Why the Music Industry Needs Bytedance to Disrupt It

Back in September 2018 I suggested that Spotify faced a Tencent risk,with the potential of Tencent launching a competitive offering in markets that Spotify is not yet in. This would effectively divide the world between Spotify in Europe, Americas and some of Asia, and Tencent potentially everywhere else. Since then, Tencent has been distracted by acquiring a 10% stake in Universal Music. The fact it is now reportedly looking for partners to share the investment could point to Tencent getting spooked by slowing streaming growth in the second half of the year, something MIDiA predicted in November last year. Meanwhile, as all this was happening, Bytedance’s TikTok has become a global phenomenon – adding 500 million users in 2019 to reach 1.2 billion in total. On the back of this success, Bytedance has picked up Tencent’s dropped baton and has been working on a subscription service that now looks set for a December launch. The streaming market desperately needs a breath of fresh air; the only question is whether music rights holders feel bold enough to let Bytedance launch something truly market changing.

Change, but remain the same

TikTok has undeniable scale, even though the 1.5 billion figure likely refers to installs rather than active users. While it is certainly bigger than previous music messaging apps, the tech graveyard is full of once-promising, now-dead or near-obsolete ones (Musical.ly, Flipagram, Dubsmash, Ping Tunes, Music Messenger etc). In order to ensure it does not go the way of its predecessors (i.e. burn bright but fast) TikTok must learn how to expand and evolve its content offering but remain true to its users’ core use cases. The smart digital content businesses do this. Facebook and YouTube have both dramatically changed their content mixes since launch, yet fundamentally meet the same underlying use cases they started out with. It is essential for TikTok to ensure it grows with its young audience in the way Instagram has – otherwise it risks following the unwelcome path of its predecessors.

Do first, ask forgiveness later

The three global-scale consumer music apps which are genuinely differentiated from the rest of the streaming pack are YouTube, Soundcloud and TikTok. All three have one thing in common: they did first and asked forgiveness later. Rather than coming to music rightsholders to acquire rights and then building platforms around whatever rights they were able to secure, they built apps, built scale and then entered into serious licensing conversations. Crucially, they did so from a position of strength. The rest managed to secure fundamentally the same sets of rights, resulting in a marketplace of streaming services that lack differentiation. They all have the same catalogue, pricing and device support. They are even competing largely in the same markets. They are forced to differentiate with extras, such as playlists, personalisation and branding. This contrasts sharply with the highly-differentiated streaming video market and is the equivalent of the automotive market telling everyone they have to buy a Lexus but can choose what colour paint they want. Those three disruptors did exactly that: they disrupted, and in doing so fast-forwarded the rate of innovation.

The music market needs Bytedance to do something transformational

This is the context in which Bytedance is building a music subscription service. What the music market really needs is for this to be something that builds on the ethos and use cases of TikTok rather than becoming a cookie-cutter “all you can eat” service. Soundcloud and YouTube both found themselves dumbing down their core propositions in order to launch music subscriptions. Now, with streaming growth slowing, the market needs a disruption more than ever. It needs a Plan B to reinvigorate growth.

It is all too easy to say that rights holders have held back the market, and in some respects they have. But they also have an obligation to protect their rights and core revenue source: streaming. Indeed, there is an argument that YouTube is currently holding back streaming potential by delivering such a compelling free proposition – something that would not have happened if it had licensed first and launched later.

Emerging markets testbed

Music experiences from China, Japan and South Korea look very different from the ones that have come from the West, whether you are looking at Tencent’s music apps or K-pop artists. While there is a temptation to say that these reflect the unique cultural make ups of their respective markets, in all probability much of it will export. Indeed, we already see this happening with the success of BTS and of course TikTok in Western markets. What unifies these experiences is monetising fandom rather than consumption (which is what Western services do). The problem is that it is difficult for music rightsholders to agree with digital service providers (DSPs) on how much of the assets monetised in fandom platforms should bear royalty income, and just how much. This is one of the main stumbling blocks in monetising fandom.

Emerging markets may be the perfect testbed. We have already seen this approach in Brazil, where Deezer launched a prepay carrier-billing-integrated 60% discounted music bundle with local carrier TIM and has enjoyed strong subscriber growth as a result. The fact that Bytedance may launch first in emerging markets such as India, Indonesia and Brazil suggests that this approach may be being followed. If so, there is a chance that we might see something genuinely innovative coming to market.

