What’s In A Number: Can Streaming Really Be Worth $28 Billion?

Goldman Sachs just made some headlines with its assessment that Universal Music is worth $23.5 billion and that the paid streaming market will be worth $28 billion in 2030 (up from $3.5 billion in 2016 and close to double the size of the entire recorded music business in 2016). For a little bit of perspective, the entire recorded music business generated $27.4 billion at its peak in 1996. Goldman Sachs’ numbers provide us with a salutary reminder of the risk that comes with taking a short-sighted view when building forecasts, or, to put it another way, predicting tomorrow based on what happened today.

Regular readers will know that I have been a music industry analyst since the end of the 1990s, witnessing enough industry cycles and getting close enough to business to build a deep understanding of the industry and its potential. As anyone involved in the business knows, the recorded music industry is more complex and more idiosyncratic than most other industries. Predicting its future is complicated by three factors:

  • Market concentration: Three companies (UMG, SME and WMG) control the majority of revenues, and four companies (Alphabet, Amazon, Apple and Spotify) control the majority of the streaming market. Such concentration of power makes for an unpredictable market that can be reshaped by the decision of one company. For example, if HBO decided it was going to move out of streaming for good, Netflix would still be a viable business. Spotify though, would not if Universal made the same decision.
  • Scarcity is gone: When Napster launched in May 1999 it threw scarcity out of the window. Until then, music had been a scarce commodity. Scarcity was the foundation upon which the glory days of the business was built. Unless you bought a CD, you had no other way of getting a high quality copy of the music. Nearly 20 years on from Napster, P2P may have faded but YouTube and Soundcloud have met the now-permanent demand for free music. Even if Safe Harbour legislation gets tightened up and YouTube scaled down, on demand free music will remain. The illegal sector will sprout a YouTube replacement in an instant. $27.4 billion in 1996 was a scarcity high-water mark.
  • $9.99 is not a mass market price point: 9.99 is more than most people spend on music. In fact, it is what the top 10% of music buyers spend in the US and in the UK. Once the first two waves of adopters (early adopters and early followers) have been converted to subscriptions, growth will slow unless pricing changes. We are already seeing this happening in mature markets. More than 90% of the opportunity has been tapped in Sweden, while across the US, UK, Canada and Australia paid streaming growth has slowed over the last three quarters. So much of the subscriber growth Apple and Spotify have been reporting is coming from other, often emerging, markets. Eventually the 9.99 (or local currency and purchasing power parity equivalent) opportunity will be tapped there too. In 2016, 106 million subscribers drove $3.5 billion of growth, which translated into an annual ARPU of $32.79. Taking this as our anchor point (and ignore the fact streaming ARPU has actually been declining) then Goldman Sachs’ $28 billion would require 853 million paid subscribers. If we factor in emerging markets having much lower ARPU and driving much of the growth, the figure would be closer to one billion paid subscribers. Even with the most radical price point innovation it takes quite a leap of faith to support one billion subscribers.
  • The world changes: It is very easy to think of tomorrow as being a bigger, shinier version of today. But things change, fast. Streaming is the driver now, but if it still is by 2030 then that will be a serious failure of innovation. When I first saw the Goldman Sachs numbers they reminded me of a similar report put out back in 1999 by another financial institution when the music business was last in vogue among that sector. It was a 130 page report called the Music and The Internet: A Celestial Jukebox and it predicted that online CD sales and downloads would be the future of the music market, because that was what the emerging market was then. It too had uber bullish predictions, claiming that the European music business alone would be worth $12 billion by 2010. It in fact reached $7.7 billion and in 2016 was $6.9 billion. With no little irony, the company that wrote the report was—Lehman Brothers. Look where they are now.

Conflicts of Interest

There is one final important factor to consider regarding both Lehman Brothers and Goldman Sachs. In fact, it is probably the most important thing of all: conflicts of interest.

Lehman Brothers made money from buying and selling shares in the companies they wrote about. Goldman Sachs is the same. On its disclosures page there are no fewer than six items listed by Goldman Sachs’  for UMG’s parent company Vivendi. These include owning a substantial volume of Vivendi shares and providing investment banking services to the company. So, if Vivendi’s share price goes up as a result of Goldman Sachs’ report, Goldman Sachs’ Vivendi investment gains value. If Vivendi sells a stake in UMG at a price influenced by Goldman Sachs new valuation, Goldman Sachs will earn a bigger transaction fee if it provides the banking services. A Goldman Sachs hedge fund also has shares in Spotify while another division is helping Spotify prepare for its IPO. So, if Spotify’s IPO/direct listing is boosted by Goldman Sachs’ report, Goldman Sachs’ Spotify investment gains value and it earns a bigger fee for the listing.

