State of the YouTube Music Economy 2.0: A Turning Point for All Parties

YouTube is the most widely used streaming music app globally but it is also the most controversial one, locked in a perpetual struggle with music rights holders, with neither side quite trusting the intent of the other. 2018 has already seen YouTube’s renewed focus on subscriptions as well as a European Parliament vote that could potentially remove YouTube’s safe harbour protection. Meanwhile, oblivious to these struggles, and despite the rise of audio streaming services, consumers are flocking to YouTube in ever greater numbers and, crucially, using it for music more than ever before. Back in 2016, at the height of the value gap / grab debate, MIDiA published its inaugural State of the YouTube Music Economy report. Now two years on we have just released the second edition of this landmark report. MIDiA clients have immediate access to the ‘State of the YouTube Music Economy’ report, which is also available for purchase on our report store. Here are some of the highlights from the report.

state of the youtube music economy midia research

2016 proved to be a pivot point for YouTube. Rights holder relationships were at an all-time low with value gap / value grab lobbying reaching fever pitch. Meanwhile, vlogger hype was also peaking and longer-form gaming videos were beginning to get real traction. If there was ever a point at which YouTube could have walked away from music, this could have been it. The picture though, has transformed, with YouTube doubling down on music and in doing so, making itself an even more important partner for record labels.

With young consumers abandoning radio in favour of streaming, YouTube is the biggest winner among Gen Z and Millennials; penetration for YouTube music viewing peaks at 73% among 16–19 year olds in Brazil. But its reach is even wider: YouTube is the main way that all consumers aged 16 to 44 discover music.

Doubling down on music

YouTube has responded by improving its discovery and recommendation algorithms and gearing them more closely to music. The combined impact of demographic shifts and tech innovation is that YouTube is making hits bigger, faster. Billion-views music videos used to be an exceptional achievement, now they are becoming common place. By end July 2018, Vevo reported that there were already ten 1 billion views music videos for tracks released that year, accounting for 17.2 billion views between them. One billion view music videos that were released in 2010 took an average of 1,841 days to reach the milestone. Videos released five years later took an average of just 462 days, while those from 2017 took an average of just 121 days to get to one billion views. Over the course of eight years, YouTube has become more than ten times faster at creating billion-view hits.

Under indexing

The impact on revenue is less even. Music videos are the single most popular video category on YouTube, accounting for 32% of views but a smaller 21% of revenue. Music is still the leading YouTube revenue driver with $3.0 billion in 2017 but many other genres, gaming especially, over index for revenue. (Many YouTube gamers have multiple video ads placed at chapter markers throughout their videos. Because music videos are shorter they get a smaller share of video ads.) Emerging market audiences are also pulling down ad revenues. The surge in Latin American markets has pushed artists like Louis Fonsi to the fore, but the less-developed nature of the digital ad markets there means less revenue per video. This trend is accentuated with the rise of emerging markets music channels like India’s T-Series becoming some of the most viewed YouTube channels globally.

The net result is that effective per stream rates are going down on a global basis, but are going up in developed markets like the US, where the digital ad market is robust. This brings us to one of the existential challenges for YouTube. What does the music industry want YouTube to be? After years of nudging by labels, YouTube is now embarking on a serious premium strategy, but is that really what YouTube is best at? What YouTube does better than anyone else in the market is monetise free audiences at scale on a truly global basis (China excepted).

A turning point

2018 is a turning point for YouTube. The accelerated success it and Vevo have enjoyed since 2016 over indexes compared to YouTube as a whole, which means that music is a more central component of the YouTube experience than it has ever been. However, driving impressive viewing metrics was never YouTube’s problem, convincing music rights holders that it is a good partner is. The value gap war of words may have died down a little but that is as much a reflection of the rise of audio streaming and a return to growth for record labels than anything else, as the European Parliament’s Article 13 vote highlighted. Safe harbour was never designed to be used the way YouTube does for music, and the fact it does so creates a commercial disincentive for other streaming services to play by music rights holders’ rules. The fact that YouTube can get a greater volume of rights and more cheaply than other services andbe the largest global streaming service unbalances the streaming market. Though against this must be set the fact that YouTube has been able to create a more rounded value proposition without operating within the same confines as other streaming services.

