How TIDAL Can Deliver On Its Promises

The continued media feeding frenzy around Jay-Z’s TIDAL demonstrates just how valuable star power is for cutting through the clutter.  What has helped sustain interest is Jay-Z’s vision for delivering better value to artists and better experiences for music fans.  It is a tall order given that TIDAL has to operate under the same basic licensing framework as all other streaming services, the nub of which is paying c. 70% of all revenues to rights holders and having no control over how much of that gets paid back to artists and songwriters.  Working within the constraints of the standard subscription model TIDAL will quite simply not be able to deliver on its aspirations.  But if TIDAL is willing to create a new model to layer on top of it, then it can do something truly transformational.  Here’s how.

The Problem With Streaming

First we need to look at the issue TIDAL has to fix.  The problem with streaming services is that they inadvertently weaken music fans relationships with musical works.  In the pre-streaming, music sales model consumers paid for an album or single and matched their cash investment with an investment of time in listening to it.  The alternative was to listen to their older music collection or the radio.  So even duff albums not only got money spent on them, they got listened to a few times by their buyers.  And even if they didn’t get listened to even once the artist still got paid.   So a portion of music sales revenue had no relationship to the quality of the music.  Streaming changed that, effectively making the music itself more accountable to its audience.

With streaming, music fans don’t need to waste time listening to music they don’t like upon first listen.  They can bypass the duff.  They also tend to listen less to any single piece of music in general because they have so much other music to choose from at no additional cost.  Artists earning a 150th per stream of what they earn from a download is thus only part of the problem.  Most of the time their mainstream fans (and by that I mean not their top 10% of super fans) aren’t listening to them enough.

Scale Will Come, But It Will Take Time

The theory is that this will be fixed by scale, that a massive installed base of users will result in bigger listening volumes.  But it’s not that easy.  To illustrated, let’s assume people listen to albums an average of 5 times each then you need 30 times as many people to listen to generate the same income as a sale.  So until we get much bigger scale from streaming (e.g. 150m+ subscribers globally) we need to look at how to encourage music fans to concentrate their listening more on the artists they really like.  This is where TIDAL can come into play:

• Artist channels: Earlier this year I laid out a vision for artist subscriptions.  In this model subscribers pay an additional fee (say $1 or $2) to their standard streaming subscription to get access exclusive programming, content and other experiences from an artist. Subscribers choose from a selection of artist channels and subscribe individually or pay for a bundle.  Think of it like adding sports or movies to your Pay TV subscription.
• Additional content: Because subscriptions already give you access to all the music in the world (well most of it) subscribers will not be paying their extra $1 or $2 to get to the artist’s music. (Taking the music out of the core subscription and locking it into premium channels is a bad idea and doesn’t fix the artist income issue as we’ll see in a moment).  Instead fans will be paying for a mixture of additional content (live streams, interviews, acoustic sessions, photos, videos, games, curated playlists, mobile content, handwritten lyrics etc.) that will be delivered as a curated, programmed whole.  These channels will need to ascribe to the D.I.S.C. principles i.e. they music be Dynamic, Interactive, Social, Curated.  Sure each of the individual components could probably be found somewhere on the web but the real value is the entirety of the experience.
• Artist revenue share: Where this model gets really interesting is how artists get paid. If all the additional content that is delivered is outside of the standard label catalogue then TIDAL could, after some basic costs are accounted for, split the entire additional $1 or $2 subscription fee 50/50 with the artist.  Or if TIDAL is that serious about making things better for artists, they could give all of the net profits to the artist. (Label 360 deals might complicate things a bit for some artists but they will not account for large percentages). Just how songwriters would benefit is a bit more complex as many artists have multiple songwriters etc. but TIDAL could set aside a songwriter pot to be distributed based on plays of the artist’s core music.

Right now TIDAL is a music service pretty much like the others but with bold ambitions.  This is one way that TIDAL can turn worthy words into meaningful actions. There aren’t too many other ways it can do so.  And of course any of the other streaming incumbents could do this too.  The difference is that that they have had a lot of time to do it and have not done so, yet at least.

So TIDAL, come show us how it is done.  Over to you Jay-Z.

The Music Industry’s 6:1 Ratio

One of the many things that the digital revolution has done to the music industry is to create and accentuate a number of imbalances. Imbalances that will either change, become the foundations of the next era of the music business, or both. In fact there are three key areas where, coincidentally, the lesser party is 6 times smaller than the other:

• Digital music revenue share: A common refrain from songwriters and the bodies that represent them (music publishers, collection societies etc.) is that everything starts with the song. And of course it does. However it is the recorded version of the song that most people interact with most of the time, whether that be on the radio, on a CD, a download, a stream or a music video. This has helped ensure that record labels – usually the owners of the recorded work – hold the whip hand in licensing negotiations with digital music services. Labels have consequently ended up with an average of 68% of total on-demand streaming revenue and publishers / collection societies just 12%. The labels’ share is 6 times bigger. Publishers are now actively trying to rebalance the equation, often referred to as ‘seeking out a fair share’. For semi-interactive radio services like Pandora the ratio is roughly 10:1.

