Facebook Is Finally Ready To Become A Media Company

Male Finger is Touching Facebook App on iPhone 6 ScreenFacebook beat estimates with its latest earnings but announced that ad revenues would likely slow in 2017 as the digital ad market feels the pinch of advertiser budgets lagging the shift in user behaviour. Facebook’s stock fell by 7% but it already has Plan B in motion: to become a media company. Facebook delayed this move as long as it possibly could, showing little enthusiasm for getting bogged down with content licenses while it was able to drive audience growth and engagement by piggy backing other people’s content. That strategy has run its course. Facebook is now about to start looking and behaving much more like a media company, but in doing so it will rewrite the rule book on what a media company is.

The Socially Integrated Web

Back in 2011 I published a report ‘The Socially Integrated Web: Facebook’s Content Strategy and the Battle of the Ecosystems’. You can still download the report for free here. In it I argued that Facebook was starting out on a path to become a media company, but not the sort of media company anyone would recognise:

Change is afoot in the Internet.  Facebook’s new Socially Integrated Web strategy is set to make Facebook one of the most important conduits on the web. It is pushing itself further out into content experiences in the outside web while simultaneously pulling more of them into Facebook itself. Facebook is establishing itself as a universal content dashboard – a 21st century cable company for the Internet, a 21st century portal – establishing its own content ecosystem to compete with the likes of Apple and Amazon. While traditional ecosystems are defined by hardware and paid services, Facebook’s is defined by data and user experience.

Now with ad revenues set to slow, Facebook is flicking the switch on phase 2 of this strategy. Think of it as the Socially Integrated Web 2.0.

Wall Street Doesn’t Like Mature Growth Stories In Tech

As Apple, Pandora and others have found to their cost, Wall Street likes its tech stocks to be dynamic growth stories. It doesn’t like mature growth stories – that’s what traditional company stocks are for. So what can a tech company with a mature customer base do? The answer is to switch on new user monetization strategy, with content and services the lynchpin. Apple’s new supplemental investor materials outlining iOS users’ services spend is a case in point. Monetizing audiences is the new black. This is the game Facebook is now starting to play.

How Facebook Will Become A Next Gen Media Company

Moving from curating to licensing is a subtle but crucial shift in Facebook’s role as a content distribution platform. Here are the pieces that Facebook will stitch together as it begins its transition towards become a next generation media company:

  • Games: In August Facebook announced its gaming platform Facebook Gameroom, a Steam for casual games. It followed that with the announcement it will bring Instant Games to Messenger – an extension of its messaging bot strategy. Games is a logical place for Facebook to start carving out its media company role as it has become the default home of casual PC gaming. It also wants to own a slice of the hugely lucrative mobile gaming market.
  • Filters: Snapchat and Line have created global marketplaces for stickers and filters. Facebook is set to follow suit and is now experimenting with Snapchat-like filters. Filters may not look like media assets in the traditional sense, but the whole point about next generation media businesses is that they contain next generation content assets. Filters are an early indication of how the definition of content will change over the next decade and Facebook now has a horse in that race.
  • Video: Despite the embarrassment of having over reported some of its video metrics, Facebook has quickly become a major player in the online video space, accounting for 29% of short form video views. The next step for Facebook is to start building a discovery and curation layer. When it does, expect video consumption to boom. This will be a major step towards its media company future. It will however have to build a lot of tech for rights holders and content creators. Right now, its aversion of getting tied up with policing rights means that many rights holders don’t even post content there. YouTube has a massive head start with its highly sophisticated Content ID stack. Facebook will need to follow YouTube’s lead.
  • Live Stream: Facebook has been doubling down on its live streaming, expanding its focus from user and celeb streams towards more traditional media content such as Steven Colbert’s Showtime Monologue, partnering with 50 media outlets for presidential election coverage, and eSports. eSports could be as lucrative as traditional sports within the next 10 years and the shift has already begun – Twitch accounted for more streaming video bandwidth than the Olympics.
  • Next generation TV operator: One of the most disruptive moves Facebook can make, at least from the perspective of traditional media, is to stitch together its video assets and combine them with video subscription apps like Netflix and TV channel apps like iPlayer and HBO Go to create an all-in-one video destination straddling, UGC, short form, live streaming and TV content. The rise of video apps has created a bewilderingly fragmented video landscape. Facebook can stitch it all together to become a next generation TV operator. It will face direct competition from Apple, Amazon and Alphabet if/when it does.
  • Editorial: Facebook took a lot of flak for its decision to censor, on grounds of nudity, a famous Vietnam photo showing the effects of a napalm attack on Vietnamese children. The photo had been posted by Norwegian newspaper Aftenposten and its editor-in-chief Espen Egil Hansen wrote “Editors cannot live with you, Mark, as a master editor”. Facebook eventually bowed to public pressure and reinstated the photo. While Facebook may have been wrong to censor the photo it revealed that Facebook is already a ‘master editor’ whether Facebook or traditional media like it or not. Facebook hosts such a vast amount of content that the master editor role is inescapable. Aftenposten might have editorial credibility but what about a white supremacist publication? Facebook is already an editor in chief, in short it is already a media company.
  • Music: Facebook’s recent ad for a music licensing executive got music business types all excited. But music is the content vertical Facebook probably has least to gain from switching from host to licensed service. Streaming music is a notoriously difficult business to make money in (Spotify’s gross operating margin is around 17%). Facebook needs to grow margin, not just revenue, and with all its other content options it doesn’t make sense for Facebook to loss lead with an AYCE music service when it can get a bigger return on that investment elsewhere. IF Facebook does do something in music either expect it to be a more radio-like experience for its mainstream audiences (Pandora had a gross operating margin of around 40% in 2015) or – and this is more likely – something for younger users that has music at its core but that is not a streaming service. Think something along the lines of lip synching app Musical.ly.

