Disney, Netflix and the Squeezed Middle: The Real Story Behind Net Neutrality

Unless you have been hiding under a rock this last couple of weeks you’ll have heard at least something about the build up to the decision over turning net neutrality in the US, a decision that was confirmed yesterday. See Zach Fuller’s post for a great summary of what it means. In highly simplistic terms, the implications are that telcos will be able to prioritize access to their networks, which could mean that any digital service will only be able to guarantee their US users a high quality of service if they broker a deal with each and every telco. As Zach explains, we could see similar moves in Europe and elsewhere. If you are a media company or a digital content provider your world just got turned upside down. But this ruling is in many ways an inevitable result of a fundamental shift in value across digital value chains.

net neutrality value chains

Although the ruling effectively only overturns a 2015 ruling that had previously guaranteeing net neutrality, the world has moved on a lot since then, not least with regards to the emergence of the streaming economy across video, music and games. In short, there is a lot more bandwidth being taken up by streaming services and little or no extra value reverting to the upgraded networks.

Value is shifting from rights to distribution

Although the exact timing with the Disney / Fox deal (see Tim Mulligan’s take here) was coincidental the broad timing was not. The last few years have seen a major shift in value from rights companies (eg Disney, Universal Music, EA Games) through to distribution companies (eg Facebook, Amazon, Netflix, Spotify) with the value shift largely bypassing the infrastructure companies (ie the telcos).

The accelerating revenue growth and valuations of the tech majors and the streaming giants have left media companies trailing in their wake. The Disney / Fox deal was two of the world’s biggest media companies realising that consolidation was the only way to even get on the same lap as the tech majors. They needed to do so because those tech majors are all either already or about to become content companies too, using their vast financial fire power to outbid traditional media companies for content.

The value shift has bypassed infrastructure companies

Meanwhile telcos have been left stranded between rock and a hard place. Telcos have long been concerned about becoming relegated to the role of dumb pipes and most had given up any real hope of being content companies themselves (other than the TV companies who also have telco divisions). They see regulatory support for better monetizing their networks by levying access fees to tech companies as their last resort.

In its most basic form, this regulatory decision will allow telcos to throttle the bandwidth available to streaming services either in favour of their favoured partners or until an access fee is paid. The common thought is that telcos are becoming the new gatekeepers. In most instances they are more likely to become toll booths. But in some instances they may well shy away from any semblance of neutrality. For example, Sprint might well decide that it wants to give its part-owned streaming service Tidal a leg up, and throttle access for Spotify and Apple Music for Sprint users. Eventually Spotify and Apple Music users will realise they either need to switch streaming service or mobile provider. Given that one is a need-to-have, contract-based utility and the other is nice-to-have and no contract and is fundamentally the same underlying proposition, a streaming music switch is the more likely option. Similarly, AT&T could opt to throttle access for Netflix in order to give its DirecTV Now service a leg up. Those telcos without strong content plays could find themselves in the market for acquisitions. For example, Verizon could make a bid for Spotify pre-listing, or even post-listing.

The FCC ruling still needs congressional approval and is subject to legal challenges from a bunch of states so it could yet be blocked. If it is not, then the above is how the world will look. Make no mistake, this is the biggest growing pain the streaming economy has yet faced, even if it just ends up with those services having to carve out an extra slice of their wafer-thin margins in order reach their customers.

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Shazam Is Apple’s Echo Nest

apple music shazam midia

Shazam finally found a buyer: Apple. Ever since its affiliate sales revenue model crumbled with the onset of streaming (there’s no business in an affiliate fee on a $0.01 stream), Shazam has been trying to find a new business model. It doubled down on providing tools for TV advertisers but never got enough traction for that to be a true pivot. Shazam’s problem has always been that it was a feature rather than a product – as so many VC funded tech companies are. The fact that it sold for $400 million – just 2.8 times its total investment ($143 million) and well below its previous pre-money valuation of $1 billion, illustrates how much value has seeped out of Shazam’s business. The Apple acquisition though, is one of the few ways that Shazam’s ‘hidden’ value can be realised.

Cool tech without a business model

Shazam was a digital music pioneer. I remember getting a demo from one of the founders back in the early 2000s, and I was blown away by just how well the tech worked. However, quality of tech was never Shazam’s problem, and once the app economy appeared it also had a very clear and compelling consumer use case. Despite competition from challengers in more recent years – especially Soundhound, which has also been compelled to pivot but may now decide to double back down on its core competences – Shazam continued to be the standout leader in music recognition. The irony is that its use case is stronger now than it was back in the download era because people are listening to a wider array of music than ever before. The problem was a lack of revenue model.

