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.

blog slide

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’.

MIDiA Research Predictions 2018: Post-Peak Economics

With 2017 drawing to a close and 2018 on the horizon, it is time for MIDiA’s 2018 predictions.

But first, on how we did last year, our 2017 predictions had a 94% success rate. See bottom of this post for a run down.

Music

  • Post-catalogue – pressing reset on the recorded music business model: Revenues from catalogue sales have long underpinned the major record label model, representing the growth fund with which labels invested in future talent, often at a loss. Streaming consumption is changing this and we’ll see the first effects of lower catalogue in 2018. Smaller artist advances from bigger labels will follow.
  • Spotify will need new metrics: Up until now Spotify has been able to choose what metrics to report and pretty much when (annual financial reports aside). Once public, increased investor scrutiny on will see it focus on new metrics (APRU, Life Time Value etc) and concentrate more heavily on its free user numbers. 2018 will be the year that free streaming takes centre stage – watch out radio.
  • Apple will launch an Apple Music bundle for Home Pod: We’ve been burnt before predicting Apple Music hardware bundles, but Amazon has set the precedent and we think a $3.99 Home Pod Apple Music subscription (available annually) is on the cards. (Though we’re prepared to be burnt once again on this prediction!) 

Video

  • Savvy switchers – SVOD’s Achilles’ heel: Churn will become a big deal for leading video subscription services in 2018, with savvy users switching tactically to get access to the new shows they want. Of course, Netflix and co don’t report churn so the indicators will be slowing growth in many markets.
  • Subscriptions lose their stranglehold on streaming: 2018 will see the rise of new streaming offerings from traditional TV companies and new entrants that will deliver free-to-view, often ad-supported, on-demand streaming TV.

Media

  • Beyond the peak: We are nearing peak in the attention economy. 2018 will be the year casualties start to mount, as audience attention becomes a scarce commodity. Smart players will tap into ‘kinetic capital’ – the value users give to experiences that involve their context and location.
  • The rise of the new gate keepers part II: In 2018 Amazon and Facebook will pursue ever more ambitious strategies aimed at making them the leading next generation media companies, the conduits for the digital economy.

Games

  • The rise of the unaffiliated eSports: eSports leagues emulate the structure of traditional sports, but they may have missed the point. In 2018, we’ll see more eSports fans actually seeking games competition elsewhere, driving a surge in unaffiliated eSports.
  • Mobile games are the canary in the coal mine for peak attention: Mobile games will be the first big losers as we approach peak in the attention economy – there simply aren’t enough free hours left in the day. Mobile gaming activity is declining as mainstream consumers, who became mobile gamers to fill dead time, now have plenty of digital options that more closely match their needs. All media companies need to learn from mobile games’ experience.

Technology

  • The fall of tech major ROI: Growth will come less cheaply for the tech majors (Alphabet, Apple, Amazon, Facebook) in 2018. They will have to overspend to maintain revenue momentum so margins will be hit.
  • Regulation catches up with the tech majors: Each of the tech majors is a monopoly or monopsony in their respective markets, staying one step ahead of regulation but this will change. The EU’s forced unbundling of Windows Media Player in the early 2000s triggered the end of Microsoft’s digital dominance. 2018 could see the start of a Microsoft moment for at least one of the tech majors. 

2017 Predictions

For the record, here are some of our correct 2017 predictions:

  • Digital will finally account for more than 50% of revenue
  • Spotify will still be the leading subscription service
  • eSports to reach $1 billion
  • Streaming holdouts will trickle not flood
  • AR will have hype but not a killer device.
  • VR players will double down on content spend
  • Google doubles down on its hardware ecosystem plays
  • 2017 will not be the year of Peak TV
  • Original video content to arrive on messaging apps

Here are some that we got wrong or were inconclusive:

  • Tidal finally sells ($300 million stake from Softbank was a partial sale – full sale likely in 2018)
  • Apple will launch an Apple Music iPhone – didn’t happen but the Home Pod may be the bundled music device in 2018 (see below)
  • Spotify will be disrupted – it actually went from strength to strength with no meaningful new competitor, yet

