Facebook is about to disrupt itself out of existence…again

Facebook’s rebranding to Meta can be interpreted in many ways. It can be seen as: following Google / Alphabet’s lead in communicating a new chapter in its business; putting distance between the company and its most well-known app, ahead of it beginning to decline; shifting the story away from whistleblower and ethics narratives; signalling a major strategic reboot. It is, of course, a combination of all of the above. In fact, Facebook is perhaps the most successful example of a global tech company that is embracing Clayton Christensen’s disruption innovation theory. Namely, that in order to compete in a new market, you have to radically change what you do, how you do it, and, crucially, your values. Facebook already went through this entire cycle when it pivoted towards messaging apps, and now it is about to do it all over again.

Strategy repeating itself?

Facebook’s Meta shift has a neat symmetry with its messaging app strategy – coming nearly ten years to the day after the app store launch of Facebook Messenger. When Facebook launched in 2004, the social media world was dominated by highly linear, desktop experiences, like MySpace and GeoCities. Facebook moved the needle, but it was a product of its time and generation. By the turn of the following decade, the world was changing, and with it cane a new generation of mobile-centric consumers – an opportunity that Evan Spiegel and Co seized, with the launch of Snapchat in 2011. As the dominant social platform, Facebook could easily have played it safe, developing a series of ‘good enough’, sustaining innovations to try to keep one step ahead of the noisy, but comparatively tiny, mobile-centric competition. Instead, it did something that big established companies rarely do – it decided to compete head on with it itself. Facebook decided to disrupt itself before the competition did.

Textbook Christensen

Facebook’s messaging app strategy was textbook Christensen. To really drive transformative change, you need to change your entire company and values, which is almost always best achieved by either acquiring companies or launching new divisions, so that you can learn to think and behave differently. After all, as a company, you have to respond to dramatic change in a dramatic fashion, because, up until now, your established way of doing things has resulted in you falling behind. So, in 2012, Facebook acquired Instagram for $1 billion (to initially be run as a separate entity), and then WhatsApp in 2014 for $19.3 billion. Facebook is now the biggest messaging app company on the planet, though the world has changed so much, these apps are often not even called messaging apps anymore. They are simply social apps. That is the scale of the transformation that Facebook achieved, and the metaverse is next.

Ramifications

If Facebook Meta follows a similar path for its metaverse strategy as it did for messaging apps, then a couple of major acquisitions will follow. It would be the wise move to do so, and hopefully Meta’s commitment to spending $10 billion on the metaverse does not reflect the hubris of a company that now thinks it is so good that it can do everything itself. If it is, then the odds are that Meta will not be the key metaverse player. But, if Meta does follow the Christensen playbook and become the central force of the metaverse, then there some major permutations, and even responsibilities, for Meta:

• If the metaverse becomes the future of social then, unless there is some kind of cultural reset, all of the negative, dark sides of social will simply migrate over and become magnified. Imagine how psychologically damaging getting trolled and abused in virtual reality could be, especially for impressionable, younger people
  
• The filter bubbles formed in two-dimensional social media already enable false narratives, like QAnon, to feel entirely real. Imagine just how much more real false narratives could feel in immersive environments

The immersive web

Societal risks and responsibilities aside, the shift to the metaverse represents a broader paradigm shift in digital entertainment and connectivity. MIDiA terms this as the Immersive Web, and, in fact, Facebook’s Meta announcement is a neat validation of the title of our 2021 Predictions report: ‘The Year of the Immersive Web’. Whether lightening can strike twice for Meta remains to be seen, but if it follows its 2011-2014 blueprint, then it has to be in with a shout of being the dominant metaverse player. Metaverses, though, are still heavily rooted in games, and while Meta is making a big bet on their future existing outside of games, there is no doubt that some gaming dynamics and experiences will still be part of what the future of metaverses are. The question is whether that means that the addressable audience is going to be narrower than it was for messaging apps, at least within a meaningful time frame (e.g., 5-10 years)? If not, then the risk is that Meta could end up winning the wrong war and building the future of games, instead of the future of social.

Can Spotify break out of its lane?