• Artist income: While music sales declined over the last 10 yeas, live boomed. And although there are signs the live boom may be slowing, a successful artist can now typically expect to earn as little as 9% of their total income from recorded music, compared to 57% from live. Again, a factor of 6:1. There are many complexities to the revenue split, such as the respective deals an artist is on, fixed costs etc. but these splits tend to recur. Ironically just as everything starts with the song for digital music, everything starts with the recorded work (and the song) for the live artist. The majority of an artist’s fan base will spend most of their time interacting with the recorded work of the artist rather than live. The recorded work has become the advert for live. In fact the average concert ticket of a successful frontline artist costs on average 8 times more than buying their entire back catalogue. Thus for fans the ratio is even more pronounced at 8:1.

• Free music users: The freemium wars are dominating the contemporary music industry debate. Spotify and other services that have on demand free tiers are under intense scrutiny over how these tiers may be cannibalising music sales. However YouTube’s regular free music user base is about 350 million compared to approximately 60 million free freemium service users across all freemium services. Again a ratio of 6:1. Whatever the impact freemium users may be having, it is 6 times less than YouTube.

The music industry has never been a meritocracy nor will it ever be one. So it would be fatuous to suggest equality is suddenly going to break out. However there will be something of a righting process in some areas, especially in the digital music revenue share equation. Most significantly though, these ratios are becoming the foundational dynamics of the new music industry. These are the reference points that artists, rights holders, and all other music industry stakeholders need in order to understand what their future will look like and how they can help shape it.

NOTE: This post was updated to reflect that the songwriter ratio is actually 10:1 for semi-interactive radio.  The 2:1 ratio applies to label revenue versus collection society revenue, which includes revenue for performers who are often but not always also the songwriter.

Zoe Keating’s Experience Shows Us Why YouTube’ Attitudes To Its Creators Must Change

It is easy to think of the internet as a mature medium, especially for those who were born into the internet era. However we are still at the earliest of stages. We are where radio was in the 1930’s and where TV was in the 1950’s: the first signs of the future markets are in place but the real maturation is yet to come. The greats of those early days, the Marconis and the RCAs, are now long gone but at the time they looked like they would rule forever. A similar long view should be taken to the internet. The dominant powers of the web (YouTube, Google search, Amazon, Facebook) may appear to have unassailable market leads but their time will come. Using more recent history, there was a time when AOL and MySpace looked irreplaceable. So why does all this matter to YouTube? The problem with absolute power is that it corrupts absolutely. YouTube, like those other dominant powers, has fallen victim to hubris. It is behaving like the unregulated de facto monopoly that it is. And in doing so it is taking its creators for granted. Right now that is bad for creators. Soon it may be bad for YouTube too. It Is Time For YouTube To Reassess It s Relationship With Content Creators Online video is truly coming of age. YouTube was one of the ice breakers and remains one the very biggest web destinations but the world is changing. YouTube has changed too of course, migrating skate boarding dogs, through music video to fostering a generation of YouTube stars like PewDiePie, Zoella and Smosh. But just as YouTube had to reinvent itself in the wake of the mid form revolution driven by Hulu et al so the time has come for another reinvention, but this one requires a change in business practices rather than product innovation. Most crucially YouTube needs to reassess its relationships with content creators and owners. When the first YouTube stars started to rise to prominence YouTube was almost positioned as a benefactor, giving the gift of a platform for these people to become stars. But now, a few years on, with millions of subscribers each, these stars are beginning to understand their real potential. In just the same way that a traditional TV star does not feel a debt of gratitude or a commitment to life long servitude to the TV channel that broke him or her, so YouTube stars are now beginning to reassess their options. The online video landscape though is dramatically less competitive than the TV landscape so options are limited. But where there is demand for change and no monopoly of supply of content, change will come. This is the context into which new video service Vessel has launched, offering YouTube stars cold hard cash payments and significantly bigger revenue shares, in return for giving just a few days of exclusivity. Be sure that few days window will change, but for now it is a low risk, high gain option for YouTube stars. Expect plenty more to follow Vessel’s lead. YouTube Is Abusing Its Position Of Absolute Power That should be where the story ends, well starts. But because the dominant internet companies are not subject to the same level of regulation as traditional companies they are able to abuse their power in order to try to maintain their strangle hold. YouTube found itself subject to extensive ire when it tried to foist a hugely restrictive contract on indie labels for its then forthcoming YouTube Music Key service. The indie sector was eventually able, via its licensing arm Merlin, to secure more favourable terms, but the same contract remains on the table for individual creators. Zoe Keating, an artist who sets the gold standard for DIY artists, has been a vocal advocate for YouTube channels as a revenue source. But now YouTube is trying to strong-arm her into signing what looks pretty much like that same original Music Key contract. Their demands include an effective Most Favoured Nation clause whereby anytime she uploads any music to the web she must upload it also to YouTube at exactly the same time. The contract also states a five year period and that failure to sign the contract will result in YouTube blocking both her channel and Keating’s ability (via Content ID) to get revenue from her own music uploaded without permission by others. The implications are:

• Music must always be available free on YouTube first on the web
• Artists must take a 5 year bet on streaming, even though there are massive doubts about its sustainability for artists