Facebook is a past master at business model transformation. Its co-opting of younger audience focussed messaging platforms in the face of ageing social network audiences was a best-in-class example of a company disrupting itself before someone else did. Now Facebook is set to make another major change in its strategy before it finds its core business disrupted. Media companies beware, there’s a new player in town and its betting big, real big.

How Spotify Can Become A Next Generation “Label”

Spotify on iPhoneOne of the themes my MIDiA colleague Tim Mulligan (the name’s no coincidence, he’s my brother too!) has been developing over in our online video research is that of next generation TV operators. With the traditional pay-TV model buckling under the pressure of countless streaming subscriptions services like Netflix (there are more than 50 services in the US alone) pay-TV companies have responded with countless apps of their own such as HBO Go and CBS All Access. The result for the consumer is utter confusion with a bewildering choice of apps needed to get all the good shows and sports. This creates an opportunity for the G.A.A.F. (Google, Apple, Amazon, Facebook) to stitch all these apps together and in doing so become next generation TV operators. Though the G.A.A.F. are a major force in music too, the situation is also very different. Nonetheless there is an opportunity for companies such as these to create a joined up music experience that delivers an end-to-end platform for artists and music fans alike. Right now, Spotify is best placed to fulfil this role and in doing so it could become a next generation “label”. I added the quote marks around the word “label” because the term is becoming progressively less useful, but it at least helps people contextualise the concept.

Creating The Right Wall Street Narrative

When news emerged that Spotify was in negotiations to buy Soundcloud I highlighted a number of potential benefits and risks. One thing I didn’t explore was how useful Soundcloud could be in helping Spotify build out its role as a music platform (more on that below). As I have noted before, as Spotify progresses towards an IPO it needs to construct a series of convincing narratives for Wall Street. The investor community generally looks upon the music business with, at best, extreme caution, and at worst, disdain. To put it simply, they don’t like the look of low-to-negative margin businesses that have little control over their own destinies and that are trying to sell a product that most people don’t want to buy. This is why Spotify needs to demonstrate to potential investors that it is working towards a future in which it has more control, and a path to profitability. The major label dominated, 17% gross operating margin (and –9% loss) 9.99 AYCE model does not tick any of those boxes. Spotify is not going to change any of those fundamentals significantly before it IPOs, but it can demonstrate it is working to change things.

The Role Of Labels Is As Important As Ever

At the moment Spotify is a retail channel with bells and whistles. But it is acquiring so much user data and music programming expertise that it be so much more than that. The role of record labels is always going to be needed, even if the current model is struggling to keep up. The things that record labels do best is:

  1. Discover, invest in and nurture talent
  2. Market artists

Someone is always going to play that role, and while the distribution platforms such as Spotify could, in theory at least, play that role in a wider sense, existing labels (big and small) are going to remain at the centre of the equation for the meaningful future. Although some will most likely fall by the wayside or sell up over the next few years. (Sony’s acquisition of Ministry Of Sound is an early move rather than an exception.) But what Spotify can do that incumbent labels cannot, is understand the artist and music fan story right from discovery through to consumption. More than that, it can help shape both of those in a way labels on their own cannot. Until not so recently Spotify found itself under continual criticism from artists and songwriters. Although this has not disappeared entirely it is becoming less prevalent as a) creators see progressively bigger cheques, and b) more new artists start their career in the streaming era and learn how to make careers work within it, often seeing streaming services more as audience acquisition tools rather than revenue generators.

The Balance Of Power Is Shifting Away From Recorded Music

Concert crowd.In 2000 record music represented 60% of the entire music industry, now it is less than 30%. Live is the part that has gained most, and the streaming era artist viewpoint is best encapsulated by Ed Sheeran who cites Spotify as a key driver for his successful live career, saying “[Spotify] helps me do what I want to do.” Spotify’s opportunity is to go the next step, and empower artists with the tools and connections to build all of the parts of their career from Spotify. This is what a next generation “label” will be, a platform that combines data, discovery, promotion (and revenue) with tools to help artists with live, merchandise and other parts of their career.