After years of relative stability, music consumption is shifting, with the DSP streaming model beginning to lose some ground as illustrated by the major labels growing streaming revenue by 33% in Q2 2021 while Spotify was up by just 23%. It is never wise to read long-term market trends into one quarter’s worth of results, but there was already enough preceding evidence to suggest we are entering a genuine market shift. The question is whether Spotify and the other Western DSPs are going to find themselves left behind by a fast-changing market, or can they innovate to keep up the pace?

Social music is streaming’s new growth driver, generating around $1.5 billion in 2020 and growing fast in 2021. It represents a natural evolution of social media rather than an evolution of streaming. Audio is just another tool for social expression, along with video, pictures and words. MIDiA has long argued that Western streaming focuses too heavily on monetizing consumption, at the expense of fandom. While social video does not fix the fandom problem, it does cater to some of the key elements of fandom: self-expression, identity and community. Which means that, in some respects, Spotify and the other DSPs only have themselves to blame for having kept fandom out of their propositions. In doing so, they created a vacuum that TikTok and Instagram eagerly filled.

The data in the above chart comes from MIDiA’s latest music consumer survey report which is available now to MIDiA clients and is also available for purchase here.

Rights holder licensing met market demand

Spotify and the other DSPs are the dominant, core component of recorded music and they will remain so for the foreseeable future. But whereas a couple of years ago it looked like they might be the entire story, now music consumption is moving beyond, well, consumption. Finally, we are seeing music becoming an enabler of other experiences. Historically this was restricted to non-scalable, ad hoc sync deals. Now rights holders have established licensing frameworks that are flexible, dynamic and scalable enough to enable a whole new generation of experiences with music either in a central or supporting role.

DSPs occupy one of streaming’s lanes

The implication of this is that Spotify and the other DSPs now risk looking like they are stuck in just one lane of the streaming market. What looked like a highway is now just a single lane – and Spotify, Apple and Amazon do not have the assets to build propositions that can get them out of it. Being part of this social music revolution requires both massively social communities and video. They could all build that, of course, but with little guarantee of success. YouTube is a different case, having launched Shorts in a belated bid to ward off TikTok’s audience theft – but at least it is now running that race, and Alphabet reported 15 billion daily global views for Q2.

An increasingly segmented market

Spotify and other DSPs now find themselves not being part of streaming’s new growth story and, YouTube excepted, with no clear path to becoming part of it. To be clear, Spotify will continue to be the world’s largest subscription revenue generator and the DSP subscription model will continue to be the biggest source of revenue, at least for the foreseeable future. But revenue growth will increasingly come from elsewhere. In many respects this simply reflects the maturation of the music streaming market. Consider video streaming. Netflix added just 1.5 million subscribers in Q2 2021 while YouTube grew by 84% and TikTok went from strength to strength. Netflix occupies just one lane in a multifaceted streaming market. The same is now becoming true of the DSPs.

Time to do a Facebook?

So, what can Spotify and the other DSPs do about it? If Spotify really wants to ‘own’ audio, then it will have to do what Facebook did to ‘own’ social: create a portfolio of standalone sister apps. Facebook would have become the Yahoo of social media if it hadn’t bought / launched Instagram, WhatsApp and Messenger. The signs are already there for Spotify. Even ignoring the slowdown in monthly active user (MAU) growth in Q2 2021, podcast users stopped meaningfully growing as a share of overall MAUs in Q4 2020. It turns out that trying to compete with yourself in your own app is hard to do. The time may have come for a standalone podcast / audiobook app (by the way, I’m just taking it as read that Spotify is going to take audiobooks a whole lot more seriously). If Spotify does launch a podcast app, then the case suddenly becomes a lot clearer for other audio-related apps, all of which could include subscription tiers, such as social short video, karaoke, and artist channels.

The more probable outlook however is for specialisation, with segments going deep and vertical rather than wide and horizontal. While Spotify, and other DSPs, might have success in one or more side bets, it will be the specialists who lead in streaming’s other lanes. Whatever the final market mix looks like as a result of this change, the streaming market is going to be more diverse and innovative for it.

The record labels are weaning themselves off their Spotify dependency

The major labels had a spectacular streaming quarter, registering 33% growth on Q2 2020 to reach $3.1 billion. Spotify had a less impressive quarter, growing revenues by just 23%. After being the industry’s byword for streaming for so long, Spotify’s dominant role is beginning to lessen. This is less a reflection of Spotify’s performance (though that wasn’t great in Q2) but more to do with the growing diversification of the global streaming market. 