No financial institution with a vested interest (unless its interest is betting against a company – which also happens­) is going to provide a cautious or skeptical view of the streaming market. It would go against its own interests to do so. But everyone likes big numbers, so big numbers do the rounds.

For the sake of utter transparency, MIDiA Research has among its research subscription client base both UMG and Spotify, along with the other majors, indies, the other streaming services, tech companies and telcos. In fact, anyone and virtually everyone of note in the streaming business is a MIDiA subscription client. But, unlike an investment bank, they pay to access our research because we tell them what they need to hear not what they want to hear. That can make the client-analyst relationship uncomfortable and tricky to navigate at times but I wouldn’t have it any other way. Nineteen years ago, I wouldn’t have put my name to research like Lehman Brothers’— nor would I do so today.

Advertisements

Amazon Is Now The 3rd Biggest Music Subscription Service

At MIDiA we have long argued that Amazon is the dark horse of streaming music. That horse is not looking so dark anymore. We’ve been tracking weekly usage of streaming music apps on a quarterly basis since 2016 and we’ve seen Amazon growing strongly quarter upon quarter. To the extent that Amazon Music is now the 2nd most widely used streaming music app, 2nd only to Spotify which benefits from a large installed base of free users to boost its numbers. So, in terms of pure subscription services, Amazon has the largest installed base of weekly active users.

But it’s not just in terms of active users that Amazon is making such headway. It is racking up subscribers too. Based on conversations with rights holders and other industry executives we can confirm that Amazon is now the 3rd largest subscription service. Amazon has around 16 million music subscribers (ie users of Amazon Prime Music and also Amazon Music Unlimited subscribers). This puts it significantly ahead of 4th and 5th placed players QQ Music and Deezer and gives it a global market share of 12%.

subscriber market share

But Amazon’s achievement is even more impressive than it first appears. Amazon’s music streaming adoption is concentrated among 4 of its Amazon Prime markets: US, Japan, Germany and UK. In these markets 35% of Amazon Prime subscribers are Amazon Prime Music or Amazon Prime Music Unlimited users. Most music subscription services think about their addressable market in terms such as total smartphone users with data plans, or in Apple’s case in terms of iTunes account holders. In both those scenarios subscribers have to be converted into paying users. But all Amazon has to do is persuade its 40 million odd Prime subscribers to start using its music app. Many of you will have seen blanket Amazon Prime Music advertising recently. Think about it. All that those ads have to do is persuade existing Prime subscribers to start using the music app for free, no new payment, no new commitment. It is as easy a sell as you could wish for. So, expect that 16 million number to grow strongly over the coming months. And of course, Amazon has another tool in its kit: the Echo. Having sold an extra 3.3 million Amazon Echos on Prime day (Tuesday 12th) Amazon now has around 13 million Echos in consumers’ hands.

The CD Factor

Amazon has one further ace up its sleeve: CDs. In Japan and Germany, the world’s 2nd and 4th largest recorded music markets, physical music sales are the majority of revenues, with streaming still getting going. As those market develop, the physical-to-digital transition will leap frog downloads, skipping straight to streaming. What better way to do that than having an established billing and subscription relationship with CD buyers. Enter stage left, Amazon. Amazon already has a very strong Prime Music base in Germany and could well become the leading subscription service there within 12 – 18 months.

Amazon is a secretive company and is unlikely to either confirm or deny these numbers, but we are confident they are an accurate reflection of its standing in the market. Amazon can now discard its dark horse guise and be revealed for what it is: one of the top streaming music players. Game on!

Amazon Prime Live Events, More Than Just Gigs For Olds

Blondie-General Image 2-Alexander Thompson

Amazon today announced ‘Amazon Prime Live Events’, a series of smaller capacity gigs by largely heritage acts made available exclusively to Amazon Prime members in the UK. The first wave of artists include Blondie, Alison Moyet and Texas. Putting aside for a moment the obvious ‘it’s iTunes Festival for old people’ jibe, there is some sound strategic thinking underpinning the initiative.

The overlap between streaming and live has long been clear to streaming services (45% of live music fans are also streaming music users – check out MIDiA’s latest live entertainment report for more). It also presents a great opportunity to transform loss-leading streaming business into profit generators by monetizing the high value fans through ticket sales. However, no one has yet managed to realize the logical opportunity. Pandora’s full stack play with TicketFly, and Access Industry’s Deezer / Songkick play both represent potential at this stage, while other streaming services have made interesting announcements that soon disappeared from view.

Amazon might just be the one to make it work. It has quietly been building up its ticketing business for some time and because it sits on the same user dataset (and billing relationships) as Prime and Amazon’s 2 music services, it has an unrivalled ability to target and monetize.

