Music has developed an attention dependency

The attention economy defines and shapes today’s digital world. However, we have long since reached peak in the attention economy with all available free time now addressed. What this means is that previously, when digital entertainment propositions grew, they were often using up users’ free time. Now though, every minute gained is at someone else’s expense. The battle for attention is now both fierce and intense. What is more, it will get worse when much of the population finally returns to commuting and going out, as 2020 was defined by entertainment filling the extra 15% of free time people found in their weekly lives. But there is an ever bigger dynamic at play, one which gets to the very heart of entertainment: the attention economy is becoming a malign force for culture. Consumption is holding culture hostage. 

The increasingly fierce competition for consumers’ attention is becoming corrosive, with clickbait, autoplay and content farms degrading both content and culture. What matters is acquiring audience and their time, the type of content and tactics that captures them is secondary. It is not just bottom feeder content farms that play this game, instead the wider digital entertainment landscape has allowed itself to become infected by their strategic worldview.

The attention dependency goes way beyond media

Do not for a minute think this is a media-only problem. The corrosive impact of the attention economy can be seen right across digital entertainment, from hastily churned out scripted dramas, through to music. Artists and labels are locked in a race to increase the volume and velocity of music they put out, spurred on by Spotify’s Daniel Ek clarion call to up the ante even further. In this volume and velocity game, algorithm-friendly A&R and playlist hits win out. Clickbait music comes out on top. And because music attention spans are shortening, no sooner has the listener’s attention been grabbed, then it is lost again due to the next new track. In the attention economy’s volume and velocity game, the streaming platform is a hungry beast that is perpetually hungry. Each new song is just another bit of calorific input to sate its appetite. 

In this world, ‘streamability’ trumps musicality, but it is not just culture that suffers. Cutting through the clutter of 50,000 new songs every day also delivers diminishing returns for marketing spend. Labels have to spend more to get weaker results. 

Music subscriptions accentuate the worst parts of the attention economy 

Perhaps most importantly of all though, music subscriptions are the worst possible ecosystem in which to monetise the attention economy. In online media, more clicks means more ads, which means more ad revenue. In music subscriptions it is a fight to the death for a slice of a finite royalty pot. A royalty pot that is also impacted by slowing streaming growth and declining ARPU. The music industry has developed an attention dependency in the least healthy environment possible.

This is not one of those market dynamics that will eventually find a natural course correction. Instead, the music industry has to decide it wants to break its attention dependency and start doing things differently. Until then, consumption and content will continue to push culture to the side lines.

It is time to take hold of the wheel

Some years ago, Andrew Llyod Webber said this: “The fine wines of France are not merely content for the glass manufacturing business”. Although those words are of someone from the old world grappling with the new, the underlying premise remains. None of this is to suggest that streaming consumption is not the future. Nor is it to even suggest that all of the changes to the culture of music that streaming has brought about are negative. In fact, it may be that streaming-era music culture is simply what the future of music is going to be. But what is crucial is that artists, labels, songwriters and publishers take an active role in steering the ship to the future rather than simply getting pulled along by the streaming tide.

2021 Predictions: The year of the immersive web

As we approach the end of 2020 it is time to look forward to what 2021 may bring. MIDiA has published the fifth edition of our Annual Predictions report which clients can read here. There are 27 predictions in the report, but I am sharing a few of them here. MIDiA has a pretty good track record with its predictions; 79% of our predictions for 2020 were correct.

These are the seven meta and cultural trends that we believe will shape 2021: 

  1. The immersive web
  2. Recessionary impact
  3. The great reaggregation
  4. The return of synchronous experiences
  5. Social consumption and micro communities
  6. Video streaming as a cultural catalyst 
  7. The end of influencers

The immersive web

Web 1.0 was an information dump; web 2.0 added multimedia and social. Now we are entering the third phase, which MIDiA terms the immersive web. As is usually the case with big epoch shifts, this will not be a clear and sudden change but instead a steady change – a change that is, in fact, already happening. The immersive web is characterised by environments in which we do not simply conduct extensions of IRL activity (e-commerce, video calls) but ones that create behaviours and relationships that only, and can only, exist within these environments. Apps and platforms like Roblox, TikTok and Discord are early iterations of the immersive web, but merely hint at what will come. The trend will be driven by Gen Z, who have grown up with social apps from the playground onwards. Gen Z relies more than any previous generation on such apps for social interaction and expression, forming muscle memory for digital-first relationships. The COVID-19 lockdown measures have accentuated this shift, further solidifying Gen Z’s receptivity to future immersive web experiences.

