Music subscriber market shares 2022

MIDiA has just released its annual ‘Music subscriber market shares’ report and dataset, with data for 23 DSPs across 33 different markets (clients can access it here). Here are some of the key global trends:

Music subscriptions may be recession-resilient, as China leads the way

As the world edges towards a recession, the music streaming market continues to stand strong. Despite indications of slowdown in some markets, the global music subscriber market remains buoyant. Growth, though, is uneven, with a number of leading streaming services outpacing the rest, especially the Chinese ones, which are now setting the global pace. 

Home entertainment tends to perform well during recessions, not least because people are inclined to cut down on leisure spend (eating out, bars, clubs, etc.), and thus spend more time at home. In previous recessions, lipstick sales boomed, reflecting their role as an affordable luxury that consumers turn to when they can no longer afford the more expensive luxuries. Music subscriptions have a good chance of playing a similar role in the coming recession.

The early signs are positive (subscriber growth was stronger in the full year of 2021 than 2020), and though the first half (H1) of 2022 growth was down from H1 2021, this reflects the mature state of the streaming market in many markets, as much as it does global economic headwinds.

The evolution of the global music subscriber market is beginning to fork between the leading Western digital service providers (DSPs) and those in Asia – China especially so. Nearly all the leading DSPs continue to experience strong subscriber growth, but none more so than Chinese DSPs Tencent Music Entertainment (TME) and NetEase Cloud Music. 

These were the key trends in 2021 and the first half of 2022:

• Subscribers: There were 616.2 million subscribers by the mid-point of 2022, up by 7.1% from the end of 2021. Total net subscriber additions for the first six months of 2022 (42.1 million) were down on the 53.8 million that were added one year earlier, hinting at the slowing global economy. However, more subscribers were added in 2021 than 2020
  
• Revenue: The $12.9 billion of subscription label trade revenue generated in 2021 was up by 23.1% on 2020, and it was the first year since 2017 that revenue growth exceeded subscriber growth, resulting in a 1.0% increase in global annual ARPU, reaching $22.42
  
• Spotify: With 187.8 million subscribers in Q2 2022, Spotify remained by far the largest DSP. However, its market share has steadily eroded since Q4 2020, and its Q2 2022 share of 30.5% was down from a high of 33.2% in Q2 2018
  
• Tencent Music Entertainment and NetEase Cloud Music: Spotify’s declining market share has much to do with the growth of the Chinese market (where Spotify does not operate). In Q4 2021, TME overtook Amazon Music to become the third largest DSP globally, and in Q2 2022 it had 82.7 million subscribers (13.4% market share). China has long been the world’s second largest subscriber market and is on track to soon surpass the US as the world’s largest
  
• Apple, Amazon, and YouTube: Amazon Music was the fourth largest DSP, with 82.2 million subscribers, and YouTube Music was fifth, with 55.1 million. Both gained share between Q2 2021 and Q2 2022, growing faster than the total market. While YouTube and Amazon both gained share in 2022, albeit it at a declining rate, second-placed Apple Music continued its long-term trend of underperforming the market, with its 84.7 million subscribers recording a 13.8% market share, down 1.2% from Q2 2021. 

The global music subscriber market is approaching a pivot point, with the slowdown in mature, Western markets contrasting with more dynamic growth in other regions. It is realistic to assume that the global recession and the organic maturation of the global subscriber market will result in some slowdown of growth in 2023, even if the sector remains otherwise resilient.

The slowing growth should be the catalyst for what needs to come next, especially in developed markets: unlocking growth pockets through differentiation. Western DSPs have managed to grow with largely undifferentiated product propositions. Music rightsholders should explore creative ways in which they can empower their DSP partners with differentiated content assets, enabling them to super-serve specific consumer segments and thus unlock extra growth within them.

If you are not yet a MIDiA client and would like to find out how to get access to this report and data then email stephen@midiaresearch.com

Global music subscriber market shares Q1 2021

The music industry’s growing obsession with declining ARPU will continue to colour the outlook for the global streaming market in revenue terms, but the positive driver of this equation is the rapid growth of music subscribers. There were 100 million new music subscribers in 2020, taking the total to 467 million. (In 2019 there were just 83 million net new subscribers). A further 19.5 million new subscribers in Q1 2021 pushed the number up to 487 million. While the failure of subscription revenues to keep up with the pace resulted in ARPU falling by 9% in 2020, this lens detracts from the huge momentum in paid user adoption. Subscription revenue might not be increasing as fast as some would like, but the global music subscriber base is not just growing – it is growing faster than ever.

Spotify continues its global dominance, adding 27 million net subscribers between Q1 2020 and Q1 2021, more than any other single service. However, it lost two points of market share over the period because its percentage growth rate trailed that of its leading competitors. Google was the fastest-growing music streaming service in 2020, growing by 60%, with Tencent second on 40%. Amazon continued its steady trajectory, up 27%, while Apple grew by just 12%.

Google’s YouTube Music has been the standout story of the music subscriber market for the last couple of years, resonating both in many emerging markets and with younger audiences across the globe. The early signs are that YouTube Music is becoming to Gen Z what Spotify was to Millennials half a decade ago.

Emerging markets are now central to the music subscriber market, with Latin America, Asia Pacific and Rest of World accounting for 60% of all 2020 subscriber growth. This is of course, also a key reason why global ARPU declined. Nonetheless, a number of emerging markets services now boast large subscriber bases. Beyond Tencent’s 61 million, China’s NetEase hit 18 million subscribers in Q1 2020 and Russia’s Yandex hit 8 million. (For more on streaming in emerging markets check out MIDiA’s latest free report: Local Sounds, Global Cultures.)