Shazam tried to position itself as a tastemaker, with its charts becoming useful heat indicators for radio stations and streaming companies. Labels soon learned to game the system with ‘Shazam parties’ but even without that challenge, this still did little to help Shazam build a business model. Apple however, saw beyond the music recognition and Shazam now gives Apple a music recognition engine. Shazam is Apple’s answer to Spotify’s Echo Nest.

Apple Music needs growth and engagement

Apple, which recently passed 30 million subscribers, continues to lag behind Spotify’s growth. Apple Music is adding around half a million new subscribers a month, while Spotify was adding close to two million a month up until it announced 60 million subscribers in July. The fact Spotify hasn’t announced since then may point to slowing growth, but my money is on a big number being announced in the next five weeks.

Apple’s weekly active user (WAU) penetration is far behind Spotify’s, indicating that Apple needs to do a better job of engaging its users. Better playlists, recommendations and algorithm driven curation all help Spotify stay ahead of the curve. Now, Apple will be hoping that Shazam will provide it with the tools to start playing catch up. And that’s not even mentioning the user acquisition potential Shazam could have when it switches to exclusively pointing to Apple Music. Game on.

Pandora’s Loss Is Sirius XM’s Gain

Pandora is in trouble, as explained by the consistently excellent Tim Ingham at Music Business Worldwide, after losing a billion dollars over the last four years and monthly active users (MAU) fell to 73.7 million – its lowest point since Q1 2014. Regular readers will know that I’m a long-time advocate of Pandora’s model. Indeed, Pandora’s model is the future of radio. However, it now appears that Pandora may not be the future of Pandora’s model. In fact, with Liberty Media subsidiary Sirius XM waiting in the wings for Pandora’s market cap to fall even lower than its current $1.4 billion (down from $8 billion in Q1 2014), Pandora might not even be the future of Pandora. In fact, Pandora’s struggles could be Sirius XM’s gain, exactly when it needs the help.

Pandora’s three most important metrics have long been:

  1. MAU
  2. Revenue
  3. The share of total radio listening it accounts for

All three are intertwined, but Pandora has managed to sustain strong growth in numbers two and three because it got better at increasing engagement and driving ad revenue from a largely flat MAU base. However, Pandora was only ever going to be able to squeeze so much revenue out of a flat user base. So, it is no surprise that ad revenue for the nine months to September 2017 was up a paltry 2.4% at $777.3m, compared to the same period in 2016 (figure). Pandora’s problem is not monetization. Indeed, it is better at monetizing ad supported streaming than any other player on the planet, having invested heavily in ad sales infrastructure and continuing to innovate ad formats. But even the shiniest car will eventually grind to halt if it has a gaping hole in its fuel tank. And make no mistake, Pandora has a gaping hole.

Spotify Stole Pandora’s Clothes

Long before Spotify was changing the music business, Pandora was virtually single-handedly creating the US streaming market – though subscription service Napster (then Rhapsody) was also making a small contribution. For the best part of a decade Pandora had almost all of the market to itself, but it is now buckling under the impact of on-demand streaming. Pandora was meant to be different to Spotify, and it was, until Spotify started stealing Pandora’s clothes. Pandora grew its user base by delivering a lean back, but personalized listening experience. Radio on its users’ terms. Spotify soon recognized the value of lean back listening, bringing in a vast selection of curated playlists, directly and via partners. Beats Music followed suit and soon became the foundation for Apple Music’s curated streaming proposition.

Pandora’s Reach Metrics Obscure The Real Story

Pandora’s own key metrics have been part of the problem. It fell into the same trap that traditional radio broadcasters did, of convincing itself that its reach metrics were a genuine indicator of its success. But reach means nothing in the digital era. Engagement is everything. MAU is a meaningless metric in today’s always on world. If you have an app on your phone that you only use once a month, you’d hardly consider that active usage. Active usage is measured at the very least in weekly active user (WAU) terms. That’s why at MIDiA we track all digital media apps using this measure to reveal just how active user bases really are.

midia pandora sirius xm

On this basis, Pandora has jut 22% WAU penetration in Q3 2017, representing around 57 million users, or 77% of its MAU base. That ‘missing’ 17 million users will be the ones that Pandora will lose next over the coming 12 months. Yet, its WAU base is at risk too. 26% of Pandora’s WAUs – its most engaged users – also use Spotify. Although Pandora has done an admirable job of building its own subscription business – reaching 5.1 million subscribers in Q3 put it at a credible sixth in the global subscriber rankings, it is looking like it’s too little too late. Furthermore, dumping its founder Tim Westergren robbed Pandora of a genuine visionary just when the company needed him most.

