The attention recession has hit Spotify too

Spotify added two million subscribers in Q1 2022. Yes, this incorporates the impact of 1.5 million lost Russian subscribers and is set against Netflix having lost 0.2 million subscribers over the same quarter. But while Spotify did well to not suffer the same fate as Netflix, it was not able to buck the broader trend affecting the entertainment market: the attention recession. The attention recession is the combined impact of: 1) the end of the Covid entertainment boom (consumers have less time and money as pre-pandemic behaviours resurface); 2) economic headwinds (rising inflation and interest rates), and 3) the geo-political situation (the Russo-Ukrainian war). Spotify’s Q1 earnings provide further early evidence of the attention recession’s impact. Spotify’s earnings were shaped by all three.

Looking at the ad-supported and paid users of a number of leading digital entertainment companies that have already reported their Q1 2022 results, a clear trend emerges: paid user growth slowed in Q1 2022, while free users continued to grow strongly. With consumers having less time on their hands and less money in their pockets, free is growing faster than paid.

Entertainment monetisation trends followed an almost mirror opposite of user behaviour. The first quarter of every year is typically down from the preceding fourth quarter for ad businesses, with the Q4 advertiser spend surge receding. Yet the declines in Q1 ad revenues for Snap and YouTube were both significantly bigger in 2022 than in 2021, with a combined drop of 22% compared to 13% the year before. Snap’s Evan Spiegel even went on record to explain just how problematic a quarter Q1 2022 had been and how there are growing concerns about the outlook for ad spend. This is because, as consumers have less disposable income, they buy less, which means advertisers get lower returns on their spend. Ad revenue is most often an early victim of a recession.

Conversely, Q1 2022 subscription revenues were up slightly, though much less so than in Q1 2021, and Spotify’s premium revenues were down 1%. Nonetheless, the key takeaway is that subscription monetisation was less vulnerable in the first phase of the attention recession. While free services and tiers benefited from incoming cost-conscious users, they were not able to harness the shift commercially. 

As MIDiA said back in 2020, all companies were going to feel the impact of the attention recession, which we identified was imminent following the pandemic. It is a case of simple arithmetic: more time and more spend during the pandemic benefited all companies. Post-pandemic, both of those increases recede, which means that all entertainment companies have to fight hard to hold on to their newly-found boosts to revenue and users, let alone grow. When we made that prediction, it was before the additional elements of economic and geo-political trends raised their heads. Rising inflation is going to hit all consumers’ pockets (with food and fuel prices being particularly hit), forcing many households to make trade-offs between essentials and luxuries. 

Though Spotify’s move to wind down Russian operations was admirable, it illustrates how the impacts of the Russo-Ukrainian war on digital entertainment will be both varied and far reaching, not least because of its impact on inflation due to its disruption of global food and fuel supplies. 

We are living in ‘interesting times’ and the future is always uncharted, but especially so now. 

Forget peak Netflix, this is the attention recession

Netflix’s Q1 2022 results caused a stir, with subscriber numbers down by 0.2 million from one quarter earlier. Some are calling this ‘peak Netflix’, but this is not a Netflix-specific issue. The decline illustrates that Netflix does not operate in isolation, and is, instead, but one part of the interconnected attention economy – an attention economy that is now entering recession. This is a recession that MIDiA first called back in February 2020, and that the wider marketplace has started to wake up to.

The attention recession – after the boom

When MIDiA made the prediction of ‘the coming attention recession’ over a year ago, we identified that once the world started returning to pre-pandemic behaviours, the Covid-bounce in entertainment time would recede, creating an attention recession. The attention economy had already peaked back in late 2019, which meant that the pandemic and its lockdown attention boom delayed the inevitable negative effects of companies that are competing in a now saturated attention economy. During the lockdown boom, media time went up by 12% and all forms of home entertainment boomed, but as we warned at the time, the effects were temporary, so entertainment companies needed to plan for post-lockdown life. 