MIDiA will be publishing its country-level music subscriber numbers as part of the global music forecast report and dataset which will be available to clients Monday 12^th July. If you are not yet a MIDiA client and would like to know how to get access to the data, email stephen@midiaresearch.com

YouTube at two billion: Still much more music opportunity to be had

YouTube just announced its milestone of reaching two billion music users on the platform. YouTube has long been the largest music service on the planet, and it has just extended that lead. In 2019, its official total user number was two billion. Lockdown has proven to be a growth driver of epic proportions. 

Nicely timed to (accidentally!) coincide with YouTube’s announcement is third edition of MIDiA’s biannual ‘State of the YouTube Music Economy’ report. This report, which provides a detailed analysis of YouTube’s contribution to the music business, put YouTube’s music user number at 1.2 billion for the end of 2019. Of course, all this comes at a time when European legislators are discussing how Article 17 of the European Copyright Directive will be implemented and therefore impact YouTube’s business (potentially a very convenient time to release a stat of this magnitude?). 2020 has proven to be a big year for YouTube – but equally, make no mistake: YouTube and music rightsholders are still not on the same page. 

One of the biggest issues regarding the YouTube music economy is that music, while performing and growing strongly, still underperforms commercially compared to other content genres on the platform. This is because music videos are not as well suited to YouTube’s monetisation mechanics as genres such as games. For example, the videos are too short to have mid-roll video ads and most music channels (Asian and Latin American ones excepted) are artist-centric, so simply do not have enough content to drive channel engagement. While there are constraints on what can be done with a music video, there is nonetheless a lot of scope for innovation and increasing music’s share of YouTube revenue.

Google is now the second largest global payer of music royalties, with $5.2 billion across free and paid as well as masters and publishing. Spotify is comfortably ahead, but the scale of Google’s royalty contribution is pronounced.

In 2019, YouTube generated $15.2 billion in ad revenue with $4 billion of that music related (this figure includes income for labels, publishers and YouTube etc.). While that was an impressive increase of 18% on 2019 it was much slower than the 36% growth in overall ad revenue. Consequently, music’s share fell from 31% to 26%. Music rightsholders might point to this being evidence of YouTube not paying enough for music, but it pays pretty much the same revenue share to all of its creators. So, there is clearly more that music can be doing to ensure that it can grow at a rate closer to that of other content genres. 

Currently, YouTube is becoming more important to music than music is to YouTube. The one billion views club is becoming the de facto Platinum ‘sales’ award for the streaming era, and there are now 208 music videos that have reached the milestone with 74 videos reaching it in 2019/20 alone. YouTube continues to dominate the global music streaming market, with 47% music weekly active user penetration, ahead of Spotify in second place at 29%. Being the most widely used music streaming app across all ages, with weekly active usage highest among 16-19 year olds at 70% penetration, YouTube is simultaneously a key ad-supported, premium, marketing and discovery asset for artists and labels. Against this setting, the debate around rights holder royalty rates continues to rage. 

State of the Streaming Nation 3.0: Multi-Paced Growth

Regular followers of MIDiA will know that one of our flagship releases is our State of the Streaming Nation report. Now into its third year, this report is the definitive assessment of the streaming music market. Featuring 16 data charts, 37 pages and 5,700 words, this year’s edition of the State of the Streaming Nation covers everything from user behaviour, weekly active users of the leading streaming apps, willingness to pay, adoption drivers, revenues, forecasts, subscriber market shares, label market shares, tenure and playlist usage. The consumer data covers the US, Canada, Brazil, Mexico, Australia, Japan, South Korea, Sweden, Denmark, Germany, Austria and the UK, while the market data and forecasts cover 35 markets. The report includes the report PDF, a full Powerpoint deck and a six sheet Excel file with more than 23,000 data points. This really is everything you need to know about the global streaming market.

The report is immediately available to MIDiA clients and is also now available for purchase from our report store here. And – for a very limited-time offer, until midnight 31^stJuly (i.e. Wednesday) the report is discounted by 50% to £2,500. This is a strictly time-limited offer, with the price returning to the standard £5,000 on Thursday.

Below are some details of the report.

The 20,000 Foot View: 2018 was yet another strong year for streaming music growth, with the leading streaming services consolidating their market shares. Consumer adoption continues to grow but as leading markets mature, future growth will depend upon mid-tier markets and later on emerging markets. Disruption continues to echo throughout the market with artists direct making up ground and Spotify spreading its strategic wings. Utilising proprietary supply- and demand-side data, this third edition of MIDiA’s State of the Streaming Nation pulls together all the must-have data on the global streaming market to give you the definitive picture of where streaming is.

