Churn in the era of dynamic retention

Kantar, a survey vendor, has been getting some attention by passing off consumer data as an actual measure of subscribers and suggesting that the music subscriber base actually declined in Q1 2022. It said the same in Q4 2021, but 2021 was a spectacular year for music subscriber growth, with the global base of subscribers growing by 118.8 million in 2021 – the largest ever increase in a single year – to reach 586 million. Of course, it would be obtuse to suggest that all is rosy in the world of digital subscriptions. After all, the attention recession has slowed growth and the actual recession will push up churn rates. But it is wrong to assume that digital subscriptions behave like their traditional counterparts, which is exactly why music subscriptions are well placed to weather the perfect storm of both recessions.

Digital subscriptions are different

Traditional subscriptions (pay-TV, internet, phone etc.) are slow moving, predictable beasts. Consumers are locked into contracts for fixed periods and must pay penalty clauses to exit them early. Which is why, when churn happens in these subscriptions, it is a big deal. It represents a hard break, the end of a subscriber relationship. But digital subscriptions are wired differently:

  • Churn doesn’t necessarily mean churn: Few have contracts, and most are as easy to leave as they are to join. They are built (if not necessarily designed) for hop-on / hop-off behaviour. When someone drops a Netflix subscription, the likelihood is that they will be back in a few months. The same does not apply for traditional subscribers.
  • Digital subscriptions are less critical: Most traditional subscriptions are utilities (phone, broadband etc.). Even a pay-TV subscription is a utility because the TV set may literally stop receiving signal without a subscription. So, cancelling one is a much bigger deal. But digital subscriptions usually just make digital entertainment better (e.g., an extra catalogue of TV shows to watch, music without ads etc.)
  • Many are still getting started: Even though music subscriptions growth is slowing in many markets, large numbers of consumers are still trying out subscriptions for the first time. This means there is always a high turnover of subscribers. Even more so in video and games where new services have come to market.

The last point is perhaps most important. MIDiA’s Q1 consumer data indicates that more people signed up to music subscriptions in the previous year (13%) than cancelled (10%) – both figures are as a share of all consumers that either had or used to have a music subscription.

The takeaway is that music subscriptions are highly fluid at the edges. They resemble a duck in water: elegant and slow moving above the water line, but legs pumping furiously below it. We can see this in Spotify’s reported numbers too. In 2020 Spotify added 25 million subscribers to its tally to reach 180 million. But it actually added twice as many subscribers as that before it also lost 25 million due to churn.

Churn is built into the model

Churn is quite simply part of the equation for music subscriptions. But at risk of sounding too Pollyanna-ish about this, there is no denying that dark clouds are building on the horizon. The cost-of-living crisis is accelerating, inflation and interest rates are going up, and wages are steadfast. As MIDiA’s recession data shows, around a fifth of music subscribers would consider cancelling their subscriptions if their everyday costs spiralled. A subscriber slowdown may indeed come. Those that do cancel should not be considered ‘lost’ but instead as taking a break. They will be there, ready to dive back in as soon as they can. 

DSPs will need to think in terms of what MIDiA calls dynamic retention. Instead of being focused on having a subscriber for all 12 months of a year, understand that in the coming economic climate, subscribers will likely require more flexibility. So, think instead of how many subscriber months can be had from that subscriber over a 12-month period, regardless of whether they are consecutive or not. It is certainly a shift in mindset, but this kind of pragmatic and flexible thinking will be crucial for navigating the times ahead.

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. 

Why Spotify cannot afford to make it three out of three with podcasts

It has been a couple of weeks that Spotify would be glad to forget – if it could. Although many of the arguments have been emotionally charged and the debate says as much about people’s political beliefs as it does business strategy, it is indisputable that there is a lot at stake for Spotify. Podcasters are its big bet on the future, music artists are the current bet that pays the bills. Both constituencies need to be kept happy, but can they both be kept happy enough and at the same time? Spotify’s big-future podcast vision has been sold to investors, divesting or censoring Joe Rogan would shake those investors’ confidence in Spotify’s ability to execute on podcasts. But it would be more than just that, it would be the third time that Spotify has had to backtrack on a big bet. Once may be careless, twice bad luck, but three times would most certainly not be a charm.