A return to a smaller and recently constrained, pre-pandemic attention economy was always going to be painful. We termed this contraction a recession because we knew there would be clear economic aftershocks. Not least because the impact has been unevenly felt. As the first signs of contraction showed, not all sectors were impacted evenly. Pandemic boom sectors, like audiobooks and podcasts, saw larger chunks of their newly-found consumption time disappear. Music clawed back some of its lost share. Video (Netflix included) fell, but social and social video buckled the trend entirely, not simply clawing back some lost share, but actually growing throughout the entire pandemic period to end it with more hours than when it entered it. The arithmetic is simple: total attention hours are falling, social is growing hours, therefore, the remainder of the attention economy collectively experiences a double whammy of decline of time and money. 

The wider economy is beginning to bite too

But, unfortunately, there is more. Since MIDiA made the case for an attention recession, the global geo-political and economic situations have changed – to put it mildly. Inflation was already spiking before Russia invaded Ukraine, and the war’s impact on grain and energy supplies will only accelerate inflation even further. Put simply, consumers will feel growing pressure, with wages racing to keep up with price rises. Discretionary entertainment spend will be one of the earliest victims. Video subscriptions inadvertently made themselves an easy target. The sheer volume of choice and competition, combined with rolling monthly subscriptions, make it all too easy to drop one subscription without seriously denting your overall video experience. But while streaming services now face a potential savvy switcher cataclysm, traditional pay-TV companies have their subscribers locked into legally binding, long-term contracts. It usually costs consumers MORE money to cancel contracts, defeating the purpose of trying to reduce spend. Consequently, we may even see the cord cutting / SVOD growth dynamic invert for a while.

Back in 2020, when we first started writing about the potential impact that an economic recession would have on entertainment, we identified that 22% of consumers would cancel one or more video subscriptions, and that 22% would downgrade from paid to free on music. Netflix’s earnings are the first signs of this consumer intent manifesting. Other subscription video on demand (SVOD) services should not consider themselves immune. Even if the economy was to stabilise tomorrow, the long-term outlook for SVOD will most likely be defined by savvy switchers continually hopping across services to watch the shows they want. SVOD subscribers had found themselves thinking the new boss looked pretty much like the old boss, having to subscribe to so many services that their SVOD spend ended up looking a lot like those old pay-TV bills. In a recession, consumers will need SVOD to deliver on the price benefit more than ever before. 

When price increase can be hindrance, not a help

A lot has been made of how great a job Netflix has done in increasing its prices while streaming music has not – heck, even I did it. Increasing prices above the rate of inflation may a) reflect Netflix’s actual market worth, and b) help drive revenue growth, but it makes Netflix exposed in a hyper-competitive SVOD market that is entering an attention recession and, potentially, an economic recession. 

Circumstances may well look very different for music. Firstly, the vast majority of music subscribers only have one subscription, so if you cancel, you lose all the benefits of a paid account, not just a slice of choice. Secondly, music subscriptions have reduced in real terms because they have not kept track with inflation. In fact, prices have hardly moved at all in 20 years. While this has long been seen as a problem, in the current circumstances, it might be an asset. Music subscriptions represent good value for money, and with inflation pushing upwards, they will represent even better value for money as every month passes. Perhaps now is not the best time for music price increases.

Reasons, not ways, to spend attention

So, with all this doom and gloom, how can entertainment companies survive – perhaps even thrive? Long term, annual billing for digital subscriptions is a logical step, but for those who do not have them, now is not the best time to try to commit to large payments, unless there is some serious discounting in place. Multi-format bundles, like Apple One and Amazon Prime, will also be well placed. Ad supported services will also do well. But it will take more than clever billing and bundling. It will require a fundamental reassessment of the relationship with the audience.

One of the key calls MIDiA made in our 2022 predictions report was the new need for reasons, not ways, to spend attention in the attention recession:

“[Entertainment companies] will not only lose time, but end up lower than pre-pandemic levels. With such fierce demands on their time, audiences will need to be given reasons, not ways, to spend their attention.”

This might also be the moment for the next generation of emerging tech majors like Byte Dance and Tencent who’s businesses have a strong focus on ad supported and monetizing fandom rather than the commodified model of monetizing consumption. As Facebook’s declining user numbers showed, even in the booming social sector, a realignment of the marketplace is happening.