Key findings: 

THE MARKET

• Streaming revenue was up $X billion on 2017 to reach $X billion in 2018 in label trade, representing X% of total recorded music market growth
• Universal Music consolidated its market-leading role with $X billion, representing X% of all streaming revenue
• There were X million music subscribers globally in Q4 2018 with Spotify, Apple and Amazon accounting for X% of all subscribers, up from X% in Q4 2015
• With X% weekly active user (WAU) penetration YouTube dominates streaming audiences, representing X% of all of the WAU music audiences surveyed

CONSUMER BEHAVIOUR

• X% of consumers stream music for free, peaking at X% in South Korea and dropping to just X% in Japan
• X% of consumers are music subscribers, peaking in developed streaming markets Sweden (X%) and South Korea (X%)
• Free streaming penetration is high among those aged 16-19 (X%), 20-24 (X%) and 25-34 (X%) while among those aged 55+ penetration is just X%
• Podcast penetration is X% with pronounced country-level variation, ranging from just X% in Austria to X% in Sweden

ADOPTION

• 61% of music subscribers report having become subscribers either via a free trial or a $1 for three months paid trial
• Costing less than $X is the most-cited adoption driver for music subscriptions at X%
• Today’s Top Hits and the Global Top 50 claim the joint top spot for Spotify playlists among users, both X%
• As of Q1 2019 there were X YouTube music videos viewed one billion-plus times, of which X were two billion-plus view videos and X were three billion-plus

OUTLOOK

• In retail terms global streaming music revenues were $X billion in 2018 in retail terms, up X% on 2017, and will grow to $X billion in 2026
• There were X million music subscribers in 2018, up from X million in 2017 with Xmillion individual subscriptions

Companies and brands mentioned in this report: Alexa, Amazon Music Unlimited, Amazon Prime Music, Anchor, Anghami, Apple, Apple Music, Beats One, CDBaby, Deezer, Deezer Flow, Echo, Gimlet, Google, Google Play Music, KuGou, Kuwo, Loudr, MelOn, Napster, Netflix, Pandora, Parcast, QQ Music, RapCaviar, Rock Classics, Rock This, Sony Music, Soundcloud, SoundTrap, Spotify, Tencent Music Entertainment, Tidal, Today’s Top Hits, T-Series, Tunecore, Universal Music, Warner Music, YouTube

How YouTube’s Domination of Streaming Clips the Market’s Wings

Firstly, happy new year to you all. Now on to the first post of 2019.

The Article 13 debate that shaped so much of the latter part of 2018 will continue to play an important role throughout 2019 while European and then national legislators deliberate on the provision and the wider Digital Copyright Directive of which it forms a part. Regular readers will know that MIDiA first highlighted the risk of unintended consequences of Article 13. Today we present the case for the impact YouTube has on the broader streaming market, driven by the advantages of its unique licensing position. (This is a complex and nuanced topic with compelling evidence on both sides of the debate).

To illustrate YouTube’s impact on the streaming market this post highlights a few of the findings from a new MIDiA report: Music Consumer Behaviour Q3 2018: YouTube Leads the Way But At What Cost?

YouTube is the dominant music streaming platform, with 55% of consumers regularly watching music videos on YouTube, compared to a combined 37% for all free audio streaming services. YouTube usage skews young, peaking at nearly three quarters of consumers under 25. Although YouTube leads audio streaming in all markets — even Spotify’s native Sweden — there are some strong regional variations. For example, emerging streaming markets Brazil and Mexico see much higher YouTube penetration, peaking at close to double the level of even traditional music radio in Mexico. Indeed, radio is feeling the YouTube pinch as much as audio streaming. 68% of those under 45 watch YouTube music videos compared to 41% that listen to music radio. The difference increases with younger audiences and the more emerging the market. For example, in Mexico YouTube music penetration is 84% for 20–24 year olds, compared to 37% for music radio. Streaming may be the future of radio, but right now that streaming future is YouTube.

YouTube’s advantage

While cause and effect are difficult to untangle, the implied causality here is that YouTube’s unique value proposition steals much of the oxygen from the wider streaming market. Due to its unique licensing position – which Article 13 would likely change, YouTube has more catalogue and fully-on-demand free streaming, not to mention standout product features such as complete music video catalogue and social features such as song comments, likes / dislikes. Services that do not use safe harbour protection (i.e. the vast majority of audio streaming services) do not have these assets and so are at a distinct market disadvantage to YouTube. If you are a consumer in the market for a free streaming service, you have the choice between everything that you want, with complete control or constraints and restrictions, with fewer features. It’s not hard to see why consumers from Mexico through to Sweden make the choice they do. With a free proposition this good (especially when you factor in stream ripper apps and ad blockers), who needs a subscription?

A new value gap emerging?

Against this though, must be set two crucial factors:

1. Audio streaming services would fare better if they had more of the features YouTube and Vevo have
2. YouTube and Vevo are still the best ad monetisation players in the global market (i.e. discounting Pandora as it is US only). What’s more, (annual) audio ad supported ARPU declined in 2018 to $1.23, while video ad supported ARPU rose to $1.08. Ad-supported users grew faster than revenue while the opposite was true of video. There is a real risk here of an audio ad-supported value gap emerging. Spotify needs to get better at selling ads, fast.

Fully committed to subscriptions?

The final part of the YouTube impact equation is premium conversion. Since appointing Lyor Cohen, YouTube has taken a much more proactive approach to subscriptions, heavily touting its, actually-really-quite-good, YouTube Music premium product. Whether Alphabet’s board is equally exuberant about subscriptions, and whether YouTube Music’s launch lining up with the Article 13 legislative process was coincidental, are both open questions…

But politics and intent aside, YouTube is always going to be far poorer at converting to paid subscriptions because a) its user base is vast, and b) that user base is there for free stuff. So, while 58% of Spotify’s weekly active users (WAUs) are paid, the rate for YouTube Music weekly active usership is in single digit percentage points. That dynamic is not going to change in any meaningful way. In fact, YouTube has a commercial disincentive for pushing subscriptions too hard. It makes its money from advertising, and advertisers pay to reach the best possible consumers. Subscription paywalls lock away your best users, out of the reach of ads, which in turn reduces the value of your inventory to advertisers, which leads to declining revenues. YouTube is not about to swap a large-scale high-margin business for a small-scale low-margin one. Moreover, this issue of advertisers trying to reach paywalled consumers is going become a multi-industry issue in 2019. See my colleague Georgia Meyer’s excellent ‘Marketing to Streaming Subscribers’report for a deep dive on the topic.

