The End Of Freemium For Spotify?

‘Leaked’ Spotify numbers emerged today indicating that the streaming service has just hit 37 million subscribers, which puts more clear water between it and and second placed Apple Music, despite the latter’s recent growth. It also means that Spotify is now nearly 10 times bigger than Tidal and probably Deezer (which hasn’t reported numbers since its France Telecom bundle partnership ended). It is beginning to look suspiciously like a 2 horse race. But there is a more important story here: Spotify’s accelerated growth in Q2 2016 was driven by widespread use of its $0.99 for 3 months promotional offer. Which itself comes on the back of similar offers having supercharged Spotify’s subscriber growth for the last 18 months or so. In short, 9.99 needs to stop being 9.99 in order to appeal to consumers. Which is another way of saying that 9.99 just isn’t a mainstream price point.

spotify june 1

As the IFPI’s 2015 numbers revealed, the average label revenue per music subscriber fell globally from $3.16 in 2014 to $2.80 in 2015, with price discounting a key factor. According to Music Business Worldwide, 4 million of Spotify’s newly acquired 7 million subscribers were on promotional offers and around 1.5 million of those are expected to churn out when their promotional period ends. That might sound high but it actually represents a 79% conversion ratio, which is a stellar rate by anyone’s standards. Meanwhile Spotify’s total user base is 100 million which means the free-to-paid ratio is 37%. So price promos are converting at more than double the rate of freemium. Does this mean the end of freemium?

spotify june 2

Freemium proved highly valuable to Spotify in its earlier years and continues to be an important entry strategy for new markets. But last year record label execs started to observe that free just wasn’t converting at the same rate it once did in mature markets like the US. This was because most of the likely subscribers had already been converted and so the majority remaining were freeloaders who were never going to pay, and warm prospects who just couldn’t bring themselves to pay 9.99. This is where price promos come into play. They deliver the impact of mid priced subscriptions, which is enough to to hook those wavering free users. Once they get used to paying the majority tend to stick around when the price goes back up.

Mid Priced Subscriptions Will Drive The Market, Even If By Stealth

I have long argued that mid priced subscriptions are crucial to driving the streaming market, and the burgeoning success of Spotify’s mid-priced-subscriptions-by-stealth strategy provides a bulging corpus of supporting evidence. In fact, the average spend of Spotify’s 7 million net new subscribers in Q2 2016 was $3.09 a month.  The tantalizing question is whether that 1.5 million promo users that are expected to churn out would take a $3.99 product if it was available?

As the streaming market becomes increasingly sophisticated, the leading players will have to rely ever more heavily on differentiation strategies. For Tidal and Apple that means urban focused exclusives, for Spotify (for now at least) that means algorithmic, personalized curation and aggressive price discounting. And in Q2 2016 it is Spotify’s strategy that is winning out, resulting in 2.3 million net new subscribers each month compared to 1.4 million for Apple Music and 0.3 million for Tidal.

Freemim is dead, long live price promos?

 

 

How Apple Music And Tidal Transformed Streaming (And Why Apple May Be Buying Tidal)

 

It is 15 months since the launch of Tidal (which was 2 months after Jay-Z’s Project Panther Bidco bought Aspiro) and it is 12 months since the launch of Apple Music (which was a year after Apple bought Beats Music). The streaming world has changed a lot in that time and both those companies have had a disproportionately large amount on influence on the market’s direction of travel. Their arrivals defined Spotify’s role as incumbent while simultaneously casting Apple and Beats as challengers. They have performed their roles of disruptive entrants well, reshaping the competitive marketplace with a strong focus on brand and artist exclusives. Now reports emerge that Apple is in talks to buy Tidal. First victory in the exclusives war or overspending for market share?

When Is An Exclusive And Exclusive?

In the streaming video world an exclusive means exactly that. If you want to watch ‘House Of Cards’ you need Netflix, if you want to watch ‘Man In The High Castle’ you need Amazon Prime. But in music the rules are far more flexible.

exclusives

Looking at the flagpole exclusives across Apple Music, Tidal and Spotify, most of these are available on other platforms as downloads, while many are available to stream. For example, Beyoncé’s ‘Lemonade’ is only available to stream via Tidal but was available to download on iTunes within 24 hours of release. Understandably, the exclusive albums of each company’s respective godfather are genuinely exclusive. But Rihanna’s ‘Anti’ was given away by Samsung while Spotify’s rock legends exclusives are streaming only.

Apple is beginning to push the envelope though, pitching creative solutions to labels and artists, resulting in output like videos for The Weekend and Drake. At the same time it is beginning to look suspiciously like a record label with the release of Chance The Rapper’s ‘Colouring Book’ mixtape. The net result of all this clamouring to be seen as the ‘home’ of an artist is resounding confusion and frustration for music fans. An avid TV fan may well accept the need to have both a Netflix and Amazon subscription because no video service claims to have all the TV shows and movies on the planet. However, the central proposition of streaming music services is exactly that…or at least it was until Tidal and Apple Music upset the the apple cart (ahem). The irony is that in scoring a quick win against Spotify, Tidal and Apple may have fundamentally undermined the long term positioning of the entire streaming music product.

