The Narrative Of Spotify’s Filing Is That The Best Is Yet To Come

Spotify just filed its F1 for its DPO. The most anticipated business event in the recorded music industry since, well…as long as most can remember, is one big step closer. The filing is a treasure trove of data and metrics, and while there won’t be too many surprises to anyone who follows the company closely, there are none the less a lot of very interesting findings and themes. The full filing can be found here. Here are some of the key points of interest:

  • Most of the numbers are heading in the right direction: MAUs, subscribers, hours spent etc are all going up while churn and cost ratios are heading down. Premium ARPU was an exception, declining: 2015 – €7.06 / 2016 – €6.00 / 2017 €5.24, which reflects pricing promotions. But Spotify was never going to have fixed every aspect of its business in time for its listing, that was never the point. What Spotify needs to convince potential shareholders is that it is heading in the right direction. The narrative that emerges here is of a company that has helped create an entire marketplace, that has made great ground so far and that is poised for even bigger and better things. That narrative and the clear momentum should be enough to see Spotify through. As I’ve previously noted, investor demand currently exceeds supply. If you are a big institutional investor wanting to get into music, there are few options. Pandora aside, this is pretty much the only big music tech stock in town. As long as Spotify can keep these metrics heading in the right direction, it should have a much smoother first few quarters than Snap Inc did, even though a profit is unlikely to materialise in that time.
  • Spotify is baring its metrics soul: Spotify has put a lot of metrics on the line, setting the bar for future SEC filings. While competitor streaming services will be busy plugging the numbers into Excel so they can compare with their own, the rest of the marketplace now has a much clearer sense of what running a streaming service entails. One really encouraging development is Spotify’s introduction of Daily Active User (DAU) metrics. As we have long argued at MIDiA, monthly numbers are an anachronism in the digital era, a measure of reach not engagement. So, Spotify is to be applauded for being the first major streaming service to start showing true engagement metrics.
  • Users and engagement are lifting: Spotify had 159 million MAUs in 2017, with 71 million paid and 92 million ad supported. Europe was the biggest region (58 million total MAUs) followed by North America (52 million), Latin America (33 million) and Rest of Word (17 million). The latter two are the fastest growing regions. Meanwhile, 44% of MAUs are DAUs, up from 37% in Q1 2015, which shows that users are becoming more engaged, though the shape of the curve (see chart below) shows that when swathes of new users are on-boarded, engagement can be dented. Consumption is also growing (a sign of both user growth and increased engagement): quarterly content hours went from 17.4 billion in 2015 to 40.3 billion in 2017. There are some oddities too. For example, ad supported MAUs actually declined in Q2 2017 by 1 million on Q1 2017 and in Q4 2017 only increased by 1 million on the previous quarter to reach 92 million.
  • The future of radio: Spotify puts a big focus on spoken word content and podcasts in the filing, as it does on advertiser products. It also lists radio companies first and subscription companies second as its key competitors. Meanwhile ad supported flicked into generating a gross profit in 2017 (ad supported went from -12% gross margin in 2016 to 10% in 2017. Premium gross margin up from 16% to 22% over same period.) As MIDiA predicted last year, free is going to be a big focus of Spotify in 2018 and beyond. The first chapter of Spotify’s story was about becoming the future of retail. The next will be about becoming the future of radio. And the increased focus on spoken word is not only about stealing radio’s clothes, it is about creating higher margin content than music. None of this is to say that Spotify will necessarily execute well, but this is the strategy nonetheless.
  • Spotify is still losing money but is trending in the right direction: Spotify’s cost of revenue in 2017 was €3,241 million against revenue of €4,090 with an operating loss of €378 million. However, losses are not growing much (€336 in 2016) and financing its debt added a whopping €974 million in 2017, from €336 million in 2016. Part of the purpose of the DPO is to ensure debt holders, investors and of course founders and employees get to see a return of their respective investments in money and blood, sweat and tears. Once that is done, financing costs will normalize. Also, Spotify’s new label licensing deals are kicking in, with costs of revenue as a share of premium revenue falling from 84% in 2016 to 78% in 2017. Spotify is not yet profitable but it is getting its house in order.

All in all, there is enough in this filing to both convince potential investors to make the bet while also providing enough fodder for critics to throw doubt on the commercial sustainability of streaming. Spotify’s structural challenge is that none of the other big streaming services have to worry about turning a profit. In fact, it is in their collective interest to keep market costs high to make it harder for their number one competitor to prosper.