Pandora Will Enhance Sirius XM’s User Base

Pandora’s loss will be Sirius XM’s gain. Sirius XM has been feeling the pressure from Spotify and co, just like Pandora, but it has also experienced competitive pressure from Pandora. Sirius XM is another of radio’s potential futures, but it has faced growing pressure from Pandora and also other streaming services. The growing adoption of interactive dashboards in cars has been key (5% of US consumers now have one). Sirius XM’s WAU base fell from 11% of consumers in Q4 2016 to 8% in Q3 2017. That 30 decline is far more dramatic than Pandora’s 6% WAU decline over the same period. The 8% WAU penetration represents around 21 million users which means that its active user rate is even lower than Pandora’s at just 69%. Added to that, more of Sirius XM’s WAUs (30%) use Spotify. It also has a demographic time bomb ticking: just 8% of WAUs are aged under 35 while just 49% are female. This compares to 31% and 57% respectively for Pandora. Sirius XM’s aging user base is old and male. While Pandora’s is young(er) and female. This is Sirius XM’s opportunity.

In 2016, Sirius XM made an informal offer of $3.4 billion for Pandora. Today, it looks like an amazing deal for Pandora, but Pandora turned it down. Sirius though was not deterred and was able to get close to its goal by investing $480 million in a struggling Pandora in June 2017 and securing three board positions. Now all Sirius has to do is wait for Pandora’s stock to fall further and make its move – perhaps when the market cap gets closer to $750 million. When this happens, Sirius will get a major boost to its user base. More than that though, Sirius will significantly enhance its audience profile. Sirius and Pandora’s user bases are so different in composition that they will slot together like jigsaw pieces. The challenge for Sirius will be how to integrate Pandora in terms of feature sets, user experience, business model and, of course, company organisations. That challenge could prove even bigger than Pandora’s attempted turn around.

The data in this blog post is taken from MIDiA’s forthcoming report: Radio – Streaming’s Next Frontier: How Streaming Will Disrupt Radio Like It Did Retail 

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

Announcing MIDiA’s Streaming Services Market Shares Report

coverAs the streaming music market matures, the bar is continually raised for the quality of data required, both in terms of granularity and accuracy. At MIDiA we have worked hard to earn a reputation for high-quality, reliable datasets that go far beyond what is available elsewhere. This gives our clients a competitive edge. We are now taking this approach a major step forward with the launch of MIDiA’s Streaming Services Market Shares report. This is our most comprehensive streaming dataset yet, and there is, quite simply, nothing else like it out there. Knowing the size of streaming revenues, or the global subscriber counts of music services is useful, but it isn’t enough. Nor even, is knowing country level streaming revenue figures. So, we built a global market shares model that breaks out subscription revenues (trade and retail), subscribers, and subscription market shares for more than 30 music services at country level, across 30 countries and regions. You want to know how much subscription revenue Spotify is generating in Canada? How many subscribers Apple Music has in Germany? How much subscription revenue QQ Music is generating China? This is the report for you. Here are some highlights:

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  • At the end of 2016 there were 132.6 million music subscribers, up from 76.8 million in 2015
  • In Q4 2016 Spotify’s subscriber market share was 35% and it had $2,766 million in retail revenue
  • Apple Music was second with 21 million subscribers at the end of 2016, a 15.6% market share and it had $912 million in retail revenue
  • In 2016 Apple was the largest driver of digital music revenue across Apple Music and iTunes
  • The US is the largest music subscription market, which Spotify leads with 38% subscriber market share
  • The UK is Europe’s largest streaming market, which Spotify also leads
  • China’s subscriber base is the second largest globally, but it ranks just 13th in revenue terms
  • Japan is the world’s third largest subscription market, in which Amazon has the largest subscriber market share
  • Brazil is Latin America’s largest music subscription market

The report contains 23 pages and 13 charts with full country detail as well as audience engagement metrics. The dataset includes four worksheets and a comprehensive methodology statement.

