The attention recession has hit Spotify too

Spotify added two million subscribers in Q1 2022. Yes, this incorporates the impact of 1.5 million lost Russian subscribers and is set against Netflix having lost 0.2 million subscribers over the same quarter. But while Spotify did well to not suffer the same fate as Netflix, it was not able to buck the broader trend affecting the entertainment market: the attention recession. The attention recession is the combined impact of: 1) the end of the Covid entertainment boom (consumers have less time and money as pre-pandemic behaviours resurface); 2) economic headwinds (rising inflation and interest rates), and 3) the geo-political situation (the Russo-Ukrainian war). Spotify’s Q1 earnings provide further early evidence of the attention recession’s impact. Spotify’s earnings were shaped by all three.

Looking at the ad-supported and paid users of a number of leading digital entertainment companies that have already reported their Q1 2022 results, a clear trend emerges: paid user growth slowed in Q1 2022, while free users continued to grow strongly. With consumers having less time on their hands and less money in their pockets, free is growing faster than paid.

Entertainment monetisation trends followed an almost mirror opposite of user behaviour. The first quarter of every year is typically down from the preceding fourth quarter for ad businesses, with the Q4 advertiser spend surge receding. Yet the declines in Q1 ad revenues for Snap and YouTube were both significantly bigger in 2022 than in 2021, with a combined drop of 22% compared to 13% the year before. Snap’s Evan Spiegel even went on record to explain just how problematic a quarter Q1 2022 had been and how there are growing concerns about the outlook for ad spend. This is because, as consumers have less disposable income, they buy less, which means advertisers get lower returns on their spend. Ad revenue is most often an early victim of a recession.

Conversely, Q1 2022 subscription revenues were up slightly, though much less so than in Q1 2021, and Spotify’s premium revenues were down 1%. Nonetheless, the key takeaway is that subscription monetisation was less vulnerable in the first phase of the attention recession. While free services and tiers benefited from incoming cost-conscious users, they were not able to harness the shift commercially. 

As MIDiA said back in 2020, all companies were going to feel the impact of the attention recession, which we identified was imminent following the pandemic. It is a case of simple arithmetic: more time and more spend during the pandemic benefited all companies. Post-pandemic, both of those increases recede, which means that all entertainment companies have to fight hard to hold on to their newly-found boosts to revenue and users, let alone grow. When we made that prediction, it was before the additional elements of economic and geo-political trends raised their heads. Rising inflation is going to hit all consumers’ pockets (with food and fuel prices being particularly hit), forcing many households to make trade-offs between essentials and luxuries. 

Though Spotify’s move to wind down Russian operations was admirable, it illustrates how the impacts of the Russo-Ukrainian war on digital entertainment will be both varied and far reaching, not least because of its impact on inflation due to its disruption of global food and fuel supplies. 

We are living in ‘interesting times’ and the future is always uncharted, but especially so now. 

Forget peak Netflix, this is the attention recession

Netflix’s Q1 2022 results caused a stir, with subscriber numbers down by 0.2 million from one quarter earlier. Some are calling this ‘peak Netflix’, but this is not a Netflix-specific issue. The decline illustrates that Netflix does not operate in isolation, and is, instead, but one part of the interconnected attention economy – an attention economy that is now entering recession. This is a recession that MIDiA first called back in February 2020, and that the wider marketplace has started to wake up to.

The attention recession – after the boom

When MIDiA made the prediction of ‘the coming attention recession’ over a year ago, we identified that once the world started returning to pre-pandemic behaviours, the Covid-bounce in entertainment time would recede, creating an attention recession. The attention economy had already peaked back in late 2019, which meant that the pandemic and its lockdown attention boom delayed the inevitable negative effects of companies that are competing in a now saturated attention economy. During the lockdown boom, media time went up by 12% and all forms of home entertainment boomed, but as we warned at the time, the effects were temporary, so entertainment companies needed to plan for post-lockdown life. 

