Announcing MIDiA’s State Of The Streaming Nation 2 Report

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

Key features for the report:

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

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

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

Selected Key Findings

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

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

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List of Figures In The Report

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

Quick Take: IFPI Revenue Numbers

Today the IFPI published their annual assessment of the global recorded music business. The key theme is the first serious year of growth since Napster kicked off a decade and a half of decline, with streaming doing all the revenue heavy lifting.

The findings won’t come as much of a surprise to regular readers of this blog, as at MIDiA we had already conducted our own market sizing earlier in the year. The IFPI reported just under a billion dollars of revenue growth in 2016 (we peg growth at $1.1 billion) with streaming driving all the growth (60% growth, we estimate 57%). IFPI also reported 112 million paying subscribers (our number is 106.3 million, but the IFPI numbers probably include the Tencent 10 million number as reported, while the actual number is closer to 5 million).

IFPI report physical sales declining by 8% (we have 7%) and downloads down by 21% which is 3 percentage points more decline than the majors reported; this implies the IFPI estimates the indies to have had a much more pronounced decline than the majors. MIDiA is currently working with WIN to create the 2017 update to the global indie market sizing study, so we’ll be able to confirm that trend one way or another in a couple of months’ time.

Overall, the IFPI numbers tell the same good news story we revealed back in February, namely that streaming is finally driving the format replacement cycle that the recorded music business has not had since the heyday of the CD. Without streaming, the recorded music market would have declined in 2016. Streaming is driving revenue growth by both growing the base of users and, crucially, increasing the spend of more casual music spenders, changing them from lower spending download buyers into monthly 9.99 customers.

Also, streaming is unlocking spending in emerging markets (especially Latin America). The old model was based on people being able to afford a CD player and being able to afford to buy albums. The new model monetizes consumption on smartphones (which are becoming ubiquitous in emerging markets). Expect each year from now to see a reallocation of recorded music revenue towards emerging markets. It will be a long process but an irresistible one. Indeed, as Spotify’s Will Page put it:

“Spotify’s success story has expanded beyond established markets, with Brazil and Mexico now making up two of our top four countries worldwide by reach. Back when the industry peaked in 2000, Brazil and Mexico were 7th and 8th biggest markets in the world respectively. A combination of increasing smartphone adoption [reaching far more users than CDs ever did] and Spotify’s success makes the potential for these emerging markets to ‘re-emerge’ and to exceed previous peaks.”

One surprising point is that the IFPI reported a total of $4.5 billion for streaming ($3.9 for freemium and $0.6 billion for YouTube, etc.). However, the major labels alone reported revenues of $3.9 billion (see my previous post for more detail on label revenues). That would give the majors an implied market share of 87% in streaming. Which seems like a big share even accounting for majors including the reveue of the indie labels they distribute in their revenue numbers (eg Orchard distributed indie label revenue appearing in Sony’s numbers). Last year the IFPI appeared to have put Pandora revenues into US performance revenues rather than treat them as ad supported streaming, so that could account for an extra $400 million or so.

Nonetheless, taking the IFPI’s $3.9 billion freemium revenue and the 112 million subs number both at face value for a moment, that would equate to an average monthly label income of $2.90 per subscriber or a combined average monthly income of $1.53 for total freemium users (including free). These numbers are skewed in that they are year end numbers (mid year user numbers would be lower, so ARPU would be higher) but they are still directionally instructive ie there is a big gap between headline 9.99 pricing and what label revenue is actually generated due to factors such as $1 for 3 month trials and telco bundles.

All in all, a great year for recorded music. And despite a slow-ish Q1 2017 for streaming and the impending CD revenue collapse in Japan and Germany, it looks set to be another strong year ahead for streaming and, to a lesser extent, the broader recorded music business.

Here’s Why Vinyl Isn’t About To Save The Music Business And Why Albums Need Rethinking

The BPI announced that ‘album equivalent sales’ were up by 1.6% in volume terms in 2016, with vinyl and streaming identified as the key drivers. Many people retain a nostalgic soft spot for vinyl, so an apparently vinyl led revival is always going to get people’s attention. But not only is vinyl not the future (it was just 2.6% of sales in 2016), the big differences between the most popular vinyl, streaming, singles and album artists reveal just how fragmented the music business has become.

Each of the top 10 charts (album sales, singles, top streaming artists, vinyl sales) almost reads as a standalone group of artists with remarkably little cross over. In fact, only 2 artists (the ubiquitous Drake and Justin Bieber) appear across streaming, singles and albums. None appear across all four charts.