While this may not yet constitute the Tencent risk model, there nonetheless remains a chance that Bytedance could end up being an emerging market counterweight to the Western market incumbents. The streaming market needs something new to up the innovation ante; let’s hope Bytedance can take on that mantle…

10 Trends That Will Reshape the Music Industry

The IFPI has reported that global recorded music revenues have hit $19.1 billion, which means that MIDiA’s own estimates published in March were within 1.6% of the actual results. This revenue growth story is strong and sustained but the market itself is undergoing dramatic change. Here are 10 trends that will reshape the recorded music business over the coming years:

top 10 trends

  1. Streaming is eating radio: Younger audiences are abandoning radio for streaming. Just 39% of 16-19-year olds listen to music radio, while 56% use YouTube instead for music. Gen Z is unlikely to ever ‘grow into radio’; if you are trying to break an artist with a young audience, it is no longer your best friend. To make matters worse, podcasts are looking like a Netflix moment for radio and may start stealing older audiences. This is essentially a demographic pincer movement.
  2. Streaming deflation: Streaming music has allowed itself to be outpaced by inflation. A $9.99 subscription from 2009 is actually $13.36 when inflation is factored in. Contrast this with Netflix, for which theinflation-adjusted price is $10.34 but the actual 2019 price is $12.99. Netflix has stayed ahead of inflation; Spotify and co. have fallen behind. It is easier for Netflix to increase prices as it has exclusive content, but rights holders and streaming services need to figure out a way to bring prices closer to inflation. A market-wide increase to $10.99 would be a sound start, and the fact that so many Spotify subscribers are willing to pay $13 a month via iTunes shows there is pricing tolerance in the market.
  3. Catalogue pressure: Deep catalogue has been the investment fund of labels for years. But with most catalogue streams coming from music made in this century, catalogue values are being turned upside down (in the streaming era, the Spice Girls are worth more than the Beatles!). Labels can still extract high revenue from legacy artists with super premium editions like UMG did with the Beatles in 2018, but a new long-term approach is required for valuing catalogue. Matters are complicated further by the fact that labels are now doing so many label services deals, and therefore not building future catalogue value.
  4. Labels as a service (LAAS): Artists can now create their own virtual label from a vast selection of services such as 23 Capital, Amuse, Splice, Instrumental, and CDBaby. A logical next step is for a 3rdparty to aggregate a selection of these services into a single platform (an opening for Spotify?). Labels need to get ahead of this trend by better communicating the soft skills and assets they bring to the equation, e.g. dedicated personnel, mentoring, and artist and repertoire (A+R) support.
  5. Value chain disruption: LAAS is just part of a wider trend of value chain disruption with multiple stakeholders trying to expand their roles, from streaming services signing artists to labels launching streaming services. Things are only going to get messier, with virtually everyone becoming a frenemy of the other.
  6. Tech major bundling: Amazon set the ball rolling with its Prime bundle, and Apple will likely follow suit with its own take on the tech major bundle. Music is going to become just one part of content offerings from tech majors and it will need to fight for supremacy, especially in the ultra-competitive world of the attention economy.
  7. Global culture: Streaming – YouTube especially – propelled Latin music onto the global stage and soon we may see Spotify and T-Series combining to propel Indian music into a similar position. The standard response by Western labels has been to slap their artists onto collaborations with Latin artists. The bigger issue to understand, however, is that something that looks like a global trend may not be a global trend at all but is simply reflecting the size of a regional fanbase. The old music business saw English-speaking artists as the global superstars. The future will see global fandom fragmented with much more regional diversity. The rise of indigenous rap scenes in Germany, France and the Netherlands illustrates that streaming enables local cultural movements to steal local mainstream success away from global artist brands.
  8. Post-album creativity: Half a decade ago most new artists still wanted to make albums. Now, new streaming-era artists increasingly do not want to be constrained by the album format, but instead want to release steady streams of tracks in order to keep their fan bases engaged. The album is still important for established artists but will diminish in importance for the next generation of musicians.
  9. Post-album economics: Labels will have to accelerate their shift to post-album economics, figuring out how to drive margin with more fragmented revenue despite having to invest similar amounts of money into marketing and building artist profiles.
  10. The search for another format: In 1999 the recorded music business was booming, relying on a long established, successful format that did not have a successor. 20 years on, we are in a similar place with streaming. The days of true format shifts are gone due to the fact we don’t have dedicated format-specific music hardware anymore. However, the case for new commercial models and user experiences is clear. Outside of China, depressingly little has changed in terms of digital music experiences over the last decade. Even playlist innovation has stalled. One potential direction is social music. Streaming has monetized consumption; now we need to monetize fandom.

