How the DNA of a hit has changed over 20 years

Recorded music has always evolved to fit the dominant format of the era, from three-minute songs to fit on 7-inch vinyl, through eight-song albums to fit on LPs, through to 16+ song albums to fill CDs. Format-driven change is nothing new, but streaming’s impact on the making of music itself is arguably more revolutionary than that of previous formats because it is both the consumption and discovery format rolled into one.

In the heyday of the album, the focus would be both on what makes a great album and what tracks would work on radio, and later MTV. Now all the considerations are rolled into the song itself, the central currency of the streaming era.

20 years of dna of hits

To illustrate just how significant this change is, we have taken a snapshot of the Billboard Top 10, now and 20 years ago. The caveats here are that this is just that: a snapshot in time, rather than a comprehensive data analysis – and it is a view of just the very top of the pile, the megahits of the day. Nonetheless, it provides some clear illustration of how the DNA of a hit has changed over the course of 20 years:

  • Shorter, snappier songs: The average length of the top 10 hits has fallen by 16% to 221.5 seconds (three minutes and 42 seconds, down from four minutes and 22 seconds). Meanwhile, intros have fallen from 13.1 seconds to 7.4 seconds. In the streaming economy where release schedules are weaponised with increased volume and velocity of releases, there is often just one chance to catch the attention of the listener. With ever fewer younger music fans listening to radio, there is little opportunity for the listener to hear the track again if they skip it in their streaming playlist.
  • Hip Hop’s apogee: The July 2000 top 10 was evenly split between pop, rock and RnB, with the latter two having the edge. In today’s top 10 Hip Hop reigns supreme, accounting for six of the top 10 tracks. Starting with the rise of EDM and now continued with Hip Hop, the hits business has become more focused, doubling down on one leading genre and in turn making it even more dominant.
  • The industrialisation of songwriting: As the buy side of the song equation, record labels are reshaping songwriting by pulling together teams of songwriters to create genetically modified hits. The more top-class songwriters, so the logic goes, the greater the chance of a hit. The average number of songwriters increased from 2.4 per track in 2000 to 4 in 2020. The upside for songwriters is more work, the downside is having to share already small streaming royalties with a larger number of people. Interestingly, the average age of songwriters increased from just under 27 to just over 31. It points to longer careers for songwriters but it does beg the question whether this means songwriters’ life experiences are that little bit more distant from those of young music fans.
  • The rise of the featured artist: Adding super star collaborators onto tracks has become a go-to strategy for streaming-era hits. In the July 2000 top 10, none of the tracks had a featured artist, by July 2020 that share had jumped to 60%.

The dominant theme underpinning these changes in the DNA of hits is reducing risk. More songwriters, more collaborations, shorter songs, shorter intros, fewer genres all point to honing a formula, following a blueprint for success. This evolution will continue to gather pace until the next format shift rewrites the rules. Until then, record labels, songwriters and artists need to ask themselves whether they are striking the right balance between business and creativity. If they are not getting it right, then the inevitability is that (at the hit end of the market) pop will eat itself. And if it does, expect an audience shift away from the increasingly homogenised head, down to the more diverse tail.

Time to stop playing the velocity game

We all know that streaming has transformed consumption and business models alike, but this is not a ‘now-completed’ process. Instead it is one that continues to evolve at pace, and the dynamic of pace is the pivotal variable. Consumer adoption continues to accelerate in terms of both time spent and take up. The streaming services – which are entirely geared to driving and responding to this behaviour – rapidly hone their systems accordingly. Labels, artists, publishers and songwriters are stuck playing catch up, running after the streaming train before it disappears over the horizon. The marketing strategies and royalty systems that worked yesterday struggle to cope today. But this ‘upstream’ side of the music business is inadvertently making it harder for themselves to ever actually catch up. By trying to play by the new rules they are in fact feeding the machine, ceding further control of their own destinies. It is time for a reset.

Streaming’s ‘upstream’ fault lines

There are three major fault lines for the upstream music business:

  1. Volume and velocity: releasing more music than ever before to meet the accelerating turnover of content
  2. The demotion of the artist: once the centrepiece of music consumption the artist is becoming a production facility for playlists
  3. Royalties: royalty payments built for the much more monolithic streaming model of the late 2000s do not reflect the complexities and nuances of streaming consumption in the 2010s 

Each of these are inherent attributes of the current model and favour the ‘downstream’ end of the equation (i.e. streaming services) far more than they do the upstream. Each problem needs fixing.

Volume and velocity

This is the most important and insidious factor, yet it is deceptively innocuous. Labels are releasing an unprecedented volume and velocity of music to try to keep up with streaming – especially the majors. But it is a Sisyphean task, no matter how many times you roll that boulder up the hill, the next one needs rolling up all over again and the hill gets steeper every time. Spotify is adding around 1.4 million tracks a month so, for example, if UMG wanted to release tracks on a market share basis it would have to release 420,000 every month.