Streaming Services Market Shares is available right now to MIDiA premium subscribers. If you would like to learn more about how to access MIDiA’s analysis and data, email Stephen@midiaresearch.com.

The report and data is also available as a standalone purchase on MIDiA’s report store as part of our ‘Streaming Music Metrics Bundle’. This bundle additionally includes MIDiA’s ‘State of The Streaming Nation 2.1’. This is our mid-year 2017 update to the exhaustive assessment of the streaming music market first published in May. It includes data on revenue, forecasts, consumer attitudes and behaviour, YouTube, app usage and audience trends.

Examples of country graphics (data labels removed in this preview)

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Spotify, Netflix And Instagram Make Gains In Q2 2017

Since Q4 2016 MIDiA Research has been fielding a quarterly tracker survey across the US, UK, Canada and Australia to build a proprietary dataset that provides a unique insight into how digital consumer trends are evolving quarter-upon-quarter. Through the tracker we monitor weekly active usage of apps for streaming music, streaming video, games, social and messaging. We also measure the shifts in key consumer behaviours, such as curated playlist listening, binge watching and subscriptions, in each of these sectors each quarter. We have structured the data so that clients can explore each app and behaviour by demographics, and, crucially, users can examine how much each app overlaps with others and with all the 40 different behaviours we track. We recently published a report for MIDiA’s paid subscribers analysing key trends across the first three quarters of our tracker. Here are some of key insights from the report. To find out more about how to get access to MIDiA’s Quarterly Trends report, email stephen@midiaresearch.com.

The leading apps in each of the categories tracked are largely consistent across all of the countries surveyed and they are also the big names that are familiar to all (see figure above). However, where things get interesting is in a) the variations in penetration across countries and b) how usage has evolved over successive quarters. For example:

quarterly trends midia figure 1

  • Messaging apps on the rise: Weekly Facebook usage was up slightly in the US between Q4 2016 and Q2 2017, but down in the UK. Over the same period WhatsApp was flat in the US but up slightly, along with Instagram, in the UK. WhatsApp penetration stood at just 11% in the US in Q2 2017 but 33% in the UK, while penetration in Australia and Canada laid in the middle of those two points.
  • Netflix growing but not in the UK: YouTube is still the standout video destination in terms of weekly usage across all the markets tracked. However, growth has slowed in these markets, with penetration going down slightly over the three quarters. YouTube’s loss is Netflix’s gain, with the streaming TV platform’s usage increasing each quarter. Though, again, there is an intriguing country level exception: Netflix is growing everywhere except the UK where weekly usage was flat over the period.

top streaming music apps in q2 2017, spotify, youtube, apple music, soundcloud, amazon, musical.ly

YouTube is the world’s leading streaming music app and this is true of the larger, mature markets. The continual breaking of YouTube music streaming records by the likes of Shakira and Luis Fonsi point to a renaissance in YouTube as a music streaming platform. However, the origin of those artists point to the location of YouTube’s music momentum: Latin America. Meanwhile, across the US, UK, Canada and Australia, weekly usage of YouTube as a music app was flat, and down actually in Australia. Most of the music apps we tracked had a dip in Q1 2017 but in the main held ranking and overall usage. Deezer saw a small rise while Soundcloud fell slightly. Spotify was the big winner, gaining penetration to close the gap on YouTube, and becoming the leading standalone music app. In the UK, Spotify surpassed YouTube for music among 16-19 year olds, hinting at a strong future for Spotify among Gen Z. Talking of Gen Z, lip synching apps Musical.ly and Dubsmash maintained momentum across the period, something other music messaging apps have previously failed to do this late on in their lives. These sort of apps, though niche in scale, point to what Gen Z want from their social music experiences.

These are just some of the very high-level trends, and there is much more in the report itself. If you are a MIDiA subscription client you can access the report and data right away here. If you are not yet a client and would like to learn more about how to get the report and the other benefits of being a MIDiA client email Stephen@midiaresearch.com.

