Time to jump off the algorithm highway

Life is perpetual change, so it is perhaps overdoing it to suggest that the music business is at a cultural pivot point. Yet, what comes next has the potential to be looked at, years from now, as a dividing line between before and after. For more than half a decade, the music business has been hurtling down the algorithm highway, repurposing artist development, marketing, fan engagement, and even the structure of the song itself in order to stay the path. Everything is splintering, from attention to remuneration, with creators and rightsholders alike finding themselves feeding a beast whose hunger is never sated. Much like an addict who wants to quit but cannot, the music business understands the problem and the costs it incurs them, yet they dare not jump off the algorithm highway for fear of being left behind by those who do not. And yet, jumping is exactly what is needed, to halt the perpetual commodification of both music and creators. It is a leap of faith, but onto a welcoming crash mat: scenes.

At Future Music Forum this week, myself and fellow MIDiA analysts Tatiana Cirisano and Kriss Thakrar talked a lot about MIDiA’s new research into scenes and identity (MIDiA clients can read our latest report on the topic here). Regular readers will be familiar with our work on fragmented fandom and how the splintering of consumption has created a parallel splintering of culture, with new hits becoming smaller and more short-lived. In this song economy environment, it is the song, not the artist, that is the central currency, thus making nurturing smaller fandoms mission critical. But fandom itself is the symptom, the cause is identity, and this, along with the scenes in which it manifests, is where the future of music marketing lies.

Algorithms have assumed a central role in the success of artists in today’s music business, with marketers forever trying to improve their understanding of their inner workings in order to gain advantage for their artist. It is, in many respects, a fool’s errand, as it is in the platforms’ interest to continually evolve the algorithms in order to ensure it is themselves that determine success, not third parties. Nonetheless, there are ways to succeed in the song economy: you may not be able to beat the algorithm, but you can join it. This means thinking and behaving like an algorithm, to hold virality by the hand. Just like an algorithm, this means real-time multivariate testing within target segments, and progressively expanding only to next-level associated segment, resisting the ability to go big as soon as something fires. But using the algorithm as a marketing discipline truly effectively entails a degree of ruthlessness that many artists and labels would find unpalatable. Algorithms find success by casting out failure instantly, instead only amplifying that which resonates within target segments. So a label pursuing this approach would need to be willing to ditch a campaign incredibly early if it does not, however much the label might believe in the release or however big a priority the artist might be. Artist rosters would become a production line of bets, as quickly discarded as signed. Failing fast is as important as succeeding fast in the song economy. 

This ruthlessness does not sit well with the traditional model of building an artist but, as dystopian a vision as it might be, is the exact path that labels already find themselves on. Scenes represent an alternative way forward.

Scenes and identity

Scenes have always existed, but now there is a growing proliferation of online scenes that allow a degree of specificity that was simply not possible previously. As Tatiana puts it:

“Not only can people find people across the globe with the exact same interests and values, algorithms actually push those people closer together”.

Though scenes can be transitory and ephemeral, subject to fast-shifting cultural trends, the really valuable ones are those that are rooted in identity, that speak to who people are about. The eBoy scene, with Young Blud as an icon, is a case in point, reflecting the values of a tribe that does not identify with the Instagram-perfect archetype of appearance. 

These scenes sometimes revolve around music, but most often, music is simply the soundtrack, with a number of artists emerging as icons, not because they have cynically targeted them but because they come from those communities and reflect their values. Fandom is an output of this shaping of identity. It is simultaneously a way of showing how much identity matters to you and of reinforcing that identity. In fact, fandom is identity’s virtuous circle of influence, with people’s fandom reinforcing their identity and communicating it to their scene community, thus reinforcing their bonds within it.

Identity is fandom’s ground zero. Music marketers that are able to identify and nurture it (rather than simply attempt to harvest it) have an opportunity to forge a depth of artist-fan relationship that will endure far beyond the whim of any algorithm, survive both hit and miss singles, and will not disappear into the black hole of lean-back consumption. 

Streaming put fandom on hiatus. Scenes represent an opportunity to reforge fandom for the modern era, an incubator for artist careers. In short, an antidote to the song economy.

MIDiA music forecasts: the new era of growth

MIDiA has just published its latest music forecasts, available to clients in full here. Here are some of the highlights.

