Amazon’s Ad Supported Strategy Goes Way Beyond Music

Amazon is reportedly close to launching an ad supported streaming music offering. Spotify’s stock price took an instant tumble. But the real story here is much bigger than the knee-jerk reactions of Spotify investors. What we are seeing here is Amazon upping the ante on a bold and ambitious ad revenue strategy that is helping to reformat the tech major landscape. The long-term implications of this may be that it is Facebook that should be worrying, not Spotify.

amazon ad strategy

In 2018 Amazon generated $10.1 billion in advertising revenue, which represented 4.3% of Amazon’s total revenue base. While this is still a minor revenue stream for Amazon, it is growing at a fast rate, more than doubling in 2018 while all other Amazon revenue collectively grew by just 29%. Amazon’s ad business is growing faster than the core revenue base, to the extent that advertising accounted for 10% of all of Amazon’s growth in 2018.

Amazon is creating new places to sell advertising

The majority of Amazon’s 2018 ad revenue came from selling inventory on its main platform. This entails having retailers advertise directly to consumers on Amazon, so that Amazon gets to charge its merchants for the privilege of finding consumers to sell to, the final transaction of which it then also takes a cut of. In short, Amazon gets a share of the upside (i.e. the transaction) and of the downside (i.e. ad money spent on consumers who do not buy). This compressed, redefined purchase funnel is part of a wider digital marketing trend and underlines one of MIDiA’s Four Marketing Principles.

But as smart a business segment as that might be to Amazon, it inherently skews towards the transactional end of marketing, and is less focused on big brand marketing, which is where the big ad dollar deals lie. TV and radio are two of the traditional homes of brand marketing and that is where Amazon has its sights set, or rather on digital successors for both:

  • Video: Amazon’s key video property Prime Video is ad free. However, it has been using sports as a vehicle for building out its ad sales capabilities and has so far sold ads against the NFL’s Thursday Night Football. It also appears to be poised to roll this out much further. However, Amazon’s key move was the January launch of an entire ad-supported video platform, IMDb Freedive. Amazon has full intentions to become a major player in the video ad business.
  • Music: Thus far, Amazon’s music business has been built around bundles (Prime Music) and subscriptions (Music Unlimited). Should it go the ad-supported route, Amazon will be replicating its video strategy to create a means for building new audiences and new revenue.

It’s all about the ad revenue

Right now, Amazon is a small player in the global digital ad business, with just 6% of all tech major ad revenue. However, it is growing fast and has Facebook in its sights. Facebook’s $50 billion of ad revenue in 2018 will feel like an eminently achievable target for a company that grew from $2.9 billion to $10.1 billion in just two years.

To get there, Amazon is committing to a bold, multi-platform audience building strategy. Whereas Spotify builds audiences to deliver them music (and then monetise), Amazon is now building audiences in order to sell advertising. That may feel like a subtle nuance, but it is a critical strategic difference. In Spotify’s and Netflix’s content-first models, content strategy rules and business models can flex to support the content and the ecosystems needed to support that content. In an ad-first model, the focus is firmly on the revenue model, with content a means to an end rather than the end. (Of course, Amazon is also pursuing the content-first approach with its premium products.)

Amazon is becoming the company to watch

So, while Spotify investors were right to get twitchy at the Amazon rumours, it is Facebook investors who should be paying the closest attention. Amazon’s intent is much bigger than competing with Spotify. It is to overtake Facebook as the second biggest global ad business. None of this means that Spotify won’t find some of its ad supported business becoming collateral damage in Amazon’s meta strategy – a meta strategy that is fast singling Amazon out as the boldest of the tech majors, while its peers either ape its approach (Apple) or consolidate around core competences (Google and Facebook). Amazon is fast becoming THE company to watch on global digital stage.