Amazon Prime Live Events’ line up might not exactly be the cutting edge of edgy, exciting new music (Katie Melua rounds off the line up) but that is sort of the point. Amazon’s streaming music strategy is so interesting because it isn’t playing by the same rules as everyone else. Amazon is not competing for the same small group of 20/30 something music aficionados that the other streaming services are tearing chunks out of each other over. Instead it has its sights set on older, more mainstream music fans for whom the smartphone-centric music service offering has limited appeal.

This line up of gigs isn’t the end game, but instead the first step of what will likely be an increasingly joined up music strategy across Amazon’s various assets. The fact that 28% of UK live music fans are also Amazon Prime subscribers hints at where Amazon can go with this (overall UK Amazon Prime penetration is 19%). The fact that the gigs will be made available on Amazon Prime Video internationally further points to Amazon’s ability to join the dots across its increasingly diverse assets.

Throughout the first half of the 2010s Amazon was very much in the shadows of Apple and Google in terms of content strategy. Now not only is it giving them a run for the money in that arena, it is also making them pay close attention in terms of hardware and the home. What makes Amazon potentially the most interesting of the GAAF (Google, Amazon, Apple, Facebook) is the way in which it combines customer data, billing relationships, content and services, infrastructure and consumer hardware. The 2000s was Apple’s decade. The 2010s are shaping up to be Amazon’s.

Quick Take: IFPI Revenue Numbers

Today the IFPI published their annual assessment of the global recorded music business. The key theme is the first serious year of growth since Napster kicked off a decade and a half of decline, with streaming doing all the revenue heavy lifting.

The findings won’t come as much of a surprise to regular readers of this blog, as at MIDiA we had already conducted our own market sizing earlier in the year. The IFPI reported just under a billion dollars of revenue growth in 2016 (we peg growth at $1.1 billion) with streaming driving all the growth (60% growth, we estimate 57%). IFPI also reported 112 million paying subscribers (our number is 106.3 million, but the IFPI numbers probably include the Tencent 10 million number as reported, while the actual number is closer to 5 million).

IFPI report physical sales declining by 8% (we have 7%) and downloads down by 21% which is 3 percentage points more decline than the majors reported; this implies the IFPI estimates the indies to have had a much more pronounced decline than the majors. MIDiA is currently working with WIN to create the 2017 update to the global indie market sizing study, so we’ll be able to confirm that trend one way or another in a couple of months’ time.

Overall, the IFPI numbers tell the same good news story we revealed back in February, namely that streaming is finally driving the format replacement cycle that the recorded music business has not had since the heyday of the CD. Without streaming, the recorded music market would have declined in 2016. Streaming is driving revenue growth by both growing the base of users and, crucially, increasing the spend of more casual music spenders, changing them from lower spending download buyers into monthly 9.99 customers.

Also, streaming is unlocking spending in emerging markets (especially Latin America). The old model was based on people being able to afford a CD player and being able to afford to buy albums. The new model monetizes consumption on smartphones (which are becoming ubiquitous in emerging markets). Expect each year from now to see a reallocation of recorded music revenue towards emerging markets. It will be a long process but an irresistible one. Indeed, as Spotify’s Will Page put it:

“Spotify’s success story has expanded beyond established markets, with Brazil and Mexico now making up two of our top four countries worldwide by reach. Back when the industry peaked in 2000, Brazil and Mexico were 7th and 8th biggest markets in the world respectively. A combination of increasing smartphone adoption [reaching far more users than CDs ever did] and Spotify’s success makes the potential for these emerging markets to ‘re-emerge’ and to exceed previous peaks.”

One surprising point is that the IFPI reported a total of $4.5 billion for streaming ($3.9 for freemium and $0.6 billion for YouTube, etc.). However, the major labels alone reported revenues of $3.9 billion (see my previous post for more detail on label revenues). That would give the majors an implied market share of 87% in streaming. Which seems like a big share even accounting for majors including the reveue of the indie labels they distribute in their revenue numbers (eg Orchard distributed indie label revenue appearing in Sony’s numbers). Last year the IFPI appeared to have put Pandora revenues into US performance revenues rather than treat them as ad supported streaming, so that could account for an extra $400 million or so.

Nonetheless, taking the IFPI’s $3.9 billion freemium revenue and the 112 million subs number both at face value for a moment, that would equate to an average monthly label income of $2.90 per subscriber or a combined average monthly income of $1.53 for total freemium users (including free). These numbers are skewed in that they are year end numbers (mid year user numbers would be lower, so ARPU would be higher) but they are still directionally instructive ie there is a big gap between headline 9.99 pricing and what label revenue is actually generated due to factors such as $1 for 3 month trials and telco bundles.