Music

Here is a short version of some of the trends we expect to shape music in 2021:

  • The start of an artist economy: Streaming is a song economy of which the scale benefits rights holders far more than creators. The industry needs to work towards a collection of models that work for artists. Components could be micro-communities (see below), sounds platforms, ticketed live streams, skills marketplaces, and virtual merch. 
  • The rise of micro-communities: Niche is the new mainstream. The next phase of this market dynamic is the emergence of micro-communities; small audiences of dedicated fans who almost consider it an honour-bound duty to support their artists. 
  • The creator tools revolution: Creator tools, particularly music production and collaboration, will be one of the most important market shifts in 2021. Companies like Splice, LANDR and Output will continue to build scale in 2021, changing both the culture and business of music. 
  • Live streaming professionalises: With live unlikely to be anything close to full capacity until the latter part of 2021, live streaming will be used by a growing body of artists as a genuine revenue driver, rather than the audience engagement role it played in much of 2020, driven by increased professionalisation, better distribution and more sophisticated monetisation.
  • Music continues to deliver as an asset class: Although the pandemic dented music publishing’s long-term growth story, music catalogues retain strong appeal as an asset class, not least because they are performing better in relation to many asset classes that have been hit hard by the pandemic and that look vulnerable to the coming recession. The imbalance between supply and demand remains, so expect prices paid to continue to accelerate. 
  • UGC continues to accelerate: User-generated content (UGC) music revenues reached $4 billion in 2020 and will push up to $4.9 billion in 2021. The crucial difference between UGC music now compared to five years ago, is that the focus is on genuine user creativity rather than users simply uploading others’ music.

2020 was a year like no other in modern times, with the impact on digital entertainment both pronounced and creating the foundations for accelerated innovation in 2021. Whatever may happen to the global economic and health outlook, digital entertainment will go through further dramatic change in 2021.

Time to move beyond the song economy

The UK parliament is currently running an inquiry into the streaming music economy, having called for evidence from across the music business. Earlier this week were the first verbal submissions, from a number of UK artists including Tom Gray (Gomez), Guy Garvey (Elbow), Ed O’Brien (Radiohead) and Nadine Shah.MPs heard impassioned but balanced submissions that shone a light on the reality of what it means to be an artist in the streaming era. Mercury Prize-nominated Shah explained that she makes so little money from streaming that she is struggling to pay her rent. Clearly, the demise of live during the pandemic has created a uniquely difficult period for artists, but it has spotlighted that streaming on its own is not working for artists. The fact that policy makers are hearing this viewpoint (albeit later rather than sooner) suggests that change will be coming. But, while the focus is understandably on how to ‘fix’ streaming, it might be that efforts would be better placed building a complementary alternative.

Direct action

In Steve McQueen’s new film Mangrove, there is a intense scene in which Darcus Howe implores café owner and community leader Frank Crichlow that after Frank’s fruitless attempts to fix the problem via the system that direct action is the only way to change things: “self-movement – external forces acting on the organism”.

The equivalent of direct action in the commercial world is innovation – it comes from the ground up. In 2008 Spotify came up with an innovation that made the problem of the time –piracy – effectively redundant. What’s required now are new innovations that make the current streaming model look like an alternative, not the only choice – to enjoy music. 

Now is the time

Now is the right time to be assessing the long-term impact of streaming. It is a mature business model and is the largest revenue driver in most of the world’s leading music markets. Whatever streaming is now, is pretty much how it is going to be. The future of what streaming can be is already here, today. Assessments must be on what the model delivers now, not some future potential. 

Streaming’s current performance can be assessed as follows:

  • Record labels and publishers have experienced strong revenue growth and improving margins. Their businesses have been improved
  • Artists and songwriters have more people listening to their music than ever before and more creators are able to earn income than ever before 

However, beyond the superstars, most do not earn a sustainable income from streaming alone and cannot see a pathway to this ever changing. This is Guy Garvey’s reference to the lack of any new (financially viable) music artists in the future. 

A model for rights holders more than creators

Streaming benefits rights holders more than it does creators. It is far easier to enjoy the benefits of scale if you have scale. Here is a simple illustration: if a label has 100,000 tracks played 10 times each in a month (i.e., a million streams) it will earn around £/$5,000. But a self-released artist with just 100 tracks with 10 plays each (i.e., 1,000 streams) will only earn £/$5. Though this is the product of simple arithmetic, the first amount is the foundation of a small business, the other buys you a cup of coffee.