Why Facebook Can Be the Future of Social Music, But Isn’t Yet

Facebook recently secured licensing deals with music rightsholders in India, an important step in what has thus far been an underwhelming social music strategy since first inking rights deals in June 2018. Facebook has the potential to be a giant in social music, in no small part because most streaming music apps do such a poor job of social functionality themselves. Instead it is Asian streaming apps that are largely setting the pace, with the occasional western breakthrough (normally from Chinese companies). So, what does Facebook need to do to deliver on its undoubted promise? Look east…

Facebook has little motivation to become a streaming service in a traditional sense. There is little room for a new global scale player in the streaming space and the wafer-thin operating margins are not so much well understood as they are simply an open wound for the sector. Facebook’s move was always going to be one that focused on creating social experiences centred around connections and personal expression. It is a sound strategy, but one that has not yet been executed. However, it is not alone; indeed, the streaming music marketplace is woefully non-social.

social music landscape midia research

Personal identity has always been at the heart of what music is. The music we listen to helps express who we are and, especially in formative years, helps shape who we are. In the analogue era, music fans could immediately convey who they were with shelves of vinyl or CDs. The very act of buying an album or single once showed that you had skin in the game for your favourite artists. Saying ‘I’ve got that album’ meant you cared enough about that artist to part with cash. In the streaming era, however, those shelves have been replaced by lists of files stored in the cloud, and ‘I’ve listened to that song’ has little inherent weight.

The self-expression void

This self-expression void needs filling, but in the west YouTube and, to a lesser degree, Soundcloud are really the only global scale streaming services meeting this need with features such as comments, thumbs up/down etc. In Asia though, things look very different. Tencent has built a portfolio of music apps that are either highly social (e.g. Kugou, Kuwo) or that are social expression first and music second (WeSing). Japan’s Line has followed a similar path.

Social music apps serve young audiences

In the west, social takes centre stage outside of streaming apps. A number of smaller apps such as Vertigo are emerging that focus on creating engaged micro communities around music. The standout success story is TikTok, which is run by Chinese company Bytedance. TikTok picks up where Musically left off (which of course was bought and then killed off by Bytedance). But, as exciting as Musically was and TikTok is for giving consumers a way to express themselves through music and dance, they appeal first and foremost to tweens and teens. TikTok is used by 31% of 16-19s, but just 2% of the overall adult population (interestingly, Musically had exactly the same penetration rates at its peak).

Facebook is not fulfilling its potential

All of which brings us onto Facebook. Facebook, through its portfolio of social apps, has an opportunity to deliver a portfolio of social music experiences that appeal to multiple age groups and use cases. This could be TikTok-like experiences for younger Instagram users, music greetings on Messenger, sound tracked stories on Facebook, or even delivering social layers directly into the streaming apps themselves. Of course, it is doing some of this already but to really deliver, Facebook needs to go beyond – far beyond. Social music experiences have not hit mainstream outside of Asia because the right formats aren’t there yet. Facebook has the potential to deliver but needs to innovate out of its comfort zone to do so.

Social music could be the next format

The decline of closed-format consumer electronics was the death knell for music formats – streaming is a business model rather than a format. But it is clear that the market needs something new. Streaming growth will slow and user experience innovation there has been limited. There is a risk that 2019 can look a lot like 1999, i.e. a long-established format going strong in a growing industry with the prospect of a fall around the corner seemingly ridiculous. Social formats may be the next much-needed injection of growth. If streaming monetizes consumption, social can monetize fandom. The question is whether Facebook can seize the mantle.

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 

The Meta Trends that Will Shape 2019

MIDiA has just published its annual predictions report. Here are a few highlights.

2018 was another year of change, disruption and transformation across media and technology. Although hyped technologies – VR, blockchain, AI music – failed to meet inflated expectations, concepts such as privacy, voice, emerging markets and peak in the attention economy shaped the evolution of digital content businesses, in a year that was one to remember for subscriptions across all content types. These are some of the meta trends that we think will shape media, brands and tech in 2019 (see the rest of the report for industry specific predictions):