It is worth remembering why Spotify is betting big on podcasts. Strategically, it wants a slice of the $30 billion radio advertising business, and it wants to ensure it is competing in all lanes of audio. But that is more about the opportunity, the potential. There is also a more prosaic motivation: podcasts represent the ability to grow higher margin revenue and give Spotify more control over its own destiny. Rather than be beholden to music rightsholders and face continual calls for higher rates from artists and songwriters (which risks making margins even smaller), Spotify can plot a course to a future where it owns much of its own content. This means both more control and higher margins. Win-win.

Spotify as a label

The only problem is that as a music platform that has acquired its hundreds of millions of users through music, music rightsholders and creators do not take too kindly to feeling like they are yesterday’s game despite still driving the vast majority of the revenue. And yet, it need not have been this way. The origins of Spotify’s podcast bet lay in the failing of their second big bet: direct artists. In September 2018, Spotify opened up its platform to artists to release their music directly on the platform. The labels of course saw this as a massive threat of disintermediation, shook their fists in fury, and compelled Spotify to swiftly backtrack, dissipating the service in July 2019. The irony is that Spotify was trying to achieve the same objectives with direct artists as it is with podcasts: more control and higher margins. The labels managed to get the strategy killed off, but in doing so they pushed Spotify into pursuing what may be an even more disruptive strategy. Competing with Spotify as a label might have been daunting to the music business, but at least the world’s leading music subscription service was still going to be squarely focused on getting its users to listen to music…

Spotify as a video service

If direct artists was Spotify’s second failed big bet, then video was the first. Back in January 2016, Spotify announced that it was becoming a video service. Featuring original content commissioned from giants of TV, such as Viacom and the BBC, Spotify went big on video. Unfortunately for Spotify, its users did not and Spotify quietly backed away from what briefly looked like a major expansion of Spotify offering away from music. Recognise the trend?

Fortune favours the brave

Spotify’s bet-based strategy is both admirable and has underpinned its huge success to date. It is just unfortunate that the biggest, highest profile bets have not panned out. If Spotify were to fail with the podcast bet too, then the consequences could be catastrophic in terms of investor sentiment. But Spotify has to bet big. It is a tech growth stock, and thus its market value is defined more by what it can be tomorrow than by what it is today. Being the leading player in a commodified and slowing DSP streaming market is not the sort of growth story that underpins valuations like Spotify’s. So it needs big dreams to aim at. 

Yet the irony is, if podcasts do not pan out then Spotify will be back at where it started: as a music streaming company (just as it was after the first two failed bets). This would be an interesting contrast to Netflix, which (occasional foray into games excepted) has had a singular focus on being a video service and is still a video service, with no failed side bets along the way.

The House of Cards moment

The likelihood is that Spotify will make a big success of podcasts, and audio more generally –and the Joe Rogan phase will be looked back on like Netflix’s House of Cards phase: a hint of what will come, the genesis of something much bigger, much more culturally impactful, and far more pervasive. But Netflix did not get to where it is without antagonising (and losing) partners along the way. TV networks that had been licensing their content to Netflix suddenly realised it was now competing with them too. By making their shows available on Netflix they were actually helping a competitor compete against them. Disney and Fox took it so seriously that they pulled their catalogue.

Netflix cause ill feeling among some TV networks and became an outright enemy. That is something Spotify cannot do with music rightsholders and creators. Spotify is currently causing ill feeling among the music community by going to great lengths to accommodate its podcast creator community, which is in stark contrast to the numerous missteps it has made with the music creator ecosystem over the years. It can do so, because it has leverage over music creators (few feel bold enough to remove themselves from Spotify), but Spotify (despite being the leading podcast platform) is still a long way from having that sort of hold over podcast creators.