Exclusives Cannot Recreate The 1990s

Apple Music’s head of original content Larry Jackson has said he wants to make Apple Music to emulate the success of MTV in the 80’s and the 90’s, creating the sense that artists ‘live there’. It is an admirable goal but the music world of the 2010’s is a dramatically different one. In those days there was scarcity (you had to buy music to listen on demand) and there was a finite amount of radio and TV. It was possible to control both the message and the audience. Now we are in the Era of Distributed Audiences where people are simultaneously in multiple digital places, with artists and labels racing after them in all those places. No amount of exclusive windowing is going to change that. The genie is well and truly out of the bottle.

The Economics Of Exclusives

Where the streaming video and streaming music markets match up is that content budgets are currently being used to drive user acquisition. While streaming services have a long way to go before they reach Netflix’s $6 billion annual content budget, both types of streaming service will overspend to get market share and will reel budgets back in later. So it should be no surprise that the amounts being spent on artists don’t really add up.

For example, Apple is reported to have spent $19 million on Drake and was rumoured to have bid up to $25 million for Harry Styles. If Styles had signed, even if he had racked up the same number of streams as Drake on Spotify in 2015 (1.8 billion, the highest number of any artist) he would still only have generated gross revenue of $18 million and net revenue of revenue of around $14 million, leaving something like an $8 million loss for Apple when Apple Music’s additional retailer margin is factored in. Apple would however have been able to make up the remainder on album sales, but Styles would have needed to have shifted a good number of albums. (Adele’s ‘25’, the biggest selling download album in the US in 2015 drove around $15 million in label revenue.) So for now, it takes selling albums to make the economics of streaming exclusives add up.

apple vs tidal

Jay-Z paid $56 million for Aspiro’s 512,000 subscribers, $110 per subscriber. Assuming he’d want a similar per subscriber price, that would put Tidal’s price tag at around $440 million. That’s no small amount of money for around 5% of the global subscriber market. Or to put it another way, Apple could another 23 Drake exclusives for that money which most likely would have a bigger impact on subscriber growth. Indeed, on all growth measures Apple Music has outperformed Tidal over the last 12 months, adding 12.5 million new subscribers to Tidal’s 3.1 million, growing by an average of 1.4 million subscribers a month compared to 0.3 million for Tidal. Apple even has the edge in % growth terms (352% compared to 328%).

So why is Apple in the market for Tidal (albeit reportedly)? Probably more than anything it is about taking an irritatingly threatening competitor out of the market. Tidal has been stealing Beat’s core customer base from right under its nose. It’s no coincidence that Apple Music’s exclusives strategy has had a strong urban bias. Apple wants its Beats customers back, just like it wants its iTunes customers back from Spotify.

Even if Apple does buy Tidal, don’t expect the exclusives wars to go away. Indeed, Spotify just acquired its own exclusives supremo in the shape of Troy Carter, and Apple clearly has its mind set on continuing to spend heavily. So the next few years of streaming will be  defined by streaming services getting closer to artists (with Connect becoming much more important for Apple) which in turn will see the distinctions between what constitutes a streaming service and a record label blur all the more.

As science fiction write William Gibson wrote: the future is already here, it’s just not evenly distributed yet…

 

Yonder Music Unlocks The Emerging Market Opportunity

One of the high profile digital music casualties of recent years was the failed ‘next generation’ service provider Beyond Oblivion. There were numerous factors behind Beyond Oblivion’s failure but a key one was the fact the market was not yet ready for its telco bundled music offering. Now 5 years on the digital music and telco content markets are very different propositions, with the number of telco music bundles global totaling 105, up from 43 in 2014.  With the proliferation of data plans and smartphones, mobile carriers are now eagerly seeking out streaming music and video services as a means of driving subscriber uptake, ARPU and market differentiation. The 11.5 million telco bundled music subscribers that now exist globally represent a vibrant marketplace that was almost non-existent back in 2011. So why the potted history? Because, as MIDIA reported back in November 2015 Beyond Oblivion’s founder Adam Kidron is back for another bite of the Apple with a new take on the model with his latest venture Yonder. Now, 7 months after its Malaysian launch Yonder has racked up an number of impressive regional metrics that act as further evidence that the telco market is ripe for music bundles.

Yonder’s partnership with a number of Axiata telcos in multiple markets is off to a flying start. Yonder’s music bundle is available across a range of tariffs including both pre-paid and post paid. With an already sizeable 300,000 strong subscriber base Yonder users are using markedly more data than users of other music services on the same tariffs. But of most interest from a telco perspective is the much lower rates of churn for Axiata’s Yonder users, on both pre-paid and paid. Though these numbers must be caveated by the fact that Yonder is available on tariffs that appeal to Axiata’s most valuable and loyal customers – a caveat that applies to most music telco bundles. But even with that considered, Yonder users have a fraction of the churn even of other same tariff users that do not have Yonder.