  • Privacy as a product: 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.
  • Green as a product: Alphabet could potentially position around environmental issues as it does not depend as centrally on physical distribution or hardware manufacture for its revenue. For all of Apple’s genuinely good green intentions, it fundamentally makes products that require lots of energy to produce, uses often scarce and toxic materials and consumes a lot of energy in everyday use. Meanwhile, Amazon uses excessive packaging and single delivery infrastructure, creating a large carbon footprint. So, we could see fault lines emerge with Alphabet and Facebook positioning around the environment as a counter to Apple and potentially Amazon positioning around privacy.
  • The politicisation of brands: Nike’s Colin Kaepernick advert might have been down to cold calculation of its customer base as much as ideology, but what it illustrated was that in today’s increasingly bipartisan world, not taking a position is in itself taking a position. Expect 2019 to see more brands take the step to align themselves with issues that resonate with their user bases.
  • The validation of collective experience: The second decade of the millennium has seen the growing success of mobile-centric experiences across social, music, video, games and more. But this has inherently created a world of siloed, personal experiences, of which being locked away in VR headsets was but a natural conclusion. The continued success of live music alongside the rise of esports, pop-up events and meet ups hints at the emotional vacuum that digital experiences can create. Expect 2019 to see the rise of both offline and digital events (e.g. live streaming) that explicitly look to connect people in shared experiences, and to give them the validation of the collective experience – the knowledge that what they experienced truly was something special but equally fleeting.
  • Tech major content portfolios: All of the tech majors have been building their content portfolios, each with a different focus. 2019 will be another year of content revenue growth for all four tech majors, but Apple may be the first to take the next step and start productising multi-content subscriptions, even if it starts doing so in baby steps by making Apple original TV shows available as part of an Apple Music subscription.
  • Rights disruption: Across all content genres, 2019 will see digital-first companies stretch the boundaries and challenge accepted wisdoms. Whether that be Spotify signing music artists, DAZN securing top tier sports rights, or Facebook acquiring a TV network. These are all very different moves, but they reflect a changing of the guard, with technology companies being able to bring global reach and big budgets to the negotiating table. Expect also more transparency, better reporting and more agile business terms.
  • GDPR sacrificial lamb: In 2018 companies thought they got their houses in order for GDPR compliance. Most consumers certainly thought they had, given how many opt in notifications they received in their inboxes.
    However, many companies skirted around the edges of compliance, especially US companies. In 2019 we will see European authorities start to police compliance more sternly. Expect some big sacrificial lambs in 2019 to scare the rest of the marketplace into compliance. They will also aim to educate the world that this is not a European problem, so expect some of those companies to be American. Watch your back Facebook.
  • Big data backlash: By now companies have more data, data scientists and data dashboards than they know what to do with. 2019 will see some of the smarter companies start to realise that just because you can track it does not mean that you need to track it. Many companies are beginning to experience data paralysis, confounded by the deluge of data, with management teams unable to decipher the relevance of the analysis put together by their data scientists and BI teams. A simplified, streamlined approach is needed and 2019 will see the start of this.
  • Voice, AI, machine learning (and maybe AR) all continue on their path: These otherwise disparate trends are pulled together for the simple reason that they are long-term structural trends that helped shape the digital economy in 2018 and will continue to do so in 2019. Rather than try to over simplify into some single event, we instead back each of these four trends to continue to accelerate in importance and influence. 

For music, video, media, brands and games specific predictions, MIDiA clients can check out our report here. If you are not a client and would like to get access to the report please email arevinth@midiaresearch.com.

Tech Majors Market Shares Q2 2018

The tech world has no shortage of acronyms for the big tech companies (GAFA, GAAF, Fang, the four horsemen…). At MIDiA we like to keep things simple, just like the major record labels and major TV studios we call the big four tech companies the Tech Majors. Each quarter the MIDiA team deep dives into the financial filings of Alphabet, Amazon, Apple and Facebook to create our quarterly Tech Majors Market Shares reports. (The Q2 edition is available to clients here.). In these reports we focus on the metrics that are most important for media and content companies. Here are some highlights of our latest report.

tech majors market shares q2 2018 midia research

Tech major Q2 2018 revenue totalled $152.1 billion, down from Q1 2018 – $155.3 billion –  but up 28% from Q2 2017 and 51% from Q2 2016. These growth rates mirror the year-on-year Q1 growths for 2016, 2017 and 2018. The tech majors are thus as a group growing at a consistent rate, despite seasonality and differences as a company level.

