Ellie Goulding and Billie Eilish Are Streaming’s New Normal

Less than a week into the new decade and we already have the first indications that the streaming rulebook continues to be rewritten faster than the ink can dry on its last entry. Three separate articles, on the surface unrelated, when stitched together create the outline of a new streaming narrative that while firmly rooted in recent developments represents an entirely new chapter for the music industry:

1. Ellie Goulding’s ‘River’ was the UK Christmas number one despite being an Amazon exclusive
2. Jimmy Iovine claims Drake and Billie Eilish each have more streams than the entirety of the 1980s
3. UK streaming revenue growth slowed, adding £191 million in 2019 compared to £210 million in 2019

Fusing consumption and retail

Streaming’s impact is both commercial and cultural, in large part because it fuses what used to be retail and radio. Like some kind of musical nuclear fusion, it smashes discovery and consumption together to create a chain reaction with explosive implications. In the old world, repeated radio spins drove awareness and then sales. In streaming environments, lean-back streams are simultaneously radio-like listens and sales. The distinction does not matter for streaming services – they are focused on user acquisition, engagement and retention, but for labels it challenges the very premise of what marketing campaigns are meant to achieve. It is in this environment that today’s streaming stars are made.

‘More of more’

With streaming services lacking any meaningful way to differentiate, they are forced to compete on who can deliver their users’ the most new music to drive the most listening. This strategic imperative of ‘more of more’ is at direct odds with the objective of any label campaign, which is inherently about ‘more of less’, i.e. listen to this song more instead of more songs. The net result is vast amounts of streams spread widely, but also an environment in which hits become megahits. The songs that get traction experience a domino effect of successive algorithmic decisions, rapidly pushing songs with buzz to a progressively wider number of playlists and users. In the old world this would have been radio airplay success; now it is just volume of streams.

Catalogue Darwinism

Because of the focus on new, streaming-era artists end up with far bigger streaming volumes than older artists that were ‘bigger’ in their respective eras, but an afterthought in the streaming era. Hence, Drake and Billie Eilish being bigger than the entirety of the 1980s. Back in mid-2018 MIDiA published a report predicting that music catalogue was going to decline. We faced a lot of opposition then but now we are beginning to see that catalogue is indeed undergoing a fundamental change. For deep, legacy catalogue, streaming dynamics are stripping out the long tail and boiling down entire decades to a handful of tracks. Think of it this way: if 10% of the artists released in the 1980s were ‘successful’ at the time, and 10% of those were successful enough for their music to still be listened to now, and that the songs that are still listened to are 10% of these artists’ entire 1980s output, then you end up with 0.1% of the music from the 1980s being streamed at any meaningful scale now. Added to that, new music gets pushed to more lean-back playlists so is listened to more times. The multiplier effect for new music acts as a divider for older music. As an illustration, 40 music videos on YouTube have more than one billion views but in October 2019 Guns ‘n Roses ‘Sweet Child o’ Mine’ was the only one from the 1980s that had a billion views.

If you own the rights to those catalogue gems then the value of that asset is arguably higher now than ever before, because it has won the Darwinian game of catalogue evolution. But the rest fall by the wayside.

Ellie Goulding: niche mainstream

So, the current dynamics of streaming programming favour new versus old. It may not always be so, but this is where we are right now. These same dynamics can then be used to create hits – demand creation, if you like. This is where Ellie Goulding comes in. Goulding’s Joni Mitchell cover ‘River’ was an Amazon exclusive yet became the overall UK number one in large part because Amazon ensured it was on just about every holiday-themed playlist. Every time someone asked Alexa to play Christmas music, ‘River’ soon found its way there. Because Echo listening skews so heavily lean-back, ‘River’ simply became part of the sonic festive wallpaper, much in the same way ‘All I Want for Christmas’ did on radio. Just like with radio, lean-back listeners are unlikely to stop whatever else they are doing in order to change the track. Because streaming economics do not differentiate with lean-back and lean-forward listening, passive listening is just as valuable as active listening. Radio has become as valuable as retail but is much easier to manipulate.

The other crucial aspect of this is that Amazon has shown that you only need to find and activate a small slice of the mainstream to have a mainstream hit. As MIDiA first said last year, niche is the new mainstream.