But it is the Content ID clause that is most nefarious. Content ID is not an added value service YouTube provides to content owners, it is the obligation of a responsible partner designed to help content creators protect their intellectual property. YouTube implemented Content ID in response to rights owners, labels in particular, who were unhappy about their content being uploaded by users without their permission. YouTube’s willingness to use Content ID as a contractual lever betrays a blatant disregard for copyright. Asymmetrical Conflict Zoe Keating is a rare talent and also a rare voice. She is willing to expose her entire digital music commercial life in a way very few artists are willing to. She is standing up to YouTube in a David and Goliath like manner but the deck is stacked against her because YouTube is able to abuse its de facto monopolistic position without any fear of regulatory intervention. If they get their way with independent music creators, expect them to take the exact same approach to other independent video creators in a bid to neuter the threat from disruptive new entrants like Vessel.  Rather than simply try to future proof itself against the emerging competition YouTube should focus on trying to be the best possible place for its creators to be to build prosperous careers. Instead it is trying to lock them in like prison inmates. Ultimately though this sort of action from YouTube reveals strategic hubris, arrogance and complacency. All of which are classic signs of an incumbent company teetering on the brink of disruption. As the Enron experience showed us, no company is too big to fail. And as my former colleague Michael Gartenberg used to say ‘cemeteries are full of irreplaceable people’.

What the Numbers Tell Us About Streaming in 2014

By the end of 2014 streaming revenues will account for $3.3 billion, up 37% from 2013. However headline market value numbers only ever tell part of the story. Just as important are the numbers on the ground that give us some sense of where the money is flowing and of the sustainability of the business models. During the last two weeks we have been fortunate to have four different sets of data that go a long way to filling in those gaps:

• Soundcloud: made a loss of €23.1 million in 2013 (an 86% increased loss ) and that’s before signing any deals with record labels
• YouTube: paid out $1 billion to rights holders via Content ID
• Spotify: turned a £2.6 million profit in 2013 with 42% y-o-y revenue growth with a 73.2% rights bill
• US music sales: track sales down 12.9%, digital albums down 11.5% in first 9 months of 2014 compared to 2013 (Nielsen SoundScan)

Each is interesting enough in isolation but it is the way that they interact and interdepend that gets really interesting:

• Sustainability: A lot is rightly made of whether the subscription business model is sustainable. Spotify has showed us that, at least in a local subsidiary, an operational profit can be turned. However that profit rate was just 2.5%, does not account for previously acquired losses and also does not account for the broader company’s cost base where many of Spotify’s other costs lie. 2.5% is a wafer thin margin that leaves little margin for error and would be wiped out in an instant with the sort of the advertising Spotify has been using in the US. Meanwhile Soundcloud have demonstrated that it is also entirely possible to post a heavy loss even without rights costs. Soundcloud is going to need every ounce of its investor money and new revenue streams when it adds a 73.2% rights cost to its bottom line (though Soundcloud is doing all it can to ensure it doesn’t have to play by those rules and instead hopes to operate under YouTube’s far more preferable rates).
• Transition: Nielsen’s US numbers should finally remove any lingering doubt about whether streaming is eating directly into download revenue. As MIDiA Research revealed last month, 23% of streamers used to buy more than an album a month but no longer do so. Streaming is converting the most valuable downloaders into subscribers and in doing so is reducing their monthly spending from $20 or $30 to $9.99. The combined effect of the perpetual decline of the CD and now of the download make it hard for streaming to turn the total market around. That won’t happen globally until 2018, though in many individual markets streaming driven growth is already here. Spotify pointed to bundles with the Times of London newspaper and mobile carrier Vodafone as key sources of growth in the UK. This sort of deal points to how subscriptions can break out of the early adopter beachhead and drive incremental ‘found’ revenue.
• The Ubiquity of Free: YouTube, Pandora, Soundcloud and Spofity free are among the largest contributors to streaming’s scale. Some business models are more proven than others – Pandora looks better placed than ever to be a central part of the long term future of radio. YouTube’s role remains controversial though. Its proudly announced $1bn payout milestone is less impressive when one considers Content ID was launched in 2007 and that this is all rights holders, not just music. So let’s say 60% was to music rights holders, over the course of seven years that averages out at $0.07 per year for each of YouTube’s current one billion monthly users. That’s a pretty small return for the globe’s biggest music service.

We are clearly still some distance away from a definitive set of evidence that can tell us exactly what streaming’s impact will be. But in many ways it is wrong to wait for that. There will never be a truly definitive argument. Instead the world will continue to change in ways that will better fit the streaming market. It is a case of streaming and the industry meeting half way. This is exactly what happened with downloads. Early fears that downloads would accelerate the demise of the CD and instigate the decline of the album were both confirmed but the music industry learned how to build a new set of businesses around these new digital realities. The same process will take place with streaming.

We are already seeing some remarkable resilience and appetite for change from artists, from DIY success stories like Zoe Keating, through veteran rockers like Iggy Pop, right up to corporate megastars like Ed Sheeran. These are as diverse a collection of artists as you could wish for but they are united in an understanding that the music industry is changing, again, and that simply bemoaning the decline in sales revenue will not achieve anything. Of course it sucks that sales revenue is falling and of course its infinitesimally easier for me to write these words than to live them. But that sort willingness to evolve to the realities of today’s rapidly changing market will set up an artist with the best chance of surviving the cull. The old adage rings truer than ever: adapt or die.