Article 13 as a platform for innovation?

The overarching dynamic here is of a leading service that constrains the opportunity for services that are not able to play by the same rules. A levelling of the playing field is needed, but this should not just be legislation (and of course should be careful not to kill music’s ad supported Golden Goose). It should also see labels and publishers finding some common ground between the Spotify and YouTube models, and making those terms available to all parties. Because if YouTube does one thing really well, it shows us how good the streaming music user proposition can be when it is not too tightly constrained by rights holders. Let’s use Article 13 to raise the lowest common denominator, not to bring YouTube down to it.

Streaming music services need a user experience quantum leap in 2019; wouldn’t it be great if Article 13 could be the springboard for transformation and innovation?

Soon to be the Biggest Ever YouTube Channel, T-Series May Also Be About to Reshape Global Culture

Some time over the next month or so a YouTube landmark will be passed: T-Series will pass PewDiePie as the most subscribed YouTube channel on the planet. As of time of writing T-Series had 75.4 million subscribers compared to PewDiePie’s 76.4 million. (PewDiePie’s lead was narrower but he has mobilised his fan base to delay the inevitable.) But do not mistake this milestone to be a narrow measure of the shifting sands of the YouTube economy. Indeed, it tells us more about the future of streaming as a whole (both music and video) than it does the current status of sweary Swedish gamers.

For those of you who somehow do not yet know who T-Seriesis, it is a leading Indian music label and movie studio – it in fact claims to be ‘the biggest – that is the world’s largest YouTube music channel and before long it will likely be able to drop the ‘music’ qualifier from that title. It is also the label that Spotify just struck a deal with as it preps its protracted launch into India.

A streaming market of contradictions

India is a problematic market for streaming monetization. It has 1.4 billion consumers but just 330 million of those have smartphones. There were 215 million free streaming users in 2018 but just 1 million paid subscribers despite leading indigenous players like Hungama and Saavn having been in market for years. Total streaming revenue was just $130 million in 2017 generating a combined annual ARPU of $0.27. And that number is heavily boosted by unrecouped Minimum Revenue Guarantees (MRGs) due to local streaming services continually failing to meet their projected subscriber numbers (though according to local accounts, perfectly happy to continue to effectively overpay for their streaming royalties). The video side of streaming is more robust with eight million subscribers generating more than three times more revenue than music streaming does. Even still, eight million subscribers is scant return against a base of 330 million smartphone users.

Streaming unlocks the potential of emerging markets

India is exactly the sort of market that streaming business models have the potential to unlock. The old world was defined by commerce, by people paying to own music or for hefty household TV subscriptions that inherently meant owning a TV set. As a direct consequence, the traditional music and TV markets skewed towards western markets with higher levels of disposable income. This was a massive missed opportunity and one that can now be fixed. As Mexico and Brazil are currently in the process of showing us, populations with strong cultural heritage and large, but lower income, populations can have massive impact. Like or loathe Reggaeton, its ability to permeate the global music marketplace is testament to the power of Latin American music fans and the artists they support, as is Colombian J Balvin’s current status as the most streamed artist on Spotify.

The growing influence of second tier markets

Streaming can monetize scale in a way the old model simply could not. What we will see over the coming decades is a steady realignment of the balance of power across the global music and video markets. Western markets – and a handful of others such as Japan – will continue dominate revenues due to a combination of higher subscription penetration and higher subscriber ARPU. But large population, 2^ndtier markets will have a growing influence. The BRIC markets (Brazil, Russia, India and China) are obvious candidates but also Mexico, the Philippines, Nigeria, Egypt, Turkey and Thailand all have similar potential.

Large, engaged local audiences can shape global trends

One of the key reasons Latin American artists have become part of the global cultural zeitgeist is that Spotify has a big regional user base – 42 million MAUs as of Q3 18. Because record labels over-prioritise Spotify in terms of marketing and trend spotting, when Latin American artists started blowing up, European and North American labels started paying extra close attention and building up their own rosters of Latin American artists. Latin American users represent 22% of global Spotify MAUs but their influence is amplified by the fact that they stream a lot and they tend to stream individual tracks repeatedly. So, when they put their support behind something it blows up, edging into the global charts which then triggers a whole bunch of actions that see that track being fed into non-Latin playlists and user recommendations, which can then trigger a further escalation of playlist strategy. And so forth. This was Luis Fonsi’s path to global stardom.

Could India ‘do a Mexico’?

So the obvious question is, if T-Series had enjoyed the same sort of success on Spotify that it did on YouTube, would Guru Randhawa be topping Spotify’s global artists instead of J Balvin? Would we be finding Bhangra in every sonic nook and cranny instead of Reggaeton? The answer is – as certain as a counter factual claim can ever be – almost certainly yes. Whereas Latin American emigres are a major demographic in the US, they are less so elsewhere. Also, Latin American culture is divided between Spanish and Portuguese. The Indian diaspora however, is far more global, with large populations in the US, Canada and UK. What is more, though India has many indigenous languages, English is spoken nationally, with many artists releasing in English. Similarly, a growing number of Bollywood movies are being made in English with an eye on the global market.

So when Spotify finally launches in India, expect a series of global cultural aftershocks. Spotify is unlikely to covert that many premium subscribers – except via telco bundles – but it is likely to build a big free user base. And when that happens expect T-Series to take centre stage with Guru Randhawato be the most streamed artist globally by 2020…?