Now that the data era has arrived in music, the risk of signing a new artists has been significantly reduced, but at the same time, an artist whose numbers are already trending does not come cheap to sign nor does she come with a guarantee of longevity. Many artists can do enough to have a successful song, but far fewer can make a habit of it. Labels have to decide how willing they are to bet on an artist one song at a time.

It feels impossibly hard not to play the game because everyone else is playing it and the system is geared that way. Feeding the velocity game habit is like feeding a crack cocaine habit. And yet, labels know better than most businesses that by breaking the rules, creative businesses can have more, not less, success.

The demotion of the artist

Western streaming services, unlike many Eastern ones, are built around tracks not artists and consequently consumption is too. Inadvertently, labels are feeding this dynamic because they are so focused on making tracks work that an artist is much less likely to be given the benefit of a long term strategy if her songs do not stream. The problem with chasing streams is that the process for one song might not apply to another. Failing at streams will often be a reason for pulling the plug on an artist, simply because ‘Plan B’ does not have a boiler plate. The more they push tracks the more they help the de-prioritisation of artists.

Fandom should come first, streaming second. A longer-term view is needed, one that puts building the artist’s fanbase first and streaming second. If an artist has a large, engaged fanbase then streams will usually follow. But if an artist gets a lot of streams on a playlist a fanbase does not necessarily follow. Marketing campaigns need to shift emphasis to a longer-term, audience-centric focus. It may be harder to measure the near-term ROI with this approach, but it will deliver better long-term returns.

Royalties

The #brokenrecord debate is not about to go away, especially as it will likely be 2022 before live music is operating at full capacity again and thus delivering artists the income they are currently missing. As I have previously discussed this is a complex problem for which there is no single solution but instead will require coordinated efforts from multiple stakeholders. A reassessment of the entire royalty streaming structure is needed from upstream to downstream.

Downstream, we need to stop thinking that every song is equal. They are not. Listening to 30 minutes of 35-second storm sound ‘songs’ in a mindfulness playlist should not be paying the same royalties as an album listened to its entirety. Also, some form of user-centred licensing solution is needed that rewards fandom, whether that is a user opt in model (‘support favourite artists’) or an actual re-work of the royalty mechanism, or a combination of the two.

Labels also need to work out how they can pay more to artists. Lowering their A&R risk exposure could free up some income. Of course, this is something that many have tried and failed at, but what if labels were to allocate 10% of their marketing budgets to top-of-funnel activity so that they can do even more work than they currently do around identifying talent early. This needs a commercial model that protects their funnel (e.g. first refusal terms for artists) and also needs to play in the creator tools space: the tools creators user to make music is the real ‘top of funnel’ – this is where the first relationships are established.

The holy grail for improving label profits would be for the label to improve the overall success rate for the artists in the portfolio. However, in the history of music, it is safe to say that no label has quite cracked it. Instead they live with it as a reality and a cost of doing business.

Labels do though, have some margin slack to play with. WMG improved its OIBDA from 11.9% in 2018 to 14.0% in 2019 while UMG improved its EBITDA from 16.7% in 2017 to 20.0% in 2019. Clearly, improved profitability is important in its own right and for investors, but the way to see this is a near-term expense to secure long-term profitability. A label without artists is not a label.

Breaking the habit

It takes a brave – some might say foolish – label to stop playing by streaming’s rules of engagement, to risk losing share in those crucial playlists. But label business models are not structured for the economics of single tracks – dance labels excepted. Their P&Ls are built around artists. When streaming behaviour started killing off the album, labels complained but then got used to building campaigns around tracks. However, this is not the destination, it is a stopover on the long-term journey towards a post-artist world. Playing streaming’s velocity game perpetuates an increasingly dysfunctional model. It feeds shortening attention spans, degrades the role of the artist and downgrades music to fodder for playlists. It is time to jump off the merry-go-round.

Just what is Tencent’s Endgame?

tencent logoTencent’s combined $200 million investment in WMG follows on the heels of its $3.6 billion joint investment in Universal Music. It is hardly Tencent’s first investments in music, having spent $6.2 billion on music investments since 2016. But music is just one part of a much larger, supremely bold and undoubtedly disruptive strategy that is making the Chinese company an entertainment business powerhouse in the East and West alike.

Tencent is a product of the Chinese economic system

Tencent being a Chinese company is not incidental – it is pivotal. The Chinese economy does not operate like Western economies. Rather than following free market principles, it is a controlled economy in which everything – in one way or another – ultimately comes back to the state. In China, the economy is an extension of the state. The state takes an active role in the running of successful Chinese companies, sometimes very openly, sometimes in less direct ways, such as ensuring party nominees end up in management positions.