Note To Struggling Bands And Singers: Sorry But Most Of Your Fans Don’t Care

The plight of artists and songwriters grappling with download dollars transforming into streaming cents is well documented and a series of long term, sustainable solutions are needed (I wrote about some here). The debate occurs alongside an assumption that there is widespread concern for the creators’ and their livelihood. Unfortunately the general sympathy that is apparent within the echo chamber of the online press and social media does not translate to the broader population

In a recent MIDiA Research survey we asked consumers the following question:

“Some singers and bands are concerned that streaming music services like YouTube, Spotify and Deezer pay too little money back to them compared to selling music. Using a scale of 1 to 5 where 1 equals ‘do not agree at all’ and 5 equals ‘agree entirely’ indicate how much you agree with this statement: This issue concerns me enough to reconsider my music buying habits.’

Just 15% of respondents said they agreed and only four per cent strongly agree. And this is against a backdrop of 60% of consumers stating that they consider music to be worth paying for.  So willingness to pay is not the overriding issue here.

Things don’t look quite so bad when you start diving into specific segments. For example among Music Aficionados – those who spend and listen above average – the rate is 30% and among subscribers it is 34%. But even those rates are remarkably low when you consider that these are some of the very most engaged music fans and that more than 80% of them think music is worth paying for.

So what is going on? Artists and fans are closer than ever before and artists are undoubtedly finding the transition to consumption models a difficult process. To some degree there has always been some fan ambivalence. Mainstream consumers tend to think of artists as megastars who drive around in sports cars and sip champagne for breakfast. So getting the mass market to feel sympathy is not an easy sell. Even though the music world has changed from its 80’s and 90’s excess, many consumers just haven’t paid enough attention to the plight of artists to join the dots. Others conveniently turn a blind eye and use their old-world stereotypes to justify piracy to themselves.

Artists and fans have an unprecedented array of tools and services to connect them and to help build genuine engagement. But outside of their core followings, artists should not expect their wider fan bases to have any particularly strong feelings about their struggles. Even less should they expect those fans to do anything about it: 54% of consumers specifically would not change their buying behaviour.

Streaming is ramping up fast, that much is clear, but even among those consumers just 24% care enough about the plight of artists to consider changing their behaviour. As bitter a pill as it may be to swallow, artists have to accept the fact that beyond their super fans, most consumers (and three quarters of streamers) simply don’t care whether streaming is making it harder for them to build and maintain a career.

Digital Ascendency: The Future Music Forum Keynote

I recently keynoted the annual Future Music Forum in Barcelona.  These are some highlights of the keynote.  If you would like the full slide deck please email me at mark AT midia research DOT COM.

Streaming is turning years of music business accepted wisdom on its head but did not arrive unannounced, it is just one chapter in the evolution of digital music. Each of the four phases of digital music have been shaped by technologies that solved problems. Now we are entering the fourth phase, bringing meaning to the 30 million tracks Spotify et al gave us access to. This might look like a simple honing of the model but it is every bit as important as the previous three stages. 30 million tracks is a meaningless quantity of music. It would take three lifetimes to listen to every track once. There is so much choice that there is effectively no choice at all. This is the Tyranny of Choice.

But the for all the evolution, today’s digital music marketplace is an unbalanced one. We have more than 500 music services across the globe but too many of them are chasing after the same customers with weakly differentiated offerings. This wouldn’t matter so much is if the competition was focused on where the consumer scale is, but this is anything but the case. The majority of paid music services are targeting the engaged, high spending Music Aficionados who represent just 17% of all consumers.

The consequences of the imbalance in digital music strategy are also easy to see in total revenues. The last decade has been one of persistent decline in recorded music revenue and by 2018 the most likely scenario is one of stabilization rather than growth. This is because of a) the CD and b) the download.

No one has taken the demise of the CD seriously enough. It still accounts for more than half of global revenue and more than three quarters of revenue in two of the world’s biggest music markets. Yet far too many CD buyers are being left to simply stop buying entirely because they see no natural entry point into the digital services market. No one appears to be putting up a serious fight for them. Meanwhile the streaming services that have been chasing those same aficionados that Apple engaged are now busy turning that download spending into streaming spending, which ends up being, at best, revenue transition rather than growth. Consequently CDs and downloads will end up declining at almost the same rate over the next five years.

Nonetheless the imbalance remains. Part of the reason we got into this state of affairs is the music industry’s obsession with revenue metrics: chart positions, market share and ARPU. Compare and contrast with the TV industry’s focus on audiences. It is time for the music industry to start thinking in audience terms too.

When we do so we see a very different picture. Here we have the US digital music market plotted by revenue and by audience size. Subscriptions pack a big revenue punch but reach only a tiny segment of the market while YouTube has vast reach but delivers remarkably little in terms of direct revenue. Meanwhile downloads, for all their doomed future, are still by far the best combination of scale and revenue.

The issue of free services stealing the oxygen from paid ones is a perennial one and is effectively a digital rerun of the never-to-be-resolved radio driving or reducing music sales debate. But it has far more impact in digital. With services like YouTube and Pandora the discovery journey is indistinguishable from the consumption destination. When they don’t lead to sales can they really be called discovery anymore?

Free is of course the language of the web. The contagion of free is legion. And free is where the audience growth is. This is the circle the music industry must square.

