Why Apple Music Matters So Much To Apple

Apple today announced a much anticipated refresh to Apple Music at its WWDC event. Apple Music has found itself at the centre of long running criticism from many parts due to its perceived product weaknesses. This is the bar against which Apple is measured. It has spent years building a well earned reputation for high quality products so its users understandably measure its services by the same standards. Apple Music was a highly ambitious version 1.0 that has since been iterated to iron out user journey kinks. Now today’s feature announcements look set to move Apple Music onto its next stage.

Being An Early Follower Requires Super High Standards

As an early follower rather than a leader Apple always sets itself the challenge of being measured against incumbents that have had years to refine their product offerings. With hardware, Apple normally meets and exceeds those standards. With Apple Music it launched a product that was light years ahead of where most of the incumbents were at launch, but that didn’t compare as favourably against their current offerings. Google Music Play All Access faced a similar challenge. The streaming music market has evolved so much since Spotify and Deezer’s inceptions that a music service cannot now afford to simply launch with the basics. It must do so much more.

applemusicwwdc

Image courtesy of the Verge

The revamped Apple Music includes a new simplified white interface, lyrics integration and better interaction with cloud libraries (a long running bug bear). These are not exactly step change innovations but they are a significant move forward in what is proving to be a process of continual change. Ultimately this update is about making Apple Music more intuitive and for it to make more sense to mainstream users. Is all this enough to blow Spotify and Tidal out of the water? No, but add in Apple’s bottomless pockets for exclusives and marketing, and you have a potent mix.apple music wwdc

Apple also announced a subscriber milestone, hitting 15 million subscribers. The number suggest that Apple’s growth is beginning to outpace that of its key challenger Spotify. Last year I suggested Apple would reach 20 million subscribers by the end of 2016. These numbers show it is well on track. Apple could yet be the leading music service by the end of 2017 if it starts to fully leverage all its ‘unfair advantages’.

Other metrics that Apple announced included:

  • 130 billion App Store downloads
  • 2 million apps available
  • $50 billion paid out to developers
  • 60 million Apple News users

10 Years On, Music Matters To Apple Once Again

Apple Music matters to Apple not because it will generate large profits (it won’t) but because it is the pace setter for Apple’s strategic shift towards being a services company. Apple is building a new narrative for Wall Street that focuses on the revenue it generates from its existing customer base (in order to distract attention from slowing device sales). Apple Music is the proof of concept. If it gets Apple Music right it will demonstrate its ability to deliver on best-in-class digital services. And because Apple still hasn’t been able to launch its TV subscription (it instead launched a partnership integration with Sling TV) it needs to get Music right until it is able to get the requisite TV deals in place.

This why the stakes are so high for Apple Music. Get it right, Apple re-establishes its market leadership role. Get it wrong, Apple’s own rescue plan goes down the pan. Music was so important to Apple in the mid 2000’s because it helped sell the iPod which in turn became the platform for growth that Apple trades upon today. Now 10 years on music has just reassumed its importance, this time to help sell Apple itself not just its hardware.

Is YouTube Building A New Music Industry?

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

The YouTube Paradox

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

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

YouTube’s New Music Industry?

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

Here’s how and why…

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

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

An Alternative Industry, Not Simply A New Element

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

 

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

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

The Real Value Of The Independent Sector

Over the course of the last year MIDiA has been working with WIN (the global indie label trade body) on a major study to define the independent sector’s contribution to the global recorded music business. The default accepted wisdom is that the indies account for something like 20% of the global revenue total. However, this study revealed, that figure strongly underestimates the actual share…it is in fact 37.6%. This matters not for bragging rights but because in the digital marketplace, market share shapes the deals that are struck, with more market share translating into better terms. So a more accurate measure of share can help the independent sector compete on fairer terms.

Distribution Versus Ownership

Distribution is the largest single contributor to the variance in market share. The 20% refers to the labels that distribute the music while the 37.6% refers to which labels actually own the music. Indeed, 3rd party distribution is becoming an ever more central element of the independent sector. The growth of streaming services and social media have helped create a burgeoning international opportunity for independent labels across the world. However, because most of these labels do not have the international infrastructure required to tap this global opportunity they often utilise 3rd party partners for distribution and other services. Often these parties are major labels or major label owned distributors. As the music market becomes more global, 3rd party distribution becomes more important for indies. But while this gives the independent sector global scale it also means that much of their revenue ends up being accounted as major label revenue, creating a distorted view of the market.

Most Indies Use International Distributors

In fact, 72% of independent labels use a 3rd party international distributor while 52% use a major label owned one or go direct via a major for distribution. The impact on the global market is huge. Just look at 2 of the biggest independent artist albums recently: Taylor Swift’s ‘1989’ on Big Machine but distributed by Universal Music, and Adele’s ‘25’ on XL/Beggars but distributed by Sony in the US and South America. 2 leading independent success stories that now appear as major label success stories in investor decks. There is no questioning the value that majors and major owned distributors bring but just as importantly these are nonetheless indie label artists.