Chinese companies are used to working closely with the state – in its most positive light – as a business partner. When a company’s objectives align with those of the state, an individual company may gain preferential treatment at the direct expense of competitors. This is exactly the opposite way in which state involvement happens in the West (or is at least supposed to) – i.e. regulation. Tencent has benefited well from this approach, not least in music.

Tencent Music is the leading music service provider in China (78% market share in Q1 2020) and is also the exclusive sub-licensor of Universal, Sony and Warner in China. This means that Tencent’s streaming competitors have to license the Western majors’ music directly from it. Tencent clearly has a market incentive to ensure terms are less favourable than it receives itself. Netease’s CEO call the set up ‘unfair’ and regulatory authorities are at the least going through the motions of investigating. But the fact this set up could ever exist illustrates just how different the Chinese regulatory worldview is.

Investing in reach and influence

Why this all matters, is that when Tencent views overseas markets it does so with a very different worldview than most Western companies. Taking investments in two of the world’s three biggest record labels might feel uncomfortable from a Western free-market perspective, but to Tencent it just makes good business sense to have influence over as much of the market as it can get. What better way to help ensure you get good deals in the marketplace? Such as, for instance, exclusive sub-licensing into China.

Music is not Tencent’s main priority. For example, its combined $6.2 billion spent on music investments is less than the $8.6 billion that Tencent spent on acquiring 84% of gaming company Supercell in 2016). Nonetheless, music – along with games, video, messaging and live streaming – is one of the central strands of Tencent’s entertainment portfolio strategy.

Just as Apple, Amazon and Alphabet are building digital entertainment portfolios designed to compete in the ‘attention economy’, so is Tencent. In fact, it is fair to say that Tencent is prepping itself as a direct competitor to those companies. But while each of the Western tech majors compete in familiar (Western) ways, Tencent is taking a more Chinese approach.

If you don’t like the rules of the game, play a different game

Tencent’s entertainment investment strategy can be synthesised as follows:

  • Take (predominately) minority stakes in companies to get the benefit of influence without having to shoulder the burden of ownership
  • Invest end-to-end across the supply chain, from rights through to distribution
  • Systematically invest in direct competitors so that they are all each other’s enemies but are all Tencent’s friend

This strategy has given Tencent access to and / or control of:

  • Audience (e.g. QQ, WeChat, Weibo, Snapchat (12%), Kakao (14%), AMC Cinemas – via its stake in Wanda Group),
  • Distribution (e.g. Tencent Music, Tencent Video, Tencent Games, Joox, Spotify (10%), Gaana, KuGou, Kuwo, QQ Music, Tencent Video, Tencent Games, Epic Games (40%)
  • Rights (e.g. UMG (<10%), WMG (1.6%), Skydance (5%–10%), Supercell (84%), Glumobile (15%), Activision Blizzard (5%), Ubisoft (5%), Tencent Pictures)

The Western tech majors have built similar ecosystems, acquiring the audience and distribution parts of the supply chain (e.g. iOS, YouTube, Instagram, Twitch, Apple Music) but only rarely getting into rights (e.g. Apple TV+ originals) and never systematically investing in competing rights holders.

The Western tech majors may have often tetchy relationships with rights holders but their strategic focus (for now at least) is to be partners for rights holders. Tencent’s strategy is one of command and control: vertical supply chain integration secured through the sort of behind-closed-doors influence that billions of dollars’ worth of equity stakes get you.

Tencent may be the future of digital entertainment

Tencent is building the foundations of being one of – perhaps even the – global digital entertainment powerhouse. By taking stakes in two of the Western major labels, Tencent broke the unspoken gentleman’s agreement that streaming services and rights holders would remain independent of each other in order to ensure the market remains open and competitive. Now the Western tech majors have to choose whether to continue playing the old game or to get a seat at the table of the new game. Back in 2018 MIDiA predicted that over the coming decade Apple, Amazon or Spotify would buy a major record label. Maybe that prediction is not quite so outlandish anymore.

Artists are Learning How it Feels to be a Songwriter

The ‘broken record’ streaming debate that continues to rage on is a natural consequence of the instantaneous collapse of live music revenue following lockdown. As soon as it was clear that live was going to be gone for some time, MIDiA predicted that the artist backlash against streaming royalties would be a natural, unintended consequence.

With many artists used to live comprising more than half of their income and streaming by contrast a sizeable minority, it was easy for them focus less on whether streaming paid enough and more on how many extra fans it was bringing to their concerts.

In the absence of live, all eyes are on streaming. As I’ve written previously, there isn’t a silver bullet solution to what is a complex, multi-layered problem. But there is a really important issue that artists’ lockdown plight shines a light on: the long-term plight of songwriters. Here’s why.