But in the realms of what Spotify can impact itself, the overriding trend in this filing is that Spotify is well and truly on the right track. For now, and the next 9 months or so, Spotify will likely remain the darling of the sector. But after that, investors will start wanting a lot more if they are going to keep holding the stock. Spotify is promising that the best days are yet to come. Now it needs to deliver.

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Radio Is Streaming’s Next Frontier

This week MIDiA held its latest quarterly research and networking event at Gibson Brands Showrooms in the heart of London’s West End. The event was heavily over-subscribed and was a great success (there are some photos at the bottom of this post).

The event combined a presentation from Pete Downton, deputy CEO of our event sponsor 7digital, a keynote from myself and a panel of leading industry experts. Here are a few highlights of my presentation.

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Streaming music has got where it has today largely by being the future of retail and replacing the download model, which in turn replaced the CD model (though vestiges of both remain). That premium model will continue to be the beating heart of streaming revenues for the foreseeable future but will not be enough on its own. The next big opportunity for streaming is to become the future of radio, which incidentally is around double the size of the recorded music market. In doing so, it will be a classic case of disruptive insurgents stealing market share from long-standing incumbents.

The opportunity for streaming is to build ad revenue around the younger audiences that are simply not engaging with traditional radio in the way that previous generations of young music fans once did. As the chart above shows, radio’s audience is aging and has an almost mirror opposite demographic profile to streaming. What is more, radio’s audience is declining by around one percentage point each quarter. It might not sound like much, but you normally do not measure change in terms of consistent quarterly trends. Instead there is normally quarterly fluctuation. So, this is nothing short of a major decline.

However, what is interesting is that free streaming is not growing by the same rate radio is declining. Instead, what is happening is that radio and streaming audiences are co-existing, with many that have spent a long time doing both eventually shifting all of their listening to streaming. Added to this, older consumers tend to embrace change more slowly than younger audiences. So, radio’s older listener base effectively acts as a disruption buffer.

What all this means is that radio is facing an existential threat like no other but it has some time to get its house in order, to identify how it can meld the best of the radio model with streaming experiences to start its fight back. And make no mistake, radio has so many unique assets that streaming does not (local content, talk, news, sports, weather, travel, brand personality etc.) and Apple’s underwhelming success with Beats 1 shows that hiring a bunch of radio people and launching a station does not guarantee success. Nonetheless, streaming services will get there. And Spotify’s recently launched Pandora-clone in Australia indicates just how serious the radio frontier is to streaming.

For more (a lot more!) data and analysis on how radio and streaming are facing up against each other, check out our new report Radio – Streaming’s Next Frontier: How Streaming Will Disrupt Radio Like It Did Retail which can be purchased directly from our report store here and is also available immediately to MIDiA clients as part of our research subscription service.

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Join Us At ‘Radio Is Streaming’s Next Frontier’

I’m very pleased to announce that MIDiA is hosting a special industry event on Wednesday 7th February at Gibson Brands in central London, in partnership with 7digital. The event ‘Radio Is Streaming’s Next Frontier’ is going to explore how in 2018, streaming music is going to start impacting radio just like it has spent the last few years replacing downloads. Streaming spent the first phase of its life being the future of retail, it will spend the next phase becoming the future of radio.

In this free-to-attend event we will present some of our latest research, including exclusive data, ranging from big picture trends through to tactical data, such as exactly how much each streaming service is affecting each radio station.

In addition to my research presentation there will be panel discussion from industry experts:

Is Streaming and Radio a Zero Sum Game?

Moderator: Zach Fuller

Panellists:

  • Jeff Smith: head of Music, Radio2 and Radio6
  • Pete Downton: deputy CEO, 7digital
  • Chris Baughen: VP Content and Formats, Deezer

After all this there will be drinks and networking. The event was publicised to MIDiA clients and newsletter subscribers first so there are only a few places left. So, RSVP your slot here now!

Hope to see you there, and watch out for a sneak peak of some of the research soon.

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Pandora Buys Rdio To Become A Global Streaming Powerhouse

 

pandora rdioPandora today announced that it was acquiring the assets of now failed subscription service Rdio.  While the whispers about Rdio’s future had been building for some time, the deal is more interesting for what it says about Pandora’s plans than what it says about the state of the subscription business.