2021 was a huge year for the recorded music business with retail values up 23% to reach $51.9 billion (retail values include masters, publishing, and retailers / DSPs). Label trade revenue was up 20% to reach $22.9 billion. Part of the reason for the wide gap between retail and label growth was the rise of non-DSP streaming that sees a much higher share go to publishing than for DSP streaming. Non-DSP streaming was worth $3.0 billion in 2021 across masters, publishing, and platforms. Production music (a segment missed out of most other market estimates) was another strong performer, generating around one billion dollars.

MIDiA forecasts global recorded music revenues to reach $89.1 billion by 2030 in retail terms. That is an increase of 72% on 2021. The $37.2 billion that will be added by 2030 will be more than was added between 2014 and 2021, meaning the music business is not even yet halfway through a long-term rebound phase. While there is a well-reasoned argument that music revenues are still not back to pre-Napster levels, the coming years should right that anomaly (rampant inflation permitting). 

Streaming will be 82% of 2030 music revenues and it is therefore streaming market dynamics that will underpin overall market growth: 

Subscriptions: Increased ARPU in Western markets and increased subscribers in emerging markets. Europe and North America will represent just 23% of subscriber growth between 2021-2030

Non-DSP: Emerging social, games, and metaverse platforms will offer new licensing opportunities. Non-DSP provides a licensing and business model framework for future emerging consumer technologies, such as Web 3.0, giving rightsholders crucial revenue diversification as subscriptions mature

Emerging markets: Asian markets in particular will become the engine room of subscriber growth. The Asia-Pacific region alone will have 0.5 billion subscribers by 2030. China accounted for 39% of global subscriber growth in 2021

The US: Even though the US will lose a share of subscriber growth by 2030 (due to China’s growth), it will drive the largest share of subscription revenue growth and will remain the world’s largest market by 2030 in revenue terms

Label trade subscriber ARPU will grow by more than 7% globally by 2030, lifted by price increases equivalent of 17%, but offset by reduction due to the growth of multi-user plans and a drop in label share.

Bull or bear?

With the influx of capital into the music business in recent years (IPOs, catalogue acquisitions, etc.) there is more attention on the space than ever. 2021 was the year in which the music business met those inflated expectations with exceptional performance, underpinned by the early fruits of a new and diversified commercial strategy that is ready to soundtrack the future of the web. 

It was a combination of these factors, forecasting non-DSP for the first time, and accounting for the exceptional performance of China in 2021, that led to MIDiA significantly increasing its forecasts by around 25%. We believe this significant increase (our biggest ever) reflects the new potential of the global music business as it enters a new chapter that will be shaped by non-DSP, Web 3.0, and emerging markets.

But – and it wouldn’t be MIDiA without a ‘but’ – this bullish outlook coincides with the global economy on the brink of entering a tailspin. So, to be prudent, MIDiA’s forecasts also include a detailed bear scenario dataset with label trade revenues slowing to just 3% for 2022, and from there, adding just another 14.3% by 2030.

We think this bear scenario is unlikely to play out, despite being within the realms of possibility. Should the global economy slow, then the likelihood is that while music will prove not be ‘recession proof’, it will neither be recession vulnerable.

If you would like to learn more about MIDiA’s music forecasts email stephen@midiaresearch.com

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. 

Fake artists are what happens when fandom dies

The topic of ‘fake artists’ refuses to go away. For those who have been on Mars for the last couple of years, fake artists refer to artists who release under a streaming pen name but do not build any artist profile around the music. Most of this music comes from production music libraries (typically ‘royalty free’) and is seen by the traditional music business (record labels especially) as a means of gaming the system – especially as the assumption is that DSPs pay less for such music (even though record labels have started playing the game themselves). Although the ‘if you can’t beat them, join them’ might seem like a pragmatic solution, it, of course, only exacerbates the problem. Because the problem is not fake artists, but it is, instead, the way in which streaming is killing fandom.

Streaming is racing to be radio, not retail

Streaming is fast becoming more of a replacement for radio than it is retail. Retail used to be where (engaged, smaller scale) fans went, while radio was where (passive, larger scale) audiences went. As streaming got bigger, there was always going to come a point in which its focus would be the large passive audience segment rather than the smaller engaged fan segment. But what has happened is that streaming is turning everyone into the passive massive, even fans. Streaming has turned music into a utility, like water coming out of the tap. This might have helped drive global scale, but it came at the cost of fundamentally eroding the cultural impact of music, by making it about consumption rather than fandom. 