Streaming did not grow in a vacuum

The streaming economy did not grow in a vacuum. It rose in the context of a thriving wider music industry where artists were earning good money from live, merch and (for some) sponsorship. Nor did streaming ever consider its relationship to live as being neutral. Spotify in fact is vocal in its belief that it  ‘supports and extends the value of live’.

This matters because it encourages artists to think about streaming delivering a wider set of concrete income benefits than the royalty cheque alone. The streaming case is that without it, artists would be playing to smaller crowds and selling less merch. A high tide raises all boats.

Without the halo effect benefits though, artists would have found it much more difficult to adjust to the shift of paradigms from a series of large one-off income events (i.e. selling albums) to a longer-term, more modest monthly income, namely trading up front payments for an annuity. Artists would have found it as difficult as…well…as they are now. This is how it feels not to have live music and merch paying the bills. This is how it feels to be a songwriter.

Songwriters only have the song

Professional songwriters (i.e. not those that are also performing artists) may have many income streams (performance, sync, mechanicals, streaming) but they all depend on the song. The songwriter lives in a song economy. The artist lives in a performance/ recordings/ clothing/ collectibles/ brands economy. Songwriters do not tour or sell t-shirts. As a consequence, they have been paying closer attention to streaming royalties over recent years than artists have. Now that artists are also unable to tour or sell shirts (at least in the same volumes) streaming royalties suddenly gained a new importance to them also.

The good news for artists is that live will recover (though it will take until late 2021 to be fully back in the saddle). The bad news for songwriters is that there is no easy or quick fix and things will get worse before they get better. One of the key imbalances is in streaming. Music publisher revenue is around 2.8 times smaller than label revenues but streaming royalties are four times smaller. As streaming becomes a progressively larger part of the wider music economy, if the current royalty mix remains, songwriters will earn a progressively smaller share of the total.

A generation of whom much is asked

Artists are fighting an important fight now, but when live picks up post-lockdown, songwriters will still be fighting their fight. This is not to in any way diminish the importance of artists getting a fairer share from streaming services and record labels, but it is to say that much of their pain will ease when their other income streams come back online.

Be in no doubt. Songwriters have a long and windy road ahead of them.

Songwriter’s streaming era plight reminds me of Franklin D. Roosevelt’s 1933 quote:

“To some generations much is given. Of other generations much is expected.”

But just as streaming does not exist in isolation, nor do songwriters. They are the foundations of the entire industry. There is a well-used saying that ‘everything starts with the song’. It doesn’t. Everything starts with the songwriter.

Quick reminder: if you are an artist and you haven’t yet taken our artists survey, then there is still time! We are keeping the survey live for a few more days. All individual responses are 100% confidential. All artists get a full copy of the summary survey data so you can benchmark yourself against your peers, including how they are dealing with the impact of COVID-19. The survey questionnaire is here.

The Global Music Industry Will Decline in 2020

Sorry to be the bearer of bad tidings but the global music industry will decline in 2020.

Although we are now nearing the post-lockdown era in many countries across the globe, we are only just at the start of the recession phase that is coming next. Over the coming months we will start to see concrete examples of the downturn (including Q2 financial results) that will transform the recession from an abstract possibility into something far more tangible.

Although live music is the most obviously impacted, all elements of the music industry will be hit. In a forthcoming MIDiA client report we will be publishing our detailed forecasts of exactly what this impact could look like. In this blog post I am sharing some of the top-level trends.

music industry revenue forecasts 2020 midia research

In order to forecast recessionary impact on music revenues MIDiA broke down all of music’s sub-industries (recorded, publishing, live, merch, sponsorship) and all relevant sub categories (streaming, sync etc.), and then divided these into the financial quarters of the year. We then modelled the impact of lockdown, longer-term social-distancing measures and the recession on each of these quarters. We then put this model through bear, mid and bull cases. The sum totals are what you see in the chart above. In all cases, the Q2 decimation of live revenue and the subsequent slow clawback in the remainder of 2020 account for the majority of the decline.

In our mid case (i.e. what we consider to be the most likely case) we forecast a 30% decline on 2019 revenues with the following sector-level changes:

  • Recorded music (retail values) +2.5%
  • Publishing -3.6%
  • Live -75%
  • Merch -54%
  • Sponsorship – 30%

This is how we are thinking about each sector:

  • Recorded music: Music streaming will be far less affected by a recession than many other sectors. But under no circumstances is it immune, and ad supported in particular is anything but ‘resilient’. When the recession bites, consumers will cut discretionary spending, including subscriptions. We expect the increase in existing music subscriber churn to be relatively modest but the growth of new subscribers to slow in markets hardest hit by a recession. Unfortunately, millennials – streaming’s heartland – are the most vulnerable to job cuts. Ad supported is going to struggle whichever way you look at it. Spotify was struggling to make ad supported work even before the recession, while Alphabet was seeing a weakening Google ad business even last year. But it is the other parts of the labels’ businesses that lockdown has hurt most so far: physical sales due to store closures; sync due to the halt in TV and film production; performance due to store and restaurant closures. Q2 revenues could average out at between -2% and +1.5% up on Q1. If the recession deepens significantly in the second half of 2020, the combined effect of higher unemployment and reduced consumer spending could result in a worst case scenario of -4.0% annual growth for recorded music. If the economy recovers in 2021, recorded music revenue will return to growth also.
  • Publishing: Music publishing has been a steady earner for so long and as a consequence has enjoyed an influx of investment in recent years. 2020 though looks set to be a year of revenue decline. Our base case is for a -3.6% change on 2019. Key to this are: reduced syncs due to the halt in filming; reduced performance royalties due to a) live music decline; b) commercial radio declines; c) retail and leisure closures. Physical mechanicals, though small, will be hit by store closures. If the economy recovers in 2021, music publishing revenue will return to growth also, though performance revenues will see long-term transformation due to changes in lifestyles, e.g. more homeworking means less commuting (less radio) and less time spent in urban centres (less retail and leisure) both of which impact publisher income. If the economy recovers in 2021, publishing revenue will return to growth also.

 

  • Live: Even if live events can be put on in Q3, reduced capacities and some venues not being able to operate at all will mean that live revenue growth will be a slow clawback – a process that will run into 2022 and that will only be partially offset by the (much needed) growth in virtual event revenue.
  • Merch: Although there have been some great merch success stories during lockdown (including veteran UK synth poppers OMD selling £75,000 of merch during one live stream) merch sales are so often closely tied to live. Once the lockdown bump is over, the natural cycle of merch sales will remain disrupted by live’s slow clawback.
  • Sponsorship: Artist sponsorship will be hit by brands scaling back their marketing budgets as the advertising economy contracts.

In addition to the forthcoming MIDiA client report we will be exploring these themes and others in our free-to-attend webinar next week: Recovery Economics: Bounce Forward Not Back. Register here.

What is the value of exposure when exposure is all there is?

There is an existential debate going on at the moment, around whether streaming is paying artists enough. It may feel like a rerun of old debates but it is catalysed by COVID-19 decimating artist income. These are some of the key narratives: here, here and here.

In this piece I lay out the underlying economics of the argument. I also focus wholly on artist income as songwriter income is another topic entirely.

COVID-19 has reset the debate

The latest streaming royalty debate is not an isolated event. It is happening because COVID-19 has decimated live income, leaving many artists worrying about how to make ends meet. Last week, just before this whole debate kicked into gear I wrote:

“Live’s lockdown lag may have the knock-on effect of making artists take a more critical view of their streaming income. When live dominated their income mix, streaming’s context was a meaningful revenue stream that built audiences to drive other forms of income. It was effectively marketing artists got paid for. Now that artists are becoming more dependent on streaming income, the old concerns about whether they are getting paid enough will likely come back to the fore. It is in the interests of both labels and streaming services, that labels use this as an opportunity to revisit their streaming splits with artists. Labels cannot afford to have artists united against the labels’ primary income stream.”

None of this makes the debate any less important, but it explains why it is happening now, and with live revenue potentially set to take years to fully recover, it is a reality that streaming services and labels need to adjust to. It is in the interests of both labels and streaming services that artists feel like they are being treated fairly. But it is crucial that this debate is grounded in a firm understanding of streaming economics and that we do not return to the mudslinging of more than half a decade ago. A debate which, by the way, did not result in any fundamental change to how artist royalties are paid and was eventually followed by labels negotiating smaller revenue shares with Spotify and others.

Where streaming has got us to

Firstly, let’s lay some ground markers:

  • Streaming has driven half a decade of recorded music revenue growth, with the market now 42% bigger than it was in 2014
  • The wider streaming economy has globalised fandom and engagement
  • More people are listening to more music now than before

Streaming has been the change agent that turned around 15 years of decline. But it also completely reframed artist income from recorded music. In the old sales model artists would get a large sum of money in a relatively short period of time. Streaming income is more like an annuity, a longer-term return where the music keeps paying long after release. In the old model artists had smaller but high-spending audiences. With streaming they have larger but lower-value audiences.

For example, a recouped independent artist might expect to earn $4,500 for selling 1,500 copies of an album. That is roughly how much an artist would get from 5,000 people streaming the album 20 times each. The average revenue per user (ARPU) has gone from $3.00 to $0.90 for streaming. The artist has traded ARPU for reach.