A Diverse Global Picture 

Even using the ownership approach, there is a massively diverse global picture, with indie market share ranging from just 16% in Finland, up to 64% in Japan and 88% in South Korea. In fact, Japan, South Korea and the US (where the distribution methodology has been in place for a few years now) account for 64% of all global indie revenue.

The disparity between ownership and distribution measures will only increase as music’s shift to streaming accelerates. The more that international markets open up, the more that smaller labels need to utilize international partners to reach music fans in those markets.  And the more that happens, the less relevant distribution market share becomes.

You can download the entire report by following this link.

Meanwhile, this graphic highlights some of the key findings.

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The 2 Spotify Charts You Need To See

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

spotify margin per user

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

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

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

spotify average pricing

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

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

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

Medianet, SOCAN, YouTube And The Kobalt Effect

Since the demise of the long-running-but-never-launched Global Repertoire Database (GRD) there has been a lot of debate over what comes next for digital rights reporting. The songwriter class action suits in the US against Spotify are the natural outcome of more than one and a half decades of failing to deal with the forsaken mess that is compositional rights in the digital era. The music industry needs a solution and now just like busses that never come, two arrive at once: Google’s Open Source Validation Tool for DDEX Standard (doesn’t sound too sexy I know, but bear with me on this one) and Canadian PRO (Performing Rights Organization) SOCAN has acquired Medianet essentially as a digital rights reporting play. So just what is going on in the world of digital rights reporting?

Transparency, Transparency, Transparency

Artist concerns about transparency in streaming services are well founded but it is an eminently fixable problem because virtually all of the necessary data is in place. When a record label or distributor licenses music to a service it literally provides a data file of its music which is then ingested (uploaded) by the service. But when service licenses from a music publisher or PRO there is no such data file, because the recorded works are owned by the labels. Publishers do not even provide a comprehensive list of what works their license covers. So music services instead do a ‘best efforts’ licensing effort, licensing all the key publishers and PROs. This model is though far, far from perfect, because:

  • Songs often have multiple writers, some of whom may be signed to bigger publishers, others not. So a single song could be covered by licenses acquired from three or four publishers and still not be fully licensed
  • Songwriters change publishers and most often publishers do not notify services, so a licensed song can suddenly become an unlicensed song without the service knowing it
  • Many songwriters are only small publishers not licensed to music services

But perhaps the biggest problem of all is the lack of a single database of compositional works against which music services can cross reference their catalogues, even better would be one that matches all compositional works against recorded works. Without them we end up with large swathes of songwriter royalties not being matched against and paid to the songwriter. Depending on who you talk to this can range between 20% and 40% of digital royalty income. Little wonder then that we end up with class action suits from disgruntled songwriters.

The problem is that until there is a market level solution that sort of action won’t go away. This means any music service operating in the US, where there is a statutory damages system, cannot operate with certainty that it will not face another legal suit with potentially vast damages awarded. The nightmare scenario is that streaming services start pulling out of the US, or restricting their catalogue to identified works (which largely means major publishers only) rather than face potentially fatal legal challenges.

SOCAN Wants To Be The Leader In Rights Reporting And Administration

And this is the world into which today’s two announcements are born. Medianet is almost one of the founding fathers of digital music, tracing its origins back to the very early 2000’s when, as MusicNet, it was set up by half of the major labels (the other other half formed press play) as a D2C music service. Both efforts failed miserably but Medianet emerged out the ashes as a white label music services company. It spent the years since quietly building a solid business powering a host of interesting music services including Beats Music and Cur. While powering and licensing services such as these Medianet developed a unique set of technology and rights assets and handled everything from ingestion, through rights reporting and administration and even payments. In short it was an end to end rights tech company. Which is what makes Medianet such an important asset for SOCAN. PROs have become increasingly marginalized in recent years with publishers withdrawing rights and a whole host of disruptive new competitors ranging from Kobalt’s acquisition of AMRA, through Irvin Azoff’s Global Media Rights, to existing alternatives such as Music Reports Inc and Fintage House pivoting into digital rights reporting and administration. These are challenging times as a PRO and the likelihood is that it will result in a fair degree of consolidation with smaller PROs outsourcing more of their work to larger ones. SOCAN has seized the initiative with the Medianet acquisition, setting out its stall as a rights society that puts tech innovation, effective reporting and accountability at the centre of what it does for its members. It has also positioned itself as a contender for global successor the the GRD. Consider this the first major repercussion of the innovation and transparency agenda that Kobalt set in motion.