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The fragmentation adds complexity to an already sophisticated and nuanced landscape:

  • Two tribes: Only one of the top single artists of 2016 (Justin Bieber) was also a top album artist. This is why the album vs playlist album argument will continue way beyond 2017. Both realities co-exist with one catering more towards older audiences and the other to younger ones. The top 10 albums list is like browsing through a high street music store CD rack circa 2005: Elvis Presley, David Bowie (twice), Coldplay, Michael Ball. Of course, there is some overlap with streaming, an inescapable overlap considering that streams are now (for all the wrong reasons) counted towards album sales. Thus, we see contemporary artists Little Mix, Drake and Jess Glyn fill the 7,8 and 9 slots, while Justin Bieber is at #4. But first and foremost this is a tale of 2 tribes, 2 groups of music fans whose tastes and consumption patterns rarely overlap.
  • Old format, old bands: Vinyl sales may have hit their highest level in the UK since 1991 but this is hardly a sign of what is to come. Indeed, a quick look through the top 10 vinyl albums of 2016 reveals that all but one of the artists were releasing music back in 1991! The exception is Amy Winehouse and she’s dead. The majority of the volume of vinyl sales is driven by nostalgic older music fans. Of course, younger people do buy vinyl too, but interestingly they generally do so as either a form of merch or as a way of supporting their favourite artist. In fact, many under 30’s vinyl buyers don’t even have turntables.

The really important takeaway from all this though, is what it means for driving sales and marketing artists in 2017. One size stopped fitting all long ago, but now there are clearly two broad groups of music audiences which must be addressed in entirely different ways, across different channels and with different tactics. At the most base level this is a case of youth versus grey, of digital native versus digital immigrant, of playlist versus album, of sales versus consumption. But it is also more complex and nuanced than that. There are overlaps and cross pollination. They may be relatively thin on the ground right now, but like some long-lost treasure map, they may point to how bridges can be built across these two worlds. If no such links can be made then ultimately this will be a story of one world hurtling to oblivion while the other booms. That is of course the more likely scenario, highlighted by the fact that (in volume terms) UK CD sales fell by 12% and download sales by 26% in 2016 while streams were up 67%.

As large volumes of older consumers switch to streaming (and Amazon should play a key role here) there will be more opportunity to join the dots. But do not mistake this simply as an opportunity to try to revive yesterday’s formats in today’s platforms. The album is clearly fading. According to MIDiA Research survey data, 68% of subscribers state that playlists are replacing albums for them. It is time to start investing though and effort in rethinking what album experiences should be in the digital era. And that conversation should have no bounds, everything should be on the table (number of tracks, street date vs continual updates, interactivity, changing content etc.).

The 2016 sales figures show us that the album in its traditional format still has a very solid, albeit quickly declining, audience. But if it is to outlive that dwindling customer base it must be rethought for the streaming era.

Understanding ’15’: How Record Labels And Artists Can Fix Their YouTube Woes

The artist-and-labels-versus-YouTube crisis is going to run and run, even if some form of settlement is actually reached…the divisions and ill feeling run too deep to be fixed solely by a commercial deal. What’s more, a deal with better rates won’t even fix the underlying commercial problems. Music videos under perform on YouTube because they don’t fit YouTube in 2016 in the way they did YouTube in 2010. The 4 minute pop video was a product of the MTV broadcast era and still worked well enough when online video was all about short clips. But the world has moved on, as has short form video (in its new homes Snapchat, Musical.ly and Vine). Short videos are no longer the beating heart of YouTube viewing and quite simply they don’t make the money anymore. This is why music videos represent 30% of YouTube plays but just 12% of YouTube time. If record labels, publishers, performers and songwriters want to make YouTube pay, they need to learn how to play by the new rules. And to do that they need work out what to do with ‘15’.

youtube monetization

There Is A Lot More To YouTube Revenue Than Some Would Have You Think

The recorded music industry gets radio, and it is beginning to get streaming. Both are all about plays. Each play has, or should have, an intrinsic value. They are models with some degree of predictability. But YouTube does not work that way, which is why the whole per stream comparison thing just does not add up. In MIDiA’s latest report ‘The State Of The YouTube Music Economy’ we revealed that YouTube’s effective per stream rates (that is rights holder revenue divided by streams) halved from $0.0020 in 2014 to $0.0010 in 2015.