How Spotify Can Buy Its Way To Platform Success

To jump start its shift towards being a next-generation “label” Spotify could use its current debt raise – and post-IPO, its stock – to buy companies that it can plug into its platform. In some respects, this is the full stack music concept that Access Industries, Liberty Global and Pandora have been pursuing. Here are a few companies that could help Spotify on this path:

  • Soundcloud: arguably the biggest artist-to-fan platform on the planet, Soundcloud could form a talent discovery function for Spotify. Spotify could use its Echo Nest intelligence to identify which acts are most likely to break through and use its curated playlists to break them on Spotify. Also artist platforms like BandPage and BandLab could play a similar role.
  • Indie labels: Many indie labels will struggle with cash flow due to streaming replacing sales, which means many will be looking to sell. My money is on Spotify buying a number of decent sized indies. This will demonstrate its ability to extend its value chain footprint, and therefore margins (which is important for Wall Street). It could also ‘do a Netflix’ and use its algorithms to ensure that its owned-repertoire over performs, which helps margins even further. But more importantly, indie labels would give Spotify a vehicle for building the careers of artists discovered on Soundcloud. Also the A&R assets would be a crucial complement to its algorithms.
  • Tidal: Spotify could buy Tidal, taking advantage of Apple’s position of waiting until Tidal is effectively a distressed asset before it swoops. Though Tidal is most likely to want too much money, its roster of exclusives and its artist-centric ethos would be a valuable part of an artist-first platform strategy for Spotify.
  • Songkick: In reality Songkick is going to form part of Access’ Deezer focused full stack play. But a data-led, live music focused company (especially if ticketing and booking can play a role) would be central to Spotify driving higher margin revenues and being able to offer a 360 degree proposition to artists.
  • Musical.ly: Arguably the most exciting music innovation of the decade, Musical.ly would give Spotify the ability to appeal to the next generation of music fans. The average age of a Musical.ly user is 20, for Spotify it is 27. Spotify has to be really careful not to age with its audience and music messaging apps are a great way to tap the next generation in the same way Facebook did (average age 35) did by buying up and growing messaging apps. (e.g. Instagram’s average age is 26).
  • Pandora: A long shot perhaps, but Pandora would be a shortcut to full stack, having already acquired Ticket Fly, Next Big Sound and Rdio. If Pandora’s stock continues to tank (the last few days of recovery notwithstanding) then who knows.

In conclusion, Spotify’s future is going to be much more than being the future of music retail. With or without any of the above acquisitions, expect Spotify to lay the foundations for a bold platform strategy that has the potential to change the face of the recorded music business as we know it.

For more information on the analysis and statistics in this post check out MIDiA Research and sign up to our free weekly research digest.

Amazon: Reverse Pricing, And The Rise Of Zero UI

Amazon’s announcement of its AYCE streaming service Amazon Music Unlimited should not come as a surprise to anyone whose been keeping even half an eye on the digital music market. Amazon are the sleeping giant / dark horse (select your preferred descriptive cliché) of digital music. With 60 million Prime Memberships it has a bigger addressable base of subscribers than Spotify, and its 300 million credit card linked customer accounts surpasses most but falls well short of Apple’s 800 million. Nonetheless, Amazon is the last major force to play its streaming hand. However, what the two really interesting things about Amazon Music Unlimited are its ‘reverse pricing’ strategy and the move towards Zero UI music experiences.

Sleeping Or Coma?

Being the sleeping giant of a space can work both ways. It normally implies major resources, a large legacy audience waiting to be tapped, and years of brand equity and trust. Amazon certainly ticks all those boxes, and some. But it can also mean that you’ve left it too late, allowing new entrants steal away your customers with new product offerings. HMV, Tower Records and Fnac were all sleeping giants but they all moved too late and too cautiously to be able to prevent Amazon, and then Apple, and then Spotify from stealing their customers. Things should though, be different for Amazon and streaming. Although streaming is growing fast we are still short of 100 million subscribers globally and in most markets subscriber penetration is below 10%. Even more importantly, the majority of adoption is being driven by music aficionados (those consumers that spend above average time and money with music). The next opportunity is the engaged end of the mainstream. This is where Amazon plays best.

Targeting The Mainstream Music Fan  

Amazon’s streaming strategy to date has revolved around a limited catalogue, curated streaming service bundled into Amazon Prime. Although it has struggled for visibility by being 3rd in the Prime pecking order (behind free shipping and video) it nonetheless deserves much credit for genuinely trying to do something different in the increasingly homogenous streaming marketplace. It is a lean back, curated experience for the music fan that is neither passive nor aficionado. This group is nearly double the size of the high spender group (see our MIDiA subscriber reports on music segmentation for much more detail). What makes this group even more interesting is that none of the other big streaming services are going after it. Why? Because they spend less than $10 a month.