Article 13 – Laws of Unintended Consequences

I do not normally add disclaimers or qualifiers at the start of blog posts, but given how divisive the whole Article 13 debate has become, there is a big risk that some readers will make incorrect assumptions about my position on Article 13. The emerging defining characteristic of popular debate in the late 2010s has been the polarization of opinion e.g. Brexit, Trump, immigration. Article 13 follows a similar model, leaving little tolerance for the middle ground. You are either anti-copyright / pro-big tech or you’re pro-big government / anti-innovation.

Such extremes are the inevitable result of multi-million-dollar lobby campaigns by both sides. Reasoned nuance doesn’t really play so well in the world of political lobbying. My objective, and MIDiA’s, from the outset has been to strike an evidence-based, agenda-free position, that considers the merits of all aspects of both sides’ arguments. So, before I embark on a blog post that will likely be viewed by some of being pro-Google and anti-rights holder (it is not, nor is it the opposite), these are some ‘value gap’ principles that MIDiA holds to be true:

• YouTube has misused fair use and safe harbour provisions against the legislation’s original intent
• YouTube’s ‘unique’ licensing model creates an imbalance in the competitive marketplace
• YouTube’s free offering is so good that it sucks oxygen out of the premium sphere
• Google has rarely demonstrated an unequivocal commitment to, nor support of current copyright regimes
• YouTube being able to license post-facto rather than paying for access to repertoire, gives it a competitive advantage over traditional licensed services
• There is too big a gap between YouTube ad-supported payments and Spotify ad-supported payments, meaning too little gets to rights holders and creators
• Take down and stay down is a feasible and achievable solution (albeit within margins of error)
• The current situation needs fixing in order to rebalance the streaming market

Nonetheless, for each one of these positions from the rights holder side of the debate, we also see an equally long and compelling list of points from YouTube’s side. Rather than list them however, I want to explain how ignoring some of the counterpoints could unintentionally create a far bigger problem for the music industry than the one it is trying to fix.

Value gap or control gap?

What really riles labels is that they cannot exercise the same degree of control over YouTube that they can over Spotify and co. This is very understandable, as they rightly want to be able to determine who uses their music, how it is used and how partners pay for usage. However, taking a very simplistic view of the world, the label-licensed approach has created: a few tech major success stories that don’t need to wash their own faces (Apple Music, Amazon Prime Music); a collection of smaller loss-making services (e.g. Deezer, Tidal); and one big break out success story that can’t turn a profit (Spotify). In short, the label-led model has not (yet at least) resulted in the creation of a commercially sustainable marketplace. Rights holders want to pull YouTube into this controlled economy model. YouTube is understandably resistant. After all, YouTube is a crucial margin driver for Alphabet. It cannot afford it to be loss leading. Alphabet’s core ad businesses generate the margin that subsidises Alphabet’s loss-making bets such as space flight, autonomous cars and curing death (I kid you not). Ad revenue has to be profitable.

Fixed costs / variable revenue

As we explained in our recent State of the YouTube Economy 2.0 report, YouTube went double or quits during the last two years, doubling down on music, making music over index across its user base, in order to try to make it an indispensable hit-making partner for labels. That bet now looks to have failed. So, the question is, will YouTube acquiesce to the new command economy approach to streaming or do something else—perhaps even walk away from music?

The fundamental commercial imperative for YouTube is as follows:

• Spotify pays a fixed minimum fee to rights holders for each ad supported stream, even if it does not sell any advertising against it. The rate is the same for every song, every day of the year.
• YouTube pays as a share of ad revenue. This means it is always paying rights holders a consistent share of its income, including all the up side on revenue spikes. But ad inventory is not worth the same 365 days a year. There are seasonal variations meaning a song can generate less rights holder income in December say, than January. Also, not all songs are worth the same to advertisers: they are willing to pay much more to advertise against a Drake track than they are for an obscure 1970s album track.

This revenue share approach without minimum per stream rates is why YouTube has a profitable, scalable ad business, but Spotify does not (as recently as Q1 2018 Spotify had a gross margin of -18% for ad supported, compared to a +14% gross margin for premium). Remember, that’s gross margin, imagine how net margin looks…

The walk away scenario

Minimum per-stream rates could break YouTube’s business model, especially in emerging markets where it usage is strong, but digital ad markets are not yet developed. It would also set a precedent that other YouTube rights holders and creators would want the same applied to them.

So, it is not beyond the realms of possibility that YouTube could simply opt to walk away from music, applying take down and stay down its way (i.e. every piece of label content stays down). It could feasibly continue to provide ad sales support and audience to Vevo, but if YouTube gets to this point, then relationships are likely to be fractured beyond repair, meaning Vevo would likely have to decamp to Facebook and build a new audience there, one which is crucially not accessible to under 13s.

A YouTube shaped hole

So, what? you might ask. The so what, is the YouTube shaped hole that would exist in the music landscape. Readers of a certain vintage will remember the long dark years of piracy booming and corroding the recorded music business. It was YouTube that killed piracy, not enforcement. Okay, I’m exaggerating a bit, but the ubiquitous availability of all the world’s music on demand, on any device, nullified the use case for P2P in an instant. Add in stream rippers and ad blockers, and you’ve got a like-for-like replacement. Piracy created and filled a demand vacuum. YouTube (and Spotify, Soundcloud, Deezer etc.) have all since filled that same space, pushing P2P to the margins. YouTube, however, has had by far the biggest impact due to its sheer global scale. If YouTube pulls out from music, that YouTube shaped hole will be filled because the demand has not changed. Kids still want their free music, as in fact so do consumers of just about every age.