Sounds terrible right? And make no mistake, there is no way to spin it into a good news story. However, it didn’t fall because of some nefarious Google ploy. It fell because of many complex reasons (all of which we explore in the report) but the 2 biggest macro causes were:

  • YouTube pays out as a share of ad revenue (55%) not on a per stream basis. So when the value of its ad inventory goes down (due to factors such as more views coming from emerging markets with weaker ad markets) the revenue per stream goes down too. This is something the labels can do little about, though an increased revenue share will soften the blow as YouTube globalizes.
  • YouTube serves its in-stream video ads (the most value ad format) on a time-spent basis, not on a per-video basis. Our research found that the average number of video ads per hour of viewing comes out at about 4. That means if you have 15 minute videos (like many YouTubers do) you will get a video ad every play. But if you have 3 or 4 minute pop videos you may only get 1 video ad for every 4 or 5 plays. Which means 4 or 5 times less video ad revenue. In fact, our research revealed that just 26% of music video views have video ads. This is the underlying issue the industry needs to address, and unlike global ad market dynamics, this is something it can indeed fix.

The 15 Scale

This is where the magic number 15 comes in. Right now music video sits in the same 3-4 minute slot it has done so ever since MTV said it wanted videos that length. Yet video consumption is now polarized between the 15 second clip on lip synch apps like Musical.ly and Dubsmash and 15 minute YouTuber clips. Falling in between these two ends is revenue no-mans land. As I have written about before, labels and publishers need to figure out how to harness the 15 second clip as an entirely new creative construct and shake off any old world concepts that this is actually anything about marketing and discovery. It is consumption, plain and simple…it just happens to look unlike anything we’ve seen before.

At the opposite end of the 15 scale labels and artists need to start thinking about what 15 minute formats they can make. Think of this as a blank canvas – the possibilities are limitless. For example:

  • 3 track ‘EP’ videos interspersed with artist narrative and reportage coverage
  • Live sessions (recorded by, and uploaded by labels so they get revenue as well as publishers)
  • Mini-documentaries such as ‘the making of’s
  • On-the-road features

15 Minutes Does Not Have To Break The Bank

And before you cry out ‘but this stuff will cost so much more to make’, it doesn’t have to if more is made out of current assets and processes. For example, ensure that one of the support crew has a handheld camera to film some shoulder footage for reportage. The whole thing about YouTube is that it doesn’t have to be super high production quality, in fact the stuff that does best patently isn’t. YouTube videos that work best are those that are an antidote to the old world of inaccessible glamour. If you really want to do things on the cheap, simply splice three music videos together into a single long form video (e.g. tag 2 older tracks onto the new single). Doing so will nearly treble the video ad income.

And before you think this isn’t what audiences want, ask Apple about ‘The 1989 World Tour LIVE’ and Tidal about ‘Lemonade’.

And (yes another ‘and’) if you can’t get your head around the inescapable need for a completely new music video construct, just think about it this way: 15 minute videos will make you 5 times more video ad revenue. This really is a ‘no brainer’.

Back To The Future

As a final piece of evidence (not that it is needed), cast your mind all the way back to 1982, to Michael Jackson’s landmark video ‘Thriller’. A 13:42 video that is widely recognized as one of the all time music video greats that has also racked up 330 million views on Vevo. So you could say the case for 15 minute video was already made a quarter of a century ago (thanks to MIDiA’s Paid Content Analyst Zach Fuller for pointing that one out).

The 4 minute music video is dead, long live the 15 minute music video.

For more detail on our ‘State Of The YouTube Music Economy’ report check out our blog.

You can also buy the 25 page report with 8 page data set here.

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

 

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This post has been updated following a conversation with the IFPI

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

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

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

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

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

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

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

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Welcome To The 15 Second Song

Music messaging apps have become something of a boom area in recent years with the likes of MSTY, Dubsmash, PingTune, Flipagram and WordUp pursuing a variety of approaches. It is clear that messaging and music sharing both play to the fundamental human need to connect. What has been less clear is the market opportunity in the context of booming growth among pure play messaging apps like LINE and WhatsApp. The global number of monthly active users of messaging apps is now over 5 billion (which compares to just 2.6 billion for social networks). Messaging platforms are the new place digital audiences congregate. Conscious of the need to add to, rather than compete with, the messaging incumbents, music messaging app Musical.ly has taken a different approach. Instead of creating a soundtrack for messages it has focused on an Instagram-meets-Vine use case, with users creating their own videos to accompany a selection of songs served up by the app. It may seem like a relatively subtle difference but it has created an utterly different use case, one that challenges the very essence of what music consumption actually is, and what a song should be.