The music industry needs the YouTube-Vevo combination, especially while Spotify scales its global free audience. The road ahead will be rocky, especially if Article 13 is eventually passed and also if rights holders continue to be disappointed by engagement growth out accelerating revenue growth due to the growing role of emerging markets. But it is in the interests of all parties to make the relationship work because neither side wants a YouTube shaped hole in the streaming marketplace, even if a Facebook / Vevo partnership was to try to fill some of it.

Screen Shot 2018-08-24 at 16.54.06Click here to see more details of the 29-page, 6,000 word, 11 chart reporton which this blog post is based. The report is based upon months of extensive research, industry conversations, MIDiA data and proprietary company data and represents the definitive assessment of the YouTube Music Economy.

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.

Music’s Role In Digital Content Is Small And Shrinking

This week I delivered a keynote at Mobile World Congress in Barcelona on the future of media. I focused on three key areas of digital content:

  • Digital Music
  • Online Video
  • Mobile Apps

Pulling together these three different strands really shone a light on where music sits in the broader digital economy.  One of the key themes I explored was how the streaming music business relies on pretty much the same model as mobile games like Clash Of Clans, i.e. relying on a tiny share of the total audience to pay. The big difference is that the annual ARPU of a King customer is $290.41 while for Universal Music the annual ARPU of a streaming music subscriber is $29.77.  Universal Music rightly got a lot of attention recently for becoming the first billion Dollar streaming music company. Universal has managed to make streaming revenue scale. However streaming remains a revenue stream that is plagued by free. Only 10% of the total streaming audience (i.e. including YouTube and Soundcloud) is paid, and though this small group generates 71% of Universal’s streaming revenue, the blended ARPU is just $4.15. That’s $4.15 for the entire year of 2015, not per month. You can see my full analysis of how free-to-paid conversion ratios and ARPU compare across big media companies here.

media company arpu

But perhaps most revealing is the relative scale of music compared to everything else. As the graphic below reveals, digital music (at retail values) will be just 10% of digital content revenue by 2020, down from 16% in 2015. So digital music is both small and losing market share. Online video, which is at an earlier stage of its development, is already bigger (at retail value) than the entire recorded music business (at trade value), while mobile app revenue is double that of online video.

forecasts midia

Yet music continually punches above its weight. Its impact on culture and emotions far outweighs that of apps (for now at least) and music artists still have far more dedicated fan bases than actors generally do (again, for now at least). Music’s impact is far beyond its revenue, even in business terms. Just look at all the brands, telcos and device companies that fall over themselves to be associated with music.

Nonetheless, the reality that must be accepted is that sooner or later, recorded music’s diminished revenue footprint is going to catch up with it. Major record labels enjoy a privileged position, because rights are so concentrated in music they each have an effective monopoly power because each of them have the power of veto if they say no. (You try launching a mainstream music service without one of the majors). This can sometimes lead to hubris and over confidence. In video and apps, rights are far more fragmented and consequently no single rights owner has market shaping power. (As an aside it is worth asking whether rights concentration is contributing to digital music losing pace with the digital content economy.) The clear risk is that music rights holders eventually overplay their hand, demanding too much from partners with too little flexibility. I have been hearing for some time from a number of ‘partner’ companies that they are beginning to question whether music is worth the hassle. Meanwhile SVOD services and YouTubers are waiting eagerly in the wings…

Another part of the equation is that recorded music revenue only paints a small part of the global music industry picture (i.e. also including publishing, live and merch). In fact, recorded music has declined from being 60% of all music industry revenue in 2000 to around 30% today.  Most artist managers now view recorded music primarily as a marketing platform to drive live revenue. Unfortunately record labels aren’t in a position to think that way.

Whatever perspective you view this from though, one thing is clear, music’s role in the global digital content marketplace is small and shrinking.