For 15+ years the music industry has been running to catch up, never quite able to get ahead of the game, an unavoidable feature of the process of digital disruption.   But although the consumer behaviour shift is inevitable the future direction of the music business is not and it will be shaped most by three key factors:

1. The continued evolution of consumer behaviour
2. Technology company strategy
3. Income distribution

Consumer behaviour. The most important consumer behaviour trends are not the steady transition of the Aficionados or even the Forgotten Fans but of the next generation of music consumers, the Digital Natives. Free and mobile are the two defining elements of their music behaviour. Of course younger people always have less disposable income, but there is a very real chance that we are beginning to see demographic trends locking in as cohort trends that will stay with these consumers as they age. For a generation weaned on free, the more free you give them, the more they will crave it. Whatever course is plotted, success will depend upon deeply understanding the needs of Digital Natives and not simply trying to shoe horn them into the products we have now that are built for the older transition generation.

Technology companies: Apple, Amazon and Google each in their own ways dominate digital music. But most importantly they all want very different things from it. For each of them music is a means to an end. All are willing to some degree to loss lead on music to achieve ulterior business objectives. All of which is great for labels and publishers as they get their royalties, advances and equity stakes. But for the pure play start up it means competing on an uneven footing with giant companies who don’t even need music to generate a revenue return for them.

 

Revenue distribution: Artists and songwriters found their voices in recent years. Partly because of the rise in social media but also because so many are now paying much more attention to the business side of their careers. The fact they are watching download dollars being replaced by streaming cents only intensifies matters, as does the fact that the top 1% of creators get a disproportionately large share of revenue. It has always been thus but the signs are that the disparity is becoming even more pronounced in the streaming age, with the effects felt all the more keenly because unless you have vast scale streaming can too easily look like chicken feed to an artist compared to download income.

But artist and songwriter discontent alone is not going to change the world. Their voices are just not powerful enough, nor do most fans care enough. Also labels and publishers remain the most viable route to market for most artists. Matters aren’t helped by the fact that artists who demand an audit of their accounts to work out where their streaming revenue has gone swiftly accept their label’s hefty silence payment and the accompanying NDA. Artist discontent while not decisive in impact is beginning to apply important pressure to the supply end of the music business.

So those are the three big challenges, now here are three sets of solutions. And I should warn you in advance that I am going to use the P word. Yes, ‘Product’.

I get why product sounds like an ugly word. It’s a term you use for baked beans, for fridges for phones. Not a cultural creation like music right? True enough, when we’re talking about the song itself, or the performance of it, product is irrelevant. But as soon as we’re talking about trying to make money out of it as a CD, download, stream or however, then we’re firmly in the territory of product. It is both naïve and archaic to think otherwise. When artists got megabucks advances and never had to worry about the sustainability of their careers and everything revolved around the simplicity of CD sales you could perhaps be forgiven for turning a blind eye. But now there is no excuse.

So with that little diatribe out of the way, on to the first solution.

Music product: The harsh reality is that music as a product has hardly evolved in the digital realm. A lot has been done around retailer and business model innovation, but the underlying product is the same static audio file that we found in the CD. Meanwhile the devices we are spending every growing shares of our media consumption have high definition touch screens, graphics accelerators, accelerometers…audio hardly scratches the surface of what tablets and smartphones do.

Music is always going to be about the song, but it is also about the artist and their story. That’s what a quarter of consumers think, and 45% of aficionados and a third of digital natives. Video, lyrics, photos, reviews, interviews, acoustic sets, art, these are all ways in which the artist can tell their story and they all need to be part of the product. Most of this stuff is already created by labels, artists and managers but it is labelled marketing. Putting this together into a curated, context aware whole is what will constitute a 21^st century music product.

Fans: Artists and fans are closer than ever but this journey is only getting going and artists need to get smarter about how to monetize their fan bases. Artists need to find their popcorn. What do I mean by this? Well when the cinema industry started out it was a loss making business. To try to fix this cinemas started by experimenting with the product, putting on double bills but that wasn’t enough. Then came innovation in the format by adding sound. Then the experience itself by co-opting the new technology of air conditioning from the meat packing industry. Still no profit. Finally cinemas found the solution: popcorn. With a 97% operating margin, popcorn along with soda and sweets quickly became how cinemas become profitable entities. Artists need to find their popcorn. To find out what other value they can deliver their fans to subsidize releasing music. It’s what newspapers are doing with wine clubs and travel clubs, and in some instances even with Spotify bundles!

Labels: Finally we have agencies or what you might call labels, but I’m going to call them agencies, because that is what they need to become. The label model is already going under dramatic transformation with the advent of label services companies like Kobalt and Essential and of fan funding platforms like Pledge and Kick Starter. All of these are parts of the story of the 21^st century label, where the relationship between label and artist is progressively transformed from contracted employee to that of an agency-client model.   Labels that follow this model will be the success stories. And these labels will also have to stop thinking within the old world constraints of what constitutes the work of a label versus a publisher versus a creative agency versus a dev company. In the multimedia digital era a 21^st century labels needs to do all of this and be able to work in partnership with the creator to exploit all those rights by having them together under one roof.

And finally, the grand unifying concept to pull all this together: experience. Experience is the product. The internet did away with content scarcity. Now the challenge that must be met is to create scarce, sought after experiences that give people reasons to spend money on the artists and music they love.