Peacocking

I’d been aware of Musical.ly for some time (music messaging apps, along with artist subscription apps, is one of the areas of music innovation that I’m currently paying a lot of attention to). But what really woke me up to the power of Musical.ly was seeing my daughter use it. Within seconds she was creating her first video, finding friends and racking up the likes. In a very similar way to Instagram Musical.ly is a perfect fit for the tweens and early teens. It appeals to the peacocking psychology of kids as they explore and define their identities, and as they learn about friendships and social circles.

musicallyJust as with kids in the school yard competing for who’s got the most Instagram followers, Musical.ly taps this somewhat narcissistic drive to outperform the rest. But while selfies and filters are the language of Instagram for kids, on Musical.ly it is music. Users are presented with a curated selection of tracks to chose from against which they create their own videos, whether they be lip synching, sharp dance routines or creative videos. As a slightly over bearing parent I insisted my daughter did not reveal her face on Musical.ly so she set about creating endless streams of stop motion animation, ranging from her Converse walking themselves across the floor to a biscuit disappearing one nibble at a time, all with a song as the soundtrack. This enforced creativity appears to have paid dividends as she quickly amassed followers and requests to collaborate.

The 15 Second Song

All well and good, but the really interesting bit for me was that each of the songs used in the videos was between 15 and 25 seconds long. Yet she plays the videos back again and again, on loop, as do her followers. So she ends up listening to, for example, 15 seconds of Justin Bieber’s ‘Sorry’ sound tracking her self-propelled Converse many, many more times than she ever listened to the full song. Musical.ly will doubtlessly pitch this to rights owners as ‘discovery’. But it’s not. It is consumption in its own right, and like we’ve never really seen before. The 15 second hook is the song. The other 3 minutes are unnecessary baggage.

Breaking Free Of The 3 Minute Straight Jacket

We have the the 3 minute pop song because that’s what radio wanted, not because that is how long a song should naturally be. So now that we are becoming freed of the constraints of radio schedules, 7 inch vinyl and other analogue formats, there is no reason that the 3 minute straight jacket should dominate anymore. There have long been exceptions, such as Queen’s ‘Bohemian Rhapsody’ (5.55) and Napalm Death’s ‘You Suffer’ (0.01). And although the pop music average remains firmly nailed to 3 minutes, change is a-coming. For example, Canadian Shawn Mendes, now firmly signed to Universal Music’s Island, found his way to fame by releasing 6 second songs on Vine. Generation Edge (i.e. Millennials aged 16 or under) have more apps, entertainment and technology competing for their attention than any previous generation. It’s not so much that their attention spans are shortening, but that they simply cannot afford to focus on any one thing too long else they miss out on everything else.

The changing structure of pop songs to feature hooks throughout, rather than simply in the chorus, means that in many ways pop songs are already becoming a stitched together collection of mini-songs. They inherently lend themselves to being unbundled. Musical.ly and its model of super-short-form music experiences is by no means the entire future of music consumption and creativity, but it absolutely does represent an entirely new strand of both of those.

The Orchard’s co-founder Scott Cohen started suggesting a few years ago that the future of the song could mean embracing 30 seconds as a creative format. It’s beginning to look like Scott may have called it right.

What Future For The Album In The On-Demand Age?

Recently BBC Radio 1’s head of music George Ergatoudis stirred up something of a storm with his claim that “albums are edging closer to extinction”. Nonetheless there is a growing body of evidence that the album does indeed seem to be losing its relevance in today’s track and playlist led world. And the implications stretch much further than the confines of the recorded music business. (Hint: live music industry, you need to be watching your back too.)

The Advent Of Grazing

When Napster emerged 15 years ago it kick started an irreversible transformation in music consumption. The music business had spent the previous three decades turning the singles dominated market of the 1950’s into the albums led market of the 1990’s, but with Napster consumers suddenly did not have to take the whole album package anymore. The labels had their own fair share of blame. When the vinyl LP had been the dominant format albums typically had 8 tracks, but with the CD labels felt compelled to fill every one of its 74 minutes’ capacity, resulting in a preponderance of filler tracks over killer tracks. Couple this with album price hyperinflation and you had the perfect recipe for consumer revolt. Little wonder that music fans cherry picked tracks, skipping the filler for the killer. Grazing replaced immersion.

Ironically the issue became even more pronounced with the advent of the iTunes Music Store. Whereas with file sharing many users downloaded entire albums – and as bandwidth and storage improved, entire discographies – listening still skewed towards the stand out tracks. Indeed the hoarding mentality of these digital immigrants was one borne out of being children of the age of scarcity, with a ‘fill up quick while you still can’ mentality. With iTunes, price was a limiting factor and so people focused on acquiring single tracks rather than albums. Labels and artists had been scared iTunes would cannibalise album sales, they were right.

