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.

Music Subscriber Market Shares Q1 2020

WWDC would have been a perfect opportunity for Apple to announce another streaming milestone for Apple Music. It didn’t but the good news is that MIDiA already have a figure for Apple Music, as part of our latest music subscriber market shares. Whether Apple’s lack of announcement was because it didn’t have a good news story to tell or because it is waiting for a bigger number to pull out of the hat at a later date, well, we’ll have to wait and see.

Music Subscriber Market Shares 2020 MIDiA Research June 20

Overall there were 400 million music subscribers in Q1 2020, up 30% from Q1 2019, with 93 million net new subscribers added. This compares to the 77 million added one year earlier. The eagle eyed of you may be struggling to rationalise why streaming revenue growth slowed in 2019 while subscriber growth accelerated. The simple answer is ARPU. The combination of family plans, promotional trials and progressively more global growth coming from lower ARPU, emerging markets means that the long-term outlook for streaming is that subscriber growth will increasingly outpace revenue growth.

Spotify remains the standout leader in terms of subscribers with 32% market share. Spotify’s market share has remained between 32% and 34% every quarter since 2015. This is some achievement given how much more competitive the market has become in that time, and the stellar growth of Amazon. Spotify’s growth is both an extension of the wider market and a driver of it.

Despite Apple Music’s strong showing in second with 18%, this market share is down from 21% in Q1 2019 and contrasts with Amazon Music which finished Q1 2020 with 14% share, up from 13% one year earlier. Apple Music is making ground in absolute terms, Amazon is making ground in both absolute and relative terms.

Tencent Music Entertainment takes fourth spot with 11%, all the more impressive given that this number almost entirely refers to China and that it is accelerating growth, adding 14 million subscribers by Q2 2020 compared to 6 million on the year earlier.

Google is fifth with a more modest 6% but this represents a turnaround, with YouTube Music finally making Google a genuine contender in the subscription space. In Q1 2018, Google’s market share was just 3%. Google is outperforming the overall market.

What is particularly interesting about the state of the global market now compared to a couple of years ago is that we are starting to see some genuine segmentation taking place, which is a real achievement given that most of the services have to operate with the same catalogue and pricing:

  • YouTube Music is resonating with Gen Z and younger Millennials
  • Amazon Music is bringing older audiences to subscriptions
  • Spotify and Apple Music are the mainstream options
  • Deezer is enjoying success in emerging markets – Brazil especially – with pre-pay mobile bundles

The global subscriber market is in rude health in Q1 2020, significantly more so than the revenue and ARPU side of the equation.

These figures are the very top level findings from MIDiA’s Subscriber Market Shares model which includes quarterly data for 25 music services across 36 markets. This year we have added splits for MENA, Russia and Ireland. As well as a whole new dataset: Ad supported market shares, with splits for Sub-Saharan Africa. This data will be available for MIDiA clients in the coming weeks. If you are not yet a MIDiA client and would like to learn more about this dataset, email stephen@midiaresearch.com

Just what is Tencent’s Endgame?

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

Tencent is a product of the Chinese economic system

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

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

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

Investing in reach and influence

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

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

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

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

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

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

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

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

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

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

Tencent may be the future of digital entertainment

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

Music Streaming Needs a New Future

While doing some research on the Chinese streaming market I came across this fantastic UX tear down of Xiami Music. I recommend you read it in full. The day before I found this – also must-read –article on Beyoncé’s streaming strategy, which explains how she uses different platforms to segment her fanbase (Tidal – super fans, Spotify engaged fans, Netlix, passive fans). These two articles may seem entirely unrelated, but they are in fact two sides of the same coin: fandom.

Regular readers of MIDiA’s output will know that we have made fandom one of our central research themes, most recently identifying it as one of the next five growth drivers for the music business. We have also discussed at length how Chinese streaming services have built businesses around monetising fandom while Western streaming services instead simply monetise consumption.

Now I am going to take this thinking one step further by proposing a new way to consider how to segment the music consumption journey and how Western companies can become part of this new vision.

the three srtags of the music journey

Consider music consumption as three key steps:

  1. The song
  2. The (artist) story
  3. The fan

Streaming services now own the song. Social is doing an okay, but far from perfect job of owning the artist story. But no one – digitally – is owning the fandom. Music fans have to hop from one place to another to join the dots. This of course contrasts sharply with Chinese streaming services which own all three steps in the music journey. Let’s take a look at Xiami Music to illustrate the point.

XiamiI have written a lot in the past about Tencent Music’s portfolio of apps. Alibaba’s Xiami Music is one of the smaller players and its end-to-end value proposition is all the more impressive for that: this sort of functionality is table stakes for competing for audience attention in the Chinese market.

Delivering the music is almost just the starting point for Xiami Music, wrapping the music with endless additional context and features including (but by no means limited to): music videos, lyrics, commentaries, reviews, news, comment streams, virtual tipping, badges, trophies, lyrics poster, you can even grow your own Tamagotchi. As Siew writes in his UX tear down:

“Every piece of music has its own entourage — live versions, videos (the official one and the live ones), behind-the-scene footage, outtakes, remakes or covers, reviews etc.

Xiami has taken a leaf out of WeChat’s playbook. Everything you need about a song, an album, or an artiste/band, you can get it on Xiami. No need for you to google for lyrics, head to YouTube for a video, or launch Twitter/Weibo for news.”

Time to stop leaning back

Another insightful observation that Siew makes is that Xiami Music – as with other Chinese streaming apps – has a white background to make it easier to read and interact with lots of content. Whereas Western streaming apps have dark backgrounds as they behave as largely passive vehicles for delivering music: find your playlist, press play, close screen.

There is a fundamentally different UX ethos:

  • Western apps: lean back, listen with minimal friction
  • Chinese apps: lean forward, dive in, interact

Years ago (11 to be precise) I laid out a vision for lean forward music experiences, where interactive context and social features were built around the music. Now is the time for Western streaming services to push themselves out of their UX comfort zones and start to own stages two and three of the music journey.

Lead, don’t follow

It is important that they do not all follow the same path. Differentiation – or the abject lack of it – is the Achilles heel of Western streaming services. The hope here is that they each pursue their own path and use this blank canvass to develop their own unique identities. Which will make it easier for record labels and artists to follow Beyoncé’s approach of segmenting their audiences across different platforms.

Of course this will take time. It may even take another 11 years (though hopefully not). In the meantime radio companies should be seeing this as a great opportunity to carve out a role for themselves in step two (artist story telling). Most have realised by now that they cannot compete with streaming but instead should compete around it. Get it right and radio could become the home of artist storytelling, a genuine complement to streaming consumption. Meanwhile, TikTok may well be best placed to act fast to own step three (fandom) before the Western streaming services can get their respective acts in gear.

There is nothing quite like some fierce competition to focus the mind.

New Webinar on What Comes After Lockdown

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

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

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

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

Register now!

Artists are Learning How it Feels to be a Songwriter

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

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

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

Streaming did not grow in a vacuum

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

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

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

Songwriters only have the song

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

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

A generation of whom much is asked

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

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

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

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

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

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

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

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

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

COVID-19 has reset the debate

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

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

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

Where streaming has got us to

Firstly, let’s lay some ground markers:

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

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

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

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

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

midia streaming royalty payments

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

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

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

Let’s take the first two points in turn.

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

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

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

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

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

So, let’s pull together all the pieces:

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

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

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

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

The IFPI Confirms 2019 was the Independents’ Year for Streaming

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

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

ifpi midia 2020 streaming

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

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

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