Introducing The New MIDiA Research

Regular readers of this blog will probably have noticed that my posting has become a little less regular than usual over the last couple of months…well there’s good reason…we’ve been building some great new product features, research and data over at MIDiA Research and we launched them today.  That’s what’s been keeping me busy!

midia site front pageAs many of you will know I formed MIDiA Research back in July last year because I wanted to provide a depth of analysis, data and research rigour for the music industry that most technology sectors benefit from. During the last year we have been fortunate enough to grow quickly and acquire a client base that is a who’s who of the music industry, from record labels to music services to big tech companies.

We quickly realised that our model was working so well for music that there were other media verticals that would benefit from the same approach. So today we are proud to announce the launch of two new research services:

  • Online Video
  • Mobile Content

Click here if you are interested in finding out more about our new site and research.

We also launched today a weekly newsletter that gives you a round up of analysis, research and data on digital music, online video and mobile content. We like to think of it as the definitive take on the digital content marketplace.

To sign up head over to the MIDiA blog and enter your email address in the field on the right of the page.  All subscribers get a free 28 page MIDiA report ‘The State Of Digital Music’.

Normal service will now resume on this blog!

Is the UK the Canary in the Mine for Digital Music?

It is beginning to look like we are at one of the most important junctures in the music industry’s history since the dawn of the digital age.  Ever since the rise of Napster the music industry has navigated a number of tricky and outlook-defining decision points, such as: how to tackle piracy, whether to license to music services, whether to go DRM free, whether to support ad-supported, what to do with mobile?  But now there is an even bigger question which straddles all of those sub-factors: Is Plan A working and if not, what is Plan B?

It is easy to get the impression that the music market is moving towards being in a good place, that the corner is slowly being turned.  Indeed US sales, in volume terms at least, showed a modest upturn in 2011.   However when the Adele factor is stripped out of the equation, music sales across most markets, US included, look a lot less rosy.  But even leaving Adele in the mix, the UK – the world’s 4th largest music market – paints a concerning picture.

 

To illustrate the point, let’s compare the situation now compared to 2 years ago.  The view from 2010 (see chart) revealed full year 2009 trends of strong CD sales decline coupled with solid digital growth, but no enough to prevent overall market contraction. However the view from 2012 shows worryingly little progress.  Though CD sales decline did slow, the overall market continued to shrink (also H1 2012 numbers show an acceleration in CD decline once again). Most concerning of all though was digital: growth slowed not just in percentage terms but also in absolute terms, down from £75 million new digital revenue in 2009 to £63 million in 2011.  As a market grows it is expected that % growth slows too, but at this relatively early stage of the market’s development absolute growth should be continuing to grow too.

The UK music market has spent most of the last decade in decline but if the current metrics and dynamics remain in place the UK recorded music market could end up losing a cumulative total of £1.3 billion between 2012 and 2017, more than its entire current value (see figure two).  The good news is that digital will represent more than 70% of revenues, but that will be a larger slice of a much smaller pie.

There are many contributory factors (piracy, the lost music buyer generation etc.) but there are two observed trends which merit particular attention:

  • Digital buyer growth has slowed.  Of the total UK digital music growth between 2008 and 2011, just 31% came from new buyers, the remainder came from increased spend per buyer.  Increasing spend per buyer is of course an important strategic objective, but in these early days of digital music more of the growth should be coming from new customers, not from consolidation around the early adopter niche. With Apple’s iTunes accounting for such a large share of the UK and US digital music markets, it is unsurprising that digital growth is closely aligned with the rates at which Apple acquire new device customers (which, to be clear, is a very different metric from the rate at which they sell new devices) and the rate at which they grow average music spend.
  • Music buyers are disappearing.  Extrapolating from Kantar’s UK music panel (as reported in the BPI Yearbook) approximately 5 million music buyers have disappeared from the UK market since 2008.  Granted many of these buyers were probably low value customers and not all of them are necessarily lost for good, but it is clear that digital services are not doing a good enough job of converting music buyers from physical to digital and certainly nowhere near a good enough job of preventing lapsing CD buyers from disappearing out of the market all-together: against the total 7.9 million CD buyers ‘lost’ between 2008 and 2011, there were just 1.9 million new digital buyers.