Q2 2018 was a quarter of winners and losers for the tech majors. All four companies reported strong revenue growth but Facebook missed some Wall Street estimates and saw $119 billion wiped of its stock value, the single biggest one day loss in US stock market history. Meanwhile Apple beat analyst estimates, in part due to booming services revenues, and ended up becoming the first ever company to have a market capitalization $1 trillion. Amazon and Alphabet both had solid quarters but it is the extremes of Apple and Facebook that provide salutary evidence of the risks that lie ahead for the tech majors. All four companies continue to grow at highly impressive rates despite already being of vast global scale and the dominant player in each of their respective core markets. But the potential of the consumer tech marketplace is finite and growth will slow. Even though Silicon Valley eagerly awaits the next billion digital consumers, these consumers will be lower spending and predominately in markets where most tech majors are not strong, such as India and sub-Saharan Africa.

Services revenue on the up

Tech major advertising and services revenue – the two revenue streams that most directly impact the businesses of media and content companies – totalled $60.7 billion in Q2 2018, up 32% YoY. Tech major advertising and services revenue growth is accelerating and becoming a progressively larger share of total tech major revenue, growing five points, up to 40% in Q2 18.

Services is still the junior partner by some distance, representing 29% of combined advertising and services revenue in Q2 18, but growing one point a year. Nonetheless, tech major services revenue for the 12 months up to Q2 18 was $64.8 billion which was 3.7 times more than global recorded music revenue in 2017 and 19% of global TV revenues in 2017.

Read the full report hereor email stephen@midiaresearch.comto find out how to get access.

Facebook Aims To Bring The Fun Back Into Music

Facebook has announced its long mooted move into music. As widely anticipated the service offering focuses on using music to add context to social experiences. The official blog outlines two key use cases:

  1. Adding music to videos
  2. Doing live stream lip syncs in Facebook Live videos

For now the roll out is limited, which will give Facebook the opportunity to hone the service and learn from the behaviour of a relatively narrow user group. A wider roll out will follow.

facebook music midiaIt’s not about subscriptions, nor should it be

Facebook was never going to try be a Spotify clone. Let me rephrase that, just in case anyone in Facebook’s management team is getting tempted to – wrongly – make the wrong move – Facebook should never try be a Spotify clone. Not only is it the wrong fit, it simply doesn’t need to. Streaming music is a low margin business that is being competed over by a number of very well established heavyweights. Facebook may be embarking on a content strategy like the other tech majors, but unlike Apple and Amazon, its core focus will be ad supported, not premium. (MIDiA subscribers – check out our forthcoming inaugural ‘Tech Majors Quarterly Market Shares’ report to see how Facebook’s content strategy stacks up against Apple, Alphabet and Amazon, and where it will be heading.)

YouTube now has a social music competitor worthy of note

For a whole host of reasons which warrant a blog post of their own, streaming music has coalesced around a very functional value proposition. In short, the fun has been taken out of music. Apps like Dubsmash and Musical.ly showed that it doesn’t have to be that way. These apps were small enough to be able to do first and ask forgiveness later. Even though Facebook has all the ingredients to do what those guys did, but at scale, it is far too big to try to get away with that strategy so had to get licenses in place first. YouTube is the only other scale player that really brings a truly social element to streaming. Now it has got a serious challenger that just upped the ante beyond comments, mash ups and likes / dislikes. The music industry so needs this right now. Especially to win over Gen Z.

Is Facebook bottling it when it comes to messaging apps?

For the moment, Facebook’s strategy is squarely focussed around its core platform. There’s no mention of Instagram (surely the best outlet for this kind of functionality). This hints at a degree of strategic wobbles in Facebook towers. By going all in with its messaging app strategy Facebook took a brave move few big companies do: it decided to disrupt itself before someone else did. It realised that the future of social was in messaging apps not traditional social networks. It is now the world’s leading messaging app company, with only Chinese companies truly challenging it (South Koreas’ Kakao Corp, Japan’s Line and Chinese players excepted). But that shift of user time to under monetized ad platforms threatens Facebook’s ad revenue growth. Hence the focus of music to drive usage back to its core platform where it can generate more ad revenue.