Disney, Netflix and the Squeezed Middle: The Real Story Behind Net Neutrality

Unless you have been hiding under a rock this last couple of weeks you’ll have heard at least something about the build up to the decision over turning net neutrality in the US, a decision that was confirmed yesterday. See Zach Fuller’s post for a great summary of what it means. In highly simplistic terms, the implications are that telcos will be able to prioritize access to their networks, which could mean that any digital service will only be able to guarantee their US users a high quality of service if they broker a deal with each and every telco. As Zach explains, we could see similar moves in Europe and elsewhere. If you are a media company or a digital content provider your world just got turned upside down. But this ruling is in many ways an inevitable result of a fundamental shift in value across digital value chains.

net neutrality value chains

Although the ruling effectively only overturns a 2015 ruling that had previously guaranteeing net neutrality, the world has moved on a lot since then, not least with regards to the emergence of the streaming economy across video, music and games. In short, there is a lot more bandwidth being taken up by streaming services and little or no extra value reverting to the upgraded networks.

Value is shifting from rights to distribution

Although the exact timing with the Disney / Fox deal (see Tim Mulligan’s take here) was coincidental the broad timing was not. The last few years have seen a major shift in value from rights companies (eg Disney, Universal Music, EA Games) through to distribution companies (eg Facebook, Amazon, Netflix, Spotify) with the value shift largely bypassing the infrastructure companies (ie the telcos).

The accelerating revenue growth and valuations of the tech majors and the streaming giants have left media companies trailing in their wake. The Disney / Fox deal was two of the world’s biggest media companies realising that consolidation was the only way to even get on the same lap as the tech majors. They needed to do so because those tech majors are all either already or about to become content companies too, using their vast financial fire power to outbid traditional media companies for content.

The value shift has bypassed infrastructure companies

Meanwhile telcos have been left stranded between rock and a hard place. Telcos have long been concerned about becoming relegated to the role of dumb pipes and most had given up any real hope of being content companies themselves (other than the TV companies who also have telco divisions). They see regulatory support for better monetizing their networks by levying access fees to tech companies as their last resort.

In its most basic form, this regulatory decision will allow telcos to throttle the bandwidth available to streaming services either in favour of their favoured partners or until an access fee is paid. The common thought is that telcos are becoming the new gatekeepers. In most instances they are more likely to become toll booths. But in some instances they may well shy away from any semblance of neutrality. For example, Sprint might well decide that it wants to give its part-owned streaming service Tidal a leg up, and throttle access for Spotify and Apple Music for Sprint users. Eventually Spotify and Apple Music users will realise they either need to switch streaming service or mobile provider. Given that one is a need-to-have, contract-based utility and the other is nice-to-have and no contract and is fundamentally the same underlying proposition, a streaming music switch is the more likely option. Similarly, AT&T could opt to throttle access for Netflix in order to give its DirecTV Now service a leg up. Those telcos without strong content plays could find themselves in the market for acquisitions. For example, Verizon could make a bid for Spotify pre-listing, or even post-listing.

The FCC ruling still needs congressional approval and is subject to legal challenges from a bunch of states so it could yet be blocked. If it is not, then the above is how the world will look. Make no mistake, this is the biggest growing pain the streaming economy has yet faced, even if it just ends up with those services having to carve out an extra slice of their wafer-thin margins in order reach their customers.

Spotify, Netflix And Instagram Make Gains In Q2 2017

Since Q4 2016 MIDiA Research has been fielding a quarterly tracker survey across the US, UK, Canada and Australia to build a proprietary dataset that provides a unique insight into how digital consumer trends are evolving quarter-upon-quarter. Through the tracker we monitor weekly active usage of apps for streaming music, streaming video, games, social and messaging. We also measure the shifts in key consumer behaviours, such as curated playlist listening, binge watching and subscriptions, in each of these sectors each quarter. We have structured the data so that clients can explore each app and behaviour by demographics, and, crucially, users can examine how much each app overlaps with others and with all the 40 different behaviours we track. We recently published a report for MIDiA’s paid subscribers analysing key trends across the first three quarters of our tracker. Here are some of key insights from the report. To find out more about how to get access to MIDiA’s Quarterly Trends report, email stephen@midiaresearch.com.