All in all, a great year for recorded music. And despite a slow-ish Q1 2017 for streaming and the impending CD revenue collapse in Japan and Germany, it looks set to be another strong year ahead for streaming and, to a lesser extent, the broader recorded music business.

Exclusive: Deezer Is Exploring User Centric Licensing

new_UI_1200x500_en

One of the great, though less heralded, successes of streaming in 2016 was keeping the lid on artist angst. Previous years had been defined by seemingly endless complaints from worried and angry artists and songwriters. Now that torrent has dwindled to a relative trickle. This is largely due to a) a combination of artist outreach efforts from the services, b) so many artists now seeing meaningful streaming income and c) a general increased confidence in the model. Despite this though, the issues that gave creators concern (eg transparency, accountability) remain largely in place. The temptation might be to simply leave things as they are but it is exactly at this sort of time, when stakeholders are seeing eye to eye (relatively speaking at least), that bold change should be made rather than wait for crisis to re-emerge. It is no easy task fixing a plane mid flight. So it is encouraging to hear that Deezer is looking to change one the key anomalies in the streaming model: service centric licensing.

Service Centric Licensing

Currently streaming services license by taking the total pot of revenue generated, dividing that by the total number of tracks streamed and then multiplying that per stream rate by the number of streams per track per artist. Artists effectively get paid on a share of ‘airplay’ basis. This is service centric licensing. It all sounds eminently logical, and it indeed it the logic has been sound enough to enable the streaming market to get to where it is today. But is far from flawless. Imagine a metal fan who only streams metal bands. With the airplay model if Katy Perry accounted for 10% of all streams in a month, the 10% of that metal fan’s subscription fee effectively goes towards Katy Perry and her label and publisher. Other than aggrieved metal fans, this matters because those metal bands are effectively seeing a portion of their listening time contributing to a super star pop artist. To make it clearer still, what if that metal fan only listened to Metallica, yet still 10% of that subscriber’s revenue went to Katy Perry?

User Centric Licensing

The alternative is user centric licensing, where royalties are paid out as a percentage of the subscription fee of the listener. So if a subscriber listens 100% to Metallica, Metallica gets 100% of the royalty revenue generated by that subscriber. It is an intrinsically fairer model that creates a more direct relationship between what a subscriber listens to and who gets paid. This is the model that I can exclusively reveal that Deezer is now exploring with the record labels. It is a bold move from Deezer, which though still the 3rd ranking subscription service globally has seen Spotify and Apple get ever more of the limelight. While Deezer will undoubtedly be hoping to see the PR benefit of driving some thought leadership in the market, the fact it must find new ways to challenge the top 2 means that it can start thinking with more freedom than the leading incumbents. And a good idea done for mixed reasons is still a good idea.

Honing The Model

Deezer has had encouraging if not wildly enthusiastic feedback from labels, not least because this could be an operationally difficult process to implement. The general consensus among labels I have spoken to is cautious optimism and a willingness to run the models and see how things look. When I first wrote about user centric licensing back in July 2015 I got a large volume of back channel feedback. One of the key concerns was that the model could penalize some indie labels as fans of their acts could be more likely be music aficionados and thus listen more diversely and more heavily. This could result in the effective per stream rate for those fans being relatively low. By contrast, a super star pop act might have a large number of light listeners and therefore higher effective per stream rates.

The truth is that there is not a single answer for how user centric licensing will affect artists and labels. Because there are so many variables (especially the distribution of fans and the distribution of plays among them) it is simply not possible to say that a left field noise artist will do worse while a bubble gum pop star will do better. But in some respects, that shouldn’t be the determining factor. This is an intrinsically more transparent way of paying royalties, that is based upon a much more direct relationship between the artist and their fan’s listening. There may well be some unintended consequences but ultimately if you want fairness and equality then you don’t pick and choose which fairness and equality you want.

If Deezer is able to persuade the labels to put user centric licensing in place, it will be another sign of increasingly maturity for the streaming market. Streaming drove $1bn of revenue growth for the recorded music business in 2016, without it the market would have declined by $1bn (due to revenue decline elsewhere). Streaming is now a monumentally important market segment and there is no better time to hone the model than now. User centric licensing could, and should, be just one part of getting streaming ready for another 5 years of growth. Deezer might just have made the first move.