Why India Matters to Spotify, and Why it May Not Deliver

Warner Music and Spotify have been involved in a rather unseemly and very public spat this week over Spotify’s India launch. I’ll leave for someone else, the discussions of the potential implications of a blanket license for songwriter rights in India for an on-demand streaming service. Suffice to say, the words ‘can of worms’ come to mind. Instead, I am going to focus on why India matters so much to Spotify.

The next one billion, perhaps…

Spotify’s Daniel Ek has made much of addressing the next one billion internet users as part of Spotify’s long-term opportunity. Given the fact that China is effectively off the table for now and that sub-Saharan Africa is probably a generation away from being a major streaming market, India is the key component of that next one billion.

Europe and North America accounted for 69% of Spotify’s subscriber growth in 2018. While this was hugely positive for those regions and delivered high-value subscribers – declining ARPU notwithstanding, growth in those regions will slow down towards the end of this year. Next tier markets – Brazil, Mexico, Germany and ideally, though probably not, Japan – will pick up much of the slack. But to sustain the growth rates its shareholders require, Spotify needs other large markets to start building real momentum by 2020/2021. India and the Middle East represent the best options. However, the Middle East already has a strong incumbent – Anghami – and a potentially resurgent Deezer, newly empowered by its exclusive deal with leading local label Rotana. So, India is effectively the last bet on the table.

India is a very competitive but problematic market

India, however, is a problematic market. It has a host of well-backed incumbents – Jio Music, Saavn, and Tencent-backed Gaana – as well as solid performances from Apple and Google. Yet despite all this robust supply, the market heavily underperforms, registering only 1.7 million subscribers in 2018 with a monthly label ARPU of just $0.74. 1.7 million may sound like a solid enough base, but it represents just 0.1% of the total Indian population. There are two key reasons for such weak uptake to date:

  1. Music plays a different role in India:Bollywood and devotional are two of the most widely listened to music genres, neither of which are mainstays of subscription services, nor streaming music consumption in general.
  2. Income levels are low:the average per capita income is $553 a month, with the luxury of a music subscription far out of reach for most Indians, other than urban elites. Spotify’s $1.80 price point in India may sound cheap, but relative to average income, it is 9.3 times more expensive than $9.99 is in the US. So, Spotify would need to be priced at $0.19 to be the same relative affordability as in the US, which coincidentally is the price for its day pass.

The ARPU challenge

The realistic ambition for Spotify should be to drive five to 10 million subscribers over the next five years or so, primarily pulling from urban elites (essentially a re-run of what has been happening in Latin America). While more credible, this falls way short of denting the ‘next one billion’ opportunity. To unlock the scale opportunity, streaming has to look beyond subscriptions, and also beyond ad supported (India’s 270 million free streamers only generated a monthly ARPU of $0.006 in 2018). The scale opportunity is telco bundles. Reliance Communications’s prioritisation of Jio Music makes it the most likely player to capitalise on this in the mid-term.

Spotify needs to find a similar scale partner and somehow convince label partners to accept an ARPU of say $0.08, which would be roughly in line with US telco bundle ARPU on a Purchasing Power Parity (PPP) basis. This would unlock scale without having to tolerate the catastrophically lower ad-supported ARPU rates. But the odds of that happening anytime soon are miniscule. When, and it is a case of when, not if, that time does come, the scale of adoption could be transformative for the global market. In fact, this is exactly where MIDiA thinks the market is heading. In our just published music forecasts, we predict that by 2026 India will have the fourth largest installed base of music subscribers, anywhere in the world.

What matters most, revenue or scale?

The question is whether Spotify can be a major part of the ‘Indian adoption’. Even if it can, the ARPU will be so small that all the current concerns about Spotify’s falling ARPU will look like a storm in a teacup when compared.

Have no doubt, India can, and perhaps will, become a major player in the global streaming market, even helping reshape global music culture. It can also play a major role in Spotify’s future, but the rules of engagement will need to change to unlock that growth, and in doing so Spotify will be sacrificing ARPU. All of this means, Spotify’s investors and partners need to ask themselves, what do they want Spotify to deliver most: strong revenue growth or strong subscriber growth, because India cannot deliver both.