So on the surface Amazon’s new $7.99 is a smart move, pushing a price point into the market that unlocks the next tier of users. The move is less radical than it first appears though, as this price is only available for Amazon Prime subscribers (all others have to pay $9.99). Also Spotify and Deezer’s aggressive price discounting ($1 for 3 months) have both created effective price deflation. That aside, there is however no doubt that Amazon’s $7.99 price point will have a major impact on consumer perceptions of pricing and will in the longer run help bring the main $9.99 price point down to $7.99 (something Apple tried and failed to do when it launched Apple Music).

Amazon’s Reverse Pricing Strategy

But Amazon’s pricing strategy is way smarter than just that, here’s why. Note the name of the service: Amazon Music Unlimited. Not Amazon Music. It echoes Google’s Google Play Music All Access. Each service’s naming convention ensures that it does not give the impression of being the core music offering for each company. In Amazon’s case this is its music sales business (CDs and downloads) and its pre-existing Prime bundled streaming service. The great thing about having a $7.99 / $9.99 product in the market is that it suddenly creates very clear perceived monetary value for its Prime-bundled service. How could consumers understand the value of something that didn’t have a price point anywhere? Now it is abundantly clear that it is $7.99 / $9.99 worth of value. This is Amazon’s Reverse Pricing Strategy: price a decoy product high to make a core product appeal more valuable. Now, a seasoned music exec might argue, ‘ah, yes, but it’s not unlimited on demand, so it’s not worth that’. But if an Amazon user gets full satisfaction from a curated, limited catalogue streaming service then the AYCE distinction doesn’t matter. It’s like telling some one that unless they eat until they are sick at an all you can eat buffet that they are not getting their money’s worth. Let’s just hope that Amazon’s reverse pricing strategy is not accidental…

Music’s Zero UI Era

Finally, onto Alexa and Amazon Echo. For just $3.99 a month Echo owners can get the full Amazon Music Unlimited service, controlling the entire experience via the Alexa voice controlled assistant. Although initially it will prove challenging to do anything other than the more rudimentary elements of using the service with the Echo, voice control is going to come of age over the next five years. Three of the big four tech companies have a voice play (Apple has Siri, Alphabet has Google Assistant and Amazon has Alexa). Also Microsoft has Cortana. Voice will play an increasingly important role in our digital lives and will help move smartphones towards post-app experiences, with app functionality increasingly built into the OS of devices and called upon via voice.

Amazon has pushed the dial for music and voice, it might even have got a little ahead of itself. But more and more of music consumption will be voice and gesture driven and Amazon is setting the pace for the voice side of the ‘Zero UI’ equation. To be clear, Zero UI does not mean Zero functionality nor Zero UX. In fact, functionality has to be even better in a Zero UI context, as it has to be able to deliver user benefits without visual reference points. But what it does mean, is that there is less friction between the listener and the music. The music becomes the experience.

Regardless of whether this ‘sleeping giant’ has timed its entry into the AYCE market right or not, its lasting legacy could well be making the first truly bold step towards music’s Zero UI era.

Have Spotify and Apple Music Just Won The Streaming Wars?

Spotify has just delivered 2 landmark data points: 40 million subscribers and $5 billion paid to rights holders to date. Although the 3 million added in Q3 was down on the 7 million added in Q2 (boosted by a summer pricing promo) there is no escaping the fact that Spotify’s momentum has accelerated rather than declined since the emergence of Apple Music. 2016 is proving to be Spotify’s year. The question is how well the rest of the market is performing beyond the 2 market leaders?

The streaming music market as a whole is experiencing unprecedented growth, with the major labels collectively reporting a 52% increase in streaming revenue in Q2 2016 compared to the same period 12 months ago. Given that total streaming revenues (including YouTube etc. but not Pandora) grew by 44% in 2015 (according to the IFPI) the picture that is emerging is one of, at worst, sustained growth, at best, accelerating growth.