What Can Be Learned from the British Experience?

The UK is not the same as the US, Japan, Germany, Sweden or any other music market.  Nor is it a direct predictor of what will happen in each of those markets.  However the overall direction of its market fundamentals are directionally similar – and in some cases functionally similar – to many other markets.  The UK is not a failing music state like Greece or Spain, it is a robust market (by music industry standards) with a mature and established digital sector and – for now – an established high street retail presence.  Over the last few years the UK’s story has been one of ‘steadying the ship’, of the corner slowly being turned.  So the UK trends should be viewed in the context of how quickly a solid market can potentially veer off course.

It is possible that the 2011 UK numbers will be followed by H2 upsurge in CD sales and an acceleration of digital growth, and I for one hope that this proves to be the case, but the safer bet is an evolution of the status quo. Across most key music markets it is clear that the current digital product mix is not delivering enough.  The US has passed the 50% digital mark and in the case of this market it is the sign of robust market fundamentals.  But passing the 50% mark in itself is not necessarily a measure of success.  It is only a commendable achievement if it is not an artefact of a shrinking overall market (as was the case with South Korea when it crossed that point with much fanfare in the mid 2000’s).

The UK’s music market is not about to implode, nor is the global market.  But it would be wise to view the UK as the canary in the mine for global digital music strategy, to assess whether the air is truly safe to breathe, whether Plan A is up to task.

Announcing the Music Industry Blog Start-Up Showcase

Over the last few months I’ve had conversations with a lot of really exciting early-stage music start- ups with a refreshingly diverse array of products and propositions.  Many of them though share the same problem: the challenge of getting from great idea and team to market awareness.  So, as this blog is read widely by investor and music industry decision makers alike I’ve decided to do my little bit by launching the Music Industry Blog Start-Up Showcase.

Over the next month I will be taking submissions for inclusion from *music* start-ups.  I’m specifically interested in early stage music start-ups, so if you are pre-funding, seed and / or chasing Series A then you could be just the sort of company to be featured in the showcase.  (There might be the occasional case for a later stage company to be included but there will have to be a very strong case).

The most important criteria of all though, is that your business is interesting, exciting and is doing something different.  That doesn’t mean you have to be a unique service or business model (though that would be great).  It does however mean that you must at least have a unique approach, a novel twist.

If you are interested in taking part then please answer the questions below and send them to me directly at musicindustryblog AT gmail DOT COM

Closing date for entries is 31st May.  I will only be selecting the best of the entries for inclusion so I can’t guarantee your inclusion.  I will also be strict in applying impartiality, so that means even if I’m working with your start-up in an advisory capacity it doesn’t mean that you will necessarily be included, (sorry!).  For sake of full disclosure I will state clearly if I am advising for, or have been so at any stage, any of the start-ups selected for inclusion.

If you have any questions, queries or concerns please feel free to send me an email or reach out to me on Twitter @mulligan_mark

Music Start-Up Criteria

If you would like your start-up included in the showcase please answer and submit the following.

What capacity are you representing the company in?

The express elevator pitch (what you do in *one* sentence)

What problem are you solving / why does the music industry need you?

What is your business model?

What is unique about what you are doing?

Who do you see as your main competitors and why can you do things better than them?

Why do consumers and / or businesses need your service(s)?

Where do you want to be in 2 years’ time?

What investment stage are you at (boot strapping, seed, series A) and who are your investors?

250 words on your company (include things like management team, value proposition, go-to-market strategy, clients/partners, etc.)

Company URL(s)

We Need To Talk About Streaming (again)

Last night I participated in a Music Tank seminar on streaming music.  It was a vibrant and valuable debate with a healthy diversity of opinion.  Below are brief highlights of my opening keynote, including some exclusive data from record labels and from Spotify.