At the start of this post I stated that streaming’s effects are both cultural and commercial. The commercial backdrop to all of these consumption and programming shifts is that the rate of revenue growth is beginning to slow (not just in percentage terms – that is a natural effect of markets getting bigger) but also in absolute terms. Early last year we predicted that streaming growth would start to slow towards the end of 2019 in developed markets and the ERA figures for the UK are the first evidence of this shift. Globally, growth will be sustained by emerging and mid-tier markets, but in markets like the UK and US, growth is peaking. The significance is that the conflation of radio and retail does not matter so much when everything is growing. When growth slows, however, quirks of the market can become business challenges. The ROI of throwing money at campaigns to cut through the audio clutter becomes problematic when the promise of the pie getting ever bigger begins to wane.

All of these things are of course simply part of a maturing and changing market. Nevertheless, the marketing strategies currently employed have been developed in an environment of growth abundance. The challenge for streaming’s next chapter is finding the new rules that are more ROI focused but can still play to streaming’s consumption strengths. Delineating different rates for lean-forward and lean-back streams feels like a logical place to start, but more evolution will need to follow – each iteration of which will trigger its own waves of unintended consequences. Exciting times.

Have We Reached Peak Tech?

In last week’s Take Five I highlighted a Vox story which reported that over the last year the number of companies using terms like ‘tech’ or technology’ in their documents is down 12%. This is an early indicator of a much more fundamental concept – we may have already reached peak in the tech sector, the business sector that has driven the fourth industrial revolution. While some may quibble whether the internet-era transformation was the predecessor to a new industrial revolution built around AI, big data and automation, the underlying factor is that tech – for better or for worse – has shaped the modern world. More in the developed world than the majority world perhaps, but it has shaped it nonetheless. Now, however, with tech so deeply ingrained in our lives and the services and enterprises that facilitate them, has tech become so ubiquitous as to render it meaningless as a way of defining business?

Tech is the modern world

When Tim Berners Lee invented the World Wide Web in 1989 he could have had little inkling of the successive wave of global tech superpowers that it would incubate. As we near the end of the second decade of the 21^stcentury it is hard to imagine daily life without it. The pervasive reach of the web and the Internet more broadly is perfectly illustrated by Amazon’s recent launch of twelve new devices, including a connected oven, a smart ring (yes a ring) with two mics and a connected night light for kids. All of which follows Facebook’s connected screen Portal, which for a company that trades on user data, raises the question: ‘Is this your portal to the world, or Facebook’s portal to your world?’ However, regardless of why the world’s biggest tech companies want us to put their hardware into our homes, this is simply the latest new frontier for consumer tech. Now that we carry powerful personal computers with us everywhere we go, we remain instantly connected to our personal collections of connected apps and services. Tech is the modern world.

The rise of tech-washing

With tech now powering so much of what we do, it raises the question whether tech is any longer that useful a term for actually distinguishing or delineating anything. If everything is tech, then what is tech? It is a question that the world’s biggest investors are starting to ask themselves, too. In fact, we have now reached a stage where a) tech is a meaningless concept – everything is tech, and b) there is the realisation that many companies are ‘tech washing’, using the term ‘tech’ to hide the fact that they are in fact anything but tech companies which happen to use technology platforms to manage their operations. In the era when everything is tech enabled, you would be hard pushed to bring a new business to market that does nothave tech at its core. Companies like Uber, WeWork and just-listedPeleton have managed to raise money against billion-dollar-plus valuations in large part because they have positioned themselves as tech companies. In actual fact when the tech veneer is removed, they are respectively a logistics company, a commercial rental business and an exercise equipment company. If they had come to market simply with those tag lines, they would undoubtedly have secured far smaller valuations and many of their tech-focused investors would not have backed them. Investors are beginning to see through the ‘tech-washing’, as evidenced by the instant fall in Peleton’s stock price, WeWork’s crisis mode sell-off and Uber’s continuing struggles.

Pseudo-tech

Calling yourself a tech company has become a get out of jail free card for new companies, an ability to raise funds at inflated valuations, and a means to persuade investors to focus on ‘the story’ and downplay costs and profit in favour of growth, innovation and of course, that hallowed tech company term: disruption. I have been a media and tech analyst since the latter days of the original dot-com boom, and the mantra of the companies of that era was that ‘old world metrics’ such as profitability didn’t apply to them. Of course, as soon as the investment dried up, the ‘old world metrics’ killed most of them off. Today’s ready access to capital, enabled in part by low interest rates, has enabled a whole new generation of companies to spin the same yarn. But whether it is the onset of a global recession or growing investor scepticism, a similar fate will likely face today’s crop of ‘disruptors’. The dot-com crash separated the wheat from the chaff, wiping out the likes of Pets.com but seeing companies like eBay and Amazon survive to thrive.It also took a bunch of promising companies with it too. The imperative now is to strip away pseudo-tech companies from the tech sector so that investors can better segment the market and know who they should really be backing through what will likely be a tumultuous economic cycle. As SoftBank is finding to its cost, building a portfolio around pseudo-tech becomes high risk when the tech-veneer can no longer hide the structural challenges that the underlying businesses face.