Record labels and publishers with large catalogues benefit from scale in a way that artists and songwriters do not, unless they have a megahit – and although streaming is great for megahits, they are few and far between. Changes to licensing (and there are many ways to do that) may make things better – but they will not change the underlying dynamic; it is simply how the model is.

We have a model that works for rights holders that is fuelled by artists and songwriters. Now we need an additional, parallel, model that works for artists.

Streaming music services are incentivised to drive consumption. What we need are additional models, incentivised to drive fandom. Streaming is a song economy, and we now need a parallel fan economy

Music used to be all about fandom. It was the way in which people identified and expressed themselves – a badge of honour and a symbol of personality. Streaming has industrialised music, turning it into a convenient utility that acts as a soundtrack to our everyday life. That may be fine, but it has simultaneously supressed those ways to express fandom. It’s not easy to express your fandom on a streaming platform, while on a social platform money must change hands. 

Music fandom hasn’t died, but it just has fewer places to live. 

The fan economy

So, what is a fan economy? A fan economy is one in which the value resides in the artist-fan relationship. Currently this model is pursued actively in Asia (e.g., Tencent Music in China, K-Pop in Korea) but far less so in the West. The fan economy will be defined by diversity but what its constituents will have in common is being built around micro-communities of fans.

Micro-communities that are built around an artist’s 1,000 true fans (or even fewer) allow the artist’s most loyal and dedicated fans to drive revenue that is small to the industry but large to the artist. For example, an artist with 1,000 subscribers paying $5 a month would generate the same $5,000 a month that a million streams would deliver a record label.

There are a number of platforms that are making a start, but now is the time for this to become a central music industry focus. Music rightsholders have a model that works well for them, so now they need to ensure that their artists and songwriters have models that work for them too. There is thus an onus on rights holders helping drive the fan economy, but to drive creator income rather than simply be another rights holder income.

A multi-pronged approach

This is the three-pronged approach we propose:

  • Governments, support new, innovative companies building fan economy models and ensure that they provide equitable remuneration for creators
  • Record labels, build teams geared at helping their artists find fan economy income streams (and take a service fee or revenue share)
  • Streaming services, allow artists more real estate to showcase where fans can find other content and experiences

None of this is to say that efforts to make streaming more equitable should not be pursued; they absolutely should. However, it should be done with a clear understanding of the ‘art of the possible’. Even if rates were doubled, the self-released artist with 1,000 streams would still only earn £/$10. For an artist with a million streams a month on a big label it would change monthly income from £/$1,250 a month to £/$2,000, i.e., £/$24,000 a year. Not a sustainable annual income. 

Our case is that streaming should indeed be made more equitable, but alongside proactive investment in a new generation of innovative fan economy apps. This is an opportunity to make UK Plc the innovation driver for the global music business. A unique opportunity that is there for the taking with the right strategy and support, from all vested interests.

The opportunity for the UK streaming inquiry

With the streaming inquiry, the UK government has an unprecedented opportunity to set a global standard for building a vibrant and viable future for music creators, but it is an opportunity that needs seizing now. In partnership with music creators and rightsholders, it can create a structure that supports the innovation and change the industry needs. Now that streaming has come of age, we can see both its strengths and weaknesses. Let’s use the weaknesses as a foundation for building something new, exciting and equitable. It is time to bring ways to allow music fans to express themselves and their support to artists more directly. That will keep music the uniquely valuable product it is, and not just the grease in the wheels. 

Mark Mulligan and Keith Jopling, MIDiA Research 

Are rights holders missing the point with Twitch?

Twitch has apologised to its users for the growing volume of rights holder takedown notices for music used in Twitch videos. Twitch is in an awkward transitionary phase with music rights holders, not dissimilar to where YouTube was when it was acquired by Google. 14 years on from that acquisition, YouTube’s relationship with rights holders is in a better place but short of where it should be. Article 17, weaving its way between the competing lobbying efforts of rights holders and tech platforms, is just the latest mile marker on a long and winding rocky road. Twitch, like YouTube, does not fit the licensing norms of most streaming services, resulting in repeated stand offs. But just like the music industry still hasn’t grasped the full potential of YouTube, it may be making a similar mistake with Twitch.

