Global Recorded Music Revenues Grew By $1.4 Billion in 2017

2017 was a stellar year for the recorded music business. Global recorded music revenues reached $17.4 billion in 2017 in trade values, up from $16 billion in 2016, an annual growth rate of 8.5%. That $1.4 billion of growth puts the global total just below 2008 levels ($17.7 billion) meaning that the decline wrought through much of the last 10 years has been expunged. The recorded music business is locked firmly in growth mode, following nearly $1 billion growth in 2016.

Streaming has, unsurprisingly, been the driver of growth, growing revenues by 39% year-on-year, adding $2.1 billion to reach $7.4 billion, representing 43% of all revenues. The growth was comfortably larger than the $783 million / -10% that legacy formats (ie downloads and physical) collectively declined by.

Universal Music retained its market leadership position in 2017 with revenues of $5,162 million, representing 29.7% of all revenues, followed by Sony Music ($3,635 million / 22.1%) while Warner Music enjoyed the biggest revenue growth rate and market share shift, reaching $3,127 million / 18%. Meanwhile independents delivered $4,798 million representing 27.6%. However, much additional independent sector growth was absorbed by revenue that flowed through digital distribution companies owned by major record labels that were thus reported in major label accounts.

MRM1804-fig0.5.png

But perhaps the biggest story of all is the growth of artists without labels. With 27.2% year-on-year growth this was the fastest growing segment in 2017. This comprises the revenue artists generate by distributing directly via platforms such as Believe Digital’s Tunecore, CD Baby and Bandcamp. All these companies performed strongly in 2017, collectively generating $472 million of revenue in 2017, up from $371 million the year before.  While these numbers neither represent the death of labels nor the return of the long tail, they do reflect the fact that there is a global marketplace for artists, which fall just outside of record label’s remits.

 

Up until now, this section of the market has been left out of measures of the global recorded music market. With nearly half a billion dollars of revenue in 2017 and growing far faster than the traditional companies, this sector is simply too large to ignore anymore. Artists direct are quite simply now an integral component of the recorded music market and their influence will only increase. In fact, independent labels and artists direct together represent 30.3% of global recorded music revenues in 2017.

A Growing and Diversified Market

The big take away from 2017 is that the market is becoming increasingly diversified, with artists direct far outgrowing the rest of the market. Although this does not mean that the labels are about to be usurped, it does signify – especially when major distributed independent label revenue and label services deals are considered – an increasingly diversified market. Add the possibility of streaming services signing artists themselves and doing direct deals with independent labels, and the picture becomes even more interesting.

The outlook for global recorded music business is one of both growth and change.

The report that this post is based upon is immediately available to MIDiA Research subscription clients herealong with a full excel with quarterly revenue from 2015 to 2017 segmented by format and by label. If you are not yet a MIDiA client and would like to learn more then email info@midiaresearch.com

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.

What Spotify Can Learn From The Roman Slave Trade

OK, you’re going to have to bear with me on this one, but let me take you back to 2nd century Rome….

Roman Slaves

Roman Slaves

The Roman Empire was at the peak of its powers. Its borders stretched from Scotland down to Syria and across to Armenia, and across its dominions Rome spread its culture, language, administration and of course, military prowess. It brought innovations such as under floor heating, running water, astronomy and brain surgery but the consensus among many modern day historians is that the Roman Empire could have been much more. Rome was fundamentally a military, expansionist state. Its endless conquests produced a steady flow of captured people that fuelled Rome’s most important economic interest: the slave trade. By the mid 2nd century around 1 in 4 Romans were slaves. It was common for wealthy citizens to have 40 or more household slaves while the super-rich had hundreds.

The Importance Of Economic Surplus

The problem was that the over-supply of labour meant that wages were horrifically low for the masses while the rich over spent on slaves to keep up with the neighbours. The net result is that the Roman Empire was not able to create an economic surplus across its population, which meant that there was insufficient investment in learning, science and culture. If that surplus had been created, Rome would have spawned a generation of innovators, inventors and entrepreneurs that should have created an industrial revolution. This raises the tantalizing possibility of steam power and steel emerging before the middle ages, which in turn could have meant that today’s technology revolution might have happened hundreds of years ago by now.

Instead, the Roman Empire eventually crumbled with Europe forgetting most of Rome’s innovations, paved roads weeding over, aqueducts running dry and heated floors crumbling. We had to wait until the second half of the 18th century for the Industrial Revolution for the change, which crucially followed and overlapped with the Age of Enlightenment, a period of learning unprecedented since the Renaissance (when everyone busied themselves relearning Rome’s lost secrets) which was fuelled by Europe’s economies have developed sufficiently to create enough surplus for more than just the aristocracy to learn, invent and create. 

So, Rome inadvertently held back human progress by half a millennium because of its obsession with slaves. But what does that mean for Spotify? The key lesson from the Roman experience is that being saddled with too large a cost base may not prevent you from becoming big but it will hold you back from fulfilling your potential and from building something truly lasting. You can probably tell now where I am heading with this. Spotify’s 70% rights cost base is Rome’s 1 in 4 are slaves.