Digital Natives Set A New Pace

In the subsequent decade new digital behavior patterns have become more clearly defined, particularly among the digital natives. Playlists and individual tracks have become the dominant consumption paradigm. Even music piracy has moved away from the album to smaller numbers of tracks, with free music downloader mobile apps and YouTube rippers now more widespread than P2P. This is the piracy behavior of the digital natives who have no need to hoard vast music collections because they know they can always find the music they want on YouTube or Soundcloud if they want it.

playlists versus albums

The behavior shift is clearly evidenced in revenue numbers. Since 2008 alone US album sales (CD and digital) have declined by 22% (IFPI), while digital track sales outpace digital album sales by a factor of 10 to 1. The top 10 selling albums in the US shifted 56.4 million units in 2000.  In 2013 the number was 14.7 million (Nielsen SoundScan). Even more stark is the contrast between playlists and albums on streaming service. Spotify has 1.5 billion playlists but just 1.4 million albums (see figure). While the comparison is not exactly apples-to-apples (album count is a catalogue count and playlist count is a hybrid catalogue / consumption count) it is nonetheless a useful illustration of the disparity of scale. (In fact the 1.4 million album assumption is probably high due to a) duplicates b) singles and EPs c) compilations.)

Even the much heralded success of Ed Sheeran’s album ‘X’ does not exactly paint a robust argument for the album. ‘X’ set the record for first week global plays of an album on Spotify with 23.8 million streams. But that represents just 0.27% of weekly Spotify listening (based on Spotify’s reported 40 million active users, 110 minutes daily listening and an average song length of 3.5 minutes).

The Album As A Mainstream Consumption Paradigm Was A Historical Anomaly

This is the consumer behavior backdrop for the demise of the album.  Creatively the album still represents the zenith of an artist’s creativity and many albums are still most often best appreciated as a creative whole. Core fans and music aficionados will still listen to albums but the majority of consumers will not. The album as the mainstream consumption paradigm was a historical anomaly of the 70’s, 80’s and 90’s. In the 50’s and the 60’s the single was the way the majority interacted with music, and now in the early 21st century it is once again. There has always been space for vast diversity of artists along the niche to mainstream spectrum but as a consumption format the album is closer to the Steve Reich end than it is the Katy Perry end.

Artists And Labels Need To Catch Up With Consumer Behaviour

The majority of artists will still make albums and labels will indulge them because their organizations and business models are built around the format. But therein lies the problem: the more that consumer behavior evolves, the more distant the gap between artists’ recorded output and their fans’ demand becomes.

There is more music released now than ever before and most likely more music listened to than ever before. But the amount of music listeners in the world’s top 10 music markets – which account for 91% of revenue – has not increased at anything like the same rate. People are spending less time with individual artists and albums. In the on-demand age with effectively limitless supply they flit from here to there, consuming more individual artists in a single playlist than an average music fan would have bought albums by in an entire year in the CD era. Fewer fans develop deep relationships with individual artists. Right now this translates into fewer album sales. In 10 years’ time it will manifest as a collapse in arena and stadium sized heritage live acts. In fact we are already witnessing the impact, after all what are festivals and DJ sets if not the playlist translated into a live experience?

As painful as it may be for many to accept, the tide has already turned against the album. The challenge to which artists and labels must now rise is to reinvent creativity in ways that meet the realities of the on-demand world.* If they do not, artists will eventually find the chasm between their wants and their audiences’ needs quite simply too wide to traverse.

*For those interested I wrote a couple of reports on this very topic a few years ago:

The Music Format Bill of Rights: A Manifesto For The Next Generation Of Music Products

Agile Music: Music Formats and Artist Creativity In The Age of Mass Customisation

The Hybrid Album: A Music Product Strategy Proposal

We are in the midst of a transition from ownership to access models but it is a shift that will take a generation to complete.  The intervening years will all be about managing the transition, both in terms of educating consumers but also with regards to ensuring that the revenue shift is as smooth as possible.  The download and the stream will co-exist for many years – especially in many emerging markets – and Apple’s iTunes Radio is a key example of how the two technologies can live side by side.  But more still needs to be done.  To that end what follows is a product strategy proposal that puts streaming into the very heart of download experiences while simultaneously driving download spending.

The Hybrid Album is a very simple and straightforward proposition:

  • Entire album download: when ever a download store customer purchases more than one individual track from an album the entire album and album art will download to the purchaser’s device.  The two track threshold is important as this proposition is not intended to swim against the tide and clutter the path for consumers that only ever want to buy single tracks.  Buying more than one track from an album though indicates a little more than passing interest in that album and represents an opportunity to engage the buyer with the entire release.
  • Two free streams per track: the purchased tracks will behave as normal downloads, the remainder of the album though will be presented with a stream icon that informs the purchaser that all the other songs on the album can be streamed free of charge, twice each.  Once any track has been streamed twice the icon will change to a click to buy icon.  Also when any single track has been streamed twice a ‘complete this album’ call to action will appear with a ‘save x% if you buy within the next 24 hours’ or ‘get an extra exclusive track free if you buy within the next 24 hours’.

