The Frank Ocean Days May Be Gone, but Streaming Disintermediation Is Just Getting Going

At the start of this month Apple struck a deal with French rap duo PNL. PNL are part of a growing breed of top-tier frontline artists that have opted to retain ownership of their masters. In our just-published Independent Artists report (MIDiA clients can read the full report here)we have sized out the label services marketplace, and when it is coupled with artists direct (i.e. DIY) the independent artist sector was worth 8% of the entire recorded music business in 2018.

While that number may sound relatively modest, it is growing fast and represents the future. Traditional label deals are not disappearing, but they are becoming just one component of an increasingly complex recorded music revenue mix. This is the industry context that enables initiatives such as Apple’s PNL deal and both Spotify and Apple backing Aaron Smith, who incidentally is signed to artist accelerator Platoon, which is a company that Apple acquired in December 2018.

Independent artists open up new opportunities for streaming services

When Apple did its exclusive with Frank Ocean back in 2016it caused such an industry backlash that UMG head Lucian Grainge banned his labels from doing exclusive deals and the movement seemed dead in the water. If there was any doubt, Spotify kicked up so much label ill will when it launched its Direct Artists platform that it officially shuttered the initiative in July. However, now we are seeing that there many more ways to skin the proverbial cat. It is perfectly possible to disintermediate labels without having to actually disintermediate them. Doing an exclusive with an independent artist or giving him / her priority promotion is doubly effective for streaming services as:

1. Record labels have no right to complain because independent artists have just the same right of access to audiences as label artists
2. The more exposure independent artists get, the more their market share will grow, which will lessen record labels’ market share, which makes it harder for them to resist and easier for the streaming services to start making bolder moves down the line

Ambiguity will be the shape of things

Even this structure plays into the traditional view of labels versus the rest. The new truth is much more nuanced. For example, when Stormzy was duetting with Ed Sheeran at the Brits, signed on a label services deal to WMG’s ADA, was he a Warner artist or an independent artist? He was, of course, both. The evolution of the market will be defined by progressively more of this ambiguity, which will give streaming services equally more ability to not only play to these market dynamics but to stress-test the boundaries. The simple fact is that streaming services will become ever-agnostic with regards to artists’ commercial partnerships and in turn they will become a more important component of the value chain. Apple Music did the PNL deal because they had much more commercial flexibility dealing with an independent artist than dealing with a label artist. At some stage, labels will have to decide whether they want to revisit the exclusives model. Without doing so, they may not get a seat at the new table.

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.

Welcome To The Post-DIY Era

I recently took part in the True Music Forum in Madrid, an event organized by Boiler Room. I was on a panel that explored whether DIY is now coming of age with a host of high profile artists, most of them urban artists, bypassing or twisting the traditional label model and still achieving stand-out success. On the surface, these look like golden years for DIY, and in many ways they are, but much of what is happening at the top end of the scale has little to do with DIY. Streaming is transforming how artists view recorded music income and is making it possible for artists to pick and choose what label capabilities they want. But more often than not, it is a variation of the label model that succeeds rather than a replacement of it. This is the start of the post-DIY movement.

The First Wave Of DIY

Firstly, to be clear, DIY is alive and well, better than it has ever been in fact. With labels increasingly only signing artists once they have seen them build up following and ‘a story’, it is becoming increasingly common for artists to spend the formative stages of their careers ‘DIY’, releasing their own music, managing their social campaigns, making their own videos, booking their own tours etc. Added to that, the combination of streaming, direct-to-fan platforms and social apps have combined to make it possible to build niche audiences on a global scale. So it is now possible for a new tier of artists to exist, a tier of artists that may never dent the charts (for whatever they may be worth these days) but that can build solid, sustainable careers by engaging their fans directly. Stalwarts like Bandcamp and CD Baby have never had it so good, while a whole crop of new entrants, such as the much hyped BandLab is emerging to drive the market forward. And of course, Soundcloud, for all its financial challenges, provides artists with a platform to engage massive audiences globally without need for any middleman whatsoever.