Spotify remains the dominant player in the music subscription sector, with 32% global subscriber market share, but streaming is becoming about much more than just subscriptions. WMG’s Steve Cooper recently reported that such ‘emerging platforms’ “were running at roughly $235 million on an annualized basis” (incidentally, this aligns with MIDiA’s estimate that the global figure for 2020 was $1.5 billion). 

The music subscription market’s Achille’s heel (outside of China) has long been the lack of differentiation. The record labels showed scant interest in changing this, but instead focused on licensing entirely new music experiences outside of the subscription market. As a consequence, the likes of Peloton, TikTok and Facebook have all become key streaming partners for record labels – a very pronounced shift from how the label licensing world looked a few years ago.

The impact on streaming revenues is clear. In Q4 2016, Spotify accounted for 38% of all record label streaming revenue. By Q2 2021 this had fallen to 31%.

Looking at headline revenue alone, though, underplays the accelerating impact of streaming’s new players. Because Spotify already has such a large, established revenue base, quarterly dilution is typically steady rather than dramatic. Things look very different though when looking specifically at the revenue growth, i.e., the amount of new revenue generated in a quarter compared to the prior year. On this basis, streaming’s new players are rapidly expanding share. Spotify’s share of streaming revenue growth fell from 34% in Q4 2017 to just 26% in Q2 2021. Unlike total streaming revenue, the revenue growth figure is relatively volatile, with Spotify’s share ranging from a low of 11% to a high of 60% over the period – but the underlying direction of travel is clear.

Spotify remains the record labels’ single most important partner both in terms of hard power (revenues, subscribers) and soft power (ability to break artists etc.). But the streaming world is changing, fuelled by the record labels’ focus on supporting new growth drivers. The implications for Spotify could be pronounced. With so many of Spotify’s investors backing it in a bet on distribution against rights, the less dependent labels are on it, the more leverage they will enjoy. From a financial market perspective, the last 18 months have been dominated by good news stories for music rights – from ever-accelerating music catalogue M&A transactions to record label IPOs and investments. 

Right now, the investor momentum is with rights. Should the current dilution of Spotify’s revenue share continue, Spotify will struggle to negotiate further rates reductions and will find it harder to pursue strategies that risk antagonising rights holders. Meanwhile, rights holders would be surveying an increasingly fragmented market, where no single partner has enough market share to wield undue power and influence. That is a place where rights holders have longed dreamed of getting to, but now – divide and conquer – may finally be coming to fruition.

We Are At a Turning Point for Social Music

In recent days we have seen three major developments that, collectively, are a potential pivot point for social music:

1. TikTok close to a US-entity buyout by Microsoft to avoid potential sanctions, following hot on the heels of an India blackout
2. Facebook launched a (US-only) YouTube competitor for music videos
3. Snap Inc signed a licensing deal with WMG and others, also for music videos

As cracks begin to appear in the audio streaming market, there is a growing sense in the music industry of the need for a plan B. This has been driven by growing discontent among the creator community, and a slowdown in revenue growth (UMG streaming revenues actually fell in Q2 as did Sony Music’s); the tail wagging the artist-and-revenue (A&R) dog. The search for new growth drivers is on, and social music – for so long a promise unfulfilled in the West – is one of the bets. TikTok was meant to be a major part of that bet. But with the US future of the app so at risk that a Microsoft US-entity buyout may be the only option, and the continued impact of COVID-19 on core revenue streams, the future is beginning to look a little more troublesome. Perhaps now more than ever, the music industry needs social music to start delivering.

There are three key issues at stake here:

1. How consumers discover music
2. How (particularly younger) consumers engage with music
3. Competing with YouTube

How consumers discover music

Among the under-aged 35 demographic, YouTube is the primary music discovery channel, followed by music streaming, then radio, and only then by social. Streaming discovery is heavily skewed towards tracks and playlists, and away from artists and release projects, which is fine for streaming platforms but impedes building sustainable artist careers. Radio is losing share of ear and YouTube… well, YouTube is YouTube (more on that below), so the music business needs a new discovery growth driver. Social has the potential to be just that. But spammy artist pages on Facebook and more-than-perfect Instagram photos are not it. TikTok, for all its amazing momentum, actually has a really uneven impact on discovery. Some tracks blow up out of nowhere while most do little, and rarely is it because of a smart label marketing strategy but instead because certain tracks just work on the platform and the community leaps on them. For now, TikTok is too unpredictable to plan around. Facebook (Instagram especially) and Snap Inc have a fantastic opportunity to do something special here. They have the audience and the social know-how. Whether they can deliver is a different matter entirely.