Not a Musical.ly killer, at least not yet

Although some have been quick to liken Facebook’s lip sync functionality to Musical.ly and co, in reality it is not competing head on with those apps because it is initially launched as a Facebook Live feature. Betraying Facebook’s strategic imperative of building its Live business. Expect a true Musical.ly ‘killer’ sometime within the next nine months.

Facebook is not here to compete with Spotify, but it is here to compete with YouTube and Snapchat and to steal some of the clothes of Musical.ly and co. The currently announced features just scratch the surface of what Facebook can do. In many respects music has taken a series of retrograde steps socially speaking since the days of imeem, MySpace and Last.FM. Now Facebook has picked up the dropped baton and is running with it.

Finally for anyone at MIDEM, I will be there from Weds PM to Thursday evening, including doing a keynote Q+A with Napster’s new CEO early Thursday evening. Hope to see you there. My colleagues Zach Fuller and Georgia Meyer are there too, both are speaking, so be sure to say hi.

Spotify’s Censorship Crisis is About Social Responsibility

Spotify has been forced into something of a rethink regarding its hate speech policy. Spotify announced it was removing music from playlists of artists that do not meet its new policy regarding hate speech and hateful behaviour. R.Kelly, who faces allegations of sexual abuseand XXXTentacion, who is charged with battering a pregnant woman, were two artists that found their music removed. Now Spotify is softening its stance following push back externally and internally, including from Troy Carter who made it known that he was willing to walk away from the company if the policy remained unchanged. Spotify had good intentions but did not execute well. However, this forms part of a much bigger issue of the changing of the guard of media’s gatekeepers.

Facebook has been here before

Back in late 2016, Facebook faced widespread criticism for censoring a historic photograph of the Vietnam warin which a traumatised child is shown running, naked, away from a US napalm attack. Facebook soon backed downbut it got to the heart of why the “we’re just a platform” argument from the world’s new media gatekeepers was no longer fit for purpose. Indeed by the end of the year, Zuckerberg had all but admitted that Facebook was now a media company.The gatekeepers might be changing from newspaper editors, radio DJs, music, film and TV critics and TV presenters, but they are still gatekeepers. And gatekeepers have a responsibility.

Social responsibility didn’t disappear with the internet

Part of the founding mythology of the internet was that the old rules don’t apply anymore. Some don’t, but many do. Responsibilities to society still exist. Platforms are never neutral. The code upon which they are built have the ideological and corporate DNA of their founders built into them – even if they are unconscious biases, though, normally, they are anything but unconscious. The new gatekeepers may rely on algorithms more than they do human editors, but they still fundamentally have an editorial role to play, as the whole Russian election meddling debacle highlighted. Whether they do so of their own volition or because of legislative intervention, tech companies with media influence have an editorial responsibility. Spotify’s censorship crisis is just one part of this emerging narrative.

Editorial, not censorship

As with all such debates, language can distort the debate. Indeed, the term ‘censorship’ conjures up images of Goebbels,but swap the term for ‘editorial decisions’ and the issue instantly assumes a different complexion. Spotify was trying to get ahead of the issue, showing it could police itself before there were calls for it to do so. Unfortunately, by making editorial decisions based upon accusations, Spotify made itself vulnerable to being accused of playing the role of judge and jury for artists who live in countries where innocence is presumed in legal process, not guilt. Also, by implementing on a piecemeal rather than exhaustive basis, it gave itself the appearance of selecting which artists’ misdemeanours were considered serious enough to take action upon. Spotify had the additional, highly sensitive, risk of appearing to be a largely white company deselecting largely black artists on playlists. Even if neither semblance was reflective of intent, the appearance of intent was incendiary.

Lyrics can be the decider

Now Spotify is having to rethink its approach. It would be as wrong for Spotify to opt for the ‘neutral platform’ approach as it would be ‘arbitrary censorship’. An editorial role is necessary. In just the same way radio broadcasters are expected to filter out hate speech, tech companies have a proactive role to play. A safer route for Spotify to follow, at least in the near term, would be to work with its Echo Nest division and a lyrics provider like LyricFind to build technology, moderated by humans, that can identify hate speech within lyrics and song titles. It wouldn’t be an easy task, but it would certainly be an invaluable one, and one that would give Spotify a clear moral leadership role. In today’s world of media industry misogyny and mass shootings, there is no place for songs that incite hatred, racism, sexism, homophobia or that glorify gun violence. Spotify can take the lead in ensuring that such songs do not get pushed to listeners, and thus start to break the cycle of hatred.