‘Too big to fail’ is not enough

Netflix survived its backlash, not because it was ‘too big to fail’, but because the video streaming market is fragmented, so it could survive without the networks it antagonised (and two of those networks could go it alone via Disney+). The music streaming market is very different – losing labels and artists would simply reduce Spotify’s value proposition compared to its competitors. Spotify cannot afford its podcast ‘House of Cards moment’ to be followed by a ‘Disney moment’ for music. Matters just got further complicated by a major investor now raising concerns about Spotify’s podcast editorial policy – which means that this is no longer even a clean case of managing investors-vs-the music business. Spotify has an intensely delicate path through which it must find its way.

If it does, then third time really will be a charm for Spotify. 

Spotify chose audio over music, but bigger decisions lie ahead

The symbolism behind Spotify’s support of Neil Young removing his music from the platform, rather than Joe Rogan’s podcast being removed for peddling vaccine misinformation was inescapable. For many, this was a highly public test of whether Spotify put audio or music first, and audio won. For a company that still makes more than 95% of its revenue from music, that is a big call. But, of course, in this particular instance we are talking about a catalogue music artist versus a superstar frontline audio creator. Rogan is one of Spotify’s biggest audio bets, and audio is Spotify’s biggest strategic bet, so it would take a lot – a real lot – to see Spotify consider pulling the plug on the controversial podcaster. Yet, that is exactly the sort of decision Spotify is going to have to start considering before long, and if it does not, then the decision might be made for them.

Becoming a media company

Spotify’s audio problem actually has remarkably little to do with the music business, and everything to do with media company regulation. Back in the mid-2010s, Facebook started its transition from platform to media company, pushing away from a pure focus on users’ content and towards professional created media. In doing so, Facebook found itself beginning to face the same sort of regulatory scrutiny as traditional media companies. It cried foul, trying to make the argument that it was more platform than media company and, therefore, not subject to traditional media company regulation. Facebook won some battles along the way, but it also lost a lot too, catalysed by milestones, such as the Cambridge Analytica debacle and Facebook’s use by Russian covert powers to influence the US presidential election. Throughout this, Facebook, now Meta, has fought tooth and nail to try to build a case of exceptionalism and for the internet to regulate itself. But for many regulators and law makers, the arguments do not pass muster. So much so, in fact, that the case for a new, dedicated regulatory body is building, and supported by no other than a former FCC chair.

Spotify’s case is even more complicated in that it is paying for the content in question, making it much more difficult to build a platform argument. Added to that, regardless of how much money Spotify has invested in Rogan, outspoken podcasters around the world will be looking at this as a test case for whether their freedom of speech is safe on Spotify.

The growing regulatory momentum matters to Spotify because:

  1. It is going through the exact same platform-to-media company transition that Facebook went through
  2. Support for regulation is stronger now than it was in the mid-2010s. Spotify could find itself getting caught in the same regulatory drag net as social media companies and regulated in the same way at the same time, or close to

Fragmented fandom looks very different in audio than music

Spotify’s audio challenges are not, however, limited to regulation. Spotify is learning the hard way that it is far, far easier to serve the fragmented fandom of music than it is of audio. There are not too many people in the world who feel the strength of antipathy towards other music genres as socialists do against conservatives, and so forth. There is no such thing as mass-market political opinion. Opinions polarise, more so now than ever. The best you can hope to address is a majority of opinion, but even that is scarce, and will be equally disliked by the remainder. This is the nature of modern-day politics and culture. Of course, Spotify understood this going into audio – it is why it has both Joe Rogan and Michelle Obama on its audio roster. But whereas having a diverse music catalogue is a consumer benefit (i.e., more choice) for audio, diversity can be divisive, as Joe Rogan’s continued presence illustrates.

Dealing with Neil Young is one thing, but if there is a flurry of younger, frontline artists that voice concern, then Spotify may need to take action. It will be betting that most, newer frontline artists lean towards political neutrality for fear of upsetting portions of their fanbases. Many artists, and their labels, will be asking themselves whether Rogan is too popular within their fanbases to make a stand. The days of the politically active, protest singer are a thing of the past. Perhaps more realistic an option is for artists somewhere between new and old (eg Beyonce, Coldplay) to take a stand, artists that feel confident enough in their beliefs and their fanbases to make a stand while still being culturally relevant.