Firstly, for sake of clarity, MIDiA firmly believes that copyrighted work should be used correctly and remunerated. We are not, in any way, suggesting that a platform should be able to use music without permission. However, the current licensing structures are:

  1. Not flexible and agile enough to truly capitalise on user-generated content (UGC) music (a market which will be worth $4 billion by year end – download our major new FREE report on UGC music here)
  2. YouTube and Twitch represent an opportunity to create new growth drivers, especially for artists, that can help fix the ‘broken record’

A lack of sync in sync

Let’s address the first point, well, first. Platform-native creators on YouTube, Twitch and TikTok create content so frequently they make the music industry’s volume and velocity problem look like child’s play. Usually, creators who want music in their videos have a choice: 1) get sync licenses, 2) get library music, 3) use music without permission and get taken down or demonetised. 

The problem with option one is that sync clearance is a lengthy process that can take weeks and cost a lot. Not a great fit for creators who create and upload videos the same day. Companies like Lickd are trying to fix this with catalogues of pre-cleared music, but the industry as a whole is moving too slowly. For the record, MIDiA’s preferred solution is for platforms securing large ‘sandboxes’ of pre-cleared tracks for creators and developers to work with. An early example of this is the NFL making all of its soundtracks available for creators on a Synchtank powered site.Unless music rights holders want to cede the growth in the music UGC space (which will be worth $5.9 billion by end 2022) to library music companies, they need to put alternative approaches at the core of their licensing strategy, not simply pursue them as interesting ‘edge’ experiments.

Going beyond the stream

However, the biggest music industry opportunity is not licensing music. It is monetising fandom. The #brokenrecord debate has shone a light on how streaming’s scale benefits do not trickle down at a sufficient rate to creators. Artists compete for tiny bits of highly valuable ‘real estate’ – playlists, artist profiles etc – but most often do not get enough to earn a living. While efforts like user-centric licensing and better songwriter rates will help, they will not change the underlying fundamentals of streaming economics. The counter argument is that scale will change everything, but:

  • Average revenue per user (ARPU) is falling. Spotify’s premium ARPU fell 34% between Q1 2016 and Q3 2020, a 34% decline
  • Streaming growth is slowing in developed markets
  • Consumption is slowing – last quarter Spotify reported an increase in consumption hours to pre-COVID levels but as there were 49 million new monthly active users (MAUs) compared to pre-COVID this implies a reduction in hours per user
  • Emerging markets are growing but a) ARPU is lower and b) domestic repertoire will drive most of the long-term consumption – so this means only a small uplift for Western creators

Before live stopped, streaming existed in a mutually beneficial ecosystem, giving artists more fans for concerts and merch. Now that live is out of the equation, streaming isn’t enough. 

This is where platforms like YouTube and Twitch can come in. They enable creators to build loyal fanbases of which they can monetise the loyal core to build sustainable careers. The idea of ‘1,000 True Fans’ was first put forward years ago by Kevin Kelly but now the dynamics of social platforms have made this a realistic possibility for any creator. Nevertheless, music artists are still way off the pace. 

Micro-communities

Twitch and YouTube enable creators to build (often small) loyal fanbases that can generate them income that far exceeds what artists get from streaming. MIDiA terms this dynamic ‘micro-communities’ and we think it will be one of the trends that will shape the music business in 2021 and beyond. As part of our creator tools research we will be exploring how platforms like Splice and Landr will be able to build their own artist-fan communities that can be as valuable to artists as Bandcamp is to many already. 

Streaming created a superstar economy where even within the non-superstars, superstars exist. For example, Tunecore states it has ‘thousands’ of artists that make more than $100,000 a year. A simple bit of arithmetic shows that this means the remainder make less than $100.

Micro-communities represent an opportunity for artists to fill the income gap that streaming leaves without live in the mix. This probably does not reflect a direct revenue opportunity for rights holders – indeed, that would be missing the point. Instead, they can ensure those platforms are supported to empower artist monetisation without speed bumps. Why? Quite simply, rights holders have a model that works for them (streaming), so now they need to support a model that works for their creators so that they can in turn continue to support the streaming model that works for rights holders. 

If the industry does not support this new virtuous circle ecosystem, then it could bring the streaming model crashing down due to creator discontent. 

Spotify Q3 2020: What price growth?