Axiata has demonstrated its belief in Yonder by both taking a 25% stake in Yonder and by committing to launching in another 9 emerging market territories, with further markets in the pipeline.

Axiata, Celcom’s parent company, has demonstrated its belief in Yonder by both taking a 25% stake in Yonder and by committing to launching in another 9 emerging market territories, with further markets in the pipeline.

Curation And Pre-Pay Are Key 

Yonder has four key assets that that have driven success so far:

  1. A curated content offering
  2. A telco optimized business model
  3. A focus on emerging markets
  4. An offering for pre-pay customers

Emerging Markets Are The Next Big Streaming Opportunity

Emerging markets are the next big opportunity for digital music. Western markets dominated the 20th century music industry because it was built on buying units of pre-recorded media and thus skewed towards countries with high levels of disposable income. Now though, as we move into the streaming era, it is consumption that is monetized and thus it is the markets with the biggest populations (typically emerging markets) that represent the bigger opportunity. This realignment of the music industry’s world order won’t happen overnight, and the big western markets will still dominate, but a realignment is taking place. The obvious way to capitalize on this is ad supported (which is YouTube’s big play) and indeed that is where the big numbers will come. But it is telco bundles that will drive the meaningful revenue in these markets because:

  1. telcos have the billing relationships (a crucial asset as credit card penetration is typically low)
  2. telcos can shoulder some or all of the cost to drive data plan uptake and make the music feel like free

Crucially, in order to tap this emerging market opportunity, the standard, premium AYCE offering is not enough. Curation and Pay As You Go (PAYG) bundling are the assets needed to unlock this opportunity and right now Yonder and MusicQubed’s MTV Trax are pretty much the only services bringing this combination to market.

2016 is already proving to be a big year for the big streaming services, but with finite remaining growth opportunity remaining in developed markets, the really interesting long term growth lies in PAYG and emerging markets.

The telco music market statistics quoted in this report are featured in the MIDiA report ‘Telco Music Strategy: Ironing Out The Strategic Kinks As Objectives Evolve’ which is available to MIDiA subscribers and can also be bought individually on the MIDiA report store herebought individually on the MIDiA report store here

This post was amended on June 28th

Soundcloud, Amazon, Tidal: Streaming’s Other Runners

Apple, Spotify and YouTube have all been grabbing the streaming headlines of late, albeit for different reasons. While these companies will continue to set the pace over the next couple of years (again, for different reasons) there is much more to the streaming market than these three. Here’s what three of the other main streaming contenders have been up to in recent weeks:

Click here to read the full post on the MIDiA blog

Is YouTube Building A New Music Industry?

Complexity and opacity continue to act as brakes on the digital music market. For all the progress of companies like PledgeMusic and Kobalt, this emerging ‘alternative’ music industry is still very much at a formative stage. Some years from now this generation of companies could underpin the emergence of a counter-industry, an interconnected mesh of disruptive rights and tech companies that give artists and songwriters different routes to market and greater transparency and accountability. Heck, it might even have Blockchain underpinning it. But before this counter-industry movement gets to scale, it could have the wind stolen out of its sails by none other than YouTube.

The YouTube Paradox

Although YouTube has never had the closest of relationships with the music industry, it has clearly found the last few months particularly challenging, portrayed as pretty much everything that is wrong with the digital music market. While there is no doubt that YouTube’s revenue-to-audience ratio is below that of audio streaming peers, it is also clear that YouTube is the music app of choice for more consumers than any other service (and it’s growing faster too). YouTube is both a crucially important part of the digital music market and a disruptive partner.

Parent company Google has long had an at-best ambivalent attitude to copyright (in stark contrast to its staunch support for patents) and the record labels’ current crusade to have safe harbour legislation revised belies an industry perception that YouTube is sailing as close to the wind as it can get. That may well be the case, and there is no doubt that Safe Harbour was not designed to underpin the business model of a global tech titan. Yet it is also clear that a whole generation of non-music YouTubers have worked out how to build vibrant careers on the platform. So YouTube’s potential is only partially tapped for music.

YouTube’s New Music Industry?

Regular readers will know that I have explored at length what makes YouTube’s native creators succeed in ways that music artists do not. But I think we may now be on the verge of YouTube flicking the switch on an entirely new platform for artists, to help them get as much out of YouTube as the likes of PewDiePie and SMOSH. This could be nothing short of an entirely new music industry, one that sits outside of the constraints and structures of today’s business.