YouTube Is Building Something Much Bigger

Alongside this, with what one assumes is coincidental timing, comes YouTube’s implementation of Digital Sales Report Flat File Standard (DSRF). Digital supply chain innovation is not always the most dynamic of sectors and this announcement could be mistaken for appearing to be the poor relation of the two today. The opposite is probably true. The digital supply chain is going to become ever more important and companies like Consolidated Independent continue to move the space forward in order to help ensure rights holders get distributed, reported and paid as effectively as possible. YouTube’s DSRF implementation is built upon the DDEX framework of standards and enables reporting of both audio and audio-visual content. DSRF aims to deliver faster, more accurate royalty reporting and distribution. You see now the link with the Medianet acquisition. Both are part of a broader movement across the music industry to bring rights reporting and administration into a state that is fit for streaming’s purpose.

The reason why YouTube’s move could have the bigger long term implications is that this is part of a much bolder and far reaching strategy by Google, one that has the music industry’s analogue inefficiencies firmly in its sights. But more on that next week….

The Kobalt Effect

Walk into any publisher or PRO right now and the odds are Kobalt will feature in the conversation sooner or late, whether in fulsome praise or through gritted teeth. Kobalt has done what all good disruptors do, it has set the agenda and in doing so is having market impact far beyond its actual, and still relatively small, revenue base. Today’s two announcements are part of the wave of digital rights disruption and innovation that Kobalt has helped accelerate. But the story doesn’t stop here, in fact, this is just the start.

After The Download: When Apple Turns Off The iTunes Store

 

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

The demise of legacy formats normally follows this pattern:

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

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

Subscriptions Are Key To Apple’s Services Narrative

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

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

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

download collapse

Turning Off The iTunes Store

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

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

 

 

After The Album: How Playlists Are Re-Defining Listening

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

Playlists Are The Lingua Franca Of Streaming

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

The Album Is No Longer The Market

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

Income Per Streaming User

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

Income Per Album Per Streaming User

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

promo slide

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

What It All Means

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

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

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

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

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

 

ifpi midia 1

This post has been updated following a conversation with the IFPI

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

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

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

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

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

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

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

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Streaming Hits 67.5 Million Subscribers But Identity Crisis Looms

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

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

Streaming’s Identity Crisis

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

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

The Free Streaming Debate Is As Complex As It Is Nuanced

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

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

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

Spotify’s Billion Dollar Challenge

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Spotify just changed the rules of the game, raising an unprecedented $1 billion in convertible debt. I’ll leave the financial analysts to pore over the financial permutations (and there are plenty) but there are a few key strategic implications:

  • This is an IPO war chest: Spotify is effectively priced out of trade sales for two reasons 1) it has received so much funding that its valuation is astronomic (somewhere close to $10 billion) and 2) the competitive market has changed so much that most companies that were potential buyers 3 years ago no longer are. Samsung neither has the growth story nor the music focus any longer, Microsoft is almost out of the game, Sony is out of the game, Apple couldn’t admit defeat so soon, Amazon is focused on the mass market and Google is focused on YouTube. So an IPO is the only realistic option and for that….
  • Spotify needs a growth story: To achieve an IPO valuation as high as Spotify needs, it is not enough to just be the leading player, it needs to be seen to be growing at a healthy clip, especially with Apple constantly making up ground and still odds on to be the long term market leader. Wall Street needs growth stories. Just look at what has happened to Pandora, a company with stronger fundamentals and a more secure licensing base. Yet Pandora has lost billions of market cap because Wall Street hasn’t warmed to the long term mature company story.
  • Growth will come from three key areas: The $9.99 model only has finite opportunity. The top 10% of music buyers only spend $10 a month on music. So to grow beyond that beachhead Spotify has to grow where the market isn’t yet mature (emerging markets), make the offering feel like free (telco deals) and make the offering feel super cheap ($1 for 3 months promos). All, in different ways, cost, which is where much of this money will be spent, along with hefty marketing efforts.
  • Some of it will be spent on strategic acquisitions: Small music services around the globe will be hastily editing their investor decks, pitching for an acquisition or hoping Spotify will come calling uninvited. But there aren’t too many realistic targets. Soundcloud would probably cost most of the raise, and Spotify would have the same problem Soundcloud now has of trying to force a 9.99 model on a user base it doesn’t fit. TIDAL wouldn’t be cheap either and besides a bunch of exclusive rights for some super star artists, would only add 10% to Spotify’s user base, less after all those users who came in for ‘Life of Pablo’ churn out. A more realistic bet would be for Spotify to target a portfolio of niche services that would add little to its user base but would communicate to the street that it is set up for super serving niches to grow its user base.
  • All bets are on Spotify: For the last 2 years the recorded music industry, the majors in particular, has been holding its collective breath. If Spotify has a successful IPO it will likely spur an inflow of much needed investment to the space. If it doesn’t then it is back to the drawing board. In many respective that should happen anyway. The 9.99 subscription model is incredibly difficult (perhaps impossible) to run profitably at scale.

The next 6 months will be ones of hyper activity for streaming, and don’t expect Apple to take this lying down. Await the battle of the gargantuan marketing budgets. Even if no one else does well out of this, the ad agencies will make hay.