The Three Things Streaming Needs To Fix Next

I spent a couple of days last week in Barcelona for the annual Future Music Forum, which is developing into an important date on the music conference circuit.   Later this week I will post some of the highlights of my opening address but first I am going to spend some time developing some of the white hot issues surrounding streaming that were raised at the conference.

In a really strong field, two speakers in particular stood out: Beggars head of strategy Simon Wheeler and PledgeMusic founder Benji Rogers.   Their presentations and the conference as a whole were infused with a sense that streaming is changing everything, and more quickly than most people expected. This change is manifesting itself in three big issues:

1. Deciding what streaming’s main role is
2. What happens to the middling majority of artists
3. How to monetize the relationship between artists and fans

1. Time To Decide Whether Streaming Is Marketing Or Sales

It is clear that most labels are conflicted about streaming. They are waking up to the fact that its promise as a retail channel will take time to realize and even then it may not be a like-for-like replacement for lost album sales. Which is prompting labels to increasingly view streaming as a marketing channel too. But if streaming is both the discovery journey and the consumption destination, then what, as a label, are you trying to actually sell with streaming? Across the bigger labels in particular the digital business teams and the marketing teams need to agree on a common view on what the streaming end game is, else risk accelerating album sales decline without adequately driving streaming revenue growth.

If the question is complex for subscription services for free streaming the picture is much clearer, especially for YouTube. As Simon Wheeler said in his presentation: “YouTube is not driving sales. People are going there to consume music. The end.”  If that isn’t a case for windowing YouTube and free tiers of freemium services then I don’t know what is.

2. What Case For The Middling Majority?

Wheeler also made a vital observation that the streaming success stories tend to be split between mega hits on the one hand (such as Calvin Harris’ 1 billion Spotify streams and Avicii’s 250 million ‘Wake Me Up’ Spotify streams) and slow burn success stories on the other. He cited the example of the XX’s eponymous album that is still in the Spotify indie top 100 five years after release.

This streaming dualism makes it look like label A&R strategy may have to choose between massive hits or long-term success. And if so, what happens to the rest in the middle? You effectively end up with three key types of streaming artist (see figure):

• Evergreens
• Middling Majority
• Hit Machines

Could it be that  streaming will end up being the natural selection process for the challenge of catalogue bloat? There is simply too much music being released at the moment, creating the Tyranny of Choice, where listeners are paralysed by excessive choice. For an artist trying to break through, the background noise can be deafening and also kill any chance of making meaningful cut through. And if you do manage to do so then the endless torrent of new releases pushes you straight back to the margins.

If the streaming natural selection process plays out then unless you have created either an album that people will want to listen to again and again or instead a monster hit, then you will simply drift into oblivion. In the old model you might have sold a couple of tens of thousands of albums and managed to sustain some sort of career. 20,000 album sales would be $180,000 gross revenue but 5 million streams (roughly an equivalence in popularity) would be $50,000 gross revenue. Perhaps streaming’s Dystopian Darwinism will kill off the ability to forge a career built on mediocrity. That may be no bad thing.

3. Monetizing the Relationship

If streaming is eating into sales then the obvious next step is to drive other spending from streaming music consumers. Hence commerce integrations from the likes of TopSpin, Bandpage and PledgeMusic. Unfortunately it isn’t that straight forward as Pledge’s Benji Rogers pointed out. Rogers rightly found himself turned to at the Future Music Forum as the fan relationship guru and he made a crucially important observation: simply because some one is listening to a song does not mean they are necessarily going to want to buy anything from that artist. Instead streaming services need to think more subtly, looking at how to nurture an artist-fan relationship rather than simply trying to sell someone a t-shirt because they happen to be streaming a track.

Artists and fans are closer than ever but this journey is only getting going. And now that artists are building deeper relationships with their fans while sales revenues decline, they need to get smarter about how to monetize them.  The key question though is whether this can be enough to offset the impact of declining music sales revenue. To help answer that I created a ‘Streaming Ancillary Revenues Model’.

A new MIDiA Research consumer survey shows that 11% of streaming consumers are VERY likely to buy merchandise and tickets from their favourite artists in streaming services. I used this conversion rate against the following artist straw man for a hypothetical Year 1 versus Year 2:

• 100,000 albums sold decline to 60,000
• Streams increase from 30 million to 45 million streams
• Total recorded music revenue (streaming and sales) consequently declines by 17%
• 11% of fans buy $30 of merch, special editions or tickets each year
• Ancillary revenues grow to represent 33% of total revenues
• Revenue decline across all income streams is just 3%

So ancillary revenues can significantly soften the impact revenue decline.

(The additional factor of the longer revenue cycle for albums on streaming services should also push the total revenue up further in the longer-term but is not included in these calculations.)

There are many obvious caveats and assumptions here (not least of which is the varying margins across different revenue streams) but these are broadly the right mix of drivers and levers. You can download the model here: Music Industry Blog Streaming Ancillary Revenues Model 9 14  I invite you to play around with it and test your own theories. If you are an artist you might want to plug some of your actual numbers into Year 1 and your projections into Year 2.

Change Is Difficult But It Is Also A State Of Mind

The streaming picture is changing at an absolutely staggering rate and everyone across the value chain needs to get their heads around all the potential permutations else get left behind.

