarding the future of our industry.”

While this might betray which party feels most positive about this component of the deal, the inescapable fact is that other major artists at the peak of their powers will now want similar deals. Label services success stories to date had been older artists such as Rick Astley, Janet Jacksonand Nick Cave as well as upcoming artists like Stormzy. Now we will start to see them becoming far more commonplace in the mainstream.

But perhaps now is the time. Catalogue revenues are going to undergo big change in the coming years, as MIDiA identified in our June 2018 report The Outlook for Music Catalogue: Streaming Changes Everything. Deep catalogue is not where the action is anymore. For example, 1960s tracks accounted for just 6.4% of all UK catalogue streams in the UK in 2017, while catalogue from the 2000s accounted for 60.4%, according to the BPI’s invaluable All About the Music report. So, by striking a long-term label services type deal, UMG secures Swift’s signature and can still benefit from the main catalogue opportunity for the first few releases without actually owning the catalogue.

Label services have come a long way since Billy Bragg’s 1993 deal and Taylor Swift has just announced that they are ready for prime time.

Penny for the thoughts of Bill Bragg having paved the way for the queen of pop’s latest deal….