Here’s how and why…

Back in 2011 Google bought royalty reporting company RightsFlow to help it identify rights holders on YouTube. RightsFlow’s team and technology were widely recognized as best-in-class and Google paid handsomely, swiftly integrating the team into the YouTube organization. My theory is that this was one of the first steps in a much bigger journey. Since then, Google has invested in next gen publisher Kobalt and next gen label 300 Entertainment. It was even reported to have looked at buying the Jackson Estate’s 50% share of Sony/ATV. Most recently YouTube announced its implementation of the DDEX Digital Sales Report Flat File Standard (DSRF), an open source digital supply chain standard aimed at faster, more accurate royalty reporting and distribution. Each component in isolation paints one picture, but put them together and you have the makings of the foundations for a full service music company. What I think could happen is for YouTube to turn its platform into a self contained music business, taking care of everything from rights through creation to monetization. Here’s how the components could stack up:

  • Rights reporting: My take is that RightsFlow will form the basis for a highly effective, real time, totally transparent rights reporting platform. One that will make traditional music industry reporting look positively prehistoric. And of course, YouTube would take full advantage of being able to compare and contrast against the traditional sector. Couple that with Google’s DDEX work and you have the potential of a truly robust and scalable toolset
  • Simplified rights: Music rights are complex, with any given song having a veriitable smorgasbord of associated rights. YouTube will most likely be pushing for something far simpler. Perhaps for a singer songwriter it would be as simple as a single music right, with flexibility in terms of assignment of usage rights
  • Direct monetization: YouTubers have learned how to make YouTube pay, now many YouTube artists are beginning to too. For example, Conor Maynard’s covers of new pop hits typically clock up 10 million views each, translating into around $10,000 of ad revenue for him
  • Promotion: Curated playlists are becoming a pivotal force in audio streaming services, but have a less central role in YouTube. A) that will likely change, but B) YouTube has many more assets and algorithms it can use to promote artists. Expect YouTube-only artists to over index in search results and recommendations in this new model. A couple of years ago Netflix announced it was going to ensure its originals over index, that is the model YouTube will likely follow
  • Margins: The added benefit of over indexing on originals is better margins, which could give YouTube some wiggle room in its current conversations with labels, allowing it to feel more comfortable about taking the short term pain of higher per stream rates.

An Alternative Industry, Not Simply A New Element

To be clear, all of this would be intended as an alternative to the traditional label / publisher / PRO model. For artists that sign up, every single right would be assigned to, and flow through the YouTube system so that there would be no remit for PROs, labels or publishers. Of course it would only work really well for a specific type of artists e.g. singer songwriters but YouTube would iterate the model over time to give it broader appeal.

 

The earliest iterations would probably be pragmatic compromises. For example, many YouTuber musicians rely on doing cover versions to drive traffic so Google would still need to work closely with music publishers. In fact, around 14% of plays of the most popular music videos on YouTube are cover versions or parodies. (Which helps put the Sony/ATV rumour into context.) Over time though, YouTube would make its music infrastructure as self contained as possible. And over time, as it acquires a bigger body of artists that have had no previous label or publisher deal, progressively more of its music catalogue would become YouTube only. Think of it like resetting the clock to zero.

I doubt YouTube’s aspirations are solely limited to its platform. The strategic investments in next gen music companies and its DDEX work could form tendrils stretching out into the broader industry, extending YouTube’s reach and influence. They days of YouTube simply as a place to promote your latest song are long gone. What we have now is a powerful, global platform that wants to make music work, with or without traditional rights holders. Google’s approach to business has always been about bringing, scale, effectiveness and efficiency to supply chains. Music is no different, but the embedded nature of the traditional companies has meant that YouTube has only been able to partially deliver on that basis. That could well be all about to change.

The 2 Spotify Charts You Need To See

Tuesday’s media scrum around Spotify’s financials illustrate that whatever ground Apple and Tidal may have made in recent months, Spotify clearly remains the poster child / bellwether for streaming. The stories oscillated between the broken nature of the underlying economics to how streaming is the future of the music business. Both are true. But a closer look at the numbers reveal some even more important findings.

spotify margin per user

Rights costs are Spotify’s Achilles Heel. Rights and associated costs accounted for 83% of Spotify’s 2015 revenue, up from 81% in 2014 and this resulted in a dramatic fall in Spotify’s gross margin per user: down from $4.20 in 2013 to $3.45 in 2015. This is particularly challenging for a model with already wafer thin margins. A number of factors underpin this decline:

  • Discounted promotions: Promos such as the £0.99 for 3 months have supercharged Spotify’s growth for the last 18 months. But as labels only contribute part of the cost this means that Spotify loses more margin with every new promo user
  • Advanced label payments: When Spotify strikes its licensing deals with labels it makes advanced payments and guarantees based on its expected growth. This means that for a growth stage company like Spotify, booked rights costs will always be higher than current booked revenue. This has obvious cash flow implications. Also, should Spotify’s growth slow and it miss those targets, it will still have to pay the monies guaranteed to labels, at which point the rights costs share will rise even further
  • Publisher rates: Over the last couple of years, music publishers have been asserting their role in the digital music value chain, pushing for more equitable rates. The net result is that publishing rights costs can now range up to 15%, depending on the deal, up from a low of 10% in some cases. This upward momentum will continue, and as labels aren’t decreasing their rates, it means less margin for Spotify and other streaming services