How (particularly younger) consumers engage with music

What TikTok lacks in consistent marketing contribution it makes up in consumption. Following on from Musical.ly’s start, TikTok has reimagined how music can be part of social experiences for young audiences. It has made music a highly relevant and integral part of self-expression, something that CD collections and music dress codes used to do in the pre-digital world but that soulless, ephemeral playlists wiped out. While labels pin hopes on TikTok successes to drive wider consumption, the discovery journey is also the destination for most TikTok users – they hear the track in a video and swipe onto the next one. That is no bad thing. This is a new form of consumption, and if TikTok were to disappear or fade then someone else needs to pick up the baton. Whether Facebook and Snap Inc can do so is, again, an open question.

Competing with YouTube

Now we get to the heart of the Facebook and Snap Inc deals. As important as the previous two points are, they were not the overriding priorities of the commercial teams driving these deals. Instead they were focused on expanding the revenue mix and part of that is creating more competition for the notoriously low-paying YouTube. Well, maybe not that low paying after all.

The internet is full of statements from trade associations, rightsholders and creators about how much less YouTube pays than Spotify. YouTube does pay less, because it manages to escape paying minimum per-stream rates for ad-supported videos – but it is a more nuanced picture than lobbyists would have you believe. Firstly, in terms of its Premium business, Google is entirely on par with Spotify. But then, that is the part that is licensed in the same way as the rest of the market.

Ad-supported is a mixed story. In North America, where there is a mature digital ad market, YouTube’s ad-supported average revenue per user (ARPU) is entirely on par with Spotify’s. However, on a global basis, ad-supported ARPU is dragged down by its large user base in emerging markets where digital ad markets are nascent. Spotify’s ARPU is 66% higher, in part because it has to pay minimum per-stream rates, i.e. it pays a fixed rate per stream regardless of whether it has sold any ad inventory against the track. This boosts ad-supported ARPU but it risks making the model unstainable, to the extent that Spotify reported -7% gross margin for ad-supported in Q1 2020 (and note, that’s gross margin, not net margin).

Rightsholders will be hoping for Facebook and Snap Inc to bring a similar level of competition to music video as exists in streaming audio, which in turn may give them a path to higher global ad-supported ARPU rates and a healthier marketplace. However, what will determine that objective is not business strategy but product strategy. The key question is what can they both do with music videos that YouTube cannot? YouTube has years of experience and user data around music videos, Snap Inc and Facebook do not. They will be playing catch-up with a weaker portfolio of content assets: Snap Inc is only partially licensed and both it and Facebook have only licensed official music videos. Unofficial videos (mash ups, covers, lyrics, TV show appearances etc.) account for 25% of the views of the top 30 biggest YouTube music videos. Those videos are crucial in that they provide the lean-forward element for viewers; they are crucial to making YouTube music social rather than just a viewing platform.

YouTube has dominated the music video globally for more than a decade. This might just be the time that this position starts to be challenged. But if Facebook and Snap Inc are going to do that, they will have to bring their product strategy A-game to the field. If they can, then the we may indeed witness a social music turnaround in the West.

Have We Reached Peak Tech?

In last week’s Take Five I highlighted a Vox story which reported that over the last year the number of companies using terms like ‘tech’ or technology’ in their documents is down 12%. This is an early indicator of a much more fundamental concept – we may have already reached peak in the tech sector, the business sector that has driven the fourth industrial revolution. While some may quibble whether the internet-era transformation was the predecessor to a new industrial revolution built around AI, big data and automation, the underlying factor is that tech – for better or for worse – has shaped the modern world. More in the developed world than the majority world perhaps, but it has shaped it nonetheless. Now, however, with tech so deeply ingrained in our lives and the services and enterprises that facilitate them, has tech become so ubiquitous as to render it meaningless as a way of defining business?