Although the major label numbers have to be interpreted with caution due to factors such as Minimum Revenue Guarantees (MRGs) – see my previous post for much more detail on this – the headline trend is growth. However, headline growth is not necessarily a reflection of how most of the market is actually performing. In fact, a forensic examination of these numbers cross referenced against reported Apple Music and Spotify numbers reveals that the outlook for the rest of the pack is very different indeed.

streaming-market-share-q2-16

At the end of 2015 there were 67.5 million subscribers, by the end of June 2016 that had increased to 83.2 million – a 23% increase from the end of 2015 and a 63% increase on Q2 2015. Spotify’s subscriber count for Q2 2016 was 37 million (including super trialists) while Apple Music was just under 16 million. This gives them a combined market share of 56%, which in itself is not particularly surprising. However, when we look at what has happened to the rest of the pack that things start to get really interesting…

The Rest Of The Pack Is Getting Left Behind

By end Q2 2015 Spotify had 20 million subscribers and Apple Music none. This meant that the rest had 31 million between them. By Q2 2016 this ‘remainder’ had shrunk to 30.5 million. Among this chasing pack there is a diverse mix of stories, with some services showing solid growth, some losing lots of paid subscribers and some disappearing all together. Meanwhile Spotify and Apple Music added 32.7 million to the global subscriber base. Thus over the same 12 month period these two players combined, became bigger then the entire rest of the market in subscriber terms with a 63% combined market share. An interesting side note: Tidal’s reported revenues of $47 million in 2015 mean that it can’t have had more than around 800,000 commercially active subscribers by year end, which means that the reported and ‘implied’ 4.2 million current subscriber count is probably closer to half that.

Streaming revenue followed a similar trend with Apple and Spotify dominating and the rest falling slightly (by 1 percentage point year on year). Spotify paid around $1.6 billion in royalties in 2015 and a cumulative $6 billion by September 2016, implying about $1.1 billion in 2016 already. The amount that Spotify paid to record labels in Q2 was somewhere between $479 million and $622 million, depending on when and how Spotify paid for those 7 million new super trialists it acquired that quarter. Towards the lower end of that range is probably the safer bet. Apple by comparison paid around $220 million. And as with subscriber numbers, the rest of the pack lost revenue.

It’s A 2 Horse Race

When Apple launched Apple Music some less informed observers suggested that it was too late to the party and that there was only room for one big player. The numbers from Q2 2016 show that Apple was far from too late (fashionably late perhaps) and that the rather than being a winner takes all scenario, the streaming market is a 2 horse race. Unfortunately for the rest of the pack it does look like there is only space for 2 leading global players, with Apple clearly having played a key role in knocking Deezer out of 2nd place and racing on ahead.

Still A Place For Regional Leaders

This does not mean that there is not space for other players, there is. Especially regional leaders like QQ Music, KKBox, Anghami and MelOn. But the consumer marketplace only has so much appetite for global scale $9.99 AYCE services. Which is why pricing and product innovation are so crucial if the recorded music business wants a vibrant streaming sector. Compare and contrast with the streaming video market where there is immense innovation with niche services and a diverse range of price points. Music streaming needs the same approach. Tidal may have (very successfully) differentiated on brand and content but it remains fundamentally an also-ran, $9.99 AYCE service. As things stand, the only really serious attempt to play by different rules is Amazon’s steadily emerging streaming strategy. Expect that dark horse to make up ground by playing by different rules. Perhaps even Pandora may be able to break the mould too.

But it is only through differentiated strategies that serious inroads can be made and unless pricing and product innovation occurs (and the labels and publishers need to enable it) expect the streaming race to continue to be a tale of 2 horses.

What Frank Ocean’s Bombastic Blond Moment Tells Us About The Future Of Artists And Labels

When frank-ocean-blond-compressed-0933daea-f052-40e5-85a4-35e07dac73dfFrank Ocean’s latest album ‘Blond’ dropped, it did so like a nuclear bomb, sending shockwaves throughout the music industry. In one of the audacious release strategies of recent years Ocean and his team at 360 fulfilled the final album contractual commitment to Universal Music by ushering his breaking-the-mold visual album ‘Endless’ onto Apple Music.  Featuring collaborations from the likes of Sampha and James Blake and set as a loose soundtrack to art house visuals, ‘Endless’ looked like the sort of digitally native, creative masterstroke that would win plaudits and awards in equal measure. But no sooner had Universal executives started daydreaming about Grammys then along came what turned out to be the ‘actual’ album ‘Blonde’, self released by Ocean (Universal contractual commitments now of course conveniently fulfilled) and, for now at least, exclusively available on Apple Music. You can just imagine seeing the blood drain from (Universal CEO) Lucian Grainge’s face as the full magnitude of what had just happened came into focus. In truth ‘audacious’ doesn’t even come close to explaining what Ocean pulled off, but where it gets really interesting is what this means for the future of artist careers.

Artist-Label Relationships Are Changing

Quickly sensing the potential implications, Grainge swiftly sent out a memo to Universal staff outlawing streaming exclusives…though voices from within Universal suggest that this diktat had been in the works for some time . A cynic might even argue that it was politically useful for Universal to be seen to be taking a strong stand ahead of the impending Vivendi earnings call. As the ever excellent Tim Ingham points out, in practice Universal could put a streaming exclusives moratorium in place and still have a good number of its front line artists put out streaming exclusives. This is because many of the deals these artists have are not traditional label deals where Universal owns all the rights. And that itself is as telling as Ocean’s bombastic blond moment. Not so much that Universal is probably the major with the highest amount of its revenue accounted for by licensed and distributed works, but that any label’s roster is now a complex and diverse mix of deal types. Artists are more empowered than ever before, and thanks to the innovation of label services companies and next generation music companies like Kobalt, labels have been forced to steal the disruptors’ clothing in order to remain competitive.