Could Spotify Buy Universal? 

Vivendi is reported to be proposing to its board a plan for spinning out Universal Music. It is certainly the right time for a spin off (always sell before the peak), but a full divestment would leave Vivendi unbalanced and a shell of its former self. Canal+ is facing the same Netflix-inspired cord-cutting pains as other pay-TV operators (and is relying heavily on sub-Saharan Africa for subscriber growth), while other assets such as those in Vivendi Village have failed to deliver. With CEO Vincent Bolloré having invested heavily in Vivendi, he would be devaluing his own wealth. For a man who is not shy of saying that he’s in the game to make money, this scenario simply doesn’t add up. As one investment specialist recently suggested to me, this talk of a spin-off is probably exactly that, talk. Talk aimed at driving up Vivendi’s valuation by association and, at most, potentially resulting in a partial spin-off or partial listing. However, it is not beyond the realms of possibility that a big enough offer for Universal would persuade Bolloré to sell. So, let’s for a moment assume that Universal is on the market and have a little fun with who could buy it.

The Chinese option

It is widely rumoured that Alibaba was in advanced discussions with Vivendi to buy some size of stake in Universal. Those conversations derailed when the Chinese government tightened up regulations on Chinese companies buying overseas assets, which is why we now see Tencent buying a growing number of minority stakes in companies rather than outright acquisitions. So, an outright Chinese acquisition is likely off the table. This doesn’t rule out other Asian bidders (Softbank had an $8.5 billion bid rejected in 2013), though perhaps Chinese companies are the only ones with the requisite scale and access to cash that would meet a far, far higher 2018 price point.

The tech major option

The most likely scenario (if Universal were for sale) is that one of the tech majors (Apple, Alphabet, Amazon, Facebook) swoops in. Given Google’s long-held antipathy for the traditional copyright regime, Alphabet is not the most likely, while Facebook is too early in its music journey (though check back in 18 months if all goes well). Apple and Amazon are different cases entirely. Both companies are run by teams of older executives whose formative cultural reference points were shaped by traditional media companies. These are companies that, even if they may not state it, see themselves as the natural evolution of media, moving it from the physical era of transactions to the digital era of access. Thus far, Apple and Amazon have focused principally on distribution, although both have invested in rights too. Apple less so, (e.g. Frank Ocean, Chance the Rapper) but Amazon much more so (e.g. Man in the High Castle, Manchester by the Sea). Acquiring a major media company is a logical next step for Amazon. A TV studio and, or network would likely be the first move (especially as Netflix will likely buy one first, forcing Amazon’s hand), but a record label wouldn’t be inconceivable. And it would have to be a big label – such as UMG, that would guarantee enough share of ear to generate ROI. Apple though, could well buy a sports league, which would use up its budget.

The Spotify option

While the tech majors are more likely long-term buyers of Universal, Spotify arguably needs it more (and is certainly less distracted by other media formats). Right now, Spotify has a prisoner’s dilemma; it knows it needs to make disruptive changes to its business model if it is going to create the step change investors clearly want (look at what happened to Spotify’s stock price despite an impressive enough set of Q1 results). But it also knows that making such changes too quickly could result in labels pulling content, which would destroy its present in the hope of building a future. Meanwhile, labels are worried Spotify is going to disintermediate them but can’t risk damaging their business by withdrawing content now – hence the prisoner’s dilemma. Neither side dares make the first move.

That’s the problem with the ‘do a Netflix’ argument: do it too fast and the whole edifice comes tumbling down. Moreover, original content will not be the same silver bullet for Spotify as it was for Netflix. This is mainly because there is a far smaller catalogue of TV content than music, so a dollar spent on original video goes a lot further than a dollar spent on original music. It is not beyond the realm of possibility that Spotify will get to a tipping point, where the labels see a shiny-toothed wolf lurking under the lamb’s wool, and with its cover blown it will be forced to go nuclear. If this happened, buying a major label would become an option. And, as with the tech majors, it would have to be a major label to deliver enough share of ear.