Tech is the modern world

When Tim Berners Lee invented the World Wide Web in 1989 he could have had little inkling of the successive wave of global tech superpowers that it would incubate. As we near the end of the second decade of the 21^stcentury it is hard to imagine daily life without it. The pervasive reach of the web and the Internet more broadly is perfectly illustrated by Amazon’s recent launch of twelve new devices, including a connected oven, a smart ring (yes a ring) with two mics and a connected night light for kids. All of which follows Facebook’s connected screen Portal, which for a company that trades on user data, raises the question: ‘Is this your portal to the world, or Facebook’s portal to your world?’ However, regardless of why the world’s biggest tech companies want us to put their hardware into our homes, this is simply the latest new frontier for consumer tech. Now that we carry powerful personal computers with us everywhere we go, we remain instantly connected to our personal collections of connected apps and services. Tech is the modern world.

The rise of tech-washing

With tech now powering so much of what we do, it raises the question whether tech is any longer that useful a term for actually distinguishing or delineating anything. If everything is tech, then what is tech? It is a question that the world’s biggest investors are starting to ask themselves, too. In fact, we have now reached a stage where a) tech is a meaningless concept – everything is tech, and b) there is the realisation that many companies are ‘tech washing’, using the term ‘tech’ to hide the fact that they are in fact anything but tech companies which happen to use technology platforms to manage their operations. In the era when everything is tech enabled, you would be hard pushed to bring a new business to market that does nothave tech at its core. Companies like Uber, WeWork and just-listedPeleton have managed to raise money against billion-dollar-plus valuations in large part because they have positioned themselves as tech companies. In actual fact when the tech veneer is removed, they are respectively a logistics company, a commercial rental business and an exercise equipment company. If they had come to market simply with those tag lines, they would undoubtedly have secured far smaller valuations and many of their tech-focused investors would not have backed them. Investors are beginning to see through the ‘tech-washing’, as evidenced by the instant fall in Peleton’s stock price, WeWork’s crisis mode sell-off and Uber’s continuing struggles.

Pseudo-tech

Calling yourself a tech company has become a get out of jail free card for new companies, an ability to raise funds at inflated valuations, and a means to persuade investors to focus on ‘the story’ and downplay costs and profit in favour of growth, innovation and of course, that hallowed tech company term: disruption. I have been a media and tech analyst since the latter days of the original dot-com boom, and the mantra of the companies of that era was that ‘old world metrics’ such as profitability didn’t apply to them. Of course, as soon as the investment dried up, the ‘old world metrics’ killed most of them off. Today’s ready access to capital, enabled in part by low interest rates, has enabled a whole new generation of companies to spin the same yarn. But whether it is the onset of a global recession or growing investor scepticism, a similar fate will likely face today’s crop of ‘disruptors’. The dot-com crash separated the wheat from the chaff, wiping out the likes of Pets.com but seeing companies like eBay and Amazon survive to thrive.It also took a bunch of promising companies with it too. The imperative now is to strip away pseudo-tech companies from the tech sector so that investors can better segment the market and know who they should really be backing through what will likely be a tumultuous economic cycle. As SoftBank is finding to its cost, building a portfolio around pseudo-tech becomes high risk when the tech-veneer can no longer hide the structural challenges that the underlying businesses face.

Tech is central to the modern global economy and will only increase in importance – at least until the world starts building a post-climate-crisis economy. It is imperative for genuine tech companies and investors alike to start taking a more critical view of what actually constitutes tech. The alternative is that the tech sector will get dragged down by the failings of logistics companies and gym equipment manufacturers.

Take Five (the big five stories and data you need to know) August 5th 2019

Spotify – steady sailing, for now: Spotify hit 108 million subscribers in Q2 2019 – which is exactly what we predicted. Spotify continues to grow in line with the wider market, maintaining market share. Subscriber growth isn’t the problem though, revenue is. As mature markets slow, emerging markets will keep subscriber growth up but with lower APRU will bring less revenue. Spotify needs a revenue plan B. If podcast revenue is it, then it needs to start delivering, fast.

Fortnite World Cup: It can be hard to appreciate the scale of transformative change while it is still happening. A few years from now we’ll probably look back at the late 2010s as when e-sports started to emerge as a global-scale sport in its own right. Epic Games’ inaugural Fortnite World Cup pulled in 2.3 million viewers on YouTube and Twitch, was played in the Arthur Ashe Stadium and the singles winner picked up more prize money ($3 million) than Tiger Woods at the Masters and Novak Djokovic at Wimbledon.