A return to a smaller and recently constrained, pre-pandemic attention economy was always going to be painful. We termed this contraction a recession because we knew there would be clear economic aftershocks. Not least because the impact has been unevenly felt. As the first signs of contraction showed, not all sectors were impacted evenly. Pandemic boom sectors, like audiobooks and podcasts, saw larger chunks of their newly-found consumption time disappear. Music clawed back some of its lost share. Video (Netflix included) fell, but social and social video buckled the trend entirely, not simply clawing back some lost share, but actually growing throughout the entire pandemic period to end it with more hours than when it entered it. The arithmetic is simple: total attention hours are falling, social is growing hours, therefore, the remainder of the attention economy collectively experiences a double whammy of decline of time and money. 

The wider economy is beginning to bite too

But, unfortunately, there is more. Since MIDiA made the case for an attention recession, the global geo-political and economic situations have changed – to put it mildly. Inflation was already spiking before Russia invaded Ukraine, and the war’s impact on grain and energy supplies will only accelerate inflation even further. Put simply, consumers will feel growing pressure, with wages racing to keep up with price rises. Discretionary entertainment spend will be one of the earliest victims. Video subscriptions inadvertently made themselves an easy target. The sheer volume of choice and competition, combined with rolling monthly subscriptions, make it all too easy to drop one subscription without seriously denting your overall video experience. But while streaming services now face a potential savvy switcher cataclysm, traditional pay-TV companies have their subscribers locked into legally binding, long-term contracts. It usually costs consumers MORE money to cancel contracts, defeating the purpose of trying to reduce spend. Consequently, we may even see the cord cutting / SVOD growth dynamic invert for a while.

Back in 2020, when we first started writing about the potential impact that an economic recession would have on entertainment, we identified that 22% of consumers would cancel one or more video subscriptions, and that 22% would downgrade from paid to free on music. Netflix’s earnings are the first signs of this consumer intent manifesting. Other subscription video on demand (SVOD) services should not consider themselves immune. Even if the economy was to stabilise tomorrow, the long-term outlook for SVOD will most likely be defined by savvy switchers continually hopping across services to watch the shows they want. SVOD subscribers had found themselves thinking the new boss looked pretty much like the old boss, having to subscribe to so many services that their SVOD spend ended up looking a lot like those old pay-TV bills. In a recession, consumers will need SVOD to deliver on the price benefit more than ever before. 

When price increase can be hindrance, not a help

A lot has been made of how great a job Netflix has done in increasing its prices while streaming music has not – heck, even I did it. Increasing prices above the rate of inflation may a) reflect Netflix’s actual market worth, and b) help drive revenue growth, but it makes Netflix exposed in a hyper-competitive SVOD market that is entering an attention recession and, potentially, an economic recession. 

Circumstances may well look very different for music. Firstly, the vast majority of music subscribers only have one subscription, so if you cancel, you lose all the benefits of a paid account, not just a slice of choice. Secondly, music subscriptions have reduced in real terms because they have not kept track with inflation. In fact, prices have hardly moved at all in 20 years. While this has long been seen as a problem, in the current circumstances, it might be an asset. Music subscriptions represent good value for money, and with inflation pushing upwards, they will represent even better value for money as every month passes. Perhaps now is not the best time for music price increases.

Reasons, not ways, to spend attention

So, with all this doom and gloom, how can entertainment companies survive – perhaps even thrive? Long term, annual billing for digital subscriptions is a logical step, but for those who do not have them, now is not the best time to try to commit to large payments, unless there is some serious discounting in place. Multi-format bundles, like Apple One and Amazon Prime, will also be well placed. Ad supported services will also do well. But it will take more than clever billing and bundling. It will require a fundamental reassessment of the relationship with the audience.