Streaming Exclusives Represent Another Option For Artists

Just as labels had started to successfully co-opt the label services marketplace by launching their own – e.g. Universal’s Caroline – or by buying up the competition – e.g. Sony’s acquisition of Essential Music & Marketing – along come streaming services giving artists another non-label route to market. In truth, the threat has remained largely unrealised. Exclusives on Tidal have most often proved to be laced with caveats and get out clauses (e.g. Beyonce’s ‘Lemonade’ arriving on iTunes 24 hours after landing ‘exclusively’ on Tidal). Chance The Rapper’s (in name only) mixtape ‘Colouring Book’ and Ocean’s ‘Blond’ are exceptions rather than the rule. So all that’s about to change now right? Not necessarily…

Album Releases Require More Time Than Apple Probably Has

As anyone who works in a label will tell you, releasing an album is typically a long, carefully planned process with many moving parts. It’s not something you do in a couple of weeks (Ocean started building the hype and expectation for his latest opus a year ago). If, for example, Apple was going to start doing exclusives routinely, even if it just did 20, that’s still a new exclusive to push every 2 weeks. That might work, at a stretch, for music service retailing promotional pushes but is far short of a fully fledged album release cycle. Which means that even for just 20 exclusives Apple would have an intricate mesh of overlapping release campaigns. This is something that labels do with their eyes closed but would it require new organizational disciplines for Apple. Not impossible, but not wholly likely either.

In practice, exclusives are likely to be limited to being the crown jewels of streaming services, their most valuable players, creative playmakers if you like. Even for Netflix, that pioneering exemplar of the streaming originals strategy, only spends 15% of its $3 billion content budget on originals and probably won’t break 20% even by 2020. What Apple and Netflix have in common is that they are using exclusives as a customer acquisition strategy, achieving their aims by making a big noise about each one. But if you’re releasing exclusives every week or two the shine soon wears off. And suddenly the return on investment diminishes.

Streaming Exclusives Are Unlikely To Turn Into A Flood

None of this means that we won’t see more artists striking streaming exclusives. We will, regardless of what labels may actually want to happen. And most of those will probably be on Apple – the service with bottomless pits masquerading as pockets. But the trickle will not turn into a flood, a fast flowing stream perhaps (see what I did there) but not a torrent.

Although they might not realise it yet, Kobalt might find themselves hurting more than the majors from this latest twist in the Exclusives Wars. Kobalt has probably done more than any single other music company to drive change in the traditional music industry in the last 5 years, showing artists and songwriters that there is another way of doing things. But Frank Ocean has just shown that there is now new another option for established artists looking for options at the end of a label deal.

Most importantly of all though, is that streaming exclusives (and indeed label services deals) work best when an artist has already established a brand and an audience. Most often that means after an artist has had a record label recording career. Apple cannot be relied upon to build anything more than a handful of artist brands. One of the founding myths of the web was that it was going to do away with labels and other traditional ‘gatekeepers’. Now, decades later, labels still account for the vast, vast, vast majority of music listening. Make no mistake, a momentous value chain shift is taking place, with more power and autonomy shifting to the creators, but that is a long journey and ‘Blond’ is but one part of this much bigger shift.

Understanding ’15’: How Record Labels And Artists Can Fix Their YouTube Woes

The artist-and-labels-versus-YouTube crisis is going to run and run, even if some form of settlement is actually reached…the divisions and ill feeling run too deep to be fixed solely by a commercial deal. What’s more, a deal with better rates won’t even fix the underlying commercial problems. Music videos under perform on YouTube because they don’t fit YouTube in 2016 in the way they did YouTube in 2010. The 4 minute pop video was a product of the MTV broadcast era and still worked well enough when online video was all about short clips. But the world has moved on, as has short form video (in its new homes Snapchat, Musical.ly and Vine). Short videos are no longer the beating heart of YouTube viewing and quite simply they don’t make the money anymore. This is why music videos represent 30% of YouTube plays but just 12% of YouTube time. If record labels, publishers, performers and songwriters want to make YouTube pay, they need to learn how to play by the new rules. And to do that they need work out what to do with ‘15’.

youtube monetization

There Is A Lot More To YouTube Revenue Than Some Would Have You Think

The recorded music industry gets radio, and it is beginning to get streaming. Both are all about plays. Each play has, or should have, an intrinsic value. They are models with some degree of predictability. But YouTube does not work that way, which is why the whole per stream comparison thing just does not add up. In MIDiA’s latest report ‘The State Of The YouTube Music Economy’ we revealed that YouTube’s effective per stream rates (that is rights holder revenue divided by streams) halved from $0.0020 in 2014 to $0.0010 in 2015.