These are both exciting and daunting times. As the bland management consultancy phrase goes ‘change is difficult’. But it is. However, the way that you view and prepare for change both have as much impact on how it affects you as the change itself. Streaming is changing everything. Those who learn how to reinvent themselves for the realities of this brave new world will be those best placed to survive and perhaps even thrive.

The Death of the Long Tail

Today MIDiA Consulting is proud to announce the publication of an important new report: The Death of the Long Tail: The Superstar Music Economy.  The report is available free of charge to Music Industry Blog subscribers.  (If you are not yet a subscriber to this blog simply enter your email address in the box on the right hand column of the home page.)

The 21^st century decline in recorded music revenues continues to send shockwaves throughout the music industry and although there are encouraging signs of digital-driven growth, the impact on artists is less straightforward.  Total global artist income from recorded music in 2013 was $2.8 billion, down from $3.8 billion in 2000 but up slightly on 2012.  Meanwhile artists’ share of total income grew from 14% in 2000 to 17% in 2013.  But the story is far from uniform across the artist community.

The Superstar Artist Economy

The music industry is a Superstar economy, that is to say a very small share of the total artists and works account for a disproportionately large share of all revenues.  This is not a Pareto’s Law type 80/20 distribution but something much more dramatic: the top 1% account for 77% of all artist recorded music income (see figure).

The concept of the long tail seemed like a useful way of understanding how consumers interact with content in digital contexts, and for a while looked like the roadmap for an exciting era of digital content.  Intuitively the democratization of access to music – both on the supply and demand sides – coupled with vastness of digital music catalogues should have translated into a dilution of the Superstar economy effect.  Instead the marketplace has shown us that humans are just as much wandering sheep in need of herding online as they are offline.

In fact digital music services have actually intensified the Superstar concentration, not lessened it (see figure).  The top 1% account for 75% of CD revenues but 79% of subscription revenue.  This counter intuitive trend is driven by two key factors: a) smaller amount of ‘front end’ display for digital services – especially on mobile devices – and b) by consumers being overwhelmed by a Tyranny of Choice in which excessive choice actual hinders discovery.

Ultimately it is the relatively niche group of engaged music aficionados that have most interest in discovering as diverse a range of music as possible.  Most mainstream consumers want leading by the hand to the very top slither of music catalogue.  This is why radio has held its own for so long and why curated and programmed music services are so important for engaging the masses with digital.

Music has always been a Superstar economy and there will always be winners and losers in music sales, with the big winners winning really big.  Over time the improved discovery and programming in digital music services should push the needle for the remainder artist tier but a) it will not happen over night and b) it will still have a finite amount of impact.

The Catalogue Size Arms Race

Matters are worsened by the music services’ catalogue arms race which has become entirely detrimental to consumers’ digital music experiences.  Action needs taking urgently to make sense of 25 million songs, not just through discovery and editorial, but also by taking the brave decision to keep certain types of content, such as sound-alikes, outside of music services’ main functionality.

Until labels, distributors and artists come to together to fix the issue of digital catalogue pollution – sound alikes and karaoke especially – the Tyranny of Choice will reign supreme, hiding 99% of artists under a pervasive shroud of obscurity and giving the Superstars another free lap of the track.

Staggered Advances: A Proposal for Better Streaming Income for Artists

I was at a rather good concert last night and while pondering what share of the few thousand in the room had actually bought the artist’s latest album I came up with the germ of an idea for how artists can be better compensated from streaming.  This is the proposal…

The overriding artist streaming concern is that streaming will cannibalize album sales and result in lower income.  Many labels and others counter that streaming will deliver at least as much revenue but over a longer period of time.  Because labels have big catalogues of music they benefit from ‘scale’ more quickly than artists how have much smaller catalogues. A label may measure the increased income from a million more subscribers in hundreds of thousands of dollars, but an artist may measure it in 100’s of dollars.

So is there then not a case for labels changing their income distribution models with artists?  Namely increasing advances by a factor of X and then instead of paying that in one lump sum, distributing it to the artist say every quarter for 3 years?  Let’s call this the Staggered Advance. This would effectively give the artist a salary from the label and take the worries about income per stream out of the equation.  The down side is that many more artists may never see actual royalty income than do so now, as it will be harder for them to recoup.

The challenge is what ‘X’ should equal.  To address that question, see the workings below. This hypothetical artist income model assumes the following:

• 100% of an artist’s fan base are now paying subscribers
• The artist is a performer and songwriter
• An artist earns $2.00 from a CD
• The artist receives 50% of a $0.01 per stream pay out
• A typical album is bought by only 60% of an artist’s fans and that the remainder, if they were on subscription services, would stream the album
• Streamers would also listen to some back catalogue

Hypothetical Artist Income Model – Music Industry Blog

The net result of this model is that an artist can expect to earn from his/her fans about half what s/he would have earned from selling an album.  Which means that a Staggered Advance needs to pay out twice the amount to the artist than is currently paid for standard advances.

Bear in mind that ‘at scale’ streaming services should expand that base of listeners further with streams from casual listeners, and new additional income from core fans when the album is re-listened to as a catalogue album in the future.  So the total income (i.e. not just from fans) will be higher.