DIY Versus Empowered Superstars

That is the DIY movement that will go down in history as one of the most culturally significant legacies of the Napster market shock. An organic, grass roots musicians’ revolution. Now though, we are seeing the emergence of a more commercially minded take on DIY, one that draws on the practices of its predecessor but that combines them with the big label model to take full advantage of the best of both worlds. This new breed of superstar DIY artist enjoys the benefit of fiercely held independence with world class distribution and marketing. They are taking the tools of DIY but not all of the ethos. The superstar DIY artist typically builds a strong brand and buzz (and often, but not always, a big live following) and then uses that as a platform to strike a deal with a major label (or a major label subsidiary company) to get the benefits of major label scale without giving up control (nor masters). This can take various forms, such as:

• Using a major label’s distribution company (e.g. Stormzy’s ‘Gang Signs & Prayer’ is distributed via Warner’s ADA)
• Setting up a label within a major label (e.g. Drake’s Ovo Sounds is part of Warner Music Group)
• Creating a tactical joint venture with a label for a specific release

In each scenario the artist retains large amounts of control (or at least more than in a traditional label deal) but gets the support of world class, global infrastructure and marketing. The artists picks the services s/he wants, like an advertiser does with a full- service ad agency. The label services and standalone distributor models have been around for some time, but now they are being used by business savvy, super ambitious superstars in-the-making. And the artist gets to retain an aura of authenticity and independence.

For those artists that want to push the needle even further, streaming services are emerging as an additional weapon in the armoury. Chance the Rapper revealed that Apple paid him $500,000 to become the exclusive streaming partner for ‘Coloring Book’, following hot on the heels of Frank Ocean’s Apple Music exclusive for ‘Blonde’. Apple is setting itself up as a modern day equivalent of the Medici – the medieval Italian family that was a driving force in the Renaissance through its patronage of artists such as Rafael, Leonardo Da Vinci and Michelangelo. Some time or another, Spotify will follow Apple’s lead. The superstar artist fits this streaming-service-as-label model best because an artist with big potential is going to deliver much better ROI for streaming services that are eager to drive market share and differentiation via original content.

Hip Hop Is Setting The Innovation Bar

Urban music, and hip hop in particular, has become a hotbed of artist-led business innovation. Although hip hop has always had stronger commercial sensibilities than other genres, streaming has brought the business innovation to the fore, ranging from the original hip hop superstar businessman Jay Z and his Tidal service, through Frank Ocean’s Apple Music released ‘Blonde’ to Stormzy’s streaming record breaking streaming success.  And the innovation is happening at the grass roots of hip hop too. As the brilliant Kieran Yates noted on the Boiler Room DIY panel, many UK Grime artists are now signing publishing deals before label deals as a) this can often mean bigger advances in today’s indie music market, and b) there is a perception that this means giving up less control, which in turn empowers the artist to strike a better deal with a label, or label-owned company. This also opens up a world of opportunity for independent music marketing agencies etc who can become part of new, agile teams.

Streaming has been continually rewriting the rule book for many years now, but we are entering a period of even faster change, with many of the more fundamental effects being the indirect consequences, such as the rise of post-DIY. It would be wrong, however, to think of this as a ‘death of the label’ narrative. Because the labels (majors and indies) are being smart enough to be as flexible and agile as artists need them to be. Artists are changing and labels are changing just as fast to meet their new needs and terms of reference. Perhaps, the best way to capture the approach of the new era of post-DIY artist is to go back to Jay Z’s classic ‘Diamonds From Sierra Leone’ lyric: I’m not a businessman; I’m a business, man!

 

What Frank Ocean’s Bombastic Blond Moment Tells Us About The Future Of Artists And Labels

When Frank Ocean’s latest album ‘Blond’ dropped, it did so like a nuclear bomb, sending shockwaves throughout the music industry. In one of the audacious release strategies of recent years Ocean and his team at 360 fulfilled the final album contractual commitment to Universal Music by ushering his breaking-the-mold visual album ‘Endless’ onto Apple Music.  Featuring collaborations from the likes of Sampha and James Blake and set as a loose soundtrack to art house visuals, ‘Endless’ looked like the sort of digitally native, creative masterstroke that would win plaudits and awards in equal measure. But no sooner had Universal executives started daydreaming about Grammys then along came what turned out to be the ‘actual’ album ‘Blonde’, self released by Ocean (Universal contractual commitments now of course conveniently fulfilled) and, for now at least, exclusively available on Apple Music. You can just imagine seeing the blood drain from (Universal CEO) Lucian Grainge’s face as the full magnitude of what had just happened came into focus. In truth ‘audacious’ doesn’t even come close to explaining what Ocean pulled off, but where it gets really interesting is what this means for the future of artist careers.