The leading apps in each of the categories tracked are largely consistent across all of the countries surveyed and they are also the big names that are familiar to all (see figure above). However, where things get interesting is in a) the variations in penetration across countries and b) how usage has evolved over successive quarters. For example:

quarterly trends midia figure 1

  • Messaging apps on the rise: Weekly Facebook usage was up slightly in the US between Q4 2016 and Q2 2017, but down in the UK. Over the same period WhatsApp was flat in the US but up slightly, along with Instagram, in the UK. WhatsApp penetration stood at just 11% in the US in Q2 2017 but 33% in the UK, while penetration in Australia and Canada laid in the middle of those two points.
  • Netflix growing but not in the UK: YouTube is still the standout video destination in terms of weekly usage across all the markets tracked. However, growth has slowed in these markets, with penetration going down slightly over the three quarters. YouTube’s loss is Netflix’s gain, with the streaming TV platform’s usage increasing each quarter. Though, again, there is an intriguing country level exception: Netflix is growing everywhere except the UK where weekly usage was flat over the period.

top streaming music apps in q2 2017, spotify, youtube, apple music, soundcloud, amazon, musical.ly

YouTube is the world’s leading streaming music app and this is true of the larger, mature markets. The continual breaking of YouTube music streaming records by the likes of Shakira and Luis Fonsi point to a renaissance in YouTube as a music streaming platform. However, the origin of those artists point to the location of YouTube’s music momentum: Latin America. Meanwhile, across the US, UK, Canada and Australia, weekly usage of YouTube as a music app was flat, and down actually in Australia. Most of the music apps we tracked had a dip in Q1 2017 but in the main held ranking and overall usage. Deezer saw a small rise while Soundcloud fell slightly. Spotify was the big winner, gaining penetration to close the gap on YouTube, and becoming the leading standalone music app. In the UK, Spotify surpassed YouTube for music among 16-19 year olds, hinting at a strong future for Spotify among Gen Z. Talking of Gen Z, lip synching apps Musical.ly and Dubsmash maintained momentum across the period, something other music messaging apps have previously failed to do this late on in their lives. These sort of apps, though niche in scale, point to what Gen Z want from their social music experiences.

These are just some of the very high-level trends, and there is much more in the report itself. If you are a MIDiA subscription client you can access the report and data right away here. If you are not yet a client and would like to learn more about how to get the report and the other benefits of being a MIDiA client email Stephen@midiaresearch.com.

The Internet’s Adolescence: The Real World Catches Up Eventually

I started my career as an internet analyst back in the period of the dot-com bubble. They were heady days in which anything seemed possible. The world was changing in unprecedented ways and the possibilities were endless. The rules that governed the old world didn’t apply. Except they did. Investors soon twigged that dot-com startups were simply not able to deliver on their revenue promises and so pulled their funding. In an instant, the whole edifice came tumbling down. It turned out that those old fashioned and outdated concepts such as turning a profit actually applied to internet companies too. We have come a long way since the dot-com bubble, but it would be wrong to think of the internet as being a mature medium yet. Instead, it is entering its market adolescence and consequently still has a lot of growing up to do.

Regulation Comes Eventually

Although the internet and its associated technologies (apps, social, streaming, e-commerce, etc) are deeply embedded in our daily lives in the developed world (and increasingly so in emerging markets), it is still fundamentally just getting going. On a global level, each key sector of the internet economy is dominated by 1 company (Amazon/e-commerce, Google/search, Facebook/social, etc). A single dominant company is typically an indication of an early stage market and/or one that is about to be opened up with regulation. In the case of internet industries, it is likely to be a combination of both. Thus far, regulation has not yet properly caught up with internet companies. The global, borderless nature of their propositions and their relative lack of precedents makes regulation a highly challenging task. But it will happen.