How Ed Sheeran Broke The Charts

Unknown.jpegUnless you have been hiding under a stone on Mars this last few weeks you will have struggled not to hear or see some clip of Ed Sheeran one way or another. Atlantic Record’s carpet bombing market campaign has tipped Sheeran into global ubiquity. At the centre of this approach is a ‘be everywhere’ streaming strategy which saw Sheeran clock up over 68 million Spotify streams in 1 day (a record for any single artist). Though, the 1 billion views he clocked up for ‘Divide’ on YouTube shows where the real streaming audience of scale resides. But what makes Sheeran’s ‘Divide’ campaign stand out is what it has done to the charts. Or rather, the weaknesses in the charts that ‘Divide’ shines a light on.

What Role Should Streaming Era Charts Play?

As of March 13th, Ed Sheeran’s ‘Divide’ album accounts for 9 of the UK top 10 singles, while all of the 16 tracks on the album are in the top 20. If there was ever a sign that streaming is breaking the charts then this is it.

The writing has been on the wall for charts ever since the recorded music business decided to incorporate streams into them. Doing so was a perfectly understandable move but it is one that has incapacitated the charts. As we predicted back in 2014, incorporating streams into charts would fall over because the charts were being forced into trying to simultaneously measure sales trends and airplay. As I wrote 3 years ago: “try simultaneously [measuring airplay] with measuring sales and you end up with a diluted mish mash that does not do either job properly.”

Underpinning all of this is an existential industry debate over whether streaming is replacing retail or radio. In truth, of course it is replacing both, but which is it doing more? The answer to that determines the role charts should be trying to play. However, the answer looks very different depending on where you sit. If you are a record label you see streaming growing by 57% in 2016 to reach $5.4 billion. Streaming is indeed becoming the future of retail. But it is also how you break artists and releases now, therefore it is a bit of both. Go over to the artist side of the equation and streaming becomes a crucial tool for driving exposure and helping sell concert tickets. As Ed Sheeran himself said during his last album promo cycle, for him it is all about live. Indeed, for most successful artists, recorded music revenue is just a small part of the revenue mix. So at its most extreme, streaming is a marketing campaign that pays you instead of you paying for it.

Reach Or Engagement?

In the old charts model an Ed Sheeran super fan buying ‘Divide’ and playing it a hundred times in the first week would only show as one sale, and an album sale at that. There would be no impact on the singles chart. But in the current UK streaming charts, not only does that fan’s album listening now get counted in the singles charts (instead of just the album charts), the resulting 1,600 streams (16 tracks*100) become 160 chart placings (100 streams = 1 sale for singles charts). Consequently, the charts are conflating audience reach with audience engagement. It is the equivalent of Facebook merging Monthly Active Users and Daily Video Views into a single metric. It wouldn’t work for Facebook and it just doesn’t work for music.

A Fiendishly Difficult Problem To Fix

There is no doubt that ‘Divide’ is a fantastically successful and popular album, the problem is that because the charts are conflating sales with consumption we simply don’t know just how successful it really is. And that does a disservice to both Sheeran and his fans. Don’t get me wrong, I truly feel for the various charts organizations across the globe. This is a fiendishly difficult problem to fix, but the current solution just isn’t working. In all likelihood, a dynamic solution is going to be needed, one that has the flexibility to evolve as the streaming market and its industry role changes.

The Time May Have Come For A Separation Into 2 Charts

Ultimately the recorded music business needs to decide what it wants the charts to measure. In old parlance: sales versus airplay, in contemporary terms: reach versus engagement. One near term fix would be to only consider cached streams towards the charts (perhaps with a smaller deflator than the current 100). This would have the advantage of making the measure more reach focused rather than engagement led. It would also have the effect of reducing the impact on ‘push’ curated playlists, which depending on where you sit, can be either an entirely good thing or an entirely bad thing.

If such an approach was taken then some sort of purer engagement chart would need creating to sit alongside the main chart, one that weighted total streams alongside traditional radio. The argument for a streaming-led airplay chart is even stronger than revising the sales chart. With playlists now accounting for 58% of all streams (see MIDiA’s Streaming Music Healthcheck report for more) and curated playlists a third of those, streaming is becoming less about on-demand and more about lean back, radio-like experiences. Streaming is seemingly making radio programmers of the entire recorded music business. It is time for a chart that reflects this change.

‘Divide’ is an exceptional album in terms of commercial performance and audience reach, as is its impact on the charts. But in the latter respect, it is simply a trail blazer for the way in which big albums are going to play out on streaming. ‘Divide’ might not be the hair that breaks the camel’s back but it has certainly fractured it.

Streaming Music Pricing: Inelastic Stretching

Pricing has long been an issue for streaming music subscriptions, with the $/€/£ 9.99 price point above what most people spend on music each month. Streaming services have navigated around the issue with a combination of tactics such as telco bundles and aggressive price discounts (e.g. $1 for 3 months). However, these tactics place long term pressure on the 9.99 price point as they create a consumer perception that streaming music should be cheaper than it is. There is no doubt that discounts are doing a great job of converting users and of easing otherwise reluctant consumers into the 9.99 pricing, but the next phase of the streaming market requires a more sustainable approach to pricing strategy, coupled with some serious product innovation.