Soon to be the Biggest Ever YouTube Channel, T-Series May Also Be About to Reshape Global Culture

pewdiepie tseries

Some time over the next month or so a YouTube landmark will be passed: T-Series will pass PewDiePie as the most subscribed YouTube channel on the planet. As of time of writing T-Series had 75.4 million subscribers compared to PewDiePie’s 76.4 million. (PewDiePie’s lead was narrower but he has mobilised his fan base to delay the inevitable.) But do not mistake this milestone to be a narrow measure of the shifting sands of the YouTube economy. Indeed, it tells us more about the future of streaming as a whole (both music and video) than it does the current status of sweary Swedish gamers.

For those of you who somehow do not yet know who T-Seriesis, it is a leading Indian music label and movie studio – it in fact claims to be ‘the biggest – that is the world’s largest YouTube music channel and before long it will likely be able to drop the ‘music’ qualifier from that title. It is also the label that Spotify just struck a deal with as it preps its protracted launch into India.

A streaming market of contradictions

India is a problematic market for streaming monetization. It has 1.4 billion consumers but just 330 million of those have smartphones. There were 215 million free streaming users in 2018 but just 1 million paid subscribers despite leading indigenous players like Hungama and Saavn having been in market for years. Total streaming revenue was just $130 million in 2017 generating a combined annual ARPU of $0.27. And that number is heavily boosted by unrecouped Minimum Revenue Guarantees (MRGs) due to local streaming services continually failing to meet their projected subscriber numbers (though according to local accounts, perfectly happy to continue to effectively overpay for their streaming royalties). The video side of streaming is more robust with eight million subscribers generating more than three times more revenue than music streaming does. Even still, eight million subscribers is scant return against a base of 330 million smartphone users.

Streaming unlocks the potential of emerging markets

India is exactly the sort of market that streaming business models have the potential to unlock. The old world was defined by commerce, by people paying to own music or for hefty household TV subscriptions that inherently meant owning a TV set. As a direct consequence, the traditional music and TV markets skewed towards western markets with higher levels of disposable income. This was a massive missed opportunity and one that can now be fixed. As Mexico and Brazil are currently in the process of showing us, populations with strong cultural heritage and large, but lower income, populations can have massive impact. Like or loathe Reggaeton, its ability to permeate the global music marketplace is testament to the power of Latin American music fans and the artists they support, as is Colombian J Balvin’s current status as the most streamed artist on Spotify.

The growing influence of second tier markets

Streaming can monetize scale in a way the old model simply could not. What we will see over the coming decades is a steady realignment of the balance of power across the global music and video markets. Western markets – and a handful of others such as Japan – will continue dominate revenues due to a combination of higher subscription penetration and higher subscriber ARPU. But large population, 2ndtier markets will have a growing influence. The BRIC markets (Brazil, Russia, India and China) are obvious candidates but also Mexico, the Philippines, Nigeria, Egypt, Turkey and Thailand all have similar potential.

Large, engaged local audiences can shape global trends

One of the key reasons Latin American artists have become part of the global cultural zeitgeist is that Spotify has a big regional user base – 42 million MAUs as of Q3 18. Because record labels over-prioritise Spotify in terms of marketing and trend spotting, when Latin American artists started blowing up, European and North American labels started paying extra close attention and building up their own rosters of Latin American artists. Latin American users represent 22% of global Spotify MAUs but their influence is amplified by the fact that they stream a lot and they tend to stream individual tracks repeatedly. So, when they put their support behind something it blows up, edging into the global charts which then triggers a whole bunch of actions that see that track being fed into non-Latin playlists and user recommendations, which can then trigger a further escalation of playlist strategy. And so forth. This was Luis Fonsi’s path to global stardom.

Could India ‘do a Mexico’?

So the obvious question is, if T-Series had enjoyed the same sort of success on Spotify that it did on YouTube, would Guru Randhawa be topping Spotify’s global artists instead of J Balvin? Would we be finding Bhangra in every sonic nook and cranny instead of Reggaeton? The answer is – as certain as a counter factual claim can ever be – almost certainly yes. Whereas Latin American emigres are a major demographic in the US, they are less so elsewhere. Also, Latin American culture is divided between Spanish and Portuguese. The Indian diaspora however, is far more global, with large populations in the US, Canada and UK. What is more, though India has many indigenous languages, English is spoken nationally, with many artists releasing in English. Similarly, a growing number of Bollywood movies are being made in English with an eye on the global market.