As Spotify edges towards an IPO it is doing everything within its power to get its house in order. It is investing in video to show Wall Street it is attempting to lessen its dependence on the labels and it is improving is cost ratios virtually everywhere else in its business, other than rights. Between 2013 and 2015, the Average Cost Per User (ACPU) for Research and Development fell from $2.12 to $1.61 and for Marketing it fell from $3.23 to $2.77. But Rights ACPU grew from $17.59 to $18.35. In fact, even in terms of costs as a % of revenues, every single expense Spotify reported fell except Rights (and Depreciation and Amortization which increased slightly). It is rising rights costs that are keeping Spotify from commercial sustainability.

spotify average pricing

There is another really important part of Spotify’s growth story: subscriber ARPU has fallen from $79.09 in 2013 to $62.30 in 2015. This is a result of multiple efforts to drive growth, including the price promos, telco bundles and student discounts. All of which are viable tactics but the fact they are necessary to drive Spotify’s growth underscore a point I have been making for years: 9.99 is not a mass market price point, and Spotify’s subscribers agree. By transforming the ARPU into an effective monthly retail price, Spotify’s average price point is now just $6.49, down from $8.24. It is about time that the music industry stopped pretending that this isn’t the reality of the market and instead starts pursuing proper pricing innovation rather than by stealth via discounting, which only serves to confuse consumers about long term value.

The music industry is in a transition phase. In such periods, the old and new worlds co-exist and collide. There are statistics that both sides of any argument can hold up in their defence, in fact they can often hold up the very same numbers to support opposite perspectives. Similarly, the comparisons you chose to benchmark with, can paint entirely different pictures. Such is the nature of transitions of human and business behaviour. For example, 83% of Spotify’s gross revenue going to rights is clearly too high and unsustainable, yet $0.00098 per song going to artists is also clearly too low and unsustainable. Something needs to give, for both ends of the value chain.

Maybe if/when Spotify gets to 50 million subscribers it will feel it has enough clout to compel rights holders to rethink licensing economics. Perhaps it will take Spotify getting to a 100 million to make that happen. Perhaps it will never happen. But if it doesn’t, the economics of streaming will remain so broken that only companies with ulterior business objectives will remain viable players, enter stage left streaming’s Triple A: Apple, Amazon and Alphabet (Google). The labels need to ask themselves whether that is the streaming future they want…

After The Download: When Apple Turns Off The iTunes Store

 

When new formats race to the fore it is easy to make the mistake of taking an eye off the legacy formats. This is risky because they usually still account for very large portions of existing revenue. Now that the marketplace has finally accepted that streaming does in fact cannibalize download sales (indeed 27% of subscribers say they have stopped buying downloads) the attention has, understandably, simply shifted to figuring out how quickly streaming revenue will grow. At a macro level this is fine, in fact it even works at a big label and publisher level. But it is far more challenging for smaller labels and publishers, and also for artists and songwriters. Each of these constituencies still depends heavily on download sales. Of course the big labels and publishers do too, but their repertoire portfolios are so large that they can take the macro view. For the rest though, because the average royalty income per album per streaming user is just $0.21, download sales remain crucial to cash flow. So, what happens when the download dies?

The demise of legacy formats normally follows this pattern:

  1. An accelerated initial decline as early adopters abandon the technology in favour of the shiny new thing
  2. A steadier, slower, long term decline as the mainstream migrates away, leaving only the laggards
  3. A sudden death when the sales channel no longer supports the product (think black and white TVs, cassette decks, VHS recorders etc.)

The CD is clearly following this trend but phase 3 will be long in coming because it is so easy for Amazon to continue stocking product, especially super high end box sets etc. Meanwhile discount retailers, petrol stations, convenience stores etc. will continue to find space for super low end cheap catalogue CDs. For downloads though, there is likely to be a near-sudden halt within the next 5 years. Although Amazon has made solid inroads into the music download business, Apple remains by far the dominant player. Thus the music industry is in effect dependent on the strategic whims on one partner for one of its most important revenue streams.

Subscriptions Are Key To Apple’s Services Narrative

Apple has historically been in the music business for one reason, to help sell more devices. That’s why Steve Jobs was happy to accept a 65% label revenue share model that ensured it was nigh on impossible to run a digital music business as a profit making venture i.e. he wanted to lock the market into a commercial model that neutered the competitive marketplace. We’re still feeling the effects of that now, with that 65% benchmark being the reference point against which streaming rates have been set.

No new news there. But what is new, is that Apple is trying to pivot its business towards a services based model. Apple is building a Wall Street narrative around monetizing its existing user base. It needs that narrative because device sales are slowing. Until it gets another hit device that can grow another new-ish marketplace (VR anyone?) Apple needs to focus on driving extra revenue from its base of device users. This has much to do with why Apple chose to enter the streaming market now as did any other factor. While the download business generated solid headline revenue it did not have the benefit of being predictable, on going spend in the way that subscriptions are.