Streaming music soundtracks our everyday lives. There are playlists for everything we do (study, fitness, relaxing, cooking, working, etc.). By becoming pervasive, music has lost some of its magic. The fandom that was inherent in people buying music because they loved it is gone. The biproduct of ubiquity is utility. In the immortal words of Syndrome from the Incredibles: “When everyone is super, no one will be…”

The problem is that, from the ground up, Western streaming is geared for consumption not fandom. From playlists through to economics, streaming is all about consumption at scale. Songs fuel consumption, not artists. Which is the breeding ground for mood music, of which ‘fake artists’ are but one sub-strand. 

Streaming’s torrent of ubiquity

This is not to say that there is anything inherently bad about consumption, after all, radio has been a corner stone of the music business for, well, pretty much forever. Labels have had a love / hate relationship with radio, but they valued the way in which it drove sales and delivered exposure for songs and artists (especially as DJs talk about the music being played, interviewing artists, etc.). With streaming, though, the discovery journey is the destination. So, the post-consumption part of the equation just disappeared. And a consumption-first environment, tailored to individuals’ daily lives and shorn of the artist context delivered by DJs, is fertile ground for mood music. In fact, mood music is the natural evolution of a consumption-first system. A system in which artists get washed away by streaming’s torrent of ubiquity. 

Add poor remuneration for mid and long-tail artists into the mix, and you have a perfect storm. Why? Because artists are compelled to diversify their income mix to eke out every extra dollar they can get from their creativity, with production music libraries being eager customers of their ancillary work.

Fandom has moved up the value chain

Streaming may have killed off fandom within its own environment, but fandom itself has not died. It has gone elsewhere (Bandcamp, Twitch, TikTok, etc.). It is TikTok that has arguably done the most to reinvigorate fandom in recent years. But, crucially, it has inserted itself before consumption instead of after it. You will be hard pushed to find a mainstream music marketing campaign that does not include TikTok as the place to kick start discovery and (if all goes well) virality. TikTok has thus become the top of the funnel for consumption. Yet, rather than filtering out what is valuable, the process is more like panning for gold, i.e., filtering out what is not valuable – consumption. Fandom, identity, recreation, engagement, and connection are all left with TikTok, while consumption flows through to streaming. Little wonder, then, that TikTok is diluting streaming’s cultural capital. 

It does not have to be this way. Chinese streaming services demonstrate that streaming can be fandom machines too. Tencent Music Entertainment makes around two thirds of its revenue from non-music, fandom revenue. But perhaps the most startling example of just how much is being left on the table by Western streaming services, is found in NetEase Cloud Music’s inaugural earnings release. 212 million music users generated RMB 3.6 billion. 0.7 million social entertainment users generated RMB 3.7 billion. Yes, that means an audience that is 0.32% the size of the music audience generated more income in fandom-related revenue than the music audience did in music revenue. Right now, if anyone in the West is going to be streaming fandom machines, it is probably going to be TikTok (a Chinese company) and Epic Games (a company 40% owned by a Chinese company).

Fandom remains the under-tapped resource in the West, but its value is not simply in the revenue potential. Fandom is the essence of what makes music move us. Under-invest in it, and music will continue on its path of commodification. Which might serve the streaming platforms well, but not the wider music business. ‘Fake artists’ will become the norm, not the exception. To misquote syndrome “when everyone is fake, no one will be…”

Recorded music market shares 2021 – Red letter year

We suggested back in 2020, that 2021 was going to be a strong year for the recorded music market. As it turns out, 2021 was the fastest growing year in living memory, with growth across most formats, contrasting strongly with 2020 when streaming was the only growth segment. 

After 2020 was constrained by the global pandemic, the global recorded music market rocketed into stellar growth in 2021, growing by 24.7% to reach $28.8 billion (the largest annual growth in modern times). 2020 growth was a much more modest (7%), but this reflected the suppressing effect of the global pandemic in the first half of the year.

2021 was a big year for the music business, with a record amount spent on music catalogue acquisitions and IPOs for Warner Music Group (WMG), Universal Music Group (UMG) and Believe Digital. These developments turned out to be the symptoms of a surge in global market growth, with recorded music revenues. 