Amazon Is Now The 3rd Biggest Music Subscription Service

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

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

subscriber market share

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

The CD Factor

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

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

How Soundcloud Could Transform Deezer’s Market Narrative

deezer soundcloud

News has emerged of Deezer being a potential buyer of troubled Soundcloud. This follows on from Spotify’s prolonged but ultimately abortive courting last year. Soundcloud was once a streaming powerhouse, with 175 million Monthly Active Users reported in October 2014. Though that number is still widely cited whenever Soundcloud is mentioned in the media, in truth its user base is now much smaller. Spotify, which now has around 150 million MAUs has a Weekly Active User penetration rate of 16% while Soundcloud’s WAU rate is just 6%. With the caveat that multiple additional variables impact WAU vs MAU rates, this would imply that Soundcloud’s MAU number is now closer to 70 million. Despite this shift in its public narrative, Soundcloud remains a uniquely valuable asset in the streaming landscape, one that would give another streaming service a distinct competitive advantage. Here’s why.

A Streaming Service Unlike Any Other (Except YouTube That Is)

Soundcloud first rose to prominence as a platform for artists before it rocketed into the stratosphere as a consumer destination with its new VC-powered mission statement ‘to be the YouTube of audio’. The legacy of its unique starting point is that Soundcloud:

  • Has a catalogue unlike any other streaming service, except YouTube (and to a lesser extent, Mixcloud)
  • Gives artists a direct connection with fans unlike standard streaming services
  • Gives up and coming artists a global platform for reaching fans with no intermediary

That unique combination of assets makes Soundcloud a highly valuable commodity despite its diminished user base and similarly reduced valuation (now said to be around $250 million from a high of $1 billion). Soundcloud has two crucial attributes that will enrich any streaming service:

  • A service tailor-made for Gen Z (ie those consumers currently aged 19 or under)
  • A crowd sourced platform for artist discovery

Soundcloud Is Built For The Era Of Mass Customization

As DJ Spooky put it:

“Artists no longer work in the bub­ble of a record­ing stu­dio. The stu­dio is the net­work.” … “The 20th cen­tury was the era of mass pro­duc­tion. The 21st cen­tury is the era of mass cus­tomiza­tion…”

Artist creativity is no longer a creative full stop, we are now in a phase of Agile Music. Even though the number of people that upload music is small (7% of consumers upload music to Soundcloud or YouTube, of which half upload their own music) their impact on the broader market is multiplied many times over as they provide the music others listen to. But even more importantly, the blurring of the line between audience and creator is the fuel in the engine of Gen Z experiences such as Snapchat and Instagram. Other than lip syncing apps like Musical.ly and Dubsmash, Soundcloud and YouTube are pretty much all the music business has in this space. That, coupled with a highly shareable, highly social UI makes Soundcloud tailor-made for Gen Z. The importance to the segment is clear: among 16-19 year olds, Soundcloud penetration is higher than Apple Music, Amazon Prime Music, Tidal and Deezer, with only Spotify boasting higher penetration for audio services.

Crowd Sourced Discovery

The other key asset Soundcloud brings is the bridge it provides between fans and artists. A host of diverse services like Tunecore, BandLab, Bandcamp and Reverb Nation provide an unprecedented range of tools to up-and-coming artists. But Soundcloud (along with YouTube) is still the only place where artists can reach such a large audience directly, without an intermediary. Layer on its massively social functionality and discovery algorithms and you have an unrivalled audio platform for new artist discovery.

Soundcloud Needs An Ecosystem

Unfortunately for Soundcloud, it has found it impossible to effectively monetize these assets (and aping Spotify’s freemium model has done little to move the dial). What Soundcloud needs is an ecosystem into which it can slot, bringing all of the great functionality but relying on another part of the ecosystem to do the monetization. Slotting Soundcloud into Deezer, Spotify or even Apple Music would create an entirely new layer in each of those propositions and would massively enhance market positioning.

It would also enable the service to start behaving more like a label, identifying and testing artists before moving them up into the main service. If done by Spotify or Apple Music, this would look highly disruptive to labels as it really would be a precursor to becoming a next-gen label. But for Deezer, the story is a little different. As part of the Access Industry potfolio, Deezer sits alongside talent management agency First Access Entertainment, live discovery platform Songkick and, last but most certainly not least, Warner Music. By acquiring Soundcloud, Access Industries would be rounding out the most complete Full Stack Music Company in the business.

YouTube Is Not For Sale But Soundcloud Is

YouTube might do most of what Soundcloud does, and at much larger scale, but Soundcloud is up for sale and YouTube is not. Right now, Soundcloud represents the best opportunity in the marketplace for an audio streaming service to make up the ground in user experience innovation that the streaming market lost over the last few years in comparison to Gen Z apps. And with Deezer at the front of the queue, the French streaming service could be about to transform its market narrative in an instant.