And that is it.  Very simple but with the potential to be highly effective.  It gives download customers a taste of the on-demand streaming experience but directly drives spending.  The licensing that would underpin the Hybrid Album will be more complex than the consumer proposition but it is not exactly an insurmountable challenge, with plenty of analogous precedents to leverage.

It is a proposition that is comparatively simple to implement and with low risk.  Let’s get it done!

The Curious Case of the South Korean Music Market

(NOTE: you can download and keep this blog post as a pdf report by clicking on the report image at the bottom of the page)

Psy’s ‘Gangnam Style’ might have catapulted the South Korean music market into the global consciousness but to industry observers like myself it has long been a market of particular interest.  Being the first major music market to pass the 50% digital mark – in 2006 – South Korea has been held up both as a digital trailblazer and as a canary in the mine for the global music industry.  Strong growth over recent years hinted at a brighter international future, but just as ‘Gangnam Style’ was propelling South Korean music to unprecedented global heights the South Korea music market went back into decline.

The South Korean music market is one of contradictions and idiosyncrasies, but crucially it also holds many lessons that the global music market would do well to pay heed to

korean music revenue trends

Bucking Global Trends

According to the IFPI’s invaluable Recording Industry in Numbers, South Korean recorded music revenues declined by 5% in 2012, breaking a run of four years of successive growth. But unlike the global market, it wasn’t the CD that was to blame for the fall but digital.  Physical revenue grew by 19%, the third successive year of growth, while digital actually declined by 25%, dragging the entire market down with it. The mirror opposite of the global music market where 7% digital growth wasn’t enough to prevent a 5% physical decline drag down total revenues by 1%.

2012 wasn’t the first year that South Korea stood out from the pack though, indeed the last 13 years have been vastly different from the global market (see figure):

  • Revenue collapse: between 2000 and 2005 South Korea lost a whopping two thirds of its value while the global market shrunk by a more modest 18%
  • Digital crossover: in 2006 South Korea became the first major music market to become more than 50% digital (the 2012 global rate was just 38%)
  • Subscription dominance: a vast 74% of digital revenues were subscription in 2012, having hit 22% back In 2008 (the global rate was just 20%)
  • Physical boom: physical revenues have risen all years but one since 2007, compared to a global market decline every year since 2000

A Tale of Booming CD Sales and Tumbling Download Revenues

There is no single explanation for the unique picture that South Korea’s last 13 years of music history paints, but there are a few key factors:

  • Piracy: piracy is of course just one contributory factor to the downturn in music revenues (albeit a crucial one) but the effect was felt particularly keenly in South Korea.  The South Korean government was an ardent supporter of the telco sector in the 1990’s and early 2000’s, resulting in some of the best high-speed broadband infrastructure on the planet.  However this support came at the cost of the government effectively turning a blind eye to rights holder concerns.  Unsurprisingly piracy boomed with file sharers and networks alike operating with near impunity.   South Korea became a perennial fixture on the US Trade Representative’s piracy watch list but finally the government started to redress the balance from 2007/8, introducing new copyright legislation, including a graduated response initiative in 2009.  And since 2007 the market has grown by an impressive 58%, nearly reaching 2000 levels by 2011.  But just how much of this can be attributed to government action is open to question as music revenues had already grown by 84% in 2006 alone.   (The rate of growth in 2006 is however skewed by the fact digital numbers were not reported in prior years).
  • Subscriptions: the central force in South Korea’s digital market is SK Telecom’s MelOn subscription service which was the first in the world to amass a million paying subscribers and now numbers 2 million paying users and 18 million registered users.  MelOn was competitively priced (less than $3.00) and included mobile downloads from the start, enabling it to have immediate impact.  South Korean subscription revenues more than doubled between 2009 and 2012.  Rights holders have not been entirely happy though, including Lee-Soo Man (founder of K-Pop power house SM Entertainment) who claimed that 1 million tracks consumed on MelOn do not cover the costs of making a music video for a single.  The pressure resulted in government intervention and in January 2013 MelOn doubled its subscription rate to 6,000 won (about $5.60).  Time will soon tell whether the increased revenue per user is cancelled out by the likely decline in number of users.
  • Download collapse: MelOn’s price hike of course came after 2012 digital decline, which instead was caused by a collapse in music download revenue, dropping by a staggering 71% in 2012.  The download collapse was the single biggest driver of the overall decline in revenue in 2012.  In fact, if download revenue had remained flat, total revenues would have grown by 6% in 2012.  Much of the decline is attributed to a tough year for another of SK Telecom’s properties, the social network Cyworld.  Once the dominant Korean network, Cyworld enables users to buy music tracks to personalize their profiles but it has struggled to compete against Facebook and spent 2012 bleeding users.
  • Physical longevity: physical revenues have bucked the global trend, with 2012 revenues 128% bigger than their 2006 low.  This compares to a 14% rise for digital (though the 2012 collapse obviously skews the rate down). It is not a unique trend though, with Japan also experiencing a physical uptick in 2012. What links these two markets is the way in which the respective local pop sectors (K-Pop and J-Pop) have created ardently loyal fan bases that eagerly buy lavishly packaged CD products, often with merchandize extras, and frequently resulting in fans buying multiple editions of the same release.  Thus for all the surge in digital, the South Korean and Japanese pop markets have found a way to deliver unique, tangible value with physical products.
  • K-Pop: though the success of K-Pop has been key to South Korean market growth there is growing criticism of this highly manufactured genre. Artists complain of being ‘contract slaves’ while others point to the huge concentration of power in the K-Pop talent agencies. A cultural critique is that this industrialized pop methodology places too heavy an emphasis on presentation over content, and too strong a focus on ‘safe bet’ lowest common denominators.  A clear echo of the American Idol and X-Factor phenomenon in the West.  Whatever its issues though, there is no denying that K-Pop is central to the resurgence in South Korean music revenues.