Regulatory Repercussions

To be clear, regulation is not some shining panacea for business. But it is the price of being part of society and global commerce. The more deeply integrated into civic society that internet companies become, the stronger the likelihood for them to become regulated. And when regulation happens, the effects can be devastating for companies that have previously operated with free reign. When the European Commission, under lobbying pressure from Real Networks, compelled Microsoft to unbundle the Windows Media Player (then by far the most popular music player) from Windows in 2004, it was the trigger for a long period of decline for Microsoft, from which it is only just beginning to recover. Clearly, there were other market factors that contributed to its decline, but regulation was the tipping point. And the model of a competitor (Real Networks) shamelessly using regulation to give it a competitive edge over an established rival could reoccur. For example, any number of big Chinese companies looking to extend their reach to the west may view EU regulators as an opportunity to prize open the market for them.

The Pendulum Swing Of Disruption

When a new technology disrupts a traditional incumbent, it normally does so by being 3 things to the end user:

  1. Cheaper/free
  2. Quicker
  3. More convenient

Napster, YouTube, Amazon, Uber, Netflix, all of these companies have done exactly this. Because they most often build market share and presence using external funding, such companies turn existing economics upside down with loss leading tactics. The result is that audiences switch in their millions and incumbents are left in tatters. Any old business that relies on scarcity economics will be swept away.

Take Uber’s impact on taxi drivers across the world. In the UK, a black cab driver will spend 5 years riding around every street in London on a scooter, memorising every street before taking a $60,000 loan on a black cab. 8 or 9 years into the venture, a black cabbie might be in the money. In the days of Google Maps and Uber, those principles go out of the window. Uber has had such an impact in London, that the cab rank queues at train stations can be miles long because black cabs have so little street side business left. In New York, yellow taxi medallions (the city’s government certification for official taxis), once traded as high as $1.3 million each in secondary markets, but have dropped to $240,000 now that Uber and Lyft have ensured that you no longer need a medallion to operate as a taxi in New York.

This is the pendulum swing of disruption. But pendulums eventually swing back. That is when regulations, real world economics and new business model innovation come into play. The original market disruptors often either disappear or get bought. The recorded music industry is now finally building a new set of effective businesses around the disruption brought by Napster, which died as an entity before the millennium really got going. YouTube transformed video and was bought by Google, Skype cannibalized mobile carriers and was ultimately bought by Microsoft, Linkedin disrupted recruitment advertising and was also bought by Microsoft, PayPal disrupted credit card companies and was bought by eBay.

All Of This Has Happened Before And Will Happen Again

Today’s internet giants may have the appearance of being permanent features of the digital landscape, but they’re not. AOL, Yahoo, Netscape or MySpace looked immortal in their days, as the GAAF (Google, Apple, Amazon, Facebook) do now. That doesn’t mean these companies cannot become long serving global superpowers. But history has a habit of repeating itself. Or as the fictional mythical Sacred Scrolls of Battlestar Galactica said: “All of this has happened before and will happen again.”

Never mistake normality for permanence.

 

Change Is Afoot In Music Video

Music video’s two power players are both in the news for strategic resets. On the one hand YouTube has announced that it is merging its YouTube Music and Google Play Music teams while on the other hand Vevo has announced it is postponing the launch of its subscription service in favour of prioritising global expansion. These are both important developments in their own rights but together form part of a changing narrative for music video.

Music video is streaming music’s killer app. According to MIDiA’s latest consumer survey, 45% of consumers watch music videos on YouTube or Vevo every month, while 25% of consumers use YouTube for music every week (more than any of the streaming audio services). So what YouTube and Vevo do has real impact.