 

Who’s Leading The Streaming Pack?

At MIDiA Research we are currently in the final stages of producing the update to our annual landmark report: The State Of The Streaming Nation, a report which compiles every streaming market data point you could possibly need.

In advance of its release in June we want to give you a sneak peak into a couple of the key areas of focus: streaming app usage and major label streaming revenue.

music apps slide

Subscriber numbers only tell part of the streaming story. They are solid indicators of commercial success, but can often obscure how well a service is doing in terms of engaging its user base. That’s why we track the main music services’ active user bases every quarter. But rather than tracking Monthly Active Users (MAUs), we track Weekly Active Users (WAUs). The MAU metric is past its sell by date. In today’s always on, increasingly mobile digital landscape, doing something just once a month more resembles inactivity rather than activity. The bar needs raising higher. Companies like Snapchat, Facebook and Supercell measure their active user bases in terms of Weekly Active Users (WAUs) and Daily Active Users (DAUs). It is time for streaming services to step up to the plate and employ WAU as the benchmark.

Using this approach, YouTube and Spotify emerge as the leading services with 25.1% and 16.3% WAU penetration respectively. However, at the other end of the spectrum, Deezer swaps its top half of the table subscriber count ranking for the bottom ranking for WAUs with just 2.3%. Google Play Music All Access does not fare much better on 5.5% and even this likely reflects survey respondent over-reporting for what has proven to be a lacklustre effort from the search giant.

Streaming music finally returned recorded music revenue to sizeable growth in 2016, driving the year-on-year growth of 6%, increasing revenues by $0.9 billion. Label streaming revenue was up $1.6 billion, finally offsetting the impact of declining revenue from the legacy formats of the CD and downloads.

label streaming revenues midia

The growth continued in Q1 2017, albeit at a slightly slower rate. Among the major labels, streaming revenue grew by 35% to reach $1.1 billion in Q1 2017, up from $0.8 billion in Q1 2016. The major labels respective share of cumulative revenue in streaming largely reflects that of total revenue. Streaming was the lynchpin of 2016’s growth and will be even more important in 2017.

Streaming represented 33% of major label revenue in 2016. That share rose to 42in Q1 2017. Streaming is now the stand out revenue source, far outstripping physical’s $0.6 billion. Though a degree of seasonality needs to be considered, the streaming trajectory is clear. Record labels are now becoming streaming businesses. The independent label sector experienced strong streaming growth also, powered in part by licensing body Merlin. Merlin paid out $300m to its independent label members over the last 12 months, leading up to April 2017, to an increase of 800% on the $36m it paid out in 2012. The streaming business is no longer simply about the likes of Spotify and Apple Music, it is the future of the labels too.

These findings and data are just a tiny portion of the State Of The Streaming Nation II report that will additionally include data such as: streaming behaviour, YouTube, role of trials and family plans, playlist trends, average tracks streamed, subscriber numbers for all leading music services, service availability, pricing and product availability, revenue forecasts and user forecasts. The report includes data for more than 20 countries across the Americas, Europe and Asia and forecasts to 2025.

To reserve your copy email Stephen@midiaresearch.com

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

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

Streaming Has Piqued Investors’ Interest

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

100-4-million-subs

Spotify Continues To Set The Pace

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

A Brave New World?

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

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

Experience Should Be Everything In 2017

 

2017 is going to be a big year for streaming. Spotify will likely IPO, paid subscribers will pass the 100 million mark in Q1, playlists will boom. 2017 will build upon an upbeat 2016 in which the major labels saw streaming drive total revenue growth. This stirred the interest of big financial institutions, companies that had previously avoided the music industry like the plague. These institutions are now seriously assessing whether the market is finally ready to pay attention to. The implication of all of this is that if Spotify’s IPO is successful, expect a flow of investment into a new wave of streaming services. But if these new services are to have any chance of success they will need to rewrite the rules by putting context and experience at the centre of everything they do.

Why User Experience Often Ends Up On The Back Seat

Putting experience first might sound like truism. Of course, everyone puts user experience first right? Wrong. You may be hard pushed to find many companies that do not say that they put user experience first, but finding companies that genuinely walk the talk is a far harder task. Just in the same way that every tech company worth its salt will say they are innovation companies, only a minority do genuine, dial-moving, innovation. Prioritising user experience is one of those semi-ethereal concepts that may be hard to argue against in principle, but that is much more difficult to actually build a company around. Why? Because the real world gets in the way. In the case of music services ‘the real world’ translates into (in no specific order): catering to rights holders’ requirements, investing in rolling out to new territories, paying out 81% of revenue to rights holders on a cash flow basis, spending on marketing etc.