Sounds terrible right? And make no mistake, there is no way to spin it into a good news story. However, it didn’t fall because of some nefarious Google ploy. It fell because of many complex reasons (all of which we explore in the report) but the 2 biggest macro causes were:

  • YouTube pays out as a share of ad revenue (55%) not on a per stream basis. So when the value of its ad inventory goes down (due to factors such as more views coming from emerging markets with weaker ad markets) the revenue per stream goes down too. This is something the labels can do little about, though an increased revenue share will soften the blow as YouTube globalizes.
  • YouTube serves its in-stream video ads (the most value ad format) on a time-spent basis, not on a per-video basis. Our research found that the average number of video ads per hour of viewing comes out at about 4. That means if you have 15 minute videos (like many YouTubers do) you will get a video ad every play. But if you have 3 or 4 minute pop videos you may only get 1 video ad for every 4 or 5 plays. Which means 4 or 5 times less video ad revenue. In fact, our research revealed that just 26% of music video views have video ads. This is the underlying issue the industry needs to address, and unlike global ad market dynamics, this is something it can indeed fix.

The 15 Scale

This is where the magic number 15 comes in. Right now music video sits in the same 3-4 minute slot it has done so ever since MTV said it wanted videos that length. Yet video consumption is now polarized between the 15 second clip on lip synch apps like Musical.ly and Dubsmash and 15 minute YouTuber clips. Falling in between these two ends is revenue no-mans land. As I have written about before, labels and publishers need to figure out how to harness the 15 second clip as an entirely new creative construct and shake off any old world concepts that this is actually anything about marketing and discovery. It is consumption, plain and simple…it just happens to look unlike anything we’ve seen before.

At the opposite end of the 15 scale labels and artists need to start thinking about what 15 minute formats they can make. Think of this as a blank canvas – the possibilities are limitless. For example:

  • 3 track ‘EP’ videos interspersed with artist narrative and reportage coverage
  • Live sessions (recorded by, and uploaded by labels so they get revenue as well as publishers)
  • Mini-documentaries such as ‘the making of’s
  • On-the-road features

15 Minutes Does Not Have To Break The Bank

And before you cry out ‘but this stuff will cost so much more to make’, it doesn’t have to if more is made out of current assets and processes. For example, ensure that one of the support crew has a handheld camera to film some shoulder footage for reportage. The whole thing about YouTube is that it doesn’t have to be super high production quality, in fact the stuff that does best patently isn’t. YouTube videos that work best are those that are an antidote to the old world of inaccessible glamour. If you really want to do things on the cheap, simply splice three music videos together into a single long form video (e.g. tag 2 older tracks onto the new single). Doing so will nearly treble the video ad income.

And before you think this isn’t what audiences want, ask Apple about ‘The 1989 World Tour LIVE’ and Tidal about ‘Lemonade’.

And (yes another ‘and’) if you can’t get your head around the inescapable need for a completely new music video construct, just think about it this way: 15 minute videos will make you 5 times more video ad revenue. This really is a ‘no brainer’.

Back To The Future

As a final piece of evidence (not that it is needed), cast your mind all the way back to 1982, to Michael Jackson’s landmark video ‘Thriller’. A 13:42 video that is widely recognized as one of the all time music video greats that has also racked up 330 million views on Vevo. So you could say the case for 15 minute video was already made a quarter of a century ago (thanks to MIDiA’s Paid Content Analyst Zach Fuller for pointing that one out).

The 4 minute music video is dead, long live the 15 minute music video.

For more detail on our ‘State Of The YouTube Music Economy’ report check out our blog.

You can also buy the 25 page report with 8 page data set here.

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.

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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.

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.

 

 

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.

 

What Other Technology Sector Thinks That It Has Arrived At Its Destination?

The internet, smartphones, app stores, open source software, all have accelerated innovation at a rate that makes Moore’s law look positively pedestrian. What defines digital technology markets is disruptive innovation, the constant challenging of accepted wisdoms and of established practices. Nothing stays still long enough to give stakeholders the luxury of feeling complacent and to fall back on slower moving sustaining innovations. These are the the realities of consumer technology, unless you happen to be in the digital music business, in which case the prevailing attitude is ‘we have reached our destination’, we have identified the model that is our future and we’re sticking with it. That approach worked fine in the old days of innovation, when Consumer Electronics (CE) companies used to spend years hashing out market standards and then competing in a gentlemanly fashion on implementation. That approach brought us VHS, CDs, DVDs Compact Cassettes etc. Everyone got a bite of the cherry and technologies stuck around for decades. Now they stick around for years, at best. So why is the music industry trying to insist on the $9.99 subscription being the new CD, a 20th century approach to standards in the dramatically different 21st century? And more crucially, why is it able to?