Time to choose? 

So, Spotify’s future as an audio company may not only be shaped by external regulation, but it may also have to regulate itself – culturally and politically. There is good reason that the global media landscape is defined by three key types of outlet: liberal / left; neutral; conservative / right. That reason is that it is really hard (perhaps impossible) to simultaneously appeal to both sides of the political divide. If you want to pursue the middle path, that means removing much of the sort of content that drives streams. There is no Joe Rogan in the middle path. Which means that Spotify is probably going to have to decide upon a political leaning, even before it feels the heavy hand of media regulation.

Music subscriber market shares Q2 2021

MIDiA’s annual music subscriber market shares report is now available here (see below for more details of the report). Here are some of the key findings.

The global base of music subscribers continues to grow strongly with 523.9 million music subscribers at the end of Q2 2021, which was up by 109.5 million (26.4%) from one year earlier. Crucially, this was faster growth than the prior year. There is a difference between revenue and subscribers – with ARPU deflators, such as the rise of multi-user plans and the growth of lower-spending emerging markets – but growth in monetised users represents the foundation stone of the digital service provider (DSP) streaming market. So, accelerating growth at this relatively late stage of the streaming market’s evolution is clearly positive.

Spotify remains the DSP with the highest market share (31%), but this was down from 33% in Q2 2020 and 34% in Q2 2019. With Apple Music being a distant second with 15% market share, and Spotify adding more subscribers in the 12 months leading up to Q2 2021 than any other single DSP, there is no risk of Spotify losing its leading position anytime soon – but the erosion of its share is steady and persistent. Amazon Music once again out-performed Spotify in terms of growth (25% compared to 20%), but the standout success story among Western DSPs was YouTube Music, for the second successive year. Google was once the laggard of the space, but the launch of YouTube Music has transformed its fortunes, growing by more than 50% in the 12 months leading up to Q2 2021. YouTube Music was the only Western DSP to increase global market share during this the period. YouTube Music particularly resonates among Gen Z and younger Millennials, which should have alarm bells ringing for Spotify, as their core base of Millennial subscribers from the 2010s in the West are now beginning to age.

But the biggest subscriber growth came from emerging markets. Between them, Tencent Music Entertainment (TME) and NetEase Cloud Music added 35.7 million subscribers in the 12 months leading up to Q2 2021. Together, they accounted for 18% of global market shares, despite being available only in China. Yandex, in Russia, was the other big gainer, doubling its subscriber base to reach 2% of global market share.

Combined, Yandex, TME and NetEase account for 20% of subscriber market share, but they drive 37% of all subscriber growth in the 12 months leading up to Q2 2021.

The strong growth in subscribers holds an extra meaning going into 2022. The surge in non-DSP streaming in 2021 means that the streaming market is no longer dependent on the revenue contribution of maturing Western subscriber markets (nor indeed ARPU-diluting emerging markets). With non-DSP streaming revenue looking set to have contributed between a quarter and a third of streaming revenue increase in 2021, streaming revenues look set for strong growth, even if subscriber growth lessens. That is what you call a diversified market.

A little more detail on the subscriber market shares report:

The report has 23 pages and 13 figures featuring country level subscriber numbers, revenues and demographics by DSP. The accompanying data set has quarterly subscriber numbers and annual revenue figures from Q4 2015 to Q2 2016 by DSP by country, with 33 markets and 27 DSPs. The report and dataset is available to MIDiA subscribers hereand also available for individual purchase via the same link.

Email stephen@midiaresearch.com for more details.

Can Spotify break out of its lane?

After years of relative stability, music consumption is shifting, with the DSP streaming model beginning to lose some ground as illustrated by the major labels growing streaming revenue by 33% in Q2 2021 while Spotify was up by just 23%. It is never wise to read long-term market trends into one quarter’s worth of results, but there was already enough preceding evidence to suggest we are entering a genuine market shift. The question is whether Spotify and the other Western DSPs are going to find themselves left behind by a fast-changing market, or can they innovate to keep up the pace?