One of the key calls MIDiA made in our 2022 predictions report was the new need for reasons, not ways, to spend attention in the attention recession:

“[Entertainment companies] will not only lose time, but end up lower than pre-pandemic levels. With such fierce demands on their time, audiences will need to be given reasons, not ways, to spend their attention.”

This might also be the moment for the next generation of emerging tech majors like Byte Dance and Tencent who’s businesses have a strong focus on ad supported and monetizing fandom rather than the commodified model of monetizing consumption. As Facebook’s declining user numbers showed, even in the booming social sector, a realignment of the marketplace is happening.

In the attention recession, entertainment companies need to start appreciating that consumer attention is a scarce resource, not an abundant one – a resource that must be won, not claimed. Those who do not will be the most vulnerable to the vagaries of the attention recession.

The attention economy after the lockdown boom

The attention economy is the cornerstone of all entertainment businesses. Throughout the 2010s, it just grew and grew, with more and more digital entertainment options filling consumers’ downtime. Staring out of windows and being bored at bus stops was replaced by Netflix, Fortnite, Spotify, Instagram and TikTok. Then, as the decade drew to a close, the attention economy became saturated. Instead of competing for unused hours, everyone was competing with everyone else. Cue Netflix’s cofounder and CEO, Reed Hastings, to claim he was competing more with Fortnite than he was HBO. This binary equation did not have time to really bite before the global pandemic hit, suddenly turning back the attention economy clock. More people stuck at home with more time on their hands and money in their pocket resulted in a 12% boost to the attention economy. But it was clear that as soon as the time came for pre-pandemic routines to return, the temporary boom would fade, sending the attention economy into negative growth. That time has come.

The attention recession is here

When MIDiA first predicted the coming attention recession, it felt like a world away to most entertainment companies because the high tide of lockdown raised all entertainment boats. Most entertainment formats grew. But the thing is, some grew faster than the 12% average, while others grew more slowly. This meant that, in isolation, a given entertainment company might have reflected on record performance, while, in reality, they were losing ground on competitors – both within and beyond their respective industries. This was an esoteric concept when everything was up, but once pre-pandemic routines started to return, those that lost share during the lockdown era were the least well placed to deal with the attention economy contracting once more. Entertainment audiences developed new behaviours that were sustained over such a long period that they became habits – and habits can be hard to shake. 

By the end Q2 2021, 42% of the extra time gained during the pandemic had already gone. Combined average weekly entertainment hours had gone from 53.1 hours in Q4 2020, to 50.7 hours. While this was still up from the Q2 2020 total of 47.4 hours, the first phase of the attention economy’s contraction is clear to see. Crucially, though, the fall back was not evenly distributed. Games, news and audio (podcasts, audio books, radio) all fell by double digit percentages in Q2 2021, while music and video fell by much smaller amounts. Meanwhile, social media and social video actually grew. The arithmetic is brutally simple: if social grew while total time declined, their win was someone else’s loss.

The contraction still has much distance to run

With Covid infection rates rising, and lockdown measures returning in some markets, there is a reasonable chance that the contraction may lessen, or even pause, in affected markets in Q4 2021. But the underlying trend has an inevitability to it. Whether it is now or next year, the attention recession is going to bite – and it is going to bite hard.

In such a fiercely contested environment, every form of entertainment, from music, to video, to games, is going to need to give its audience reasons, not just ways to spend attention. Every minute of attention is going to be hard earned2022 and beyond will be shaped by fierce competition from entertainment companies that are trying to hold onto as much of their recently gained time as possible, which, in the finite attention economy, will mean others will not only lose time, but end up lower than pre-pandemic levels. Matters will be complicated further by consumers multitasking more than ever in order to try to squeeze in as much entertainment as their waking hours will permit. While this will tick the hours-spent box, it will devalue that time spent, to the extent that attention may not even be attention at all.