Consumers Are Predictable Creatures

Consumers adopt technology in highly predictable ways. First come the early adopters, the tech aficionados who are always the first to try out new apps, services and devices, next come the early followers who supercharge growth, then the mainstream who bring scale of adoption and finally the laggards who adopt at a more measured pace and slow growth. The result is an ‘S-Curve’ of adoption, with slow growth followed by fast growth, followed by slow growth again at the top of the curve. Music services are no exception, usually starting slowly before accelerating and then slowing again when they have saturated their addressable audience. Exactly where growth peaks varies by service and is determined by the type of service, but the same shape of adoption curve plays out nonetheless, most of the time.

music service adoption

Spotify’s 30 Million Might Just Be The Start Of Maturation

Spotify yesterday announced it had it 30 million paying subscribers. A true digital music landmark. But in the context of its long term growth curve it looks like it might be the start of the end of rapid growth. (It is worth noting that the accelerated growth of the last 16 months has been supercharged by the $1-for-3-months promos so the maturation point may have otherwise been reached earlier or it may have happened at the same time but with a lower number). This isn’t however, some failing of Spotify, rather an illustration that the $9.99 stand alone subscription model is nearing maturity. And this is where the scarcity of innovation comes into play. The major record labels, some more than others, have become increasingly unwilling to threaten the $9.99 status quo. Services that don’t fit the mould either find it impossible to get licenses for new models or they are forced to adhere to the $9.99 cookie cutter subscription model (Soundcloud anyone?).

Video Sets The Standard For Streaming Innovation

Compare and contrast with the streaming video subscription market. Alongside the mainstream Netlfix, Amazon and Hulu Plus services (the Spotify and Deezer equivalents) there is a growing body of targeted niche services with diverse pricing. These include: Hayu (a reality TV, $5.99), MUBI (cult movies, $4.99), Disney Life (Disney shows and movies, £9.99), Twitch (live streamed gaming, $4.99), YouTube Red (YouTuber originals, $10), Vessel (short form originals, $3) Comic-Con HQ (Comic Con content, pricing tbd).

Of course music is drastically different from TV and it is far easier to have a video service with just one slice of all available content than it is for music. Nonetheless, in the video sector there is no prevailing attitude of not wanting to disrupt the dominant $7.99 broad catalogue model. TV and video industry stakeholders are not only willing to tolerate disruptive innovation (online at least!), they understand it is crucial to drive the market forwards. So why don’t labels take a similar view? A key reason is rights concentration. Because three labels account for the majority of music rights, each has de facto veto power. Most companies that are dominant in their markets pursue smaller, sustaining innovations that improve the product but that do not threaten their businesses. So it is fully understandable that major labels have not empowered disruptive innovations that could risk turning their digital businesses upside down. It would be like turkeys voting for Christmas. And yet the growth trajectory of most leading music services shows that by sticking with sustaining innovations they are unwittingly curtailing the scale of their future growth.

Again, compare and contrast with TV where rights are far more fragmented and are becoming even more so. No single TV network or studio has the ability to stop a service in its tracks. The result is a far greater rate of innovation.

Music Subscription Services Are Compelled To Behave Like CE Companies

Thus music subscription services are forced to behave like the old CE companies, competing on the implementation of fundamentally the same product. TIDAL do exclusives and high definition, Spotify do playlist innovation and video, Apple does curation and exclusives. But when it comes down to it they are selling the same $9.99, 30 million tracks, on demand, mobile caching product to largely the same group of consumers.

Postscript: The Unusual Case Of Apple

The keen eyed among you will have noted that Apple Music’s growth curve does not fit the S-Curve model, or at least not what we can see of it yet. It certainly appears that Apple is set for a very different adoption path. There are mitigating factors. The streaming market is far more mature now than when Spotify and Deezer launched. Additionally, Apple has a unique platform and ecosystem advantage that enables it to short cut adoption rates. It can sell straight to its user base of Apple-super-fans. Selling additional products and services to its installed base of 850 million iTunes customers will be key to the next stage of Apple’s story and music will play its role in that. (Amazon is potentially another exceptional case given its ability to sell directly into its customer ecosystem and also with its focus on a more mainstream audience.)

But even Apple will eventually reach the saturation for the $9.99 product within its user base. In fact, one reading of Apple’s adoption curve is that it skipped the first stage of slow growth, has had a brief period of mid period strong growth and is now settling down for a long gradual arc of adoption that looks like an amalgamation of the final 2 stages of the S-Curve model. Whatever the path, let’s just hope that long before Apple Music hits maturity, the record labels will have woken up to the need to support an unprecedented phase of experimentation and innovation to identify all the other opportunities for premium music that exist outside of the super fan beachhead. Remember its 2016 not 1986.