Also a crucial assumption here is that the artist’s core fans will listen to the album an average of ten times.  But that is predicated upon the album being good enough to make fans want to listen to the album that many times.  This means that if an artist releases a duff album that fans only listen to twice on average then the income difference will be 80% less than from album sales.  So there is a clear implication here: a poor album will earn an artist a lot less on streaming compared to albums sales, but the difference will be a lot less for a good album.  This is the democratization of music spend.

There are of course multiple additional variables and extenuating factors but the point of this exercise is to create a strawman for directional comparisons (you can download the excel model to test yourself by clicking on the link below).  This proposal also comes at a time when labels are moving away from bigger up front advances, but it may be that this is the only truly viable tool the labels have at their disposal to be able to soften the impact of the transition to streaming for artists.  Labels and streaming services alike need artists onboard and artists need streaming to make commercial sense for them.

Is this a step in the right direction?  Download the model, play around it, stress test the assumptions and let me know.  Hypothetical Artist Income Model – Music Industry Blog.

Making Freemium Pay: An Artist’s Perspective

With the much anticipated US launch of Spotify and the successful IPO of Pandora there’s a very palpable sense of momentum in streaming music.  And that’s great news, the future of music revenues will depend upon a successful transition from distribution based models (downloads, CDs etc) to consumption-era models (on-demand streaming etc.).  Yet, there’s a growing sense that the current Freemium business model just isn’t fit for purpose.

I’ve written before about the challenges of squaring the consumption circle (see my post here for more).  There is a direct tension arising from record labels feeling they don’t get enough from ad-supported music, and from the services themselves feeling that they actually pay too.  To complicate matters even further, it is becoming increasingly apparent that artists aren’t getting enough out of ad-supported music either.

Slicing the Digital Income Pie

Singer / songwriter Benji Rogers of Marwood (and who also happens to be the founder of the great direct-to-fan funding music site Pledge Music) generously offered to share his digital revenue data to illustrate how his income spreads between different music services.

Looking at Benji’s digital music revenue for March and April (see figure 1) the glaring disparity between download stores and streaming services is immediately apparent.  In terms of units of activity (i.e. a stream or a paid download) streaming services are way out in front, with 92% of total units for the period, yet in revenue terms the relationship is reversed, with them accounting for just 3% of total income.  (You can read more about Benji’s digital music income here).

Now of course streaming based services are always going to generate a significantly lower unit of income than a download, but the inverse income-to-unit relationship here is misaligned to the extreme.

What Happens If / When Downloads Go Away?

The other side of this equation is the vastly important role that downloads play in artists’ recorded music income. The download revenue is effectively bringing the income dynamics of the old CD model into the digital equation.

But there is also massive risk with the download dependency.  Download sales growth is slowing and there is little evidence that the 99 cents download model translates well outside of the iTunes ecosystem.  Worse still, the current momentum in digital music business models and behaviour is in streaming not downloads.  Take a look around: Amazon, Google and of course Apple have all jumped on the locker bandwagon.  And as Benji’s data illustrates painfully well, streaming is where consumers are going too.  While downloads may not disappear entirely, their role is set to lessen markedly in the midterm future and most of the alternatives in play from the big three players generate much lower income for artists.

Premium, Ad Supported, Freemium…Streaming Just Isn’t Adding Up for Artists

And to be clear, this isn’t just a problem with Freemium.  Streaming services as a whole just aren’t delivering enough income for artists.  Spotify is much maligned for the raw deal it is perceived to give artists, yet when you look at the average-pay-per stream Spotify actually pays out more than that darling of premium services Rhapsody (see figure 2) despite the majority of Spotify’s streams being ad supported rather than premium (something feels broken there).

The simple fact is that the disparity between paid downloads and streaming is unsustainable.   It just isn’t tenable that 3 paid downloads from Amazon can still deliver 50% more revenue than all the streaming services combined over the same period and yet have less than 1% the activity level of those services.

Is Freemium No Longer Fit for Purpose?

No one in the Freemium value chain thinks that they’re getting enough income: not labels, not publishers, not artists, not the services themselves. It looks increasingly like the Freemium model itself is fundamentally flawed, that any fix will do little more than paper over the cracks.  And the new wave of locker services are only marginally better.  They share the same fundamental revenue share dynamics when compared to download income (for all parties).

So what is the answer?   As I said in my June Midem post (click here to read more), first and foremost business models and products must be innovated.  There simply aren’t enough levers left to pull in the ad supported streaming business models to fix the problem.  That doesn’t mean that services such as Spotify, Pandora and We7 don’t have a future, they absolutely do, but their future lies in successfully bringing in business partners to subsidize  premium tiers of their businesses to make music feel-like-free or close-to-free for  mainstream customers (see my previous post on Digital Music’s Third Way for more on this).  Spotify’s US launch will bring a great new music experience to US music fans, but Spotify will need partnerships like it has struck with Virgin Media, 3 and Telia Sonera in Europe if it is going to be sustainable.

But most importantly we need a new generation of music products that leverage social, user participation, access models, multimedia and device connectivity to the full.

Ad supported streaming can evolve, it doesn’t need to be the Neanderthal of digital music’s evolutionary chain, but unless evolution happens quickly there is a very real risk that many artists will start seeing their recorded music careers face extinction.