Streaming isn’t the paradigm shift, increased convenience of music access is

Streaming is no new thing.  Napster, Rhapsody, YouTube have been with us for many years.  What changed is that Spotify made it work with elegant simplicity, wrapped up in a consumer-friendly value proposition.  Of course Spotify had timing on its side too, coming to market once most of us already had broadband and at a time when a rapidly growing share of us were getting smartphones with data plans.  And of course timing is everything in business.

Timing aside though, we should be careful not to get hung up on the idea of streaming as an alternative format to the download.  It is not.  It is simply a different delivery mechanism for digital music, and when you factor in cached streams the distinction blurs further.  Streaming versus downloading is tech speak.  All music fans are interested in is being able to listen to the music they want, when they want, where they want.

Rebooting the conversation

Streaming music, and Spotify in particular, has been cause of much controversy and debate of late.  I’ll come on to some of the causes later but it is first worth taking stock of what we actually do and don’t know about streaming.

  • What we know. Streaming is proving popular with consumers at a time when download growth is slowing. But many artists are not fully comfortable with the model and feel that they don’t get a fair enough deal.  A dynamic which is complicated by the fact there are many different types of artist deals.  Scale is key to streaming being successful (you don’t make money off dozens or hundreds of streams).
  • What we don’t know.  We don’t know yet whether streaming cannibalizes sales.  Whatever data you see on either side of the argument we are simply too early in the evolution of streaming to draw conclusions.  There simply isn’t enough empirical data.  We need a few more years yet and even then separating cause from effect is challenging at best.
  • What we suspect.  It is looking like streaming does help reduce the amount people use file sharing.  Again, the evidence isn’t definitive and there certainly isn’t sufficient evidence to suggest that the number of people using P2P etc is declining due to streaming, but intensity of usage perhaps.  Smaller artists don’t seem to do that well out of streaming.

 

Access based services are the first post-transition technology products

Any new technology looks more like what came before than what will come next.  After all we only have the past and present as our reference points. Thus when a new set of technologies emerge they begin with transition technologies.  The first car was a steam powered horse-less carriage (see figure 2).  It was a transition to the first internal combustion engine vehicle and it wasn’t until the 1950’s that we really started to see automobile form factors that had fully thrown off the horse drawn carriage heritage.  Digital music is no different.  The download was the steam powered horse-less carriage, a really useful transition tool to help us bridge the gap between analogue and digital, but just that.  Access based services are the first steps towards the internal combustion engine, services that leverage some of the unique capabilities digital presents, rather than just using the web as a delivery mechanism.  But it is still very early days, we are not even at the Model-T yet.

Putting streaming income into context

A number of record labels provided Music Tank with data illustrating the level of income across various platforms which can see here at aggregate level (see figure 3). This chart uses the income from a download as a base of 1 and then income from other sources as a multiple thereof, shown for labels and for artists.  Note that the artist data is 3rd party licensing income only and does not reflect songwriter income etc.   The data suggests that an artist requires 80 streams to match the income from one download.  However data from artists suggests it is more than 200 streams.  And this rate varies massively depending on the nature of the deal an artist has struck with their label (e.g. whether they are paid on a share of net income basis or on points) and what share intermediaries such as distributors take.  It is also impacted by what deal the label has struck with a service.   One smaller label claims, somewhat dubiously, that the rate for them is closer to 2,000 times.  Whatever the exact rate (and there isn’t just one) you have to  stream a lot of music to get the same income as a download, but much, much less than a web radio stream or radio listens.  It take more than 5,500 national BBC radio listeners to generate the same income as one download in the UK

The labels’ take on streaming

Some record labels also provided Music Tank with some of their views on streaming and how they see it in the bigger revenue picture. Quickly summarized these are:

  • Markets with a strong streaming sector also often have stronger overall digital growth
  • Streaming is now growing more quickly than downloads
  • Streaming can be 50% of an artist’s digital revenue in some markets
  • Streaming consumers and download buyers do not strongly overlap
  • Streaming subscriber ARPU is often higher than download buyer ARPU