In the attention recession, entertainment companies need to start appreciating that consumer attention is a scarce resource, not an abundant one – a resource that must be won, not claimed. Those who do not will be the most vulnerable to the vagaries of the attention recession.

New Webinar on What Comes After Lockdown

0Want to know what happens in the post-Lockdown era? Join us for our free-to-attend Recovery Economics webinar tomorrow (Wednesday 10th June) at 4pm BST / 11am EST / 8am PT for insight on music, radio, games, TV, sports and media.

We will be presenting an overview of MIDiA’s latest research thesis: Recovery Economics. This is our framework for identifying which changed need states that emerged during lockdown will form the basis for new behaviours post-lockdown and what you need to do in order to adapt to this new normal.

What is clear is that simply doing more of the same is not a strategy. The Covid-19 lockdown created severe dislocation across many entertainment sectors but also a host of new growth opportunities. As we emerge from lockdown and enter the early stages of a global economic recession, some of these ‘new-normal’ business models will grow further, presenting increased competition for the ‘old normal’. New and established players alike will have to play by different rules in this coming period, dealing with challenges such as permanent changes to lifestyles, weakening consumer spending and ever growing competition for attention.

In the webinar we will explain how this will look across the music, TV, film, games, radio, sports and media industries.

Register now!

Recovery Economics | Bounce Forward not Back

COVID-19 social distancing measures caused unprecedented dislocation to the entertainment economy. With a recession now a question of ‘how bad’ rather than ‘if’, entertainment companies have to adapt their businesses and identify new partners to maximise opportunities in the post-lockdown era. This requires a detailed understanding of how the underlying user need states of their customers changed during lockdown, how these changes will in turn evolve, and how they can meet this new demand.

To help entertainment businesses and creators understand these dynamics and navigate the choppy waters ahead, MIDiA Research has created a new research stream entitled Recovery Economics. Recovery Economics explains what the post-lockdown era will look like, which market and audience fundamentals will remain changed and the risks and opportunities these will result in.

MIDiA clients can already access the first two Recovery Economics reports here in our exclusive COVID-19 research practice, with more reports to follow. And following on from the runaway success of MIDiA’s first COVID-19 webinar, we are showcasing some of the research highlights in another free-to-attend webinar: Recovery Economics: Bounce Forward not Back. Spaces are strictly limited so sign up soon! In the meantime, here is an introduction to Recovery Economics.

Recovery Economics - MIDiA June 2020

Recessions are no new thing to the global economy, but the scale and impact of the coming recession looks set to be unlike any that has been experienced in the living memory of today’s business world. Although it is COVID-19 effects that are the fire’s spark, these factors will still underpin the recession’s impact on entertainment businesses.

The crucial difference is the recession prologue that was lockdown. We can hope that COVID-19 dissipates far more quickly, but at this stage it would be imprudent of any business not to at least plan for things being markedly different for some time so that it can identify how to adapt and even thrive during such a scenario. It is time to prepare for the new normal.

recovery economics midia research

Politicians talk of a lockdown ‘bounce-back’, with business returning to normal after its enforced hiatus. In practice, recessions do not work this way. Instead, the dislocation that caused the economy creates permanent scarring, with the effect persisting into the future even once the causal factors are gone. This dynamic is known as hysteresis, as economist Michael Roberts puts it:

“Hysteresis is the argument that short-term effects can manifest themselves into long-term problems which inhibit growth and make it difficult to ‘return to normal’.”

For the purposes of understanding how the coming recession will impact entertainment businesses, the crucial consideration is what ways lockdown impacted consumer demand and supply chains will have long term effects. The length and severity of the recession will be crucial in determining this as will the degree to which social distancing measures remain a feature of the economy.

Perhaps the single most important factor to consider is changed need states. User need states underpin all businesses. For consumer entertainment businesses this is particularly true. Lockdown’s reframing of consumption paradigms showed us that some businesses did not have a plan B when need states became void states (e.g. live) while others were dependent on specific use cases (e.g. radio and music streaming on the commute).