So music is now more important to Apple because it is the entry point for its services based business model. Eventually music will lose importance to video, and potentially games too if Apple can build a subscription business around that. But for now Apple will be looking to migrate as many of its iTunes customers as possible to subscriptions, whatever it might actually be saying to record labels!

download collapse

Turning Off The iTunes Store

And this is where the download collapse comes in. Last year downloads declined by 16% in nominal terms. This year they are tracking to decline by between 25% and 30%. If we trend that forwards there will only be a modest download business of around $600 million by 2019, down from a high of $3.9 billion in 2012. For Apple, if it continues to grow its subscription business at its current rate, hitting 20 million subscribers by end 2016 and around 28 by end 2017 etc, by 2020 its download business would be tracking to be 10 times smaller than streaming revenue but, crucially, streaming revenue would nearly have reached the 2012 iTunes Store download revenue peak. This is the point at which Apple would chose to turn off the iTunes Store. The narrative of services based music business would be complete.

Smaller labels, publishers, artists and songwriters all better have a Plan B in place before this transpires. The download was a fantastic transition product to give the music industry its first steps into the digital era. But as we transition from transactional models to consumption based ones, its role diminishes every passing year. It has served the market well, but the end is now in sight.

 

 

After The Album: How Playlists Are Re-Defining Listening

Later this week we’ll be publish a new report in the MIDiA Research Music report and data service: ‘After The Album: How Playlists Are Re-Defining Listening’.  In it we explore the changing role of streaming playlists and in particular how they are impact albums both as a consumption format and as a revenue model. The full 18 page report includes half a dozen graphics and a couple of sheets of excel, including a detailed revenue model.  I want to share with you here one of the key themes we explore in the report…

Playlists Are The Lingua Franca Of Streaming

Streaming hit a host of milestones in 2015, reaching 67.5 million subscribers and driving $2.9 billion of trade revenue, up 31% on 2014. While the competitive marketplace upped the ante, music services wielded curation to drive differentiation. Playlists have always been the core currency of streaming, but now more than ever they are becoming the beating heart, the fuel which drives both discovery and consumption. In doing so they are helping drive hit singles into the ascendancy and albums to the side lines.

The Album Is No Longer The Market

Perhaps the biggest problem with streaming’s dissolution of the album is that the wider industry is still catching up with the concept. Artists still consider the album as their core creative construct, their novel. Similarly, labels still build P&Ls, marketing campaigns and their core business models around albums and album release schedules. There will long remain a market for albums, especially among core fan bases, as TIDAL’s exclusive album campaigns for Kanye West and Beyoncé reveal. But it is just that: a market, not the market anymore.

Income Per Streaming User

The most effective way to measure the value of streaming is to measure the value per user. For record labels at a macro level this equated to $2.80 annual revenue per subscriber and $0.37 per free streamer globally in 2015. But even that measure is too blunt to allow label campaign teams, artists and their managers to understand the value to them because that value is wrapped up with all the music in the world. For these stakeholders a more meaningful measure is the average amount they earn per album per streaming user.

Income Per Album Per Streaming User

Music subscribers in the US and UK streamed an average of 3,447 streams each in 2015, averaging 66 streams a week. But the average number of complete unique albums streamed was just 47 for the whole year. The average across free and paid streaming users was 11. Less than one new album per year. In the old model that average would have been just fine, pulling in more than $100 in retail revenue per user but in the streaming model that equate to a combined total of $0.73 in rights holder revenue.

promo slide

Even that measure though, is only partially useful for an artist, manager, songwriter or label campaign manager. What matters for them is how much they earn per streaming user, not the music industry in general. The average royalty income per album per streaming user is $0.21, with $0.03 flowing to the artist and $0.02 flowing to the songwriter. For subscribers the average income is $0.44 with $0.05 flowing to the artist and $0.04 flowing to the songwriter. While for free users it is $0.13 and $0.01 for artists and $0.01 for songwriters.

What It All Means

Albums are not the currency of streaming.  Everyone needs to rethink what long form, artist led content consumption looks like on streaming. Music fans still want artist led experiences. Drake’s 46 million Spotify listeners is more than double all the Filtr, Digster, Topsify and Todays’ Top Hits followers put together. As I have suggested before, multimedia artist subscription bundles for $1.50 on top of standard streaming fees feel like the right fit and would also help start pushing up streaming ARPU.

The power of music discovery used to lie in the hands of the radio DJ, now it lies in the hands of the playlist curator. And because streaming has melded discovery and consumption into a single whole, that means their power is becoming absolute. Albums are not quite an afterthought in the curated playlist world, but they are certainly an awkward relative that doesn’t quite fit in at the party.