The distinct advantage that the next generation of streaming services will have is that they will sit on the shoulders of the streaming incumbents’ innovation. Instead of having to learn how to fix stream buffering, drive compelling curation, make streaming on mobile work and define rights holder licenses for freemium, they can take the current state of play as the starting point. They are starting the race half way through and with completely fresh legs. They come into the market without the same tech priorities of the incumbents and also without any of their institutional baggage (baggage that, whether they like it or not, shapes world views and competitive vision).

Streaming Music Is Not Keeping Digital Pace

During the last 5 years, users’ digital experiences have transformed, driven by apps like Snapchat, Instagram and Musical.ly. Video has been at the heart of most of the successful apps, as has interactivity. Music services though have struggled, not only with how to make video work, but also with how to give their offerings a less 2 dimensional feel. They have lagged behind in the bigger race. For all of the undoubted innovation in discovery, recommendation, personalization and programming, the underlying streaming experience has changed remarkably little. We are still fundamentally stuck in the music-collection-as-excel-spreadsheet paradigm. Underneath it all is the same static audio file that resided on the CD and the download. Granted, there have been some major improvements in design (such as high resolution artist images, full screen layouts and strong use of white space). Now though, is the time to apply these design ethics to streaming User Interface (UI) and User Experience (UX).

Successful (non-music) apps are multidimensional, highly visual and often massively social. These are the UX and UI bars against which streaming services should benchmark themselves, not how other streaming services are doing. Of course, a key challenge is that music in not inherently a lean forward, visual experience. Most people want much of their listening time to be lean back, without interruptions. Nonetheless, Vevo and YouTube have shown us that there is massive appetite, at truly global scale, for lean forward, highly social, visual music experiences.

Fixing A Plane Mid-Flight

The streaming incumbents could all do this, but they will be at distinct disadvantage compared to potentially well-funded new entrants. It is no easy task to refit a plane mid-flight. Also, Spotify, Deezer and Napster are built on tech stacks with origins more than a decade old. All have made massive changes to those original tech stacks (Spotify in particular, shifting from a monolithic structure to a modular one) but in essence, all these companies were first built as desktop software providers in an era when Microsoft and Nokia were still technology leaders. They have adapted to become app companies but that change did not come naturally and took a huge amount of organizational discipline and resource. This next market phase will require exactly the same sort of discipline, but more effort and at a time when competition is fiercer and costs are higher.

Streaming Services Need To Know Who They Are Really Competing With

The streaming services might think that they are competing with each other but in reality they are competing in the digital economy as a whole. Their competitors are Snapchat, Instagram and Buzz Feed. Right now, music listening accounts for 36% of consumers’ digital media time but that share is under real threat. Over the course of the millennium, music has relied increasingly on growth in lean back environments and contexts. The rise of listening on the go via MP3 players and then smartphones created more time slots that music could fill, while media multitasking has been another major driver of listening. All of this works well when whatever else is going on does not require the listener to be using their ears. The rise of video is, paradoxically, creating more competition for the user’s ear. Even though we are seeing the 2nd coming of silent cinema with social video captioning, there are many more calls to action for our eyes and ears. Even a Facebook feed 24 months ago would have been something that could in the large be safely viewed in silence. Now it is full of auto playing videos, willing the user to unmute. As soon as s/he does so the music has to stop. On video-native platforms like Snapchat the view is even starker for music. Killing time in the Starbucks queue is now as likely to involve watching a viral video as it is listening to a song.

Thus streaming music has to create a user experience renaissance, not just to keep up with contemporary digital experiences but in order to ensure it does not lose any more share of digital consumers’ consumption time. This is the new problem to fix. The Spotify generation fixed buffering and mobile streaming, the Apple Music generation fixed discovery, the next generation will fix UX. Just as Apple Music and Google Play Music All Access were able to skip the first lap of the race, launching with what Spotify and co took years to develop, so the next generation of streaming services, when they come, will take all of the recent innovation playlists, curation and user data analysis as the blank canvas. Which in turn will force the incumbents to up their game fast. Until then, the streaming incumbents have an opportunity to get ahead else get left behind.