Artist-Label Relationships Are Changing

Quickly sensing the potential implications, Grainge swiftly sent out a memo to Universal staff outlawing streaming exclusives…though voices from within Universal suggest that this diktat had been in the works for some time . A cynic might even argue that it was politically useful for Universal to be seen to be taking a strong stand ahead of the impending Vivendi earnings call. As the ever excellent Tim Ingham points out, in practice Universal could put a streaming exclusives moratorium in place and still have a good number of its front line artists put out streaming exclusives. This is because many of the deals these artists have are not traditional label deals where Universal owns all the rights. And that itself is as telling as Ocean’s bombastic blond moment. Not so much that Universal is probably the major with the highest amount of its revenue accounted for by licensed and distributed works, but that any label’s roster is now a complex and diverse mix of deal types. Artists are more empowered than ever before, and thanks to the innovation of label services companies and next generation music companies like Kobalt, labels have been forced to steal the disruptors’ clothing in order to remain competitive.

Streaming Exclusives Represent Another Option For Artists

Just as labels had started to successfully co-opt the label services marketplace by launching their own – e.g. Universal’s Caroline – or by buying up the competition – e.g. Sony’s acquisition of Essential Music & Marketing – along come streaming services giving artists another non-label route to market. In truth, the threat has remained largely unrealised. Exclusives on Tidal have most often proved to be laced with caveats and get out clauses (e.g. Beyonce’s ‘Lemonade’ arriving on iTunes 24 hours after landing ‘exclusively’ on Tidal). Chance The Rapper’s (in name only) mixtape ‘Colouring Book’ and Ocean’s ‘Blond’ are exceptions rather than the rule. So all that’s about to change now right? Not necessarily…

Album Releases Require More Time Than Apple Probably Has

As anyone who works in a label will tell you, releasing an album is typically a long, carefully planned process with many moving parts. It’s not something you do in a couple of weeks (Ocean started building the hype and expectation for his latest opus a year ago). If, for example, Apple was going to start doing exclusives routinely, even if it just did 20, that’s still a new exclusive to push every 2 weeks. That might work, at a stretch, for music service retailing promotional pushes but is far short of a fully fledged album release cycle. Which means that even for just 20 exclusives Apple would have an intricate mesh of overlapping release campaigns. This is something that labels do with their eyes closed but would it require new organizational disciplines for Apple. Not impossible, but not wholly likely either.

In practice, exclusives are likely to be limited to being the crown jewels of streaming services, their most valuable players, creative playmakers if you like. Even for Netflix, that pioneering exemplar of the streaming originals strategy, only spends 15% of its $3 billion content budget on originals and probably won’t break 20% even by 2020. What Apple and Netflix have in common is that they are using exclusives as a customer acquisition strategy, achieving their aims by making a big noise about each one. But if you’re releasing exclusives every week or two the shine soon wears off. And suddenly the return on investment diminishes.

Streaming Exclusives Are Unlikely To Turn Into A Flood

None of this means that we won’t see more artists striking streaming exclusives. We will, regardless of what labels may actually want to happen. And most of those will probably be on Apple – the service with bottomless pits masquerading as pockets. But the trickle will not turn into a flood, a fast flowing stream perhaps (see what I did there) but not a torrent.

Although they might not realise it yet, Kobalt might find themselves hurting more than the majors from this latest twist in the Exclusives Wars. Kobalt has probably done more than any single other music company to drive change in the traditional music industry in the last 5 years, showing artists and songwriters that there is another way of doing things. But Frank Ocean has just shown that there is now new another option for established artists looking for options at the end of a label deal.

Most importantly of all though, is that streaming exclusives (and indeed label services deals) work best when an artist has already established a brand and an audience. Most often that means after an artist has had a record label recording career. Apple cannot be relied upon to build anything more than a handful of artist brands. One of the founding myths of the web was that it was going to do away with labels and other traditional ‘gatekeepers’. Now, decades later, labels still account for the vast, vast, vast majority of music listening. Make no mistake, a momentous value chain shift is taking place, with more power and autonomy shifting to the creators, but that is a long journey and ‘Blond’ is but one part of this much bigger shift.