The findings in this post come from MIDiA’s latest report Attention economy: After the lockdown boomThe report contains detailed data and analysis of just how media consumption has changed across 15 different forms of entertainment. If you are not yet a MIDiA client and would like to learn how to get access to this insight, email stephen@midiaresearch.com.

Music has developed an attention dependency

The attention economy defines and shapes today’s digital world. However, we have long since reached peak in the attention economy with all available free time now addressed. What this means is that previously, when digital entertainment propositions grew, they were often using up users’ free time. Now though, every minute gained is at someone else’s expense. The battle for attention is now both fierce and intense. What is more, it will get worse when much of the population finally returns to commuting and going out, as 2020 was defined by entertainment filling the extra 15% of free time people found in their weekly lives. But there is an ever bigger dynamic at play, one which gets to the very heart of entertainment: the attention economy is becoming a malign force for culture. Consumption is holding culture hostage. 

The increasingly fierce competition for consumers’ attention is becoming corrosive, with clickbait, autoplay and content farms degrading both content and culture. What matters is acquiring audience and their time, the type of content and tactics that captures them is secondary. It is not just bottom feeder content farms that play this game, instead the wider digital entertainment landscape has allowed itself to become infected by their strategic worldview.

The attention dependency goes way beyond media

Do not for a minute think this is a media-only problem. The corrosive impact of the attention economy can be seen right across digital entertainment, from hastily churned out scripted dramas, through to music. Artists and labels are locked in a race to increase the volume and velocity of music they put out, spurred on by Spotify’s Daniel Ek clarion call to up the ante even further. In this volume and velocity game, algorithm-friendly A&R and playlist hits win out. Clickbait music comes out on top. And because music attention spans are shortening, no sooner has the listener’s attention been grabbed, then it is lost again due to the next new track. In the attention economy’s volume and velocity game, the streaming platform is a hungry beast that is perpetually hungry. Each new song is just another bit of calorific input to sate its appetite. 

In this world, ‘streamability’ trumps musicality, but it is not just culture that suffers. Cutting through the clutter of 50,000 new songs every day also delivers diminishing returns for marketing spend. Labels have to spend more to get weaker results. 

Music subscriptions accentuate the worst parts of the attention economy 

Perhaps most importantly of all though, music subscriptions are the worst possible ecosystem in which to monetise the attention economy. In online media, more clicks means more ads, which means more ad revenue. In music subscriptions it is a fight to the death for a slice of a finite royalty pot. A royalty pot that is also impacted by slowing streaming growth and declining ARPU. The music industry has developed an attention dependency in the least healthy environment possible.

This is not one of those market dynamics that will eventually find a natural course correction. Instead, the music industry has to decide it wants to break its attention dependency and start doing things differently. Until then, consumption and content will continue to push culture to the side lines.

It is time to take hold of the wheel

Some years ago, Andrew Llyod Webber said this: “The fine wines of France are not merely content for the glass manufacturing business”. Although those words are of someone from the old world grappling with the new, the underlying premise remains. None of this is to suggest that streaming consumption is not the future. Nor is it to even suggest that all of the changes to the culture of music that streaming has brought about are negative. In fact, it may be that streaming-era music culture is simply what the future of music is going to be. But what is crucial is that artists, labels, songwriters and publishers take an active role in steering the ship to the future rather than simply getting pulled along by the streaming tide.

The Attention Economy Has Peaked. Now What?

Regular followers of MIDiA will know that we’ve been writing about the attention economy for a number of years now. Throughout 2019 we have been building the concept that we have arrived at peak in the attention economy – that all of the addressable free time has been addressed. In 2017, Netflix’s Reed Hastings said sleep was his biggest enemy. By 2019 he claimed Netflix was competing more with Fortnite than HBO (it wasn’t really, but the concept of competing in adjacent markets is valid). In the old world, media was nicely siloed by dedicated formats and hardware (print newspapers, books, DVDs, CDs, radio sets). Now, though, we access through devices where everything is separated by nothing more than a finger swipe. Attention saturation was always going to be an inevitability, not a possibility. The important question is not why this happening, but what will come next and what the right strategies are for surviving and thriving in this post-peak world.