Lessons for the Global Market

South Korea is a truly unique music market and, just as with Japan, one has to tread carefully when attempting to project trends onto western markets.  But even with that caveat there is clearly much that can be learned from the South Korean experience:

  • It is possible for music revenues to return to 2000 levels (if only for a fleeting moment)
  • Subscriptions can reach significant scale when competitively priced (sustainability issues aside)
  • Physical revenues can be given new impetus with smart product strategy (though don’t expect Westerners to start behaving like K-Pop fans)
  • Concentration of any one segment of digital revenue in a single player can leave a market highly vulnerable

But perhaps most importantly of all, just like in the disclaimer of a financial services advert: music revenues can go up and down.  Even when a market eventually starts to grow again, don’t expect that to mean that the corner has been permanently turned.

The Curious Case of the South Korean Music Market report

To download a pdf report version of this blog post just click on the image.  You can find more free reports to download here.

 

The Tale of Emily White, Scarcity and the Future of Music Products

Unless you spent the first half of this week on the digital music equivalent of planet Mars, you will have noticed the Emily White furore. The long and short of which was NPR (US public radio) Intern Emily White blogging that she owned 11,000 songs of which just 15 were albums that she had purchased and pining for a universally available universal database of music.  The post was swiftly followed by reasoned critiques against, foragainst, and for, and also by vacuous foul mouthed grandstanding. What surprised me wasn’t the strength of feeling on the topic, but a view by some that this was somehow a watershed moment, a changing in collective perspective.  It wasn’t.  For anyone who has followed this space closely for more than a few years this debate will be seen as another chapter in a long-running discourse.  An important chapter, but just a chapter nonetheless.  Long time readers of my blog will remember a series of posts on ‘why music can’t just be free’ and the heated debate that surrounded them.  For those who didn’t, some of the posts are here and here.  (And for an insight into how ‘free’ impacts an artist take a look at this evergreen artists’ post.)

But the point of this post isn’t just to pour another layer of opinion into the simmering cauldron.  Instead I want to try to move the debate on from diagnosing the symptoms onto identifying a potential cure, or at the very least some palliative care.

For argument’s sake let’s assume the following:

  • A large share of consumers have fallen out of the habit of buying music and a larger share of younger consumers have simply never learned the habit
  • Fewer people place a monetary value on music than used to and yet more people listen to more music than ever before
  • High spending music consumers do exist though, and across all age groups, albeit in declining numbers

Understanding the Role of Scarcity

The key reason fewer people buy music is because they don’t have to.  In the analogue age there was a monopoly on supply of music: if you wanted to get new music you had to buy it in high street shops when record labels decided you could, paying the price they and retailers decided you should. The alternative was making a poor quality cassette copy from the radio or friends.  People who liked music had little choice but to associate a very specific monetary value to music.  Napster threw that scarcity model out the window.  With paying for music now a life style choice the monetary value of music has been subjected to hyper deflation.  The ‘price it and they will come’ logic now only applies to a small subset of music fans, a subset that is at risk of becoming an endangered species.