To explore this issue in detail, MIDiA has published its latest music report: Streaming Music Pricing: Inelastic StretchingIn it we use proprietary MIDiA data to assess how much of the 9.99 opportunity has been tapped, how much further opportunity exists and what level of demand exists for different price points.

midia music subscriber projections

These are some of the key takeaways from the report:

  • 2017 will be a stellar streaming year: A combination of enough growth being left in the market and the continued success of pricing discounts should see subscriber numbers grow at a slightly faster rate in 2017 than they did in 2016, hitting 146.6 million. This is up 44.3 million from the 106.3 million hit in 2016. (That 2016 figure is 5.9 million more than our provisional estimate published back in the start of January, as the result of receiving a couple of slightly stronger than expected numbers. However, the increase is not due to the very high subscriber numbers reported elsewhere for some Chinese services. We consider these numbers to be high and we place our estimate closer to half of those.) By 2018, subscriber growth will begin to lessen and by 2019 we’ll be in market maturation phase. Around 2/3 of the readily addressable opportunity for 9.99 has already been tapped and this remainder is what will drive the 2017 growth. New tactics will be required for the rest of the cycle.
  • Beyond 9.99: Emerging markets, new partnerships and discounts will all be important growth tactics, but pricing will also be key. Many readers will be familiar with my longstanding enthusiasm for mid tier streaming pricing. Unfortunately, mid-tier pricing by stealth (e.g. price discounts, student offers) coupled with an overly resplendent free marketplace (YouTube, Vevo, Spotify free, etc.) have combined to suck most of the oxygen out of the mid tier sector. Nonetheless, there is a major need for something to cater for the lower end of the market. One of the key sections in the report reveals that streaming pricing is inelastic and the change in demand is smaller than the change in pricing. Even dropping the main price to $6.99 would only result in reducing the size of the streaming market.
  • Unbundling: So how do we square the circle? By using super low prices (e.g. 2.99; 3.99) to launch laser focused niche apps aimed at specific demographics and genres. This can be done both by standalone specialists (e.g. the Overflow, FreqsTV) and by the big incumbents taking a leaf out of Facebook’s app strategy and creating standalone, unbundled apps. In order for them to work, they cannot simply look like a thin slice of Spotify or Apple Music. They have to be as different from their parent apps as Instagram and Whatsapp are from Facebook. That means new user experiences, new functionality, different approaches to programming/ curation and standalone branding. To work, mid tier products have to look like something unique, not a compromised, watered down version of the full fat product. Mid tier services risk looking like low-fat, gluten-free, sugar-free, organic, diet, hand knitted soya milk. While there is a market for it, it shouldn’t come as a surprise that the market is in fact tiny.

So, a good 2017 looks on the cards for streaming, one which will confirm the maturity of the streaming sector as a whole. But the next stage of the market will require product and pricing innovation, at both the high end and the low end. Now is the time to start putting the pieces in place for 2018 and beyond.

The report from which this insight is taken (Streaming Music Pricing: Inelastic Stretching) is immediately available to MIDiA report subscribers. To find out how to become a MIDiA subscriber email info@midiaresearch.com.  If you just want to buy the report and the supporting data then visit our report store here.

Ed Sheeran’s Ticketing Fiasco Shines A Harsh Light On A Broken Industry  

Ed Sheeran has hit the news, bemoaning the inflated prices that tickets for his forthcoming tour are being sold at on ticket reseller websites. Some tickets have sold for as much as £999, compared to the original face value of £77. As the chart below shows, even the standard resold tickets are selling for up 5 times the original price.

ed-sheeran-ticket-prices

Sheeran is in the fortunate position of being one of the most in demand artists of the moment, but the broken nature of the ticketing market is locking his core fans out of his gigs. It is just the latest example of an industry in dire need of change:

  • Ticketing companies are playing double agent: Over the course of the last decade the live music market has grown almost dollar-for-dollar at the same rate the recorded business has declined. In 2000 live was around 30% of the global music business, now it is around 2 thirds. The live boom has long been seen as the good news for the music business, held up as evidence of value simply shifting from one part of the business to another, and the new way in which artists can build vibrant careers. The problem is that a) much of that growth has come in ticket price inflation, and b) most of the money does not make it back to artists. In fact, on average, artists only earn 14% of ticket sales revenue. Ticket resellers are a major contributory factor. Hiking up the prices and only distributing a small fraction back to artists, often in many cases (eg ticket marketplaces) nothing at all. The big ticketing companies are not merely passive observers, they are actively driving the reseller market, essentially acting as double agents and often cross promoting  reseller destinations they own. For example, Ticketmaster is also the parent company of Seatwave and GetMeIn. Though Ticketmaster’s reseller destinations do not bulk buy tickets, some independent resellers have teams of people that do exactly that.
  • Resold tickets put gigs out of reach of core fans: Resellers argue that there is a market for high priced tickets. There is, but it is a different market than that of core fans. Many sports leagues have seen a ‘gentrification’ of crowds, with older, more affluent fans being the only ones that can afford inflated ticket prices. The result is more subdued crowds and less vibrant atmospheres. The same thing is happening to live music, with young fans being forced out in favour of older audiences. It might be good for the ticket resellers and venues and booking agents, but it is bad news for bands and fans. The presence of ticket reselling marketplaces actively encourages nefarious behaviour, with a whole segment of professional resellers that use technology such as bots to bulk buy tickets before real fans get their hands on the tickets. There is an opportunity, nay a moral obligation, for more connected action to be taken to eradicate this sort of behaviour.
  • It is a problem that can be fixed, but it requires coordinated effort: Ed Sheeran’s camp has told fans not to buy from resellers at inflated prices. But Sheeran’s camp have to shoulder some of the blame.  The solution is as simple as it is complex. The simplicity is not to allow tickets to go to resell and to only admit fans whose names are on the tickets (which cuts out the ticketing marketplaces like Seatwave). But the complexity is that vested interests apply pressure to ensure this doesn’t happen. Nonetheless, action can be taken. Adele and her manager Jonathan Dickins took a bold stance last year, only allowing named ticket holders to attend some of her gigs. They even went as far as cancelling some resold tickets for other gigs. Mumford and Sons went one step further and booked Wembley directly, cutting out all the middle men.

But isolated action is not enough. Unless artists, managers and labels act together, to take a bold stance, change will not happen. And the losers then will be the fans.

Music Subscriptions Passed 100 Million In December. Has The World Changed?

In streaming’s earlier years, when doubts prevailed across the artist, songwriter and label communities, one of the arguments put forward by enthusiasts was that when streaming reached scale everything would make sense. When asked what ‘scale’ meant, the common reply was ‘100 million subscribers’. In December, the streaming market finally hit and passed that milestone, notching up 100.4 million subscribers by the stroke of midnight on the 31st December. It was an impressive end to an impressive year for streaming, but does it mark a change in the music industry, a fundamental change in the way in which streaming works for the music industry’s numerous stakeholders?

Streaming Has Piqued Investors’ Interest

The streaming market was always going to hit the 100 million subscriber mark sometime around now, but by closing out the year with the milestone it was ahead of schedule. This was not however entirely surprising as the previous 12 months had witnessed a succession of achievements and new records. Not least of which was the major labels registering a 10% growth in overall revenue in Q2, driven by a 52% increase in streaming revenue. This, coupled with Spotify and Apple’s continual out doing of each other with subscriber growth figures, Spotify’s impending IPO and Vevo’s $500 million financing round, have triggered a level of interest in the music business from financial institutions not seen in well over a decade. The recorded music business looks like it might finally be starting the long, slow recovery from its generation-long recession.

100-4-million-subs

Spotify Continues To Set The Pace

Spotify has consistently led the streaming charge and despite a continually changing competitive marketplace it has held determinedly onto pole position since it first acquired it. Even more impressively, it has also maintained market share. According to data from MIDiA’s Music Streamer Tracker, in Q2 2015 Spotify’s share of global music subscribers was 42%, H2 15 41%, H1 16 44%, H2 16 43%. Not bad for a service facing its fiercest competitor yet in Apple, a resurgent Deezer and an increasingly significant Amazon. Spotify closed out the year with around 43 million subscribers, Apple with around 21 million and Deezer with nearly 7 million. 2nd place is thus less than half the scale of 1st, while 3rd is a third of 2nd place. Meanwhile Apple and Spotify account for 64% of the entire subscriber base. It is a market with many players but only 2 standout global winners. Amazon could change that in 2017, largely because it is prioritising a different, more mainstream market (as long as it doesn’t get too distracted by Echo-driven Music Unlimited success). Meanwhile YouTube has seen its music streaming market share decline, which means more higher paying audio streams, which means more income for rights holders and creators.

A Brave New World?