So when Spotify finally launches in India, expect a series of global cultural aftershocks. Spotify is unlikely to covert that many premium subscribers – except via telco bundles – but it is likely to build a big free user base. And when that happens expect T-Series to take centre stage with Guru Randhawato be the most streamed artist globally by 2020…?

Emerging Music Markets: Streaming’s Third Wave

MIDiA has just published a new report that deep dives into how streaming is, or in some cases is not, lifting off in emerging markets. The regions we focused on were Russia, the Middle East, sub-Saharan Africa, China and India. The report ‘Emerging Music Markets: Streaming’s Third Wave’ is immediately available to MIDiA subscription clients and can also be purchased, along with its full dataset (including service- and country-level subscriber and free users numbers, as well as consumer data for India and China) on our report store here.

Here are some of the key findings and themes of the report.

emerging markets midia streaming

With streaming growth set to slow in mature western markets by 2019, the next wave of fast growth will come from a mixture of mid-tier markets such as Mexico, Brazil, Japan and Germany. The lower income mid-tier markets such as Brazil and Mexico are so populous that the urban elites have been big enough to generate paid user bases that are comparable to those of smaller European markets. The real scale opportunity, however, exists in monetising lower income groups with much cheaper propositions. Beyond that, the streaming market will need to look towards emerging markets for growth. Emerging markets in Asia and Africa present a diverse variety of opportunities, but current evidence suggests that the outlook for these markets is far from uniform.

The rule that defines emerging markets for streaming music is that there isn’t one. China has a large base of free users and a solid base of subscribers. India has large numbers of free users, but a tiny paid base. Russia and the Middle East both have a solid ratio of free-to-paid users while Africa has the lowest per capita metrics for both paid and free.

Arguably, the single most important reason for these differences is mobile data network availability and affordability. In China and India mobile data use is increasingly widespread, making streaming a compelling proposition, while in most sub-Saharan African countries coverage is patchy and expensive.

Despite their differences, these regions will be crucial to the long-term outlook for streaming growth. So, mapping their respective trajectories helps to forecast long-term global market growth for streaming. Rights holders will need to innovate out of their comfort zone if they are to truly seize the emerging markets opportunity. The fact that Nigeria’s MTN only gets a retail ARPU of around $2 a year across sub-Saharan Africa for its music products, including ringtones and downloads, hints at where ARPU expectations may have to be set.

Companies and brands mentioned in the report:Baidu Music, Gaana, Hungama, iRoking, Jio Music, Kugou, Kuwo, Mdundo, Mkito, MTN, MTN Music+, Mzliki, Netease Cloud Music, QQ Music, Quan Min K G, Saavn, Simfy Africa, Vkontakte, Vkontakte Music, Vuga, Wynk Music, Yandex, Yandex Music, Zvook

Click here to view the report on MIDiA’s report store.

Just What Is Tencent Up To With Streaming?

Tencent is building a global streaming empire. Back in December 2017 Tencent Music did a 10% equity swap deal with Spotify and now it has led a $115 million investment round for India-based streaming service Gaana. India may only be a small subscription market, with just 1.1 million paid subscribers at the end of 2016, but it one dominated by local players and has massive free streaming potential. Tencent now has major streaming stakes that give it reach across Asia, Europe and the Americas. The key missing parts are the Middle East and North Africa (Anghami is probably waiting for the phone to ring). Right now, Tencent has a streaming foothold in the world’s three largest countries:

  1. China: population 1.4 billion. 100% ownership of QQ Music, Kugou and Kuwo which together account for 70% of subscribers
  2. India: population 1.3 billion. Undisclosed ownership of top three streaming service Gaana
  3. US: 330 million. 10% ownership of leading subscription service

What Tencent is doing is building a global network of strategic positions in the streaming market that individually might not have global influence, but, collectively could be brought to bear to in an impactful way. Much like John Malone’s Liberty Media, Tencent is taking minority stakes in a strategically selected portfolio of companies. This provides it with the ability to exert some degree of influence and extract some benefit without the risk and resource required for a majority ownership. Minority stakes can also be used as beachheads for majority ownership further down the line.

In some respects, Tencent does not have a huge amount of choice in the matter. Last year the Chinese government placed restrictions on the amount Chinese companies could spend on overseas companies, in order to slow the outflow of capital from China. But, rather than let this be a hindrance Tencent is now using the policy to shape a bold internationalisation strategy. Coupled with other minority investments (12% in Snap Inc., 5% of Tesla) Tencent is positioning itself to be king maker in the future of digital media.