Social music is streaming’s new growth driver, generating around $1.5 billion in 2020 and growing fast in 2021. It represents a natural evolution of social media rather than an evolution of streaming. Audio is just another tool for social expression, along with video, pictures and words. MIDiA has long argued that Western streaming focuses too heavily on monetizing consumption, at the expense of fandom. While social video does not fix the fandom problem, it does cater to some of the key elements of fandom: self-expression, identity and community. Which means that, in some respects, Spotify and the other DSPs only have themselves to blame for having kept fandom out of their propositions. In doing so, they created a vacuum that TikTok and Instagram eagerly filled.

The data in the above chart comes from MIDiA’s latest music consumer survey report which is available now to MIDiA clients and is also available for purchase here.

Rights holder licensing met market demand

Spotify and the other DSPs are the dominant, core component of recorded music and they will remain so for the foreseeable future. But whereas a couple of years ago it looked like they might be the entire story, now music consumption is moving beyond, well, consumption. Finally, we are seeing music becoming an enabler of other experiences. Historically this was restricted to non-scalable, ad hoc sync deals. Now rights holders have established licensing frameworks that are flexible, dynamic and scalable enough to enable a whole new generation of experiences with music either in a central or supporting role.

DSPs occupy one of streaming’s lanes

The implication of this is that Spotify and the other DSPs now risk looking like they are stuck in just one lane of the streaming market. What looked like a highway is now just a single lane – and Spotify, Apple and Amazon do not have the assets to build propositions that can get them out of it. Being part of this social music revolution requires both massively social communities and video. They could all build that, of course, but with little guarantee of success. YouTube is a different case, having launched Shorts in a belated bid to ward off TikTok’s audience theft – but at least it is now running that race, and Alphabet reported 15 billion daily global views for Q2.

An increasingly segmented market

Spotify and other DSPs now find themselves not being part of streaming’s new growth story and, YouTube excepted, with no clear path to becoming part of it. To be clear, Spotify will continue to be the world’s largest subscription revenue generator and the DSP subscription model will continue to be the biggest source of revenue, at least for the foreseeable future. But revenue growth will increasingly come from elsewhere. In many respects this simply reflects the maturation of the music streaming market. Consider video streaming. Netflix added just 1.5 million subscribers in Q2 2021 while YouTube grew by 84% and TikTok went from strength to strength. Netflix occupies just one lane in a multifaceted streaming market. The same is now becoming true of the DSPs.

Time to do a Facebook?

So, what can Spotify and the other DSPs do about it? If Spotify really wants to ‘own’ audio, then it will have to do what Facebook did to ‘own’ social: create a portfolio of standalone sister apps. Facebook would have become the Yahoo of social media if it hadn’t bought / launched Instagram, WhatsApp and Messenger. The signs are already there for Spotify. Even ignoring the slowdown in monthly active user (MAU) growth in Q2 2021, podcast users stopped meaningfully growing as a share of overall MAUs in Q4 2020. It turns out that trying to compete with yourself in your own app is hard to do. The time may have come for a standalone podcast / audiobook app (by the way, I’m just taking it as read that Spotify is going to take audiobooks a whole lot more seriously). If Spotify does launch a podcast app, then the case suddenly becomes a lot clearer for other audio-related apps, all of which could include subscription tiers, such as social short video, karaoke, and artist channels.

The more probable outlook however is for specialisation, with segments going deep and vertical rather than wide and horizontal. While Spotify, and other DSPs, might have success in one or more side bets, it will be the specialists who lead in streaming’s other lanes. Whatever the final market mix looks like as a result of this change, the streaming market is going to be more diverse and innovative for it.

Spotify and music listening 10 years from now

July marks ten years since Spotify’s US launch. Although the tendency among some is to consider this ‘year zero’ for streaming (thus ignoring everything that had happened in prior years both within and outside of the US) it does present a useful opportunity to reflect on what the next decade might hold for Spotify. 