So far so good. But does 100 million represent a brave new world? In truth, there was never going to be a sudden step change but instead a steady but clear evolution. That much has indeed transpired. The music market now is a dramatically different one than that which existed 12 months ago when there were 67.5 million subscribers. Revenues are growing, artist and songwriter discontent is on the wane and label business models are changing. But 100 million subscribers does not by any means signify that the model is now fixed and set. Smaller and mid tier artists are still struggling to make streaming cents add up to their lost sales dollars, download sales are in freefall, many smaller indie labels are set to have a streaming-driven cash flow crisis, and subscriber growth, while very strong, is not exceptional. In fact, the global streaming subscriber base has been growing by the same amount for 18 months now: (16.5 million in H2 2016, 16.5 million in H1 2016 and 16.4 million in H2 2016). Also, for some context, video subscriptions passed the 100 million mark in the US alone in Q3 2016. And streaming music had a head start on that market.

At some stage, perhaps in 2017, we will see streaming in many markets hit the glass ceiling of demand that exists for the 9.99 price point. Additionally the streaming-driven download collapse and the impending CD collapses in Germany and Japan all mean that it would be unwise to expect recorded music revenues to register uninterrupted growth over the next 3 to 5 years. But growth will be the dominant narrative and streaming will be the leading voice. 100 million subscribers might not mean the world changes in an instant, but it does reflect a changing world.

Here’s Why Vinyl Isn’t About To Save The Music Business And Why Albums Need Rethinking

The BPI announced that ‘album equivalent sales’ were up by 1.6% in volume terms in 2016, with vinyl and streaming identified as the key drivers. Many people retain a nostalgic soft spot for vinyl, so an apparently vinyl led revival is always going to get people’s attention. But not only is vinyl not the future (it was just 2.6% of sales in 2016), the big differences between the most popular vinyl, streaming, singles and album artists reveal just how fragmented the music business has become.

Each of the top 10 charts (album sales, singles, top streaming artists, vinyl sales) almost reads as a standalone group of artists with remarkably little cross over. In fact, only 2 artists (the ubiquitous Drake and Justin Bieber) appear across streaming, singles and albums. None appear across all four charts.

top-10s-20165

The fragmentation adds complexity to an already sophisticated and nuanced landscape:

  • Two tribes: Only one of the top single artists of 2016 (Justin Bieber) was also a top album artist. This is why the album vs playlist album argument will continue way beyond 2017. Both realities co-exist with one catering more towards older audiences and the other to younger ones. The top 10 albums list is like browsing through a high street music store CD rack circa 2005: Elvis Presley, David Bowie (twice), Coldplay, Michael Ball. Of course, there is some overlap with streaming, an inescapable overlap considering that streams are now (for all the wrong reasons) counted towards album sales. Thus, we see contemporary artists Little Mix, Drake and Jess Glyn fill the 7,8 and 9 slots, while Justin Bieber is at #4. But first and foremost this is a tale of 2 tribes, 2 groups of music fans whose tastes and consumption patterns rarely overlap.
  • Old format, old bands: Vinyl sales may have hit their highest level in the UK since 1991 but this is hardly a sign of what is to come. Indeed, a quick look through the top 10 vinyl albums of 2016 reveals that all but one of the artists were releasing music back in 1991! The exception is Amy Winehouse and she’s dead. The majority of the volume of vinyl sales is driven by nostalgic older music fans. Of course, younger people do buy vinyl too, but interestingly they generally do so as either a form of merch or as a way of supporting their favourite artist. In fact, many under 30’s vinyl buyers don’t even have turntables.

The really important takeaway from all this though, is what it means for driving sales and marketing artists in 2017. One size stopped fitting all long ago, but now there are clearly two broad groups of music audiences which must be addressed in entirely different ways, across different channels and with different tactics. At the most base level this is a case of youth versus grey, of digital native versus digital immigrant, of playlist versus album, of sales versus consumption. But it is also more complex and nuanced than that. There are overlaps and cross pollination. They may be relatively thin on the ground right now, but like some long-lost treasure map, they may point to how bridges can be built across these two worlds. If no such links can be made then ultimately this will be a story of one world hurtling to oblivion while the other booms. That is of course the more likely scenario, highlighted by the fact that (in volume terms) UK CD sales fell by 12% and download sales by 26% in 2016 while streams were up 67%.

As large volumes of older consumers switch to streaming (and Amazon should play a key role here) there will be more opportunity to join the dots. But do not mistake this simply as an opportunity to try to revive yesterday’s formats in today’s platforms. The album is clearly fading. According to MIDiA Research survey data, 68% of subscribers state that playlists are replacing albums for them. It is time to start investing though and effort in rethinking what album experiences should be in the digital era. And that conversation should have no bounds, everything should be on the table (number of tracks, street date vs continual updates, interactivity, changing content etc.).

The 2016 sales figures show us that the album in its traditional format still has a very solid, albeit quickly declining, audience. But if it is to outlive that dwindling customer base it must be rethought for the streaming era.