Spotify’s take on streaming

Spotify also put some data on the table (see figure 4) showing how a major global artist’s catalogue fared following the release of their album the same day to stores as to streaming.  Obviously this data is positioned in the context of the cannibalization and ‘windowing’ debates (which I’ve contributed to here). The data doesn’t prove anything either way in terms of cannibalization (i.e. it could be interpreted as streaming activity does well when an album does well or it could also be viewed as lost buyer activity).  However it does make a compelling case for the degree to which an artist’s back catalogue can be significantly boosted on streaming following an album release. There are some well voiced concerns that streaming favours big name artists, the head rather than the long tail, but if it does then it appears to do a good job of mining the long tail of the head!

The potential of Spotify’s Developer API strategy: an API for Music?

In the last 6 months digital music has two developments of potentially seismic proportions that through their subtle brilliance many haven’t yet appreciated their actual importance.  One was Facebook’s content dashboard strategy.  The other was Spotify’s Developer API.  Of course APIs are no new thing, but if Spotify can reach a hundred million plus total users then its API has the potential of becoming a de facto API for music.   Allowing developers to skip seeking licenses from rights owners and using Spotify’s instead.  It is a crucially well timed move, coming just as investors are turning away from investing in services that require licenses (you may have noticed by now that impecable timing is one of Spotify’s strengths).  Investors have tired of funding license advances for services that often, as in the case of Beyond Oblivion, don’t even make it to market.  The labels still get their digital income but investors are left with a debt write off.  Index’s highly influential Saul Klein went as far as stating that he won’t even invest in  start-ups that require rights owner licenses.

Making the right comparisons

Crucial to the streaming debate is making the right comparisons.

  • Streaming does not = a download
  • Streaming does not = radio
  • But Streaming does = (download + radio) ÷ ??

The exact balance is in flux but the conversation must recognize that a direct comparison with either is off the mark.  What we don’t yet know, and won’t for a couple of years, is whether streaming is pulling its users from green field and thus growing the market in a truly additive manner, or whether it is instead catalysing the organic digital transition, converting those consumers who would have gone digital anyway.  If it is the latter then questions about the income from streaming users compared to other digital customers becomes a more pressing one.  If it is the former then it frees us up to look at the scale picture with fewer reservations.  If these customers simply weren’t ever going to adopt a different digital service then we can start to discuss how low we can bring pricing to drive even great numbers.  The elephant in the room is that £/$10 is just too much for mainstream consumers.  It needs to be close to £/$5 to really break into the mainstream.  And you can only make that business case with genuine scale.

Conclusions

  • It is too early to make conclusive judgements about streaming affecting sales or piracy in the near-to-mid term
  • Long-term, music consumption will shift from ownership to access
  • The streaming debate is clouded by conflicting artist statistics and concerns
  • More artists need to be better sold the story by labels and by the services themselves, and some deals may even need revisiting.  Greater transparency is key and record labels have a big role to play here – there’s only so much services can do themselves
  • Streaming is neither a radio replacement or a download replacement, it has some of the best of both

As for the legacy of streaming?  Streaming will help make Facebook the most important player in the digital music market by 2013.

Agile Music (the Midem Speech)

For those of you who weren’t able to make it to Midem last week here are the text and main graphics from my Midem Visionary Monday speech.

Agile Music: Artist Creativity and Music Formats In the Age of Mass Customization

Today I want to talk to you about a concept called Agile Music, a framework for understanding how artist creativity, industry business models and music products must all undergo a programme of radical, transformational change.

I’m going to start by outlining the catalysts for this change.

This time last year on this very stage I argued that the digital music market was at an impasse, that momentum was seeping out of the space at an alarming rate.  Unfortunately 2011 lived up to the pessimistic billing.  The market further consolidated around the Triple A of Apple, Amazon and Android and digital revenue growth remained stuck in single digit rates.

The simple fact is that the digital music market should be hitting hockey stick growth curves by now.  And don’t think that hockey stick growth curves only exist in the crazy minds of industry analysts, take a look at this chart: hockey stick growth rates are what the music industry itself used to be used be based on.