None of this to say that the album is dead, but it can no longer be considered the main way most people listen to music. Of course some would argue that with radio it has ever been thus…

To find out more about the report and how to access MIDiA reports and data either visit our website or email us on info AT midiaresearch DOT COM

IFPI First Take: Declining Legacy Formats Continue To Hold Back Growth

 

ifpi midia 1

This post has been updated following a conversation with the IFPI

The IFPI today announced its annual assessment of the size of the global recorded music business.  For the first time in a long time the music industry has been able to announce a significant growth in revenue: 3% up on 2014 to reach $15 billion. Except that the growth isn’t quite what it first appears to be. In fact, the IFPI reported $15 billion last year for 2014, and for 2013 too. So on the surface that appears to actually be three years of no growth.

The IFPI has done this before. For example, it had previously announced a small 0.2% growth in 2013 (which was the big headline of the numbers that year). But it then downgraded that to a small decline the following year before then upgrading it to a small growth again in 2015.

The IFPI explained that they have retrospectively downgraded their 2014 number to $14.5 billion to reflect some changes in the way they report performance royalties (a minor revenue impact) and, more importantly, to create ‘constant currency’ numbers i.e. to try to remove the impact of currency exchange fluctuations. That approach works well for company reports but less well for the macro picture. The IFPI have to report this way as they are essentially summing up company reports, however when we are talking about global macro markets we run into difficulties, for example looking at music revenue as a % of GDP etc.

The approach also has the effect of generating very different growth rates. For example, if we assume that the top 10 music markets each grew at 3% in local currency terms in 2015, using the exchange rates the years took place (i.e. 2014 USD to local currency and 2015 USD to local currency) there would only have been 0.48% growth in US dollar terms. If, however, we take the constant currency approach we see 3.2% growth. When we are talking about individual companies there is a lot of value in reporting at constant currency rates as those companies are dealing with repatriating and recording revenue from across the world into their local reporting HQs. But when we are talking about global markets comprised of many local companies (e.g. the vast majority of South Korean and Japanese revenues stay in local companies so are not directly shaped by currency fluctuations) the methodology is less useful. The cracks really begin to show when you take the long view. For example if we went back 5 years with constant currency rates the value of the music business as a % of the global economy would be over stated.

So, with all that said, for the purposes of this analysis I am going to use as my baseline for comparison the IFPI’s previously reported 2014 numbers stated in its ‘Recording Industry In Numbers, 2015 Edition’.  Here are some of the key takeaways (further charts at the end of this post):

  • Revenue was flat: Despite all of the dynamic growth in streaming declining legacy formats (CDs and downloads) offset their impact, keeping revenues flat. Also, once performance and synchronization revenues are removed from the mix, revenue fell slightly. This highlights the industry’s transition from a pure sales business into a multi-revenue stream model. It also emphasises the fact that we are still some way from a recovery in consumer spending on music
  • Downloads and physical still both falling: Download revenue was down 16% while physical was down 4.5%. The physical decline was lower than the 8% decline registered in 2014 and played a major role in helping total revenues grow. If physical revenue had fallen at the same rate as 2014 there would have been $0.25 billion less revenue which in turn would have brought total revenues down into decline. The Adele factor can once again be credited for helping the industry out of a sticky patch. The download decline was more than double than in 2014 (6.6%) and that drop is accelerating in 2016, with Apple Music playing a major role in the cannibalization / transition trend (delete as appropriate depending on your world view). What is clear is that downloads and subscription growth do not co-exist. Though it is worth noting that the move away form purchase and ownership is a bigger trend that long preceded Spotify et al.
  • Streaming growth accelerating, just: Total streaming revenue was up 31% in 2015, growing by $0.69 billion compared to 39% / $0.62 billion in 2014. This is undeniably positive news for subscriptions and a clear achievement for the market’s key players. However, it is worth noting that over the same period the number of subscribers by 63%, up from 41.4 million to 68 million (for the record MIDiA first reported the 67.5 million subscribers tally last week based on our latest research). So what’s going on? Well a big part of the issue is the extensive discounting that Spotify has been using to drive sales ($1 for 3 months) coupled with 50% discounts for students from both Spotify and Deezer and finally the surge in telco bundles (which are also discounted).  The number of telco partnerships live globally more than doubled in 2015 to 105, up from 43 the prior year. But even more significant was…
  • Ad supported revenue fell: Ad supported streaming revenue was just $0.634 billion in 2015, down very slightly from $0.641 billion in 2014. YouTube obviously plays a role, and that was a key part of the IFPI’s positioning around these numbers. You’ll need to have been on Mars to notice the coordinated industry briefings against YouTube of late, and these numbers are used to build that narrative.  But YouTube is far form the only ad supported game in town, with Soundcloud, Deezer and Spotify accounting for well over a quarter of a billion free users between them. Also, the IFPI doesn’t count Pandora as ad supported, one of the most successful ad supported models. Then there are an additional quarter of a billion free users across services like Radionomy, iHeart and Slacker. So the music industry doesn’t just have a YouTube problem, it has an ad supported music problem.
  • Streaming ARPU is up but subscription ARPU is down: The net effect of streaming users growing faster than revenue is that subscriber Average Revenue Per User (ARPU) fell to $2.80, from $3.16 in 2014, and $3.36 in 2013. Ad supported ARPU was down from $0.10 to $0.08 while subscription ARPU was down. The fall in subscriber ARPU is down to a number of factors including 1) discounting, 2) bundles, 3) churn, 4) growth of emerging markets services such as QQ Music (monthly retail price point $1.84) and Spinlet (monthly retail price point $1.76). For a full list of emerging markets music service price points check out the MIDiA ‘State Of The Streaming Nation’ report. The irony is that the major record labels are increasingly sceptical of mid tier price points yet they have inadvertently created mid tier price points via discounted pricing efforts. Total blended monthly streaming ARPU for record labels was $0.37 in 2015. And if you’re wondering how ad supported and subscription ARPU can both be down but total ARPU up, that is because subscriptions are now a larger share of total streaming revenue (up to 78% compared to 71% in 2014).