Tech is central to the modern global economy and will only increase in importance – at least until the world starts building a post-climate-crisis economy. It is imperative for genuine tech companies and investors alike to start taking a more critical view of what actually constitutes tech. The alternative is that the tech sector will get dragged down by the failings of logistics companies and gym equipment manufacturers.

Sonos @ 15

Sonos, granddaddy of the connected home audio marketplace, is now 15 years old. Sonos was a pioneer that was so far ahead of its time, it inadvertently found itself as one of the key early drivers of streaming subscriptions. Visionary founders John MacFarlane and Tom Cullen had some long-term inkling that streaming would eventually be a major force for them, but their near-term vision was built on getting music downloads piped around the home. Now, 15 years on, Sonos has effectively achieved two missions: deploying iTunes around the home, as well as Spotify and co around the home. But now, the outlook is less clear. Sonos’s marketplace is complex and competitive more than ever. Furthermore, the departure of MacFarlane, a round of lay-offs and having ‘missed voice’, may have left Sonos looking less vibrant than it once did. So, where next for Sonos?

These are some of the key challenges Sonos faces:

• Battle of the apps: Sonos hardware reflects the company’s obsession with elegance and attention to detail. But, as with so many hardware companies (in fact the majority of them), Sonos’s weak point is software. Apple makes seamless software-hardware integration look deceptively easy – it is, in fact, nigh on impossible to do well. The Sonos app works well enough, certainly much better than it used to, and the networking of devices is usually relatively pain free. But in the app economy, consumers expect apps to work perfectly, not ‘well enough’. They expect high-quality user experiences, not functional experiences with lots of clicks and swipes, which is what Sonos can feel like when doing activities like building playlists. In spite of this, the biggest software threat for Sonos is the very fact that it is a standalone app. A Spotify user does not want to have one app to use on the train, or in the car, and a different one to use in the home. This is what Sonos effectively does right now. Sonos’s new CEO, Patrick Spence, knows this needs fixing but the question is whether Sonos can make the fix before Spotify and co come up with their own fix.
• Just play: Traditional home audio just works. You press play and there’s music. Sonos stood out way ahead of the pack – an admittedly poor quality pack – for out-of-the-box simplicity, though even now it remains a marker of good practice. However, the convenience benchmark for connected home audio still falls far short of traditional home audio. Sonos works most of the time, emphasis on most of the time. Every so often there’s a network problem; sometimes this is due to a firmware issue, other times it is the network itself. The network glitches of course aren’t Sonos’s fault but that doesn’t matter to the user experience. A CD player works every time, Wi-Fi or not. That is the convenience benchmark Sonos and all other connected audio players must meet. But even without Wi-Fi issues, pressing play is not always so straight forward because Sonos’s app experience is not on a par with its hardware experience.
• Sonos…sonos….sonos…: Ok, that was meant to be an Echo. Yes, Amazon’s Alexa vehicle has totally shaken up the connected home audio space. And with Amazon Music integration, it sets a standard for what an integrated hardware-software service experience should be. One voice command pulls up a song in an instant, no having to select which music source to choose. Yet Echo is far from the end game. In fact, voice is not an ideal interface for music. It’s fine for when you know exactly what you want to play, it’s also pretty good for when you want to select a lean back experience e.g. ‘play me music to work out’ – but it struggles with the more nuanced use cases that lie in between. Voice is another thing that Spence knows needs fixing.
• Good enough: And of course, the Echo is not a super high-quality audio experience. It’s a decent audio experience. Sonos might grumble at otherwise sophisticated users tolerating modest audio playback, but ever since the advent of MP3s and iPod earbuds, convenience trumps quality for most when it comes to music. Even Sonos is guilty of playing the convenience game. Though its speaker quality has improved, Sonos speakers are still a long way off the audio specs audiophiles seek. And yet, even this isn’t the biggest challenge for Sonos. The core problem Sonos faces is that the likes of Amazon, Google and even Apple are not focused on winning the home audio race, instead they view smart speakers as a beachhead for controlling the smart home. That is the war, home audio is the first battle. Just as Apple used the iPod as the first step towards winning the personal digital life war, smart speakers are being used in the same way in the home.