Rather than focus on the business outlook, I am going to explore how Spotify and other streaming services, could change the way in which music is consumed ten years from now. But first, three quick future business scenarios for Spotify:

  1. It continues to be the global leader but with reduced market share due to the rise of regional competitors in emerging markets
  2. It loses market momentum, stock price tumbles and is acquired by another entity 
  3. It morphs into a true multi-sided entertainment and creation platform, doing for entertainment what Amazon now does for retail but with more tools and services

So, on to the future of music consumption.

To map the future, you need to know the past. These are (some of) the key ways streaming has transformed how we engage with music:

  • We listen to a larger number of artists but spend less time with individual artists
  • We listen to tracks and playlists more, and albums less
  • Music is programmed (by ourselves and by streaming services) to act as a soundtrack for our daily lives and routines
  • Genre divisions are becoming less meaningful
  • Artist brands are becoming less visible
  • Music fandom is becoming less pronounced

Music is more like the soundtrack to daytime TV than blockbuster movies

In 2015 Spotify’s Daniel Ek said that he wanted Spotify to ‘be the soundtrack of your life’. Undoubtedly, Spotify and other streaming services are achieving that but the utopian vision is more prosaic in practice. Less ‘that was the best day of the summer’ and more ‘put on some tunes while I cook’. It is a soundtrack, but less the soundtrack to a blockbuster movie and instead more like the soundtrack to daytime TV. Music has become sonic wallpaper that is a constant backdrop to our daily mundanity. (Though the pandemic, the climate crisis and stagnant labour markets can make even the mundane look aspirational for many).

Like it or loathe it, this sound tracking dynamic is likely to play a key role in what the future of music consumption looks like. But it is not all sonic dystopias; personalisation, algorithms, user data and programming also have the potential to reinvigorate music passion. Here are two key ways in which Spotify and other streaming services could transform music listening ten years from now:

  • Dynamic and biometric personalisation: The current recommendation arms race works from a comparatively small dataset, focused on users’ music preferences and behaviour. The next battle front will be the listener’s entire life. Any individual user can appear to be a dramatically different music listener depending on the context of their listening. Even the same time of day can have very different permutations; for example, looking for chilled sounds at 7pm after a manic Monday but banging beats at the same time on a Friday. If streaming services could harvest data from personal devices and the social graph, elements such as heart rate, location, activity, facial expression and sentiment could all be used to create a music feed that dynamically responds to the individual. Instead of having to actively seek out a workout or study playlist, the music feed would automatically tweak the music to the listener’s behaviour and habits. The faster the run, the more up-tempo the music; the later in the evening, the more chilled (unless it’s 9pm and you’re getting ready for a big night out). Selecting mood and activity-based playlists will look incredibly mechanical in this world. Think of it like the change from manual gear change to automatic in cars.

  • Music catalogue reimagined: Just as activity and mood-based listening will become more push and less pull, so can music catalogue. Traditionally catalogue consumption is driven by a combination of user behaviour (‘I haven’t listened to that band in a while’) and marketing pushes by labels, publishers and now music funds’ ‘song management’. But it needn’t be that way anymore. Over the years, streaming services have collected a wealth of user data. Just as Facebook introduced memories for users’ posts, so streaming services could deliver music memories, showing users what they were listening to on this day ten years ago, or what the soundtrack to your summer was way back in 2021. Clearly Spotify is already making steps in this direction with Wrapped but this would be much bigger step, routinely delivering nostalgia nuggets throughout a day, week, month, year. In many respects the result would be a democratisation of catalogue consumption. It wouldn’t simply be the rights holders with the biggest marketing budgets and smartest campaigns on TikTok (or whatever has replaced TikTok ten years from now) that get the biggest catalogue bumps. Instead, catalogue consumption across the board would boom. This could make the current 66% of all listening look like small fry in comparison. What that means for frontline releases finding space is another question entirely.