Piracy could be the winner

The most likely mid-term effect of YouTube shuttering music videos would be piracy in some form or another raising its head, filling the demand vacuum. Probably a decentralised, end-to-end encrypted, streaming interface built on top of a torrent structure, sort of like a Popcorn Time for music. Then it really would be back to the bad old days.

Is this the most likely scenario? Perhaps not. But perhaps it is. I suppose a just-as-possible outcome is that YouTube sticks up the proverbial middle finger and creates its own parallel music industry, using a unified music right and ‘doing a Netflix’. Yes, YouTube could be a next-generation record label, with more reach and bigger pockets than any major record label. If the labels are worried about Spotify disintermediation, YouTube could make that threat look like a children’s tea party.

As one YouTube executive said to me a couple of years ago: “This is how we are as friends. Imagine how we’d be as enemies.”

Too much to handle?

‘Couldn’t Spotify, Deezer and Soundcloud fill the potential YouTube shaped hole?’ I hear you ask. If these companies did take on YouTube’s 1.5 billion music users on the current financial agreements they have with rights holders, and with their currently far inferior ad sales infrastructure, they would be out of money in no time. It would literally kill their businesses. Based on YouTube’s likely music streams for FY 2018 and, say, a minimum per stream rate of $0.002, Spotify and co would need pay nearly $3 billion in rights revenue, regardless of how much revenue it could generate. Let alone the unprecedented bandwidth costs for delivering all that video. Of course the flip side, is that in the mainstream streaming model, that is how much potential revenue is up for grabs. So, more money would flow back to rights holders. But the extra revenue could come at the expense of the survival of the independent streaming services, ceding more power to the tech majors.

The artist and songwriter value gap

Throughout all of this you’ll have noted I haven’t said much about artists and songwriters. That’s because the value gap isn’t really about how much they get paid, even though they get put front and centre of lobbying efforts. It’s about how much labels, publishers and PROs get paid. And none of them are talking about changing the share they pay their artists and songwriters once Article 13 is put into action. That particular value gap isn’t going to be fixed. Even if Spotify picked up all of YouTube’s traffic, on say a $0.002 minimum per stream rate, a typical major label artist would still only earn $300 for a million streams, while a co-songwriter would earn just $150. The new boss would look pretty much like the old boss.

Be careful what you wish for

The laws of unintended consequences tend to proliferate when legislation tries to fix commercial problems without a clear enough understanding of the complexities of those very commercial problems.

It is of course in the best interests of YouTube and rights holders to carve out a workable commercial compromise, and I truly hope they do. But there is a very real risk this may not happen if Article 13 is successfully enacted into national member state legislation. Perhaps the phrase that rights holders should be considering right now is ‘be careful what you wish for’.

State of the YouTube Music Economy 2.0: A Turning Point for All Parties

YouTube is the most widely used streaming music app globally but it is also the most controversial one, locked in a perpetual struggle with music rights holders, with neither side quite trusting the intent of the other. 2018 has already seen YouTube’s renewed focus on subscriptions as well as a European Parliament vote that could potentially remove YouTube’s safe harbour protection. Meanwhile, oblivious to these struggles, and despite the rise of audio streaming services, consumers are flocking to YouTube in ever greater numbers and, crucially, using it for music more than ever before. Back in 2016, at the height of the value gap / grab debate, MIDiA published its inaugural State of the YouTube Music Economy report. Now two years on we have just released the second edition of this landmark report. MIDiA clients have immediate access to the ‘State of the YouTube Music Economy’ report, which is also available for purchase on our report store. Here are some of the highlights from the report.

2016 proved to be a pivot point for YouTube. Rights holder relationships were at an all-time low with value gap / value grab lobbying reaching fever pitch. Meanwhile, vlogger hype was also peaking and longer-form gaming videos were beginning to get real traction. If there was ever a point at which YouTube could have walked away from music, this could have been it. The picture though, has transformed, with YouTube doubling down on music and in doing so, making itself an even more important partner for record labels.

With young consumers abandoning radio in favour of streaming, YouTube is the biggest winner among Gen Z and Millennials; penetration for YouTube music viewing peaks at 73% among 16–19 year olds in Brazil. But its reach is even wider: YouTube is the main way that all consumers aged 16 to 44 discover music.

Doubling down on music

YouTube has responded by improving its discovery and recommendation algorithms and gearing them more closely to music. The combined impact of demographic shifts and tech innovation is that YouTube is making hits bigger, faster. Billion-views music videos used to be an exceptional achievement, now they are becoming common place. By end July 2018, Vevo reported that there were already ten 1 billion views music videos for tracks released that year, accounting for 17.2 billion views between them. One billion view music videos that were released in 2010 took an average of 1,841 days to reach the milestone. Videos released five years later took an average of just 462 days, while those from 2017 took an average of just 121 days to get to one billion views. Over the course of eight years, YouTube has become more than ten times faster at creating billion-view hits.

Under indexing

The impact on revenue is less even. Music videos are the single most popular video category on YouTube, accounting for 32% of views but a smaller 21% of revenue. Music is still the leading YouTube revenue driver with $3.0 billion in 2017 but many other genres, gaming especially, over index for revenue. (Many YouTube gamers have multiple video ads placed at chapter markers throughout their videos. Because music videos are shorter they get a smaller share of video ads.) Emerging market audiences are also pulling down ad revenues. The surge in Latin American markets has pushed artists like Louis Fonsi to the fore, but the less-developed nature of the digital ad markets there means less revenue per video. This trend is accentuated with the rise of emerging markets music channels like India’s T-Series becoming some of the most viewed YouTube channels globally.