A mine full of canaries?

What got MIDiA first thinking about peak attention was seeing the mobile gaming audience declining every quarter in our quarterly tracker surveys. Mobile games were the canary in the mine for peak attention. When we first got mobile phones, we didn’t have a huge amount to do with them. We couldn’t watch our favourite shows, and we couldn’t easily (legally) listen to new music. So many consumers filled their ‘dead time’ by playing games, as they were de rigueurin the early days of the app stores. Before long casual gamers were the core audience of titles like Angry Birds and Clash of Clans, while your middle-aged aunt was spamming you with Facebook invitations to play Candy Crush Saga. Once Netflix, Spotify and others had got traction, however, those casual gamers started reverting to consuming the content they actually liked the most. The result was a long steady decline in the mobile gaming audience. Now, music looks like it may be following suit.

another canary

Across the US, UK, Australia and Canada, the share of people that listen to the radio declined steadily between Q1 2018 and Q2 2019. Meanwhile, those streaming audio for free remained relatively flat. The net result is that the combined audio audience declined. So many lapsing radio listeners exited the audio market as a whole (though a share shifted to podcasts, which is not considered in the above chart). The ‘share of ear’ battle is looking a lot like a minor theatre of conflict in a much larger conflagration. Amazon will continue to do a good job of shifting older, high-net-worth consumers to streaming, but that is not enough to stem the tide – especially as Amazon’s global footprint is unevenly distributed.

This is what happens in the era of attention saturation.

Social video is eating the world

Four years ago, MIDiA argued that video was eating the world. Now social video is eating the world. Video is becoming the omnipotent format through which we communicate, consume and share. Social video is eating everything. Captioning looked like it was heralding a new era of silent cinema, but it was in fact a trojan horse – a means of enabling us to fit extra video consumption into our wider consumption patterns. Over time, though, sound has become more important and with the increased tolerance of video we are now far more willing to unmute. Nowhere is this better seen than Instagram and TikTok. Audio is the victim in that equation. Not only are there are many other scenarios where audio is slipping, there are even more scenarios where other media formats are losing out. For example, Epic Games’ decision to allow Fortnite players to watch live video of the Fortnite World Cup while gaming hints at how games companies understand that there is a delicate balance between video extending brand reach and competing directly for gaming time.

Looking back gives us a feel for what comes next

Understanding what comes next in a saturated attention world requires looking back at previous markets that have peaked. The mobile phone and PC markets give us some pointers, butthe industrial revolution’s impact on the labour market is an even more useful analogue. Attention is like labour. It is a product of human behaviour and it is scarce. Digital content is analogous to the labour market, and content supply is now beginning to exceed attention output. This is already translating into increased customer acquisition and retention costs.

This is exactly the wrong time for bringing more content to market, but that is exactly what is happening. Nowhere is this better seen that the video subscriptions space with a blizzard-like flurry of new services from Disney, Warner, Apple, Discovery and NBC.

The net result of an over-supply of content is that attention saturation will become an attention deficit for many players, Netflix included. The marketplace needs a new currency for measuring success and monetising audiences.

The MIDiA Attention Economy Event

This is where I am going to cut to credits, leaving you on a cliff edge. For those of you in London next Wednesday (November 20th), come along to our free-to-attend attention economy event, where you can hear my colleague Karol Severin present our attention saturationresearch and our take on what will be the next audience currency that content providers will need to compete for. For those of you not in London there will also be a live stream, which you will be able to find here at 7pm GMT. Also, check back in next week when I will post the next chapter in this story.

NOTE: I shamelessly sat on the shoulders of giants in this post – these ideas were collectively crafted by the entire, amazingly talented MIDiA team.