YouTube Is Where Google Is Placing Its Music Bets

YouTube’s merging of teams is not a huge surprise. It always appeared overkill having 2 separate teams, especially considering that Play was performing so poorly in the market (its weekly active users are measured in single digit percentages) and that Google’s music priority has always been, and will always be, YouTube. Although nothing will change immediately in terms of user proposition, the strategic direction of travel is clear: YouTube is where Google will place its music bets. Which places even greater importance on rights holders and Google coming to an understanding around royalty payments. YouTube moving to minimum guaranteed per stream rates is untenable (for Google) as is the Value Gap/Grab (for rights holders). Something has to give.

My long-term bet is still on Google creating a parallel music industry around YouTube, one that is entirely opted out of the traditional music industry’s rights frameworks. But a more immediate concern for Google is contingency planning in the event of Vevo upping sticks and becoming the centre piece of a revamped Facebook video play. A combination of no Vevo and disgruntled rights holders would be a recipe for disaster for YouTube’s music strategy.

Facebook And Vevo May Be Courting 

Vevo jumping ship to Facebook is not as far-fetched as it might have seemed when it was first mooted a few years ago. Facebook is now the world’s 2nd biggest online video property and has finally admitted that it is a media company. Slowing ad revenues in 2017 will see Facebook double down on ancillary revenue streams and content will be a key plank of that strategy. Games is the biggest addressable market and it has already made moves in that direction. Growing video is another. While streaming music is a relatively small market opportunity for Facebook, it has wide appeal. Launching an AYCE streaming service would be an ill-advised (and highly unlikely) option for Facebook, but partnering with Vevo would be a higher margin, lower risk way of getting into music. It would also be the perfect vehicle with which to showcase Facebook’s next generation of video UI, which will include features such as curation, channels, recommendations etc. In short, a lot less like Facebook video and lot more like YouTube.

The Rise Of Music Inspired Video

Interestingly, Vevo’s CEO Erik Huggers has announced that Vevo will be increasing its focus on short form, non-music video, such as artist interviews, mini-documentaries, and animated shorts. This snackable, highly shareable content bears closer resemblance to the sort of video that works well in Facebook’s more social-centric video platform than YouTube’s more viewer-centric environment. Vevo’s non-music video approach is smart. As we explained in our report ‘From Music Video To Music Inspired Video’, if rights holders want their share of overall video time to grow, or at least hold their own, then they need to start exploring creating music related video rather than just music videos.

The core consumption format will still be the music video, but the additional content expands reach and time spent. In a Facebook environment (especially if Instagram was incorporated) this sort of content would spread like wildfire. Add into the mix that Huggers also referenced Vevo’s prioritization of building its direct audience via its own apps (ie not via YouTube) and we might just be starting to see the emerging shape of a planning-for-life-after-YouTube strategy. Even if Vevo decided to stick with YouTube (which remains the most likely outcome), it could use all of these moves as leverage for getting a better deal.

Change is afoot in the music video space and we may just be beginning to see the two key players beginning to put competitive space between each other. But perhaps most tellingly, as both companies up their game, they are also both, in different ways distancing themselves from their subscription plays. Music video is the killer streaming app for many reasons. The fact that it is free is reason number one, and Vevo and YouTube both know it.

MIDiA Research Predictions 2017: The Year Of The Platform

MRP1611-coverFollowing an 84% success rate for our 2016 Predictions report, we today launch our 2017 predictions report: ‘MIDiA Research Predictions 2017: The Year Of The Platform’. The report is immediately available to all MIDiA subscription clients and can also be purchased for individual download from our report store here.

Here are some highlights:

2016 was the year that video ate the world. 2017 will be the year of the platform, the year in which the tech majors will fight for pre-eminence in the digital economy, competing for consumer attention through formatting and distribution wars. Companies that are already using mobile Operating Systems to achieve global reach will take the next step, creating Mobile Life Ecosystems that both break out of the app silo walls and straddle them. Facebook, Amazon, Tencent, Microsoft, Apple and Google/Alphabet will be the main players. 2015 was about parking tanks on each other’s front lawns, in 2016 shots were fired, 2017 will be all-out war. Artificial Intelligence (AI) and voice assistance will be key battlegrounds and indeed will form the glue of Mobile Life Ecosystems.