The net result is that effective per stream rates are going down on a global basis, but are going up in developed markets like the US, where the digital ad market is robust. This brings us to one of the existential challenges for YouTube. What does the music industry want YouTube to be? After years of nudging by labels, YouTube is now embarking on a serious premium strategy, but is that really what YouTube is best at? What YouTube does better than anyone else in the market is monetise free audiences at scale on a truly global basis (China excepted).

A turning point

2018 is a turning point for YouTube. The accelerated success it and Vevo have enjoyed since 2016 over indexes compared to YouTube as a whole, which means that music is a more central component of the YouTube experience than it has ever been. However, driving impressive viewing metrics was never YouTube’s problem, convincing music rights holders that it is a good partner is. The value gap war of words may have died down a little but that is as much a reflection of the rise of audio streaming and a return to growth for record labels than anything else, as the European Parliament’s Article 13 vote highlighted. Safe harbour was never designed to be used the way YouTube does for music, and the fact it does so creates a commercial disincentive for other streaming services to play by music rights holders’ rules. The fact that YouTube can get a greater volume of rights and more cheaply than other services andbe the largest global streaming service unbalances the streaming market. Though against this must be set the fact that YouTube has been able to create a more rounded value proposition without operating within the same confines as other streaming services.

The music industry needs the YouTube-Vevo combination, especially while Spotify scales its global free audience. The road ahead will be rocky, especially if Article 13 is eventually passed and also if rights holders continue to be disappointed by engagement growth out accelerating revenue growth due to the growing role of emerging markets. But it is in the interests of all parties to make the relationship work because neither side wants a YouTube shaped hole in the streaming marketplace, even if a Facebook / Vevo partnership was to try to fill some of it.

Click here to see more details of the 29-page, 6,000 word, 11 chart reporton which this blog post is based. The report is based upon months of extensive research, industry conversations, MIDiA data and proprietary company data and represents the definitive assessment of the YouTube Music Economy.

Could Article 13 Kill Off Music on YouTube?

It was a day of two halves for YouTube. On one side a big press release went out championing a host of impressive new stats – including hitting 1.9 billion logged in users, following an official launch of YouTube Musicthe day before. Meanwhile, on the other side, the European parliament’s legal affairs committee voted in support of Article 13, whichwill overturn some basic premises of the fair use / safe harbour frameworks under which YouTube operates. The question is which half will prove to be most impactful on YouTube’s music strategy.

It’s complicated

If YouTube was to post the status of its relationship with the labels on its Facebook profile it would be ‘It’s complicated’. The whole value gap argument – which posits that YouTube does not pay as much as other streaming services because it does not have to directly license in the way they do – has created a war of words characterised by obfuscation and disinformation on both sides. Its super-recent new premium strategy was almost certainly timed to coincide with this vote and it helps present YouTube as a premium player, doing what the labels want.

But fundamentally, Google and its YouTube subsidiary are all about selling advertising. If you put too many of your most valuable customers behind an ad-free pay wall, advertisers will eventually stop paying as much for ads. Google is not about to kill off a large scale, high-margin business for a small scale, low margin one. In short, Google cannot afford for music subscriptions to be too successful.

The three numbers that matter

The EU vote will likely get pushed to a full parliamentary vote, so the legislative picture is still far from resolved. When determining the outcome, policy makers, YouTube and rights holders should consider three metrics: $0.0020, -51% and 171:

• $0.0020: In the US, where there is a strong video ad market, effective per stream rates for YouTube actually increased by 14% in 2017 to $0.0020. Bet you haven’t heard that spoken about much by rights holders? Globally however, the rate fell for labels but, interestingly, was about flat for rights holders overall (publishers get paid on videos—such as cover versions, so there are more videos they get paid on, labels do not).What it means:YouTube’s US experience shows market economics can reduce the value gap.
• –51%: This was Spotify’s gross margin on ad supported in Q1 2016. By Q1 2018 it had risen to 13%. This was in large part because the labels had cut Spotify better deals on ad supported, which meant that the difference between what YouTube pays and what Spotify pays now is smaller than it was in 2016 when the value gap lobbying was in full effect. What it means: the labels have reduced the value gap!
• 171: This is how many days it took on average for music videos to reach one billion views in 2017. In 2010 it took 1,841. YouTube has become far more effective at turning songs into hits, thus making it more valuable to the music business than ever before. Major record labels are in the business of making superstars, but superstars need massive global audiences to turn them into global brands—much bigger audiences than you get behind a Spotify paywall. The majors need YouTube’s scale to make global successes. What it means: the labels need YouTube as much as it needs them.

Commercial sustainability is the core issue

At the heart of the value gap argument is a fight for control. Rights holders want more control over YouTube to extract better deals and YouTube does not want to cede that control. But there is an argument that YouTube’s greater control enabled it to build a commercial sustainable model. Spotify, which does not have YouTube’s negotiating power, is still not generating a net profit on streaming. On a sliding scale, there are label-defined rates with a non-commercially sustainable business model at one end, while at the other end there is YouTube, which does not pay rights holders what they want, but has a commercially sustainable model. The solution clearly lies somewhere between the two extremes. Moreover, what is crucial, if YouTube is going to remain incentivised to continue to make music videos a success, is that rights payment need to be a share of revenue, not based on a minimum per track fee.

Would YouTube walk away from music?