Making Free Pay

2018 was a big year for subscriptions, across music (Spotify on target to hit 92 million subscribers), video (global subscriptions passed half a billion), games (98 million Xbox Live and PlayStation Plus subscribers) and news (New York Times 2.5 million digital subscribers). The age of digital subscriptions is inarguably upon us, but subscriptions are part of the equation not the whole answer. They have grown strongly to date, will continue to do so for some time and are clearly most appealing to rights holders. However, subscriptions only have a finite amount of opportunity—higher in some industries than others, but finite nonetheless. The majority of consumers consume content for free, especially so in digital environments. Although the free skew of the web is being rebalanced, most consumers still will not pay. This means ad-supported strategies are going to play a growing role in the digital economy. But set against the backdrop of growing consumer privacy concerns, we will see data become a new battle ground.

Industry fault lines are emerging

Three quotes from leading digital executives illustrate well the fault lines which are emerging in the digital content marketplace:

“[Ad supported] It allows us to reach much, much deeper into the market,” Gustav Söderström, Spotify

“To me it’s creepy when I look at something and all of a sudden it’s chasing me all the way across the web. I don’t like that,” Tim Cook, Apple

“It’s up to us to take [subscribers’] money and turn it into great content for their viewing benefit,”Reed Hastings, Netflix

None of those quotes are any more right or wrong than the other. Instead they reflect the different assets each company has, and thus where they need to seek revenue. Spotify has 200 million users but only half of them pay.  Spotify cannot afford to simply write off the half that won’t subscribe as an expensively maintained marketing list. It needs to monetise them through ads too. Apple is a hardware company pivoting further into services because it needs to increase device margins, so it can afford to snub ad supported models and position around being a trusted keeper of its users’ data. Netflix is a business that has focused solely on subscriptions and so can afford to take pot shots at competitors like Hulu which serve ads. However, Netflix can only hike its prices so many timesbefore it has to start looking elsewhere for more revenue; so ads may be on their way, whatever Reed Hastings may say in public.

The three currencies of digital content

Consumers have three basic currencies with which the can pay:

  1. Attention
  2. Data
  3. Money

Money is the cleanest transaction and usually, but not always, comes with a few strings attached. Data is at the other end of the spectrum, a resource that is harvested with our technical permission but rarely granted by us fully willingly, as the choice is often a trade-off between not sharing data and not getting access to content and services. The weaponisation of consumer data by the likes of Cambridge Analytica only intensifies the mistrust. Finally, attention, the currency that we all expend whether behind paywalls or on ad supported destinations. With the Attention Economy now at peak, attention is becoming fought for with ever fiercer intensity. Paywalls and closed ecosystems are among the best tools for locking in users’ attention. As we enter the next phase of the digital content business, data will become ever more important assets for many content companies, while those who can afford to focus on premium revenue alone (e.g. Apple) will differentiate on not exploiting data.

Privacy as a product

So, expect the next few years to be defined as a tale of two markets, with data protectors on one side and data exploiters on the other. Apple has set out its stall as the defender of consumer privacy as a counter weight to Facebook and Google, whose businesses depend upon selling their consumers’ data to advertisers. The Cambridge Analytica scandal was the start rather than the end. Companies that can — i.e. those that do not depend upon ad revenue — will start to position user privacy as a product differentiator. Amazon is the interesting one as it has a burgeoning ad business but not so big that it could opt to start putting user privacy first. The alternative would be to let Apple be the only tech major to differentiate on privacy, an advantage Amazon may not be willing to grant.

The topics covered in MIDiA’s March 27 event ‘Making Free Pay’.The event will be in central London and is free-to-attend (£20 refundable deposit required). We will be presenting our latest data on streaming ad revenue as well as diving deep into the most important challenges of ad supported business models with a panel featuring executives from Vevo, UK TV and Essence Global. Sign up now as places are going fast. For any more information on the event and for sponsorship opportunities, email dara@midiaresearch.com