Spotify reported another strong quarter in Q3 2020, with subscriber growth up 27% year-on-year (YoY) and ad-supported user growth up 21%. Spotify continues to set the pace for the global streaming market and has demonstrated that streaming has proven resilient to lockdown. (Spotify finished the quarter with 144 million subscribers, just above MIDiA’s 143 million forecast – we maintain our end of year forecast for 154 million.) Further evidence of Spotify’s lockdown resilience is that global consumption hours surpassed pre-COVID levels and that churn levels fell. However, Spotify’s premium revenue growth continues to trail subscriber increases, which raises the question: what price is growth coming at for rightsholders and creators?

Spotify’s Q3 2020 premium revenue was €1,790 million, up 15% YoY – notably lower than the 27% subscriber growth. This is a long-term trend for Spotify, resulting in a steady erosion of premium average revenue per user (ARPU). Q3 2020 ARPU fell to €4.19, down from €4.67 in Q3 2019 and €5.76 back in Q3 2016.

There are multiple factors underpinning this shift:

Growth of emerging markets where ARPU is lower

Growth of family and duo plans

Use of promotional offers

Growth of low-priced tiers (telco bundles, student plans)

Spotify emphasised that ‘product mix’ was the core driver of lower ARPU in Q3 2020 and pointed to price increases for family plans across four Latin American markets, Australia, Belgium and Switzerland. Rightsholders and creators will be hoping that this is the start of a wider strategy. 

‘Measure us on growth’

Spotify continues to tell the markets to measure it on growth and market share rather than margin or ARPU. That serves Spotify better than rightsholders and creators. However, this may be about to change. Spotify’s big growth bet is podcasts, which it is monetising via advertising. Although Spotify had a decent quarter for ad revenue (after many weak ones) it is still just 9% of total revenue. Podcasts have the potential to be bigger than music for Spotify but it is going to take a long time to realise the potential, especially as the coming recession will likely dent the global ad market. 

A new growth story

Why this matters for music stakeholders is that Spotify may find it hard to convince investors to start backing yet another ‘measure us on growth’ story when it already has one. As streaming starts to mature in Western markets, Spotify may now be on a path to shift its music subscriptions narrative to one of turning around the ARPU decline, focusing on increasing “lifetime value”, reducing churn and improving margins. It can then make podcasts the ‘growth story’ and music the ‘margin and ARPU story’.

Music rights holders may be concerned that podcasts threaten their share of Spotify revenue, but they may also end up thanking Spotify’s podcasts strategy for indirectly resulting in a stronger focus of improving music monetisation. This in turn will mean higher per-stream rates – something that artists and songwriters in particular will appreciate.

What AWAL’s $100k artists mean for the streaming economy

Kobalt’s AWAL division announced that ‘hundreds of its artists have reached [the] annual streaming revenue threshold [of $100,000]’. Make no mistake, this is major milestone for a record label that has around 1% global market share. It is compelling evidence for how a label built for today’s streaming economy can make that economy work for its artists. So, how does this tally up with all of the growing artist concern in the #brokenrecord debate?

It’s complicated. The short version is that we have a superstar economy in streaming quite unlike the old music business, one in which artists on smaller independent labels have just as much chance of breaking into that exclusive club as those on bigger record labels. Given that AWAL states its cohort of $100k+ artists grew by 40% (assuming they mean annually) while global label streaming revenues grew by 23%, the implication is that AWAL is getting better at doing this than the wider market. And it is the implied growth of the rest of the market where things get really interesting.

(A model with more than 50 lines of calculations was required to build this analysis so I am going to walk through some of the key steps so you can see how we get there. Bear with me, it will be worth it I promise you!)

Finding the third data point

To do this analysis I am going to share one of MIDiA’s secrets with you: finding the third data point. Companies, understandably, like to share the numbers that make them look good and hold back those that do not help their story. Often though, you can get at what that third number is by triangulating the numbers they do report. A really simple example is if a company reports its revenues and subscribers but not its average revenue per user (ARPU), you can get to an idea of what the ARPU is by dividing revenue by subscribers (and if you have a churn number to work with, even better).

In this instance, Spotify gives us the ‘second’ dataset to go with AWAL’s ‘first’ dataset. In early August, Spotify reported that 43,000 artists generated 90% of its streams, up 43% from one year earlier – you’ll note how similar that 43% growth is to AWAL’s 40% growth. Combining Spotify’s data with AWAL’s, we now have what we need to create the picture of the global artist market.