 

Rdio Battled Bravely And Set Innovation Standards But Fell Short

For what Rdio lacked in subscriber numbers it made up for in innovation.  It continually set product and feature precedents that Spotify and others subsequently aped, and its $75 million dollar ad inventory deal with US radio giant Cumulus sets a business model blueprint that other streaming services will follow. But for all its efforts and extensive marketing efforts Rdio was simply not able to get to the same sort of level as Spotify’s 2nd tier competitors, let alone to seriously challenge Spotify itself.  The music subscription business is not a winner-takes-all market.  But it is one in which some degree of meaningful scale is required to trigger the telco partnerships and brand advertiser deals that are necessary to achieve sustainability.  Eventually a company transitions from ‘bright new hope with potential’ to an ‘also ran that isn’t ever going to make it’.  Once that imperceptible line of market perception has been crossed it is only a matter of time before the end comes.

Pandora Will Use Rdio’s Assets To Go Global

Crucially Pandora is not acquiring Rdio as a going concern but only its assets, which won’t include licenses (as they have to be renegotiated when a music service changes corporate hands).  What those assets represent, or at least the bits that matter to Pandora, are teams, product and tech, licensing know how and an international footprint.  That last bit is particularly pertinent.  Rdio’s 100 markets contrasts sharply with Pandora’s 3 (US, Australia and New Zealand).  Indeed Pandora CEO Brian McAndrews stated “We seek to be the definitive music source for music discovery and enjoyment globally”.  While 100 markets is probably a step too far for Pandora, expect a healthy selection of top tier and emerging markets to feature in Pandora’s roadmap.  And if you’re eager to identify which ones, just take a look at the bigger radio markets globally (Japan possibly excepted).

Pandora’s Success Is Built On Lean Back Not Lean Forward

Pandora’s success is firmly rooted in delivering a high quality, lean back experiences to largely mainstream audiences.  That’s how it reaches 78 million monthly listeners, more than a quarter of US adults.  That positioning has served Pandora well and made it one of the few success stories of digital music.  In fact, other than Beatport and Last.FM, it is one of the very few music start ups that had an exist that considered to be a true financial success. Crucial to that success has been the fact Pandora has operated under statutory licenses for semi-interactive radio, which leaves it with dramatically higher (potential) operating margins than on demand services.  Which begs the question, just why is Pandora getting into the subscription business?

This Is The Latest Part Of A Major Strategic Pivot

The answer is that it forms part of a much bigger, much bolder plan.  Pandora has spent the last couple of years quietly amassing the assets that will transform it into a music platform super power.  In 2015 it acquired music data company Next Big Sound (c.$50 million), then came ticketing company Ticketfly in October ($450 million) and now Rdio ($75 million).  The combined $0.6 billion is a truly sizeable investment in a streaming-centred business model by anyone’s standards.  It also accompanies a concerted and costly investment in Pandora’s regional ad sales teams across the US to compete on a level footing with traditional radio’s sales teams.  Couple all that with November announcements to become the exclusive streaming outlet for popular podcast series ‘Serial’ and the landmark direct deal with Sony/ATV Publishing and a picture of something truly ambitious starts to emerge.

Pandora was fortunate to be able to IPO at a time when public offerings were still a highly viable option for digital start ups.  Spotify and Deezer (which just cancelled its IPO) will look on with no little jealousy at the power that a market capitalisation of nearly $3 billion gives you.  Now it is using this financial firepower to take the next step on its streaming journey.  Whatever that will prove to be, expect it to be a platform in its truest sense, rather than simply a streaming service with a few loosely attached ‘alternative revenue’ models, which is a mistake some of the subscription incumbents have made thus far.

Discovery Doesn’t Lead Anywhere Anymore, At Least Not To Sales

Pandora may aspire to be the definitive source of ‘music discovery’ but streaming discovery is becoming streaming consumption.  i.e. it is increasingly not leading to sales.  Live music sales is one alternative way to make money from ‘discovery’ but if ‘free music to sell tickets’ is Pandora’s end game then some difficult conversations with songwriters (who of course often don’t play live) will need to be had.

Pandora has just thrown its hat into the ring as a top tier player in the global streaming business.  By some measures you could say it is poised to become the biggest.  McAndrews left no room for doubt by stating “We plan to substantially broaden our subscription business.”  But in doing so Pandora will have to look itself in the mirror and ask itself “what am I now?”.