Some of MIDiA’s other key predictions for 2017 are:

  • Services are the new black: Maturing ‘phone and tablet markets mean that hardware companies will place a greater focus on digital content and services in 2017. Services are an opportunity to drive strong growth that will compensate for slowing device sales
  • Ad market growing pains: Digital advertising inventory supply will exceed demand in 2017. Audience engagement will grow more quickly than advertisers’ appetite. Consequently, ad rates will decline with the bloating of the market by content farms accentuating the problem. Facebook will not be alone in seeing slowing ad revenues in 2017.
  • A tech major will be hit with the first stage of an anti-trust suit: The incoming US Presidency has made its anti-trust inclinations clear. A likely early target will be the AT&T/Time Warner merger. The global-scale tech companies may be mature companies but their respective sectors are not. Regulation is one of the inevitable growing pains of maturing business sectors. Digital is next.
  • Snapchat’s IPO will be digital’s canary in the mine: App store era unicorns and their attendant Initial Public Offerings (IPOs) will redefine the media and tech landscape. Not only will the success, or failure, of Snapchat’s IPO affect those of Uber and Spotify, poor showings could deflate the VC bubble andput an end to the grow-at-all-costs For the music industry, the stakes are even higher, as an under-achieving Spotify IPO would create a crisis in confidence in the entire streaming market.

Among our music predictions for 2017 are Spotify’s IPO and the subsequent start of a new generation of experiential streaming services, Tidal selling (probably to Apple) while Spotify closes out the year with around 55 million subscribers to Apple Music’s 30 million.

Facebook Is Finally Ready To Become A Media Company

Male Finger is Touching Facebook App on iPhone 6 ScreenFacebook beat estimates with its latest earnings but announced that ad revenues would likely slow in 2017 as the digital ad market feels the pinch of advertiser budgets lagging the shift in user behaviour. Facebook’s stock fell by 7% but it already has Plan B in motion: to become a media company. Facebook delayed this move as long as it possibly could, showing little enthusiasm for getting bogged down with content licenses while it was able to drive audience growth and engagement by piggy backing other people’s content. That strategy has run its course. Facebook is now about to start looking and behaving much more like a media company, but in doing so it will rewrite the rule book on what a media company is.

The Socially Integrated Web

Back in 2011 I published a report ‘The Socially Integrated Web: Facebook’s Content Strategy and the Battle of the Ecosystems’. You can still download the report for free here. In it I argued that Facebook was starting out on a path to become a media company, but not the sort of media company anyone would recognise:

Change is afoot in the Internet.  Facebook’s new Socially Integrated Web strategy is set to make Facebook one of the most important conduits on the web. It is pushing itself further out into content experiences in the outside web while simultaneously pulling more of them into Facebook itself. Facebook is establishing itself as a universal content dashboard – a 21st century cable company for the Internet, a 21st century portal – establishing its own content ecosystem to compete with the likes of Apple and Amazon. While traditional ecosystems are defined by hardware and paid services, Facebook’s is defined by data and user experience.

Now with ad revenues set to slow, Facebook is flicking the switch on phase 2 of this strategy. Think of it as the Socially Integrated Web 2.0.

Wall Street Doesn’t Like Mature Growth Stories In Tech

As Apple, Pandora and others have found to their cost, Wall Street likes its tech stocks to be dynamic growth stories. It doesn’t like mature growth stories – that’s what traditional company stocks are for. So what can a tech company with a mature customer base do? The answer is to switch on new user monetization strategy, with content and services the lynchpin. Apple’s new supplemental investor materials outlining iOS users’ services spend is a case in point. Monetizing audiences is the new black. This is the game Facebook is now starting to play.