This doesn’t mean people don’t value music anymore, but instead that a majority no longer value it monetarily.  This dynamic is beautifully encapsulated in a response from a 12 year old file sharer that Feargal Sharky was fond of quoting

“I love music and if I could download my Nike I would pay for my music”.

Nike still has scarcity, that’s why so many kids pay for their trainers but not their music.  Like it or loathe it, as far as music products are concerned,  we are in the post-scarcity age.

What, if Anything, Can Be Monetized in the Post-Scarcity Age?

So if scarcity has gone – and it is gone for good – how can recorded music revenues ever be rebuilt?  Indeed should they?  Some argue that charging for music is an outdated model, but you will find that 99.999% of those people also believe that they should still be able to get that exact same music which they don’t think should be paid for i.e. they value the product, just not the price.  Their world view is shaped by the last decade of experience but lacks grounding in basic economics.  The music needs making and that costs money.  Whether that is the money the label invests when it takes a punt on an artist or the cost of an artist getting by on an often very modest income.

Arguing that artists should make their real money in ‘ancillary services’ misses the bigger picture.  Only a tiny subset of music fans pay for merchandize and only about half of music buyers go to concerts.  And the number 1 music consumption channel?  It’s still radio.  So those ancillary revenues are a much smaller addressable market.  They are also largely irrelevant if you are a songwriter rather than a performer.

Recorded music is still the core product. 95% of us listen to music most days.  The vast majority of music consumption (by all people) is recorded music.  Why shouldn’t it also be the core revenue stream?  Scarcity has been disrupted, not market demand.  None of us would reasonably expect a plumber to fix our washing machine for free and then go out into the street and make his money by selling overalls and tools.  Also let’s not forget that most artists make music because they love making music, not T-Shirts.

Why the Flat-Rate Isn’t the Answer

Don’t get me wrong: of course artists have to learn how to make money across a much wider range of income streams than ever before, but there is no inherent reason that they should have to accept that their core creative asset is no longer monetize-able.  The channel, product and pricing strategies may be broken, but the creative heartbeat of music is not.  Simply applying a ‘flat rate’ fee on all the music in the world might seem like an elegant and ‘convenient’ solution.  But it will only exacerbate the problem.  It will formalize and legitimize the concept that music has little value.  It will also accelerate the demise of those music fans who still like to support their favourite artists by buying their music. ‘Flat Rate’ is a pricing strategy for the low end of the music market, not all of it. Even if music has to end up like water, there should still be a market for bottled mineral water.

Of course unlimited access to music in the cloud will play a really important part of the future of music, it will probably be how most people consume music.  But that is a service which should have clear monetary value.  Everyone accepts that premium Cable and Satellite TV packages are paid for commodities.  In fact consumers pay more to have some of that content provided on-demand.  The reason it is different for music (and indeed news) is of course scarcity.

The New Wave of Scarcity

Scarcity still exists for music, predominately in the form of live, and consumers pay premiums accordingly.  If recorded music spending is ever going to rebound, scarcity must be reintroduced to music product strategy.   Not, however, scarcity in the sense of building walls around content (it will always leak out) but instead by creating scarcity of experience. The success stories of paid content to date (iTunes, Kindle, xBox, PlayStation etc) may be walled gardens but their success is derived from the quality of experience that is delivered within them and cannot be experienced externally.  Music products must learn how to create uniquely valuable experiences around music, fully leveraging the interactivity, connectivity and sociality of the contemporary digital world.  Current digital music products do not do so.  As I outlined in my Music Format Bill of Rights report (which you can download for free here) music products must be:

  • Dynamic
  • Interactive
  • Social
  • Connected

The future of music products will be app like experiences that deliver unique, interactive and curated music experiences where the whole will be far greater than the sum of the parts (see figure).  Pirating the individual components will lack the context rich, curated and programmed environments in which the music experiences will occur, and will consequently have massively diminished value.  Scarcity will have returned to music products.

Future Music Formats Must Be: Dynamic Interactive Social Curated

Waiting for an iPad Moment

Monetizing convenience only accelerates a race to the bottom.  Convenience should be an inherent part of the value of music products, but only one part.  Just because current music products don’t deliver enough tangible extra value to persuade the likes of Emily White to pay for music does not mean that it must always be thus.  Until 26 months ago the market between smartphones and laptops was that of netbooks.  At that stage most consumers not only did not own a netbook, they would have reported that they never intended to buy one either.  Then along came the iPad and suddenly we have a product revolution on our hands.  An apparently dead market segment transformed virtually overnight into gold-rush prosperity.

The music industry needs an iPad moment.  When it does come (and it will) even the likes of Emily White may finally start to see the value in paying for music again.