So the end of term report card is: an ok year, with the years of successive decline behind us, but long term questions remain about sustainability and the longer term impact of incentivized growth tactics.

ifpi midia 2

ifpi midia 3

Streaming Hits 67.5 Million Subscribers But Identity Crisis Looms

MRM1601-fig1 for blog

For our recently published MIDiA report ‘State of the Streaming Nation’ we conducted an exhaustive programme of research to assess the global streaming music market, from each of the consumer, market and service perspectives. In pulling together subscriber numbers for each of the music services (there’s a full table in the report) we found that there were 67.5 million subscribers globally in 2015. That was 24 million more subscribers compared to 2014 (also nearly double the number of new subscribers in 2014). It is clear that global subscriptions are gathering pace. However, all is not as it may at first appear:

  • Zombies still walk the streaming streets: Back in 2013 I ruffled a few feathers highlighting the issue of zombie subscribers, music subscribers that are recorded in the headline numbers but that are actually inactive, normally because they are on telco bundles. Fast forward to 2016 and the issue is more firmly in the public domain due to Deezer’s IPO filings. Zombies coupled with overstating by music services accounted for around 12 million subscribers in 2015 so the active ‘actual’ subscriber number was nearer 55 million.
  • Emerging markets are gaining share: Emerging markets will play a key role for streaming over the next few years. They are already driving growth for Apple and Spotify and they will collectively bring the most dynamic growth with western markets nearing saturation for the 9.99 price point. Much of the growth though will come from indigenous companies, such QQ Music (China), KKBOX (Taiwan), MelOn (South Korea) and Saavn (India).
  • Free still dominates: For all the scale of of subscriptions, free still leads the way with free streaming services accounted for nearly 600 million unique users (1.3 billion cumulative users if you add together the user counts of all the services). Free thus outweighed paid by a factor of 10-to-1.

Streaming’s Identity Crisis

Streaming must overcome its identity crisis. Depending on where you sit in the music industry, streaming is either the future of retail or the future of radio. It can be both, but there is increasing pressure for it to be retail only. That would see only a fraction of the opportunity realised. Throughout its history, a small share of people have accounted for the majority of spending. Casual buyers and radio accounted for the rest.

17% of music buyers account for 61% of spending. These are the people who are either already subscribers or that will become subscribers over the next couple of years. Which leaves us with the remaining 83% of consumers. The majority of these listen to radio while a growing minority use free streaming (mainly YouTube). The question the music industry must now answer is how seriously does it want to treat the opportunity represented by these consumers? Does it want to only serve its super fans or does it also want to be global culture? Radio enabled music to be global culture in the 20th century, free streaming will enable it to be in the 21st.

The Free Streaming Debate Is As Complex As It Is Nuanced

This is why the free streaming debate is important but also so complex. Yes, too much free music will curtail the opportunity for paid subscriptions, but too little could consign music culture to the margins. With streaming there is an opportunity to monetize a bigger audience at higher rates than radio ever enabled. At the moment free streaming bears the burden of being all about driving sales (either subscriptions or music purchases) but that misses the far bigger opportunity for free in the streaming era: mass monetization.

What we have now is a dysfunctional system. Freemium services have licensing minimas (the minimum that must be paid per stream) that effectively prevent them from building profitable ad supported businesses, while YouTube has licenses unlike any other but is the industry’s bête noire. Only Pandora has a model that is both (largely) acceptable to the industry and (theoretically) profitable. I say, ‘theoretically’ because Pandora could get towards a 20% margin if it wasn’t investing so heavily in ad sales infrastructure and other companies.

Out of those three disparate models an effective middle ground can and should be found so that the streaming debate becomes one of free AND paid rather than free VERSUS paid. Then we will have the foundations for creating a market that enables subscriptions to thrive within their niche and for global audiences to be monetized like never before.