But that scenario is a long, long way off. First, Spotify has to prove it can be successful and generate enough revenue and market cap to put itself in a position where it could buy a major. And that is still far from a clear path. For now, Spotify’s focus is on being a partner to the labels, not a parent company.

All of this talk might sound outlandish but it was not so long ago that an internet company (AOL) co-owned Warner Music and a drinks company (Seagram) owned Universal Music, before selling it to a water utilities company (Vivendi), and, long before that, EMI was owned by a light bulb company (Thorn Electrical Industries). We have got used to this current period of corporate stability for the major record labels, but this situation is a reflection of the recorded music business being in such a poor state that there was little M&A interest. Nonetheless it is all changing, potentially heralding a return to the past. Everything has happened before and will happen again.

Facebook Might Just Have Done YouTube a Massive Favour

The word on the street is that the deals labels have struck with Facebook for its forthcoming music service have been done on a blanket license basis (i.e. a flat fee) with no reporting. This was reported by Music Business Worldwideand has been confirmed to me by various well-placed third parties:

“One controversial element of these agreements is, we hear, that these are ‘blind’ checks: effectively, advances that are not tied to any kind of usage reports from Facebook.”

Now to be clear, this has not been confirmed by either the labels concerned nor by Facebook but, if true, it has potentially dramatic implications, and not where you would necessarily think.

Facebook will bring something highly differentiated to streaming

Facebook is obviously in legislative cross hairs right now because it has proven unable to keep sufficient tabs on user data. The reason reportedly given for the lack of reporting is that Facebook does not yet have the reporting technology in place to track and report on music consumption. Now, there is no doubt that music rights reporting is no small undertaking; it requires expensively constructed systems to manage complex frameworks of rights. Given that Facebook is likely to launch something that more closely resembles Musical.ly and Flipagram (e.g. sound tracking, messaging, social interaction and photo albums) than it does Spotify, the odds are that this proposition will be particularly complex from a reporting perspective. But, and it is a crucial ‘but’, this challenge of tracking, enforcing and reporting on music-integrated user-generated content (UGC) is exactly the same challenge YouTube has been grappling with for years.

Facebook will become the new big player in UGC music

As we all know, YouTube’s relationship with music rights holders (labels in particular) has been fraught with conflict, tension and disagreement. The recorded music industry remains committed to rolling back much of the ‘fair use’ rules under which YouTube operates, to ensure that it can be licensed more like the standard music services. And it appears that genuine legislative progress has been made with big announcements mooted for later this year.

However, if I was part of YouTube’s lobbying team right now I’d be thinking I’ve just been given a free pass. The crux of the industry’s argument is that YouTube does not sufficiently protect copyright, enforce policing nor pay enough. Not paying enough is not directly a legislative issue, but instead a commercial factor. But the labels argue that the unique ‘fair use’ basis on which YouTube operates enables is to pay too little.

If the assumed basic premise of this deal is indeed correct, it transforms in an instant, YouTube from wild west desperado into the closest thing global scale UGC music has to a sheriff. YouTube’s Content ID system is more than 99% accurate at tracking and reporting on consumption. There is so much music on YouTube because in large part the labels need YouTube as a marketing platform. In fact, labels spend more on YouTube marketing than any other digital channel except social.

Fair use lobby efforts may be impacted

Meanwhile Facebook’s position on reporting, according to Music Business Worldwide, is:

“the social media service has committed to building a system which will be able to provide such usage reports – and therefore royalty reports – in the future.”

The deal as a whole could result in three potential legislative outcomes:

  1. Proposed regulations are rethought
  2. Proposed regulations are put on ice
  3. Proposed regulations are implemented but applied equally to Facebook too

The latter is a possibility, but the complication is that the labels – and again this is if the suggested deal structure is correct – have chosen to enable Facebook to behave in many of the exact ways which they do not want YouTube to operate.