Product Innovation Where Are You?

Spotify has made immense progress but it and the overall market have done too little to innovate product and user experience.  There’s been business and commercial innovation for sure but looking back at the streaming market as a whole over the last 5 years, other than making playlists better through smart use of data and curation teams, where is the dial-moving innovation? Where are the new products and features that can change the entire focus of the market. Compare and contrast how much the likes of Google, Facebook and Amazon have changed their businesses and product offerings over that period. Streaming just got better playlists. Musical.ly shouldn’t have been a standalone company, it should have been a feature coming out of Spotify’s Stockholm engineering team. But instead of being able to think about streaming simply as an engine, Spotify has had to marshal its modest operating margins around ‘sustaining’ product development and marketing / customer acquisition.

Post-Listing Scrutiny

Spotify will likely go public sometime next year as a consequence. But once public it will need to be delivering demonstrable progress towards profit with each and every quarterly SEC filing. Growth alone won’t cut it. Just ask Snap Inc. Spotify does not have a silver bullet but it does have a number of different switches it can flick that will each contribute percentages to net margin and that collectively can help Spotify become commercially viable and in turn enable it to invest in the product and experience innovation that the streaming sector so crucially lacks.  Spotify hasn’t done these yet because most will antagonize rights partners but it will be left with little option.

spotify full stack midia

Spotify The Music Company

To say that Spotify will become a label is too narrow a definition of what Spotify would become. Instead it would be a next generation music company, encompassing master rights, publishing, A+R, discovery, promotion, fan engagement and data, lots of data. If Spotify can get a couple of good quarters under its belt post-listing, and maintain a high stock price then it could go on an acquisition spree, acquiring assets for a combination of cash and stock. And the bigger and bolder the acquisition the more the stock price will rise, giving Spotify yet more ability to acquire. This is the model Yahoo used in the 2000s, with apparently over-priced acquisitions being so big as to impress Wall Street enough to ensure that the increase in market cap (ie the value of its shares) was greater than the purchase price. Spotify could use this tactic to acquire, for example, Kobalt, Believe Digital and Soundcloud to create an end-to-end, data-driven discovery, consumption and rights exploitation music power house.

What other ‘label’ could offer artists the end-to-end ability to be discovered, have your audience brought to you, promoted on the best playlists, given control of your rights and be provided with the most comprehensive data toolkit available in music? And of course, by acquiring a portion of the rights of its creators though not all (that’s where Kobalt / AWAL comes in) Spotify will be able to amortize some of its content costs like Netflix does, thus adding crucial percentages to its net margin. It will also be able to do Netflix’s other trick, namely using its algorithms to over index its own content, again adding crucial percentages to its margin.

Streaming Is The Engine Not The Vehicle

The way to think about Spotify right now, and indeed streaming as a whole, is that we have built a great engine. But that’s it. We do not have the car. Streaming is not a product, it is a technology for getting music onto our devices and it is a proto-business model. While rights holders can point to areas where Spotify is arguably over spending, fixing those will not be enough on their own, they need to accompany bolder change. Once that change comes Spotify can start to fulfil its potential, to become the butterfly that is currently locked in its cocoon. While rights holders we be understandably anxious and may even cry foul, they have to shoulder much of the blame. Spotify simply doesn’t have anywhere else to go. Unless of course it wants to end up like Rome did….overrun by barbarians, or whatever the music industry equivalent is…

The Three Eras Of Paid Streaming

Streaming has driven such a revenue renaissance within the major record labels that the financial markets are now falling over themselves to work out where they can invest in the market, and indeed whether they should. For large financial institutions, there are not many companies that are big enough to be worth investing in. Vivendi is pretty much it. Some have positions in Sony, but as the music division is a smaller part of Sony’s overall business than it is for Vivendi, a position in Sony is only an indirect position in the music business.

The other bet of course is Spotify. With demand exceeding supply these look like good times to be on the sell side of music stocks, though it is worth noting that some hedge funds are also exploring betting against both Vivendi and Spotify. Nonetheless, the likely outcome is that there will be a flurry of activity around big music company stocks, with streaming as the fuel in the engine. With this in mind it is worth contextualizing where streaming is right now and where it fits within the longer term evolution of the market.

the 3 eras of streaming

The evolution of paid streaming can be segmented into three key phases:

  1. Market Entry: This is when streaming was getting going and desktop is still a big part of the streaming experience. Only a small minority of users paid and those that did were tech savvy, music aficionados. As such they skewed young-ish male and very much towards music super fans. These were people who liked to dive deep into music discovery, investing time and effort to search out cool new music, and whose tastes typically skewed towards indie artists. It meant that both indie artists and back catalogue over indexed in the early days of streaming. Because so many of these early adopters had previously been high spending music buyers, streaming revenue growth being smaller than the decline of legacy formats emerged as the dominant trend. $40 a month consumers were becoming $9.99 a month consumers.
  2. Surge: This is the ongoing and present phase. This is