Facebook trying to do an Apple, and an Amazon: With 140 million daily users of its Watch video service, Facebook is positioning to become the video powerhouse it always looked like it could be. Now it is trying to follow in Apple and Amazon’s footsteps and make itself a video device company too. Currently in talks with all its key video competitors, Facebook wants to add streaming to its forthcoming video calling device. That would leave Alphabet as the only tech major without a serious video household device play (unless you count Android TV).

Ticking time bomb?: Having recently hit 120 million users in India, TikTok clearly has scale, but it also has a rights problem, calling in the UK Copyright Tribunal to resolve a dispute with digital licensing body ICE, which characterised TikTok as being ‘unlicensed’. This feels a lot like the days when YouTube was first carving out licenses. Sooner or later TikTok is going to need a licensing framework that rights holders will sign off on. Matters just took a twist with TikTok poaching ICE’s Head of Rights and Repertoire. It’ll take more than that though to fix this structural challenge. 

We’re competing with Fornite: Yes, more Fortnite….fresh from World Cup success and on the eve of the Ashes, the English Cricket Board said ‘There’s 200 million players of Fortnite…that is who we are competing against.’ Do not mistake this for a uniquely cricket problem, nor even a uniquely sports problem. In the attention economy everyone is competing against everyone. And while Fornite might be the go-to for middle-aged execs bemoaning attention competition (yes that means you Reed Hastings) the trend is bigger than Fortnite alone, way bigger.

Spotify Takes Aim at Radio, Again

Spotify has launched a radio-like feature set for premium subscribers in the US called Your Daily Drive.Although it is only positioned as a playlist, the content mix includes podcast news content and plays music the listener already likes with a sprinkling of new tracks. This might not sound that special, but this ‘recurrent heavy’, news-anchored programming is Spotify taking the essence of US drive time radio and translating it into a playlist. As we wrote back in early 2018, radio is streaming’s next frontier, and nowhere is that more true than in the US.

Right now, streaming consumption is fragmented across multiple programming formats with no stand-out use case. Curated playlists are not for music what binge watching is for video. While this is positive in the context of multiple use cases being met within an increasingly diverse user base, if streaming is ever going to seriously challenge the mainstream mass-market audience that is radio, it needs a binge watching equivalent. Streaming needs a simple, easy to understand and access format that translates seamlessly to traditional radio audiences. Your Daily Drive is a very small first step on that journey.

The playlist is now just a delivery vehicle

If we were to rewind just a few years ago, the idea of Spotify delivering drive-optimized playlists interspersed with news may not have sounded totally outlandish but it would nonetheless have only felt a distant possibility. But now that Spotify has extensive podcast capabilities under its belt and a very proven willingness to insert podcasts throughout the music user’s experience, the concept of what constitutes a playlist needs rethinking entirely…largely because that is exactly what Spotify has just done. The industry needs to start thinking about playlists not as a collection of music tracks but instead as a targeted, personalized and programmed delivery vehicle for any combination of content. In old world parlance you might call it a ‘channel’, but that does not do justice to the vast personalization and targeting capabilities that playlists, and Spotify’s playlists in particular, can offer.

In this context, Your Daily Drive is not simply a playlist but instead Spotify’s first foray into next-generation radio broadcasting. There will doubtless be further Spotify playlist announcements over the coming months that leverage podcast content. As with Your Daily Drive, they won’t just be playlists; instead, pay attention to what they are aiming to compete with to understand their true intent.

Making radio work takes more than just making radio work

Radio programming itself will take a long time for Spotify to master – just look how long it is taking Apple. Even when it does, the even bigger challenge is monetisation. Ad-supported revenue simply isn’t growing fast enough, and the Q1 earnings (which recognized the revenue of its new podcast companies) did not indicate that podcasts were going to bring a big bump anytime soon either. To compete with radio in a meaningful way, Spotify will have to invest heavily in ad sales and ad tech to the same extent that Pandora has. That means having people pounding the streets, knocking on the doors of mom and pop stores selling local spot ads, through to competing with Google, Facebook and Amazon to deliver world class ad tech. No small task, but the rewards could be huge.

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.

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.

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