How Facebook Will Become A Next Gen Media Company

Moving from curating to licensing is a subtle but crucial shift in Facebook’s role as a content distribution platform. Here are the pieces that Facebook will stitch together as it begins its transition towards become a next generation media company:

  • Games: In August Facebook announced its gaming platform Facebook Gameroom, a Steam for casual games. It followed that with the announcement it will bring Instant Games to Messenger – an extension of its messaging bot strategy. Games is a logical place for Facebook to start carving out its media company role as it has become the default home of casual PC gaming. It also wants to own a slice of the hugely lucrative mobile gaming market.
  • Filters: Snapchat and Line have created global marketplaces for stickers and filters. Facebook is set to follow suit and is now experimenting with Snapchat-like filters. Filters may not look like media assets in the traditional sense, but the whole point about next generation media businesses is that they contain next generation content assets. Filters are an early indication of how the definition of content will change over the next decade and Facebook now has a horse in that race.
  • Video: Despite the embarrassment of having over reported some of its video metrics, Facebook has quickly become a major player in the online video space, accounting for 29% of short form video views. The next step for Facebook is to start building a discovery and curation layer. When it does, expect video consumption to boom. This will be a major step towards its media company future. It will however have to build a lot of tech for rights holders and content creators. Right now, its aversion of getting tied up with policing rights means that many rights holders don’t even post content there. YouTube has a massive head start with its highly sophisticated Content ID stack. Facebook will need to follow YouTube’s lead.
  • Live Stream: Facebook has been doubling down on its live streaming, expanding its focus from user and celeb streams towards more traditional media content such as Steven Colbert’s Showtime Monologue, partnering with 50 media outlets for presidential election coverage, and eSports. eSports could be as lucrative as traditional sports within the next 10 years and the shift has already begun – Twitch accounted for more streaming video bandwidth than the Olympics.
  • Next generation TV operator: One of the most disruptive moves Facebook can make, at least from the perspective of traditional media, is to stitch together its video assets and combine them with video subscription apps like Netflix and TV channel apps like iPlayer and HBO Go to create an all-in-one video destination straddling, UGC, short form, live streaming and TV content. The rise of video apps has created a bewilderingly fragmented video landscape. Facebook can stitch it all together to become a next generation TV operator. It will face direct competition from Apple, Amazon and Alphabet if/when it does.
  • Editorial: Facebook took a lot of flak for its decision to censor, on grounds of nudity, a famous Vietnam photo showing the effects of a napalm attack on Vietnamese children. The photo had been posted by Norwegian newspaper Aftenposten and its editor-in-chief Espen Egil Hansen wrote “Editors cannot live with you, Mark, as a master editor”. Facebook eventually bowed to public pressure and reinstated the photo. While Facebook may have been wrong to censor the photo it revealed that Facebook is already a ‘master editor’ whether Facebook or traditional media like it or not. Facebook hosts such a vast amount of content that the master editor role is inescapable. Aftenposten might have editorial credibility but what about a white supremacist publication? Facebook is already an editor in chief, in short it is already a media company.
  • Music: Facebook’s recent ad for a music licensing executive got music business types all excited. But music is the content vertical Facebook probably has least to gain from switching from host to licensed service. Streaming music is a notoriously difficult business to make money in (Spotify’s gross operating margin is around 17%). Facebook needs to grow margin, not just revenue, and with all its other content options it doesn’t make sense for Facebook to loss lead with an AYCE music service when it can get a bigger return on that investment elsewhere. IF Facebook does do something in music either expect it to be a more radio-like experience for its mainstream audiences (Pandora had a gross operating margin of around 40% in 2015) or – and this is more likely – something for younger users that has music at its core but that is not a streaming service. Think something along the lines of lip synching app Musical.ly.

Facebook is a past master at business model transformation. Its co-opting of younger audience focussed messaging platforms in the face of ageing social network audiences was a best-in-class example of a company disrupting itself before someone else did. Now Facebook is set to make another major change in its strategy before it finds its core business disrupted. Media companies beware, there’s a new player in town and its betting big, real big.