Spotify is, for now at least, all about music, so it has to make it work. YouTube is not. If music suddenly becomes lower margin for YouTube with fixed per stream costs, then it would be commercially foolish for YouTube to do anything other than push its viewers to other forms of content than music. That 171-day metric didn’t happen on its own. YouTube honed its algorithms to ensure it can make hits faster for the music industry, but it can dial that back in an instant.

There is even a possibility that paying more for music rights could scupper YouTube’s entire business model as other types of rights holders might start demanding better rates too. The crux of the matter is that the current economics suit YouTube but not rights holders. What we have to be careful to avoid is a new paradigm where roles are reversed. As important as music is to YouTube, Google could walk away if it really wanted to. Rights holders—labels especially, need to think whether that is a price they are willing to pay.

Is YouTube Serious About Music Subscriptions This Time Round?

In 2014 YouTube launched its inaugural music subscription service YouTube Music Keyin beta. The following year YouTube announced it was closing it ahead of the launch of YouTube Red, a multi-format subscription video on demand (SVOD) offering, of which music was going to be sub-component. Soon after Music Key’s launch I announced on stage at a Mixcloud Curates event that it would close within two years: and

“I’m gonna put my cards on the table and say it [YouTube Music Key] won’t exist in 18-24 months” after

Now YouTube is backfor another round at the table with the launch of YouTube Music.

In 2014 my Nostradamusmoment was less about being a psychic octopusthan it was simply a case of joining the strategic dots. YouTube is all about advertising. Advertisers pay most to reach the best consumers, who are also the ones most likely to pay for a subscription service, which is ad free. YouTube’s ad business is high margin and large scale. Its music subscription business is low margin and low scale. Hence, the more successful YouTube’s music subscription business is, the more harm it does to its core business and operating margins. The same principles apply today as they did four years ago.

So why bother at all? Because it has to keep the labels on side. Although the labels scored a lobbying own goal with their Facebook music deal, they are still applying pressure on YouTube for its safe harbour framework and the ‘value gap’. So if YouTube does not play ball on premium, it puts its core ad business at risk. And music is still the largest single source of YouTube’s ad revenue. Total YouTube ad revenue was $9.6 billion in 2017 – that is a revenue stream that parent company Alphabet cannot put at risk.

When YouTube launched Music Key it used those negotiations to get better features for the free YouTube music offering, including full album playlists, which went live the day after the deal was announced and are still there now, even though Music Key is not. YouTube is no slouch when it comes to doing deals. This time however, YouTube Music will last longer. Here’s why:

• This isn’t actually year zero:Google already has around five million Play Music subscribers and around the same number of YouTube Red subscribers. Red subscribers will become YouTube Premium subscribers, Play Music subscribers will get access to YouTube Music. So, inasmuch as YouTube is launching a cool new app with lots of new features, this is not Google entering the streaming fray, it is simply upping its game.
• Spotify is making up ground:YouTube Music is not about to become the global leader in music subscriptions, for all the above stated reasons and more, but it can’t stand on the side lines either. Data from MIDiA’s Quarterly Brand Tracker shows that while YouTube is still the leading streaming music app in weekly active user (WAU) terms, Spotify is making up ground. Crucially, Spotify is now more widely used (for music) among 16–19 year olds. And Spotify is betting big on ad-supported, largely because it has finally persuaded the labels and publishers to amend its deals to allow it to, evidenced by the fact that Q1 2018 ad-supported gross margin increased dramatically from -18% to 13% in Q1 2017. YouTube Music is in part a defensive play to ensure it has an enriched offering for thoseconsumers, both now as free users, and for when they want to pay.
• YouTube is the best featured music service: One of the great ironies of the recorded music industry’s relationship with YouTube is that because it doesn’t have to negotiate deals in the way other services to, it now has the best featured music service. Streaming and social have risen in tandem, but only YouTube has fully embraced this with comments, likes / dislikes, mash ups, user cover versions, parodies, unofficial remixes etc. And all of these features are front and centre in the new service. Spotify and co can’t get that sort of content because the labels can’t license it. Moreover, labels don’t like users being able to thumb down their songs or comment negatively on them. This launch enables YouTube to shout from the roof top about what it has and, by inference, what Spotify does not.
• Testing:YouTube Music is being rolled out in the same markets as YouTube Red was (US, Australia, New Zealand, Mexico and South Korea). This slightly eclectic mix of markets represent a test base; a wide range of varied markets that will provide diverse user data to enable YouTube to model what global adoption will look like.
• Upping the ad load: YouTube’s global head of music Lyor Cohen has nailed his colours firmly to the subscription mast. Although Cohen may not be up high in the Alphabet hierarchy he is a strong voice in YouTube’s music business. It also serves Alphabet well to have this particular voice with that sort of message at the forefront. Cohen has gone on record stating that YouTube will up its ad load to force more users to paid, and it is happening, but it is not just a music thing. Ad loads are up across the board on YouTube. Either way, this element was patently missing back in the days of Music Key.

YouTube Music may not be the start of Alphabet’s streaming game, but it is certainly its biggest play yet. And while it will remain focused on protecting its core business, it will likely explore ways to drive ad revenue within its ‘ad free’ premium offerings. Sponsorship and product placement will be one tactic; using MirriAd’s dynamic product placement ad tech could be another. YouTube is unlikely to become the leading music subscription service soon, but there is no denying that it has clearly upped its game.

The data in this chart and some of the analysis will form part of MIDiA’s forthcoming second edition of its landmark ‘State of the YouTube Music Nation’ report. If you are not already a MIDiA client and would like to know how to get access to this report and data, email stephen@midiaresearch.com