This chart also reveals a crucial fact: each time an analogue music format went into decline its successor was already firmly in the ascendency.  The same is patently not true of the digital products and their failure to generate a genuine format succession cycle is dragging the whole market down.

So we had a year once again defined by declining revenues.  And though streaming (especially Spotify) had a fantastic year, we saw the emergence of the debate over whether access based streaming services cannibalize ownership.  The third key trend of 2011 was the emergence of new ecosystems to challenge the dominance of Apple’s iTunes.  Ecosystems from Facebook, Spotify, Amazon, Android.

2011 also saw the first real stirrings of three key trends which will shape 2012: firstly, Social listening: a niche activity thrust into the mainstream by Facebook’s subtly brilliant content dashboard strategy. Open innovation, supercharged by age of the API and connected consumption, powered by increasingly ubiquitous connectivity.  These three trends are also the fundamentals of Agile Music.

And so, onto Agile Music itself.  The access / ownership debate is in fact just one part of a much wider transition in content consumption.  In the analogue era media consumption was characterized by ownership of linearly programmed physical formats that we leant back to consume.  In the digital age we lean forward, interact and value access.

A new generation of music formats is needed that are built for the digital age rather the current ones which essentially squeeze the analogue square into the digital circle.

But just in the same way that HD TV and 3D movies need new content, this new wave of products needs to be built upon an entirely new approach to artist creativity.

Analogue-era music formats shaped artist creativity.  In the 50’s artists recorded singles, in the 70’s 8 song albums, in the 90’s 14 song CDs.  In the 21st century, well for some reason they’re still recording 14 song albums. When of course there is no music format reason for them to do so anymore.

The other big change is that artists now have at their disposal a much wider range of creative inputs into their music, such as fan forums, social networks, fan remix apps.  Inputs that should be harnessed in a structured manner rather than the ad hoc approach which currently dominates.  And don’t mistake these inputs for just being marketing opportunities, or tactics for boosting ‘engagement metrics’.  They are genuine windows of creativity that artists and their labels simply cannot afford to ignore.

This fan input comes in three key forms, what I call the three Cs of fan-fuelled creativity:  Customize, Create and Contribute.  The degree of fan participation ranges from modest on the left, to deep on the right, because of course all fans are not the same.

These three levels of fan engagement need embedding into the creative process , which you’ve probably realized by now, means a much deeper level of participation for the average artist. I’m not suggesting that everyone has to become Imogen Heap, but the needle certainly needs shifting further along the dial from where it currently sits.

Agile Music means embracing fan fuelled creativity; it means breaking free of the straight jacket of the 14 track album and releasing music when it is ready; it also means releasing some of it before it is ready, to let fans help shape the music .  Agile Music means allowing music fans to customize their music experiences, and for those music experiences to be dynamic and ever changing, free of the stasis of physical media formats.

But a vibrant future for music products and revenues can only occur with networked collaboration right across the music industry’s various value chains.  Artist, labels, developers, technology companies, telcos all need to pull together to create a generation of music formats that will be a genuine successor to the CD.  This collaboration is needed, and it is needed now, because what I am proposing here is merely verbalizing what consumers already expect.

And this is why the future of music products must be built upon a consumer centric Music Format Bill Of Rights, which can be defined by four key principles: Dynamic: they must always change and update with new content (the format stasis of the download and the CD need consigning to the history books); Interactive: empower consumers to participate in their music experiences; Social: music has always been social, now it is massively social and music products must place this at their core; Curated: the curation of dynamically updated music content will not only be part of the key value, it will become part of the creative construct itself.

Now the irony of these principles spelling that most physical of terms DISC is intentional, but make no mistake, these are the basic building blocks that any new music product must contain if it is to have any long term viability.