Of course, there are good reasons this deal has happened, not least that Facebook will make a massive contribution to the digital music space in a truly different way. But perhaps more importantly in this context, Facebook will have paid enough to make the labels do a 180 degree turn on their approach to UGC. Therein lies the heart of the YouTube problem. Rights holders want to get paid more, and lobbying for legislative change is seen as the only way to make that happen. But some of the fundamentals that underpin that change are potentially put into question by the Facebook deals. So, there is a chance that in their efforts to get more revenue from Facebook, the labels might just have compromised their ability to get even more revenue in the long term from YouTube.

Facebook Has Got An Instagram Problem

Mark Zuckerberg dropped a bit of bombshell during the Q4 2017 earnings call. He announced that Facebook daily active users (DAUs) have fallen across some key markets, including the US. COO Sheryl Sandberg elaborated:

“In the US and Canada, these changes contributed to a DAU decline of 700,000 compared to Q3. We don’t see this as an ongoing trend, but we do anticipate that DAU in this region may fluctuate given the relatively high penetration level.”

Facebook attributed the fall to the newsfeed changes it has made to improve the quality of relevance of content users see, and to mitigate against trends such as fake news. While these will certainly have played a role, there is a bigger, more fundamental factor driving the decline: Facebook has an Instagram problem. Or, to be more precise, Facebook has a messaging app problem.

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Messaging apps are the third phase of platforms on which digital audiences congregate. First came websites, then social networks and now messaging apps—which collectively accounted for 7.7 billion monthly active users (MAUs) at the end of 2017, up from 6.6 billion in 2016 and 5.5 billion in 2015. This is a massive segment that continues to grow at pace.

When the sector first started emerging, Facebook could have battened down the hatches and played a defensive hand. Instead, it did what the bravest companies do: it decided to disrupt itself before the competition did. The result: Facebook is now the global leader in the mobile messaging space, with a 2017 global market share of 49%, up from 43% in 2016 and 41% in 2015. It has done such a good job of transitioning its audience that 77% of Facebook’s total audience now use at least one messaging app. But, the problem with messaging apps is that no one has really worked out how to monetise them yet. And that’s a doubly big problem for Facebook because the more time that its users spend on lower monetised messaging apps, the lower the ad revenue yield. So, the more successful that Instagram and WhatsApp become (neither of which are included in Facebook’s active user numbers) the worse off Facebook itself becomes.

Hiking ad rates hides the impact

Right now, Facebook has got enough velocity in its core ad business to absorb the DAU drop. Q4 ad revenue grew by 26% on Q3, only one percentage point less growth than it recorded one year prior. But, until Facebook gets better at monetising its messaging apps, ad revenue will increasingly feel the pinch. This is why Facebook spent much of its earnings call talking about how it is increasing the relevance of advertising, improving targeting and improving user experience, so that it can charge advertisers more. For the midterm, it will hide the impact of the messaging app shift.

Longer-term though, Facebook needs a more robust solution. It cannot rush monetisation of its messaging apps as this will risk alienating users, especially in the more personal environments of WhatsApp and Messenger. Instagram will be the core focus of ad revenue growth, as this has already proven to be a natural home for branding. Facebook is also confident it will be able to build upon its initial base of business users of WhatsApp. All of this will take time though. So, it will need to be complemented with other efforts.

If it looks like a duck

Back in our November 2016 report ‘Facebook The Media Company: If It Looks Like A Duck’, we correctly predicted that Facebook would start to feel the impact of messaging app growth on its core platform. We also predicted that Facebook would start calling itself a media company, but that it would say it was a media company unlike any other. Sure enough, one month later that’s exactly what Zuckerberg did.

There is a serious point to this analyst gloating though; Facebook needs its media company strategy to start paying dividends. It is busy finalising music rights deals and is building up its video arsenal. For music, expect (ad supported) music-based social communication to find a home in messaging apps. For video, expect the messaging apps to start acting as virtual TV programming guides and remote controls for what will likely be a semi-scheduled ad supported and premium video offering. As we said in our 2016 report:

“Media companies beware, there’s a new player in town and it’s betting big, real big.”

This blog post is an excerpt from MIDiA’s forthcoming report ‘Facebook’s Instagram Problem: Building Media Strategy In A Fragmented Audience World’.