Streaming revenues reached $18.5 billion, up by 29.3% from 2020, adding $4.2 billion – also a record increase. One of the key drivers of streaming growth was non-DSP revenue, representing deals with the likes of Meta, TikTok, Snap, Peloton and Twitch. Non-DSP streaming recorded music revenue totalled $1.5 billion in 2021, a massive uplift from 2020. DSP streaming (Spotify, Apple Music, Amazon Music, YouTube Music, etc.) also grew strongly too, reaching $17 billion. 

UMG remained the biggest label, with $8.2 billion, giving it a market share of just under 29%. However, for the second successive year, Sony Music Group (SMG) was the fastest growing major, and it increased its market share by growing significantly faster than the total market. For the first time since 2017, the major labels did not see their collective market share decrease.

Independents also had a good year, with strong growth across both larger and smaller labels. But it was, once again, artists direct (i.e., self-releasing artists) who were the big winners, driving $1.5 billion of revenue and increasing market share to 5.3%. They also added more revenue than in the prior year, something the segment has done every year since 2015. However, because 2021 was characterised by all segments performing strongly, artists direct’s increase in market share was smaller than in previous years.

The concept of evenly distributed growth was also reflected across geographies and formats, with physical and other (i.e., performance and sync) all growing strongly. Physical growth was so strong that revenues surpassed 2018 levels.

The recorded music market looked vulnerable in 2020, relying entirely on streaming for growth, with the outlook inextricably tied to that of DSPs. 2021 was a very different story, with growth on most fronts, but, most importantly, the rise of non-DSP revenue, reflecting an increasingly diversified future in which labels can fret a little less about the prospect of slowing subscriber growth in mature markets. When coupled with longer-term growth opportunities (NFTs, the metaverse, etc), the outlook is positively rosy. Although 2021 was boosted by exceptional circumstances (e.g., the wider economy rebalancing after the Covid-depressed 2020, and much of the non-DSP income being in the form of one-off payments), annual growth of 24.7%, points to the emergence of a new era for an increasingly diversified recorded music business.

The full report and dataset (with quarterly revenue by segment and format going back to Q1 2015) is available here. If you are not a MIDiA client and would like to learn how to get access to our research, data and analysis, email stephen@midiaresearch.com

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.

Major label revenue surged in 2021, but what does that mean?

2021 was an anomalous year for the recorded music market. Two of the majors did an IPO, the pandemic continued to disrupt the marketplace, and major label revenues grew at unprecedented rates. If the fourth quarter majors’ earnings follow similar seasonality patterns to previous years, collective major label recorded music revenue will be up by 29% in 2021, reaching $19.6 billion (a more bearish estimate is $19.3 billion). By way of comparison, 2020 growth was 6%, and 2019 was 10%. To put it another way, major label revenue increased by $787 million in 2020, and in 2021 it was up by $4.4 billion. 2021 was a red-letter year for the major labels, but was it a one-off or an industry pivot point?

To get to the answer, we first need to contextualise major label revenue growth within the wider market. 

Streaming 

Predictably, streaming was the core driver of major label revenue growth in 2021, accounting for 67% of the revenue, and up by 31% to reach $12.8 billion. That level of annual streaming growth has not been seen since 2016. 2020 streaming growth was 18%. But streaming’s leading player, Spotify, did see that kind of growth. Spotify’s full year 2021 revenues look set to hit €9.6 billion (which would be up by 22% from 2020), and if we only consider premium growth (i.e., the part that is not boosted by podcast revenue), then growth was just 19%. And it is not as if Spotify is losing much ground in the global streaming market – its subscriber growth was largely in line with the global market average (excluding China). So, the majors grew streaming faster, somewhere beyond Spotify.

The total market

The major labels’ total revenue growth also follows a different trajectory to other parts of the market, The year-to-date performance of just one of the top four recorded music markets matches the majors’ trend (bear in mind that these four markets were 62% of global label revenues in 2020, so they shape global growth trends):

  • US: 27.1% growth (H1) – RIAA
  • Japan: -1.0% (Jan-Nov) – RIAJ 
  • UK: 8.7% (FY) – ERA
  • Germany: 12.4% (H1) – BVMI

(It will be interesting to see how the IFPI allocates the revenue. There may well be quite a gap between their global total and the sum total of all the individual countries if this is indeed largely attributable to one off payments rather than reflecting organic, country level revenue.)