Superstars within superstars

Spotify generated 73 billion hours of streams in 2019, which equates to around 1.3 trillion streams. Interestingly, taking its roughly $7.6 billion of revenue, this implies that its global per-stream royalty rate (masters and publishing, across free and paid) stood at $0.00425 – which is a long way from a penny per stream. This highlights how promotions, multi-user plans, free tiers and emerging markets are driving royalty deflation. But that’s a discussion for another day…

For the purposes of this work let’s assume that the average artist royalty rate (across standard major, indie and distribution deals) is 35%. Spotify’s 90% of streaming label royalties in 2019 was $3.9 billion, which translates to an average artist royalty income of $29,221 for each of those 43,000 artists. That is obviously south of AWAL’s $100k cohort, which illustrates that those AWAL artists are not just superstars but an upper tier of superstars.

$66,796 is good, as long as you don’t have to split it

But how does this look outside of Spotify? Firstly, the top 90% of global streaming label revenues was $10.8 billion in 2019. We then scale up Spotify’s 43,000 top-tier artists to the global market and deduplicate overlaps across services and we end up with a global base of around 56,000 top-tier artists earning an average of $66,796 per year from streaming (audio and video).

$66,796 is a decent amount of annual income but it looks a lot better if you are a solo artist than, say, a four-piece band splitting that revenue into $16,699 slices. Interestingly, AWAL seems to skew towards solo artists (94% of AWAL’s featured artists are solo acts) so the $66,796 goes a lot further for them than an average indie label rock band.

And then there’s the remaining 99% of artists…

But of course, this is how things look for the most successful artists. What about the remainder that have to share the remaining 10% of streaming revenue? That remaining label revenue is $1.2 billion of which $0.7 billion (i.e. 57%) is Artists Direct. That means the entire global base of label-signed artists that are not in the top tier have to share 4% of global streaming revenues. This translates to an average annual streaming income of $425. Artists Direct meanwhile earn an average of $176 (only 59% less than those non-superstar label artists).

The 90/1 rule

The key takeaway then is that streaming is levelling the playing field for success. Consistently breaking into the top bracket is now achievable for artists on major and indie labels alike and, if anything, independents are enjoying progressively more success. But this is a very different thing from all artists doing well. Music has always been a hits business. Streaming is widening the distribution but with less than 1% of artists generating 90% of income, the spoils are far from evenly shared. Music streaming has taken Pareto’s 80/20 principle and turned it into a 90/1 rule.

Streaming’s remuneration model cannot be ‘fixed’

The #brokenrecord debate continues to build momentum and new models such as user-centric are getting increased attention, including at governmental level in the UK. But as Mat Dryhurst correctly observes, there is a risk of the market falling into streaming fatalism; that the obsession with trying to fix a model that might not be fixable distracts us from focusing on trying to build alternative futures.

I have previously explored what those new growth drivers might be, but now I want to explain the unfixable problems with the current streaming system for creators and smaller labels. Streaming’s remuneration model cannot be ‘fixed’, but that is mainly because of its inherent structure. Tweaking the model will bring improvements but not the change artist and songwriters need. Instead of exploring sustaining innovations for streaming, it is time to explore new disruptive market innovations

Product remuneration versus project remuneration

Smaller independent artists and labels are outgrowing the majors and bigger indies on streaming, so why are we having the #brokenrecord debate? Why isn’t it adding up? The answer lies in how artists and songwriters are remunerated. In all other media industries other than music and books, creators are primarily remunerated on a project basis. An actor will be paid an appearance fee for a film or TV show; a games developer will be paid for their time on a project; a sports star paid a salary; a journalist paid for a story. In many of those cases the creator will sometimes have the opportunity to negotiate a share of profit too, an ability to benefit in the upside of success. But, crucially, the media company has assumed all of the risk. Also, of course, the media company owns the copyright.

Artists and songwriters might get an advance, but that is a loan against future earnings, not a project fee. Artists and songwriters, like authors, are remunerated via product performance. They shoulder the risk, and most of the time they do not even own the copyright. Actors and sports stars do not have to worry about slicing up a royalty pot; they have been paid for their creativity whatever the outcome of the project. Any royalty splits are an upside, an ability to benefit from success rather than a dependency for income.