In the post-lockdown era, some void states will return to need states – but slowly, while some of the new need states that emerged in lockdown (e.g. more video conferencing, YouTube fitness trainers, wellness / mindfulness apps) will continue to prosper in the post-lockdown era.

The boredom dependency

For music streaming, podcasts and radio, the biggest need-state change will be the commute. For so long a source of captive audiences, the commute is entering terminal decline. Post lockdown fewer employees will be fully office based. Some will be entirely home-based. Nearly a third of consumers said that during lockdown they have been using their commute time to do something else rather than listen to audio. This dynamic will lessen post lockdown, but it is not going to go away.

Lockdown revealed the vulnerability of entertainment’s boredom dependency. The obvious weakness of relying on people to consume because they have nothing better to do is that as soon as they can do something better, they will. Entertainment companies will have to plan for a steady erosion of boredom-driven consumption.

For more on Recovery Economics, insight into what forms of entertainment will do best post lockdown and how to map how it will affect you, join us on June 10th for: Recovery Economics | Bounce Forward not Back

If you have any questions regarding registration contact dara@midiaresearch.com.

How Coronavirus Will Affect the Entertainment Industries

The coronavirus is a global pandemic. Regardless of what its actual infection and mortality rates might be, it is already having seismic impacts on stock markets and consumer behaviour – the result of which might be to tip the global economy into recession. It is also creating the largest home working experiment in history. Even if coronavirus doesn’t tip us into recession, the next few months will see major disruption of consumer behaviour patterns with major implications for the entertainment industries. However, to introduce an element of calm into the hysteria, coronavirus appears to be following the s-curve (scroll down to chart). So although the data we are currently looking at is two weeks out of date (ie factoring in the incubation period) the early signs are that it tops out as a small minority of the population).

In Q4 2019 MIDiA fielded questions to consumers about how they would change their leisure and entertainment spending if a recession took place and they had to reduce their overall expenditure. The full findings of this exclusive research will soon be published in a MIDiA report: Recession Impact | Cocooning Will Protect Entertainment Spend (the latest in our series of Recession Impact reports). Here are a few highlights and how they relate to the current coronavirus spread.

In the last economic downturn, consumers cocooned, opting to stay in more in order to save money. The signs are that this pattern will be replicated if another recession comes, particularly so because of public concerns about health risks in public places. When we asked consumers which three types of leisure and entertainment spend they expected to cut back on most, going out and eating out were by the far the two most widely-cited options. Live music was also widely cited among concert goers but less so than going out and eating out, with around two thirds of concert goers not planning to stop going to gigs – cancellations allowing. The difference between now and the last economic downturn is that digital content services have boomed, so consumers now have much better home entertainment options than they used to. Cocooning is therefore an even more appealing prospect. Indeed, there are probably already many people looking forward to binge watching themselves through a few virtual boxsets.

Crucially, streaming looks to be relatively well placed. Just over a fifth of consumers expect to have to cancel a video subscription and the same goes for music. However, the impact on music would be more pronounced due to the majority of music subscribers only having one music subscription. So, a consumer cancelling a music subscription means a lost subscriber. But with more than half of video subscribers having more than one video subscription, a cancelled video subscription would most often simply mean one less subscription in the market rather than a lost subscriber.

Of course, when push comes to shove, consumers may find themselves cutting back more dramatically, with streaming music particularly vulnerable because:

  1. Younger people are normally the first to lose their jobs and millennials make up the lion’s share of music subscribers
  2. Downgrading to a free tier still leaves the consumer with a decent music experience, and that’s without even considering the role of YouTube

Across both music and video, a long-term recession – if it happens – would see a growing role for ad-supported. YouTube looks best placed to prosper, not least because Spotify has not had the best of times growing its ad business. Pandora may also benefit, as may the likes of Peacock in video.

In short, whether it be subscriptions or ad-supported, coronavirus may actually benefit streaming business models, especially video. If a recession comes then entertainment spend will be hit, but significantly less so than leisure. These are worrying times, but at least we’ll be able to binge watch our way through them.