And to whet your appetite here’s a glimpse of what a DISC product should look like.  It looks a lot like an app experience and for good reason.  The future of music products will be app-like experiences.   . DISC products will leverage the potential of apps to deliver rich, curated streams of artist content incorporating everything from photos, interviews, games, outtakes, remix apps through to core music audio and video itself.  But the central value of DISC products will come from how they are out together. It won’t matter whether kids upload elements up to Rapidshare or Torrents, the value will lie in the uniquely curated context of the product, just as our favourite magazines and websites deliver a value as a whole which is much greater than the sum of their individual parts.

And not only do DISC products compete with piracy, they mitigate the access / ownership debate.   Because DISC products will be artist specific.  Music fans will buy DISC products for each of their favourite artists and then use streaming services for the rest, thus solidifying a complementary and additive role for streaming.  A fan will pay to get everything their favourite artist does for the next 18 months, delivered directly to all of their devices (and I do mean to all of their devices because we are in the per person age, not the per device age, and it is time for licensing practices to embrace this reality).

So to conclude:

– The paradigm shift in consumer behaviour is not just here to stay

– No single part of the music value chain can fix this on their own, and artists must play a more active role

– Music fans already expect D.I.S.C. experiences.  Don’t meet those expectations, exceed them

Now I know that a lot of this is easy enough for me to lay out here on stage but complex to implement.  However the stakes are high enough to justify the sizeable effort.    The next generation of music formats needs to be dictated by the objective of meeting consumer needs, not business affairs teams’ T&Cs.  It must be defined by consumer experiences not by business models.  The cart’ of commercial terms, rights complexities and stakeholder concerns must follow the ‘horse’ of user experience, not lead it.

Release Windows, the Cure for the Access vs Ownership Debate?

Back in early 2009 when I was at Forrester Research I wrote a report proposing that the Music Industry should adopt release windows.  It seemed to many something of an anachronistic concept, written just at the time with the Movie Industry – that bastion of release windows – was deeply engaged in a dialogue about compressing windows.  But now, with the growing debate over whether streaming services are cannibalizing CD and download sales, the idea is beginning to look highly relevant.  Because the simple fact is that a structured release window strategy for the music industry would do away with much of the access versus ownership debate once and for all.

Music products and services need segmenting into distinct windows

The basic structure of my release window argument was that music products and services should be segmented into tiers of priority and then each of those tiers be allocated a release window.  The tiering would work something like this:

  • Window 1, week 1: CDs, downloads and premium subscriptions
  • Window 2, week 3: Radio (excluding web-only radio)
  • Window 3, week 4: Subsidized subscriptions and web radio
  • Window 4, week 5: Ad supported streaming services

 

All of the new releases would go straight to Window 1 and be available there, and there alone, for a 2 week period, with terrestrial and digital radio coming after that.  This is a contentious point as radio is of course intended to act as a discovery and marketing tool but the time has come for the top tier of the music product pyramid to be held up as exactly that.  After all, why should passive music fans who don’t pay for music get to hear new songs as soon as those who pay 9.99 a month or buy downloads or CDs?  Users of free ad supported streaming services would have to wait a full 4 weeks before they get to hear the latest new music.

 

The problem with differentiating a free stream from a paid download is that there simply isn’t that much difference.  Release windows however, put clear blue water between the download and the free stream.

Coldplay is already pioneering the window strategy

Coldplay’s decision to keep ‘Mylo Xyloto’ off Spotify until album sales have peaked is effectively artist level windowing in practice.  The alternative strategy of just putting the odd track on there – such as Adele’s ‘Rolling In The Deep – treats streaming as a radio-like promo vehicle but if all artists did that then its promotional value would soon disappear as people would stop using streaming services.  A structured, industry level windowing strategy however would bring consistency and effective results.

 

Of course the windowing approach isn’t free of problems.  For example pushing radio to the second window will require a new approach to marketing music and a revision of assumptions of sales cycles.  However both of those things are already in effect happening, forced along by the current streaming status-quo, and of course unlicensed free music.  Windowing is an opportunity for record labels to take control of the situation and simultaneously protect music sales and define a long term, complementary role for streaming services.  The alternative is a prolonged and unproductive debate about cannibalization that will cause deep fault lines across the music industry and may ultimately kill off streaming all together.