The consumption hierarchy has become compressed

Music used to be split into a neat hierarchy, with radio and social being about passive enjoyment and generating usually small royalties, while albums were about active fandom that generated large income. Streaming fused those two together into one place and created a royalty structure that, in artist income terms, resembles radio more than it does album sales. The problem does not lie with how much streaming services pay (c.70% of income is a hefty share to pay out), but instead:

  1. how those royalties are divided up
  2. the way they monetise consumption
  3. the fact royalty rates are determined by how much streaming services charge

Streaming rates are going down because users are listening to more music and streaming services are charging less per user due to promotions, trials, multiple-user plans, telco bundles, student plans etc. Even before you start thinking about how the royalty pie is sliced, it is getting ever smaller in relation to consumption – and there is no onus on streaming services to protect against rates deflation because they pay as a share of income rather than a fixed per-stream rate (for subscriptions).

Monetising fandom

Music fans care about artists and songwriters, and given the opportunity and the right context many fans will support them. But that context is often artificial and happens outside of the normal consumption experience; for example, a music fan listening to a band on Spotify then going to Bandcamp to buy an album. It requires a conscious decision for the fan to say ‘I want to support this artist’. No such decision is necessary for a sports fan or movie fan because the remuneration system already ensures the talent has been adequately remunerated. On top of this, most music consumers are not passionate fans of most artists, so most will not make that step.

There are two natural paths that follow:

  1. Build fandom monetisation into the streaming platforms, e.g. virtual artist fan packs, virtual gifting, premium performances, creator support etc. I have written at length about how Chinese streaming services do well at monetising fandom, but there it is the platform that benefits most, not the artists. Western streaming services have an opportunity to monetise fandom for the creators, not for the platforms.
  2. Create new models where consumers pay for artist-centric experiences. These will always be more niche and have the challenge of building new audiences rather than tapping into existing streaming audiences, but the decision does not need to be ‘either/or’.

The third way

There is additionally a less obvious third path, that would reframe the entire basis of artist/label/publisher/songwriter/streaming service relationships: direct licensing for creators. No streaming service is going to want to do this (they already prefer to negotiate with aggregators rather than small labels) and labels and publishers are unlikely to want to cede such power. But a pragmatic compromise could be a new generation of artist and songwriter contracts that provide for the creators to set stipulations for royalty floors to ensure that they do not pay for streaming services cutting their prices via promotions and multi-user plans. This would also require rightsholders to ensure that streaming services set a royalty floor which in turn would compel streaming services to start pushing up the average revenue per user and perhaps even introduce metered access for users.

Options 1 and 3 are not exactly easy to do and they would require seismic industry change with wide-reaching impact. But if the industry wants a significant change in creator remuneration, then it needs to embrace truly disruptive innovation rather than spend its time tweaking a model that simply cannot change in the way many want it to.

COVID-19 hit major labels much harder than it did Spotify

COVID-19 was always going to have a significant impact on the music business, and with the Q2 results for all of the major music companies now in we can start to look at just how big that impact has been so far. Year-on-year (YoY), combined major label recorded music revenues fell by 7.8% on a current currency basis while major publisher revenue fell by 1.6% over the same period (though slow reporting for income such public performance means that the full impact on publishing is yet to be seen). The figures in themselves are disappointing for an industry that has grown acclimatised to growth but the factors driving this are global economic and health policy ones. As we identified back at the start of June, income streams such as physical, public performance and ad supported are all vulnerable to lockdown impact. The only truly resilient revenue source so far is paid subscriptions. The dependency on streaming has never been higher but there are questions here too.

q2 2090 major label streaming music revenues

Major label streaming revenue fell by 0.6% in Q2 2020 compared to the previous quarter. Although it was up YoY by 6.3%, (and even allowing for seasonality), there was already a clear slowdown in growth before COVID-19 kicked it into reverse. When markets mature, the margins between growth and decline are small. So, factors such as the weakening digital ad market pushing down ad-supported revenues can be the difference between being in the red or in the black. The music business is going to have to get used to ad-supported under-performing because advertising is always an early victim of recessions.

Despite all of this gloom, the likelihood is that by the end of the year, there will have been sufficient return to growth in many sectors and regions, meaning global recorded music revenues will be higher in 2020 than 2019 – not by much, but up nonetheless.