These are of course just two well-educated guesses, and their weaknesses are that they are based on what has happened so far rather than what currently unforeseen consumption shifts may happen in the future. Indeed, streaming itself may have been surpassed ten years from now. But tomorrow’s technology often looks more like today than it does tomorrow. Henry Ford’s model T Ford looked more like a horse and trap than it did the swept wing aerodynamics of 1950s cars. Change takes time. But ten years is a long time in the world of technology, so even if neither of the above come to pass, you can be sure that music listening is going to look a whole lot different than it does now.


Global music subscriber market shares Q1 2021

The music industry’s growing obsession with declining ARPU will continue to colour the outlook for the global streaming market in revenue terms, but the positive driver of this equation is the rapid growth of music subscribers. There were 100 million new music subscribers in 2020, taking the total to 467 million. (In 2019 there were just 83 million net new subscribers). A further 19.5 million new subscribers in Q1 2021 pushed the number up to 487 million. While the failure of subscription revenues to keep up with the pace resulted in ARPU falling by 9% in 2020, this lens detracts from the huge momentum in paid user adoption. Subscription revenue might not be increasing as fast as some would like, but the global music subscriber base is not just growing – it is growing faster than ever.

Spotify continues its global dominance, adding 27 million net subscribers between Q1 2020 and Q1 2021, more than any other single service. However, it lost two points of market share over the period because its percentage growth rate trailed that of its leading competitors. Google was the fastest-growing music streaming service in 2020, growing by 60%, with Tencent second on 40%. Amazon continued its steady trajectory, up 27%, while Apple grew by just 12%.

Google’s YouTube Music has been the standout story of the music subscriber market for the last couple of years, resonating both in many emerging markets and with younger audiences across the globe. The early signs are that YouTube Music is becoming to Gen Z what Spotify was to Millennials half a decade ago.

Emerging markets are now central to the music subscriber market, with Latin America, Asia Pacific and Rest of World accounting for 60% of all 2020 subscriber growth. This is of course, also a key reason why global ARPU declined. Nonetheless, a number of emerging markets services now boast large subscriber bases. Beyond Tencent’s 61 million, China’s NetEase hit 18 million subscribers in Q1 2020 and Russia’s Yandex hit 8 million. (For more on streaming in emerging markets check out MIDiA’s latest free report: Local Sounds, Global Cultures.)

MIDiA will be publishing its country-level music subscriber numbers as part of the global music forecast report and dataset which will be available to clients Monday 12th July. If you are not yet a MIDiA client and would like to know how to get access to the data, email stephen@midiaresearch.com

Hi-Res audio: It’s all about a maturing market

Apple and Amazon made a splash this week by integrating Hi-Res Dolby Atmos audio into the basic tiers of their streaming services. The timing, i.e. just after Spotify started increasing prices, is – how shall we put it, interesting. It also struck a blow against the music industry’s long-held hope that Hi-Res was going to be the key to increasing subscriber ARPU. While that might be true, for now at least, the move is an inevitable consequence of two streaming market dynamics: commodification and saturation.

Music streaming contrasts sharply with video streaming. While the video marketplace is characterised by unique catalogues, a variety of pricing and diverse value propositions (including a host of niche services) music streaming services are all at their core fundamentally the same product. When the market was in its hyper-growth phase and there were enough new users to go around, it did not matter too much that the streaming services only had branding, curation and interface to differentiate themselves from each other. Now that we are approaching a slowdown in the high-revenue developed markets, more is needed. Which is where Hi-Res comes in.

Now that streaming is, as Will Page puts it, in the ‘fracking stage’ in developed markets, success becomes defined by how well you retain subscribers rather than how well you acquire them. As all the key DSPs operate on the same basic model, they need to innovate around the core proposition in order to improve stickiness and reduce churn. Spotify started the ball rolling with its podcasts pivot, but the fact that its podcasts can be consumed by free users means it is not (yet) a tool for reducing subscriber churn.

On top of this, when podcasts are mapped with other positioning pillars, Spotify’s competitive differentiation spread is relatively narrow. Because Apple and Amazon now both have Hi-Res as standard, they not only boost audio quality but value for money (VFM) as well. Bearing in mind, both companies already scored well on VFM because they have Prime Music and Apple One in their respective armouries. 