 

 

 

The Global Implications Of The BBCs Streaming Strategy

Yesterday the BBC’s Director General Tony Hall laid out a vision for the future of the BBC (for an excellent take on this see the blog post from MIDiA’s video analyst Tim Mulligan, and yes the name may look familiar, he’s my brother!).  The BBC has long played a crucial innovation role in the digital content economy but it has yet to carve out a convincing role for itself in online music.  It has built up a compelling YouTube content offering and it has pursued a streaming coexistence strategy with its innovative Playlister initiative but the bigger play has yet to be made.  That looks set to change, with the announcement that the BBC is planning to launch a ‘New Music Discovery Service’, which would make the 50,000 tracks broadcast by the BBC every month available to stream for a limited period.  The initiative is interesting in itself but its implications are more profound and could have global repercussions.

Radio Still Rules The Roost But The Streaming Fox Is At The Door

Radio is still by far the main way most people interact with music.  75% of consumers listen to music radio regularly compared to 39% that stream for free. Radio also remains the main way in which people discover new music and its DJs are still some of the most influential tastemakers on the planet cf Apple poaching Zane Lowe from the BBC’s Radio 1.  But things are undoubtedly changing.  Music radio penetration among 16-24 year olds falls to 65% while streaming rises to 54%.  In Sweden streaming has overtaken music radio among 16-24 year olds.  All of this without even considering YouTube which has overtaken radio for 16-24 year olds in markets as diverse as UK, US, Sweden, Germany and Mexico and is on the verge of doing so in France.  (All consumer data is from MIDiA Research).  Radio held its own throughout the digital revolution of the last 15 years but the cracks are now there for all to see.  Most radio broadcasters do not yet have the assets to properly navigate the digital transition.  In most markets there is no dedicated digital platform (the US and UK are two notable exceptions) so broadcasters rely increasingly on mobile streaming for engaging audiences digitally.  Which means they are one swipe of a finger away from a bewildering array of radio alternatives.  It is this dynamic that underpins the BBC’s approach to streaming.

The Tyranny Of Choice

Though streaming had been around long before Spotify (hello Rhapsody) the Swedish upstart simply made the model work.  It did so by fixing buffering and by giving consumers frictionless (i.e. not cost and easy to use) access to all the music in the world.  By fixing that problem Spotify inadvertently created a new problem: the Tyranny of Choice.  Consumers are paralysed by excessive choice.  The Tyranny of Choice is of course not solely Spotify’s fault but it was certainly a catalyst for it. With the traditional gatekeepers / curators (delete as appropriate according to your worldview) increasingly bypassed by data-driven discovery, mainstream music fans are left feeling utterly bewildered.

Consumers Don’t Get Curation

The BBC is keenly aware of its value as a curator and quite frankly thinks it can do a better job than pure play streaming services.  It is probably right.  But what it doesn’t yet know how to do is communicate and deliver that value outside of the framework of radio.  The problem with curation is most people don’t think they need it.  Just 5% of consumers state they want discovery and recommendation features from streaming services.  Yet these are in the main the very same consumers that listen to music radio, which of course is all about discovery and recommendation.  The difference is that it doesn’t feel like it.

Setting Curation Free

This the challenge for the BBC and all radio broadcasters: how can they take the essence of DJ led programming and translate that into the streaming environment.  Apple’s approach of simply taking programmed radio and building on demand streaming around it is one bold approach but it is just a first step. The BBC, and other publicly funded broadcasters, have the advantage of being able to take the long view, of planning for long term evolution rather than focusing on ‘flipping’ their start up or keeping shareholders happy each quarter.

The BBC is placing the bet that giving its curation the maximum ability to permeate and interact with the streaming marketplace will give it the best chance of delineating which models will work and how best to bottle up that curation magic dust.  It is also a bold move because if it follows its course this could see the BBC’s content, curation and editorial break free of the confines of the BBC.  Because if it works well enough out in the ‘streaming wild’ why would a user need to even visit a BBC property.  The BBC is setting curation free.  It is a strategy that gives a hat tip to BuzzFeed, a company with a stated intent to distribute content as widely as possible even if that ultimately means killing off the BuzzFeed website.  A quote from BuzzFeed’s CEO Jonah Peretti sums up the thinking perfectly: “Content might still be King but distribution is Queen, and she wears the trousers.”

So watch the BBC’s streaming endeavours closely because the outcomes will likely provide blueprints for thriving in the streaming era for media companies of all types and sizes right across the globe.