This model worked fine when live and merch were booming because more than three times as many monetised fans meant three times more opportunity for selling tickets and t-shirts. This of course is the ‘exposure’ argument streaming services are fond of, which works until it does not. Now that live and merch have collapsed, as the trope goes ‘exposure does not pay the rent’. The previously interconnected, interdependent model has become decoupled.

Put simply, artist streaming economics do not work without live.

midia streaming royalty payments

The question is: what levers can actually be pulled and what effect can they have? In the above chart I have used Spotify’s 2019 premium revenues to illustrate how changes in royalty shares can impact what artists earn. I have used a total per stream rate of $0.06 as the base case, which could look on the high side for some artists, but the purpose is to show the relative change. Whatever amount the base rate is, it will increase by the same percentages.

The tl;dr of the chart is the most radical of the options (label rate returns to 55%, podcast dilution is removed from the royalty pot, a 25% increase in retail price and therefore royalties) results in a very meaningful uplift of 42% in royalties for artists from today’s current state. But, the three problems here are:

  1. Such measures could damage the commercial sustainability of streaming
  2. It does not change the underlying annuity model shift that streaming represents
  3. We are about to enter a recession. Music subscriptions are at risk, increasing the prices right now could accelerate subscriber churn. Meaning a bigger slice of a smaller cake for artists.

Let’s take the first two points in turn.

1) Spotify lost $184 million in 2019. With this royalty model it would have lost more than $1 billion. Spotify would have to reduce its operating costs by a fifth just to get back to losing $184 million. Critics would argue this represents trimming the fat. It might, but it would also likely lead to Spotify:

  1. Cutting back on product development
  2. Cutting back on growing its subscriber base
  3. Finding new ways to charge labels and artists for additional services

None of these are reasons not to pursue the strategy but they are prices that labels and artists have to be willing to take. Spotify revenue growth will slow. Furthermore, it will skew the market towards Apple, Amazon and Google who can afford to make music loss leading. In the mid term this may benefit artists, but in the longer term (i.e. when Spotify is sufficiently squeezed) these tech majors are likely to follow their MO of ‘reducing inefficiencies in the supply chain’. So be careful what you wish for.

2) Taking an artist straw person, with 20% of her total income coming from streaming, if live and merch only gets to 25% of its previous level, the 41% increase in streaming income would still see her total annual income fall by 40%.

No streaming lever can be pulled hard enough to offset the decline in live revenue.

So, let’s pull together all the pieces:

  1. Streaming royalties can be increased meaningfully if prices are increased and rates revisited but it may slow the streaming market
  2. Now is probably not the best time to be increasing streaming prices for consumers
  3. Even a big increase is not going to offset the fall in live income

There is not a simple, single answer to fixing the current crisis in artist income. A blended, pragmatic solution would be:

  1. Increase royalties at a middle option rate (do not increase prices until after the recession)
  2. Artists push their fans to buy their music at destinations like Bandcamp
  3. Professionalise and commercialise the livestreaming sector, with a strong focus on charging for events in order to create some live income
  4. Innovate virtual fandom products to drive new, additional income streams

It is not going to be easy for artists for some time yet. The hard truth is that income levels will not return to full strength until live does, and that is a way off yet. Streaming is more important now than ever so any solution must balance maintaining its momentum and scale with sustaining artist careers.

The IFPI Confirms 2019 was the Independents’ Year for Streaming

UPDATE: this post has been updated to correct an erroneous data point. Previously it stated that independent market share was 41%. It has been corrected to 29%

Recently I wrote about how a little-known Spotify statistic revealed that independents (labels and artists) outperformed the majors on its platform in 2019. The IFPI’s latest global revenue estimates provide further evidence of 2019 being a stellar streaming year for independents. As we have two sets of fixed reported figures (major label reports, and the artists direct sector reported by MIDiA) we can simply deduct these figures from the IFPI’s streaming figures to reveal what the IFPI estimates independent label revenues to be. The tl;dr: Independents grew by 39% while majors grew by 22%, which means that the independents’ global share of streaming revenue increased by two whole points from 27% to 29%.

ifpi midia 2020 streaming

The IFPI reported global streaming revenues of $11.2 billion, however these figures include YouTube but not Pandora ad supported revenues. So, to match up the IFPI’s definition with how the record labels report the revenue we need to add in Pandora ad revenue which takes us to $11.9 billion which is almost exactly what MIDiA reported two months ago.

Although independent labels and artists grew fastest in relative terms in 2019, the majors grew most in absolute terms, adding nearly twice as much net new revenue ($1.5 billion compared to $0.8 billion). The majors remain the powerhouse of the streaming economy but independents are rapidly making this space their own. If they were to add another four or five points of share across 2020 and in 2021, then independents would be represent a third of the entire streaming market. But a crucial consideration is that these figures are on a distribution basis, so the major revenue includes independents they distribute. According to the last WIN study, the independent market share went up another c12%. On that basis, by 2021, the independent label share of streaming could be approaching 50%. That would be a genuine paradigm shift, the clear announcement of a newly aligned music business.