It is Amazon, though, that looks best positioned of the four leading Western streaming services. In addition to audio quality and VFM, it is building out its podcasts play (as compared to the Wondery acquisition) and it has the potential to bundle in the world’s leading audiobook company, Audible. Given that spoken-word audio consumption grew at nearly twice the rate music did during 2020, being able to play in all lanes of audio will be crucial to competing in what will become saturated streaming markets. 

Immersive audio storytelling 

Finally, Dolby Atmos is more than simply Hi-Res audio; it is an immersive format that enables the creation of spatial audio experiences. If we are truly on the verge of a spoken-word audio revolution, then immersive audio may have a central role to play. Surround sound has been a slow burner for home video, but that may be because the video experience itself has improved so much (bigger screens, HD, more shows than ever) that the audio component has been less important (though the growing soundbar market suggests that may be beginning to change). However, in audio formats there is only the audio to do the storytelling. This could mean that tools like immersive audio become central to audio storytelling, which means, you guessed it, Amazon and Apple would then have a competitive advantage in podcasts and audiobooks that Spotify would not.

Spotify pushes prices up, but do not expect dramatic effects

Spotify finally announced a significant price increase, raising prices in the UK and some of Europe, with the US set to follow suit. The increases affect Family, Duo and Student plans. The fact that streaming pricing has remained locked at $9.99 since the early 2000s is an open wound for streaming, so this news is important – but less so for actual impact than statement of intent.

Back in 2019 MIDiA showed that since its launch, Spotify’s $9.99 price point had lost 26% in real terms due to inflation while over the same period Netflix (which increased prices) saw a 63% increase. Price increases are a must, not an option. Not increasing prices while inflation raises other goods and services means that streaming pricing is deflating in real terms. In this context, Spotify’s move is encouraging, but it is not yet enough. The increases of course do not affect the main $9.99 price point, currently apply to a selection of markets and do not address the causes of ARPU deflation (promotional trials, uptake of multi-user plans, emerging markets). But let’s put all that aside for the moment and look at just what impact these changes will have:

  • Pricing: The increase is 13% for a Family plan and 20% for Student, both meaningful but below the 26% real terms deflation that was hit back in 2019. Averaged across all price points, the price increase represents a 10% uplift (in the markets where this is being done). By comparison, Netflix’s last major price hike averaged out at 11% across all price points, so it is line with that, though obviously Netflix had numerous other previous increases.
  • ARPU: ARPU (i.e. how much people are actually spending) matters more than nominal retail price points, which are subject to promotions and discounts. Spotify ARPU fell from €4.72 in 2019 to €4.31 in 2020. Let us conservatively estimate that would fall to €4.00 in 2021 without any price increases. Let us also assume that the announced price increases roll out to every single Spotify market (which of course they won’t) and let’s assume it all happened on January 1st 2021 (which of course it didn’t). On that basis, and factoring in what share of Spotify subscribers are on family and student plans, total revenue and premium ARPU would increase by 6.2%. ARPU would hit €4.25 (still below 2020) and premium revenue would hit €9.5 billion.
  • Income: Spotify would earn an extra €166 million gross margin, music rights holders would earn an extra €388 million, record labels €310 million and the majors €212 million, representing 2% of their total income. UMG would earn €95 million. Meanwhile, a recouped major label artist could expect to see a million streams generate €1,487 rather than €1,400 (assuming all the streams were premium).

All of these assumptions are based on this rollout being global and FY 2021, neither of which are the case. So the actual effect will be markedly less. The key takeaway is that this is an important first step on what needs to be a continual journey, and one followed by the other streaming services. Spotify was previous locked in a prisoner’s dilemma where no one was willing to make the first move. Spotify had the courage to jump first. What needs to happen next are (though not necessarily in this order):

  • Pricing increase to all remaining tiers, especially $9.99
  • Other streaming services follow suit
  • Tightening up of discounts and promotional trials in well-established markets

Good first step by Spotify; now let the journey begin.