Under attack from all sides

There are countless other challenges too. Sonos’s mission of filling rooms with audio might not actually be what most people want. A smart speaker in the kitchen and a sound bar under the TV might be enough for most, and those may be best served via a native hardware / software / content ecosystem like Amazon’s Prime. At the bottom end of the market, cheap Bluetooth speakers are flooding the market, while for those consumers who do value audio quality over convenience, incumbent audio companies like Bose, Panasonic and Sony are all upping their games. (In virtually all markets MIDiA tracks, Bose wireless speakers are more widely adopted than Sonos.)

Foundations for success

Sonos is also upping its game and tweaking its strategy. The recently launched PlayBase shows both high-quality product design and a recognition that TV is the next big battle Sonos needs to fight, having already made good ground with its PlayBar. Sonos needs all the strategic nous and product excellence it can get. It has the low-end and high-end squeezing it in a pincer movement, while the big tech companies carpet bomb its heartland simply to gain a foothold in the smart home. Five years ago, Sonos was the golden child of its market. Now it is a company with a very strong brand in need of some laser focussed positioning in a remarkably competitive field. Sonos has enviable foundations, it now needs to build a new house.

The Three Eras Of Paid Streaming

Streaming has driven such a revenue renaissance within the major record labels that the financial markets are now falling over themselves to work out where they can invest in the market, and indeed whether they should. For large financial institutions, there are not many companies that are big enough to be worth investing in. Vivendi is pretty much it. Some have positions in Sony, but as the music division is a smaller part of Sony’s overall business than it is for Vivendi, a position in Sony is only an indirect position in the music business.

The other bet of course is Spotify. With demand exceeding supply these look like good times to be on the sell side of music stocks, though it is worth noting that some hedge funds are also exploring betting against both Vivendi and Spotify. Nonetheless, the likely outcome is that there will be a flurry of activity around big music company stocks, with streaming as the fuel in the engine. With this in mind it is worth contextualizing where streaming is right now and where it fits within the longer term evolution of the market.

The evolution of paid streaming can be segmented into three key phases:

1. Market Entry: This is when streaming was getting going and desktop is still a big part of the streaming experience. Only a small minority of users paid and those that did were tech savvy, music aficionados. As such they skewed young-ish male and very much towards music super fans. These were people who liked to dive deep into music discovery, investing time and effort to search out cool new music, and whose tastes typically skewed towards indie artists. It meant that both indie artists and back catalogue over indexed in the early days of streaming. Because so many of these early adopters had previously been high spending music buyers, streaming revenue growth being smaller than the decline of legacy formats emerged as the dominant trend. $40 a month consumers were becoming $9.99 a month consumers.
2. Surge: This is the ongoing and present phase. This is the inflection point on the s-curve, where more numerous early followers adopt. The rapid revenue and subscriber growth will continue for the remainder of 2017 and much of 2018. The demographics are shifting, with gender distribution roughly even, but there is a very strong focus on 25-35 year olds who value paid streaming for the ability to listen to music on their phone whenever and wherever they are. Curation and playlists have become more important in order to help serve the needs of these more mainstream users—still strong music fans— but not quite the train spotter obsessives that drive phase one. A growing number of these users are increasing their monthly spend up to $9.99, helping ensure streaming drives market level growth.
3. Maturation: As with all technology trends, the phases overlap. We are already part way into phase three: the maturing of the market. With saturation among the 25-35 year-old music super fans on the horizon in many western markets, the next wave of adoption will be driven by widening out the base either side of the 25-35 year-old heartland. This means converting the fast growing adoption among Gen Z with new products such as unbundled playlists. At the other end of the age equation, it means converting older consumers— audiences for whom listening to music on the go on smartphones is only part (or even none) of their music listening behaviour. Car technologies such as interactive dashboards and home technologies such as Amazon’s echo will be key to unlocking these consumers. Lean back experiences will become even more important than they are now with voice and AI (personalizing with context of time, place and personal habits) becoming key.

It has been a great 18 months for streaming and strong growth lies ahead in the near term that will require little more effort than ‘more of the same’. But beyond that, for western markets, new, more nuanced approaches will be required. In some markets such as Sweden, where more than 90% of the paid opportunity has already been tapped, we need this phase three approach right now. Alongside all this, many emerging markets are only just edging towards phase 2. What is crucial for rights holders and streaming services alike is not to slacken on the necessary western market innovation if growth from emerging markets starts delivering major scale. Simplicity of product offering got us to where we are but a more sophisticated approach is needed for the next era of paid streaming.

NOTE: I’m going on summer vacation so this will be the last post from me for a couple of weeks.