Soon we’ll be writing on how the majors can turn this around. Watch this space.

Independents Grew Fastest on Spotify in 2019, But There’s a Twist

Tomorrow (Wednesday 29th April) Spotify announces its Q1 2020 results, at which point we will find out whether it had a COVID-bounce like Netflix did (adding 15.8 million subscribers in Q1) or whether growth slowed. But before that, there is one little detail from Spotify’s 2019 Annual Report which warrants a closer look. Hidden away in the commentary there is this innocuous looking line:

“For the year ended December 31, 2019 [Universal Music Group, Sony Music Entertainment, Warner Music Group, and Merlin] accounted for approximately 82% of music streams.”

The same line is in Spotify’s 2018 Annual Report with the figure at 85%. So, the majors and Merlin indies saw their share of Spotify streams decline by three percentage points in 2019. That in itself is interesting and builds on the narrative of the streaming tail getting longer and fatter, with the superstars losing share. But with a little creative thinking we can do a lot more with this three percentage points shift.

Using MIDiA’s label market shares data for FY 2019 we can do a full breakdown of Spotify’s streaming revenue. Applying shares for streaming volumes to streaming revenue, and shares for the total streaming market to Spotify is not methodologically pure and has margins of error, but it is a broadly sound approach and lets us do the following:

  • First we apply the percentage share to Spotify’s annual revenue
  • Next, we take the majors’ share of streaming revenues for 2019 and apply them to Spotify’s streaming revenue
  • We can then deduct the majors from the majors + Merlin total to leave us with Merlin’s revenue
  • Then we apply the independent artists streaming share to the Spotify revenue which leaves us with one remaining segment: ‘other independent labels’

spotify streaming griowth by label type

What emerges is a hierarchy of dramatically different growth rates, ranging from just 11% for Merlin labels through to a dramatic 48% for independent artists and an even more impressive 58% for ‘other independent labels’. This provides further evidence of the way in which (much of) the independent sector continues to thrive during streaming’s continuing ascendancy.

spotify streaming growth by label type

Most intriguing is the 58% growth for ‘other independent labels’. I am using the quote marks because this is essentially an ‘all others’ bucket and so captures music entities that don’t fit the traditional classification of ‘label’. This includes AI generative music and of course library music companies like Epidemic Sound.

It is of course important to consider that growth rates are not absolute growth – the majors still added much more new Spotify revenue in 2019 (€1 billion) than all of the rest put together. Nonetheless, the difference in growth rates is stark and only Spotify will be able to answer questions about how much of this is organic versus how much of this is driven by the way that it engineers its recommendations and programming.

Whatever the causes, the effect is clear: streaming benefits everyone but it benefits some more than others.

Recorded Music Revenues Hit $21.5 Billion in 2019

With IPOs from Warner Music and Universal Music pending and continued institutional investment into music catalogues, the music business is firmly in the sights of big money. The performance of the recorded music business in 2019 is going to heat up interest even further. The global recorded music industry continued its resurgence in 2019 with a fifth successive year of growth. Global revenues grew by 11.4% in 2019 to reach $21.5 billion, an increase of $2.2 billion on 2018. That growth was bigger than 2018 in both absolute and relative terms. Whichever way you look at it, growth accelerated, and – crucially – this growth was achieved even though streaming revenue growth slowed.

recorded market shares infographic

These are the key trends that underpinned growth:

  • Independence is on the rise: The major record labels retained the lion’s share of the overall market in 2019, accounting for 67.5% of the total – down half a point from 68.0% in 2018. The remaining 32.5% accounted for by independent labels and artists combined was up 0.5 points from 2017 and 4.6 points from 2015. Artists direct – i.e. artists without record labels – was again the fastest-growing segment of the market, growing by 32.1% in 2019 to reach $873 million, representing 4.1% of the total market, up from 1.7% in 2015.
  • Big year for Universal: Universal Music Group was the big winner among the majors, growing both faster than the other two majors and the total market to reach 30% market share. Universal also added more revenue in 2019 ($729 million) than Warner Music and Sony Music combined ($650 million).
  • Race for 2nd heats up: In 2015 Warner Music’s recorded music revenue was just 67% of Sony Music’s, and at the end of 2019 that share had increased to 93%. Just $279 million separated Warner and Sony at the end of 2019. Based on 2019 growth rates, Warner would be level with Sony by the end of 2022.
  • Still stream powered: Streaming was again the key source of growth, up 24% year-on-year to reach $11.9 billion, representing 56% of all label revenues. But growth is slowing; streaming revenue grew by $2.3 billion, which was $64 million less than in 2018. The reason that the total market was able to grow as fast as it did in spite of this is because downloads and physical fell by $0.4 billion less than in 2018. So, ironically, it was the improved performance of legacy formats that enabled streaming’s performance to be good enough to drive 11.4% growth. 