All of this means that the additional major label growth is likely reflective of factors such as:

  • Large, one-off payments from the likes of ByteDance, Twitch and Facebook
  • Licensing income from the same parties
  • Increased contribution from other markets
  • Market share increase from catalogue acquisitions 
  • Revenue growth from major-distributed independents
  • Organic market share growth

While all of these factors will be at play, it is the first two factors that are likely the most consequential. MIDiA estimates that these new non-DSP streaming income sources accounted for between $0.8 and $1.2 billion in 2021. Even at the lower end of the estimates, that revenue alone would have driven the same amount of growth in 2021 as all major label revenue growth combined in 2020. 

There is a clear narrative that post-digital service provider (DSP) revenue is now becoming a central growth driver for the recorded music business. Clearly a very beneficial narrative to have had during an IPO year, especially if the trend was accentuated by one-off payments and settlements – which would help explain the divergence between major label growth and local market growth. 

There are two key potential scenarios:

  1. Upfront payments for post-DSP streaming partners exceed organic mid-term revenue, resulting in slower growth rates in 2022 and 2023
  2. Post-DSP streaming partners meet / exceed expectations, making 2021 and 2022 look much like the late 2000s and early 2010s did for DSP streaming, with minimum guarantees being more often than not 

So, by 2023 we should be able to tell whether 2021 was a spike or a pivot point. If I was a betting man, I would probably put money on the outlook being closer to 2 than to 1.

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.

The record labels are weaning themselves off their Spotify dependency

The major labels had a spectacular streaming quarter, registering 33% growth on Q2 2020 to reach $3.1 billion. Spotify had a less impressive quarter, growing revenues by just 23%. After being the industry’s byword for streaming for so long, Spotify’s dominant role is beginning to lessen. This is less a reflection of Spotify’s performance (though that wasn’t great in Q2) but more to do with the growing diversification of the global streaming market. 

Spotify remains the dominant player in the music subscription sector, with 32% global subscriber market share, but streaming is becoming about much more than just subscriptions. WMG’s Steve Cooper recently reported that such ‘emerging platforms’ “were running at roughly $235 million on an annualized basis” (incidentally, this aligns with MIDiA’s estimate that the global figure for 2020 was $1.5 billion). 

The music subscription market’s Achille’s heel (outside of China) has long been the lack of differentiation. The record labels showed scant interest in changing this, but instead focused on licensing entirely new music experiences outside of the subscription market. As a consequence, the likes of Peloton, TikTok and Facebook have all become key streaming partners for record labels – a very pronounced shift from how the label licensing world looked a few years ago.

The impact on streaming revenues is clear. In Q4 2016, Spotify accounted for 38% of all record label streaming revenue. By Q2 2021 this had fallen to 31%.

Looking at headline revenue alone, though, underplays the accelerating impact of streaming’s new players. Because Spotify already has such a large, established revenue base, quarterly dilution is typically steady rather than dramatic. Things look very different though when looking specifically at the revenue growth, i.e., the amount of new revenue generated in a quarter compared to the prior year. On this basis, streaming’s new players are rapidly expanding share. Spotify’s share of streaming revenue growth fell from 34% in Q4 2017 to just 26% in Q2 2021. Unlike total streaming revenue, the revenue growth figure is relatively volatile, with Spotify’s share ranging from a low of 11% to a high of 60% over the period – but the underlying direction of travel is clear.

Spotify remains the record labels’ single most important partner both in terms of hard power (revenues, subscribers) and soft power (ability to break artists etc.). But the streaming world is changing, fuelled by the record labels’ focus on supporting new growth drivers. The implications for Spotify could be pronounced. With so many of Spotify’s investors backing it in a bet on distribution against rights, the less dependent labels are on it, the more leverage they will enjoy. From a financial market perspective, the last 18 months have been dominated by good news stories for music rights – from ever-accelerating music catalogue M&A transactions to record label IPOs and investments. 

Right now, the investor momentum is with rights. Should the current dilution of Spotify’s revenue share continue, Spotify will struggle to negotiate further rates reductions and will find it harder to pursue strategies that risk antagonising rights holders. Meanwhile, rights holders would be surveying an increasingly fragmented market, where no single partner has enough market share to wield undue power and influence. That is a place where rights holders have longed dreamed of getting to, but now – divide and conquer – may finally be coming to fruition.