However, the streaming slowdown emphasises just how important it is for the industry to establish a series of potential plan Bs to streaming’s plan A, and fast.

spotify revenues compared to major label revenues q2 2020

Q2 2020 wasn’t bad news for everyone in streaming. In fact, Spotify actually increased its revenues both quarter-on-quarter (2.2%) and annually by 13%, i.e. double the rate the majors grew their streaming revenue. The result is that by Q2 2020, Spotify’s total revenue was only 5% smaller than the entire major labels’ streaming revenue combined. All this was despite Spotify’s ad-supported revenue falling by 11%. Spotify’s revenues are slowly but surely becoming uncoupled from that of the majors. Although factors such as timing of revenue recognition and payments to rightsholders will play a role, the key inference is that independents grew faster than majors on Spotify in Q2, continuing the 2019 trend. Although, the term ‘independent’ is becoming progressively less useful as the market internationalizes; in addition to independent labels and artists we are seeing growing impact from regional, non-western ‘majors’ e.g. T-Series, India; Avex, Japan; YG Entertainment, South Korea.

The three key takeaways from all this are:

  1. Streaming revenue growth was already slowing. COVID-19 shows us just how important it is to push new growth drivers
  2. Spotify is already working on its new growth driver (i.e. podcasts) and though the slowdown in the digital ad market will dent momentum, podcasts will further decouple Spotify revenue from that of the majors
  3. The more likely scenario remains that streaming and label revenues will pick up before year end, but if the recession deepens and swathes of millennials lose their jobs, then subscription revenue could be hit, which brings us back to takeaway #1

Why Spotify needs Russia

Spotify’s delayed Russia launch finally happened this week. While it did not drive a stock price growth like the Josh Rogan deal did (the stock closed just 1 cent higher than the previous day’s close) it will actually prove much more important in the medium term.

Podcasts are Spotify’s long-term bet, the moon shot that keeps investors excited and that points to a future where Spotify is better able to plot its own destiny without being constrained by record labels. But that future destination does not mean anything if Spotify is unable to maintain strong growth in its core business in the interim. Which is where Russia comes in.

Spotify has an Apple-like problem but chose a very non-Apple solution

Global streaming revenue growth was 22% in 2019 and growth will slow significantly in the COVID-19 impacted 2020. Growth rates however were already slowing due to the maturation of developed western markets, while subscriber numbers were growing faster than revenues, pushing down ARPU. Spotify has the same challenge as Apple.

Apple is the market leader in smartphones but does not own the majority of the market and the overall smartphone market is slowing, which means that iPhone sales have slowed. Apple could have decided to go ‘down market’ and created cheaper devices for less affluent consumers and emerging markets. It decided not to, and instead to start pushing its top-end devices even higher up the market with higher price points. Spotify has taken the opposite approach. Rather than increase prices in high-value markets, it is prioritising lower ARPU emerging markets. Spotify has done so because a) it does not have a diversified product like Apple so is less able to risk slowing sales, and b) its product is not sufficiently differentiated from other streaming services to prevent churn if prices went up.

Betting big on emerging markets

Instead of focusing on maximising revenue growth among existing subscribers, Spotify is rolling the dice on subscriber growth. It keeps telling investors to measure it on growth and market share, and that is exactly the game Spotify has chosen to play. Which is where Russia comes in.

Emerging markets are where the subscriber growth lies: Asia Pacific, Latin America and Rest of World combined will drive 71% of global music subscriber growth between 2019 and 2027. Spotify is already committed to this strategy and is already seeing results. In its Q1 2020 earnings, Latin America and Rest of World were the workhorses of Spotify’s growth during the quarter, accounting for 73% of all new subscribers; one year previously the share was just 30%.

But emerging markets take time to convert, users need to get familiar with the service via ad supported and extended trials before slowly converting to paid, though always at lower rates than in developed markets due to lower spending power. So, Spotify needs to keep expanding the user acquisition funnel which means launching in populous new markets such as Russia.

Russia’s contribution to the global picture is what matters for Spotify

The question many are asking is, has Spotify left it too late for Russia? There is no doubt that 2019 was a big year for streaming in Russia, with revenues growing at 79% to reach $249 million in retail terms, which makes it a sizeable, but not (yet) a large market. By way of comparison, Brazil’s streaming revenues are comfortably more than double that. As of Q1 2020 there were 7.4 million subscribers with Vkontakte and Yandex commanding a combined market share of 80%, so Spotify is entering an established market with well-established indigenous players.

This is not Spotify’s modus operandi and the last time it took this approach was India, which is yet to deliver results. So Russia is unlikely to be a runaway success for Spotify, but it is entirely reasonable for it to expect to pick up three million subscribers there over the next three years, which in turn will help sustain Spotify’s global subscriber growth. This is not about winning in Russia but instead winning globally. Or put another way, Spotify needs Russia more than Russia needs Spotify.

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.