Despite the inevitable slowdown in streaming revenue growth, the recorded music market managed to not only consolidate on its strong 2018 performance but improve upon it in 2019. The continued boom in recorded music revenues is accompanied by a growing complexity to the underlying business, with increased diversification of business models and artist/label relationships. Over the next few years continued revenue growth will be both accompanied and driven by business model innovation and disruption.

What UMG’s IPO Means for the Business of Music

Finishing 2019 on $6.4 billion, Universal Music is to go to IPO hot on the heels of Warner Music’s announcement to do the same. This of course also follows the Tencent-led agreement to acquire 10% of UMG for $3 billion with an option to acquire another 10%. Added into the context of a total of $10 billion in music rights mergers and acquisitions (M&A) in the last decade, we have a clear case of capital flowing into the booming recorded and music publishing businesses. The global recorded music market looks set to have reached a little under $21 billion in 2019, up 10% on 2018 (MIDiA’s definitive market estimate will be ready within the next few weeks). That 10% growth was up on the 8% seen in 2018. Investors of all sizes are either already invested in the music business or are looking for a route in, and UMG just gave them a new, very attractive option. But where is all this heading? How far can it go? And what are the implications for the business of music itself?

Looking for a return

The power behind UMG parent Vivendi is Vincent Bolloré. Although he stepped down from the board last year, he helped instigate a share buyback programme that will leave his family the majority shareholder and could even trigger a mandatory takeover. Additionally, Vincent Bolloré remains as a ‘censor and special advisor’ to Vivendi’s chairman, his son Yannick. This all matters because the motivations of Vivendi’s prime mover are, according to investors we’ve spoken to, focused on maximisation of value for Bolloré Group and for investors. This is not inherently a bad thing. The Bolloré Group has invested billions in Vivendi, so it is only natural that it will be seeking a return on that investment. And the likelihood is that Vivendi will only list a minority of UMG stock, otherwise Vivendi – Bolloré Group’s key financial interest here – would most likely lose value.

Why an IPO?

The IPO announcement follows a previous statement from Vivendi that it would look for other equity buyers for UMG. The IPO may well reflect that this course of action has not delivered fruit. But this does not mean the IPO would struggle. Equity buyers may have balked at the valuation and the lack of company control they would acquire. Stock investors, however, have a different perspective. For example, asset managers will be looking to add a profile of asset class that slots into a particular segment of their portfolios. Meanwhile, hedge funds would see UMG stock as a way to directly bet for (and against) rights in the emerging ‘rights versus distribution’ investment thesis. Finally, publicly-traded stock inherently reflects what the market values a company at, not what the company values itself at.

Investing back into the music business

Sales and IPOs during the peak of markets are usually a good way of maximising return. The question is how much of the income from the equity sales and IPO will flow back into the UMG business, compared to profit taking by investors. The same question of course applies to Len Blavatnik’s Access Industries’ proposed WMG IPO.

In its earnings release Vivendi stated that the income from the various UMG transactions “could be used for substantial share buyback operations and acquisitions”. Share buyback suggests further potential consolidation of the Bolloré Group’s relative dominance of Vivendi shareholding, while acquisitions could refer to activity at both Vivendi and UMG levels. There is a strong case for IPO proceeds being reinvested in the businesses of both UMG and WMG. The music market is growing and both companies outperformed total market growth in 2019 – but a slowdown is coming. Both UMG and WMG added less new streaming revenue in 2019 than they did in 2018. Not by much, but the early signs are there.

Time for plan B, C and D

Emerging and mid-tier markets will drive much of the growth over the next half decade, but the lower average revenue per user (ARPU) rates mean that subscribers will grow faster than revenue. So, the record labels need a new revenue driver. UMG actually saw physical sales grow a little in 2019 (due in part to deluxe editions of Beatles classic releases). But physical is not going to be the long-term revenue driver. Innovating in new revenue streams (e.g. creator tools) and new business models (e.g. streaming services that monetise fandom rather than consumption) is more promising. There is an opportunity here for UMG and WMG to supercharge growth beyond the coming streaming slowdown. In fact, MIDiA would go further and say there is an imperative to do so. Larger independents such as Downtown Music Holdings, Kobalt, BMG and Concord are collectively taking billions worth of capital and investing it in growing their businesses. If the majors do not follow suit, then they will lose ground to this emerging generation of innovative music companies.

This is looking to be the time to capitalise on the music industry’s revenue renaissance. Which begs the question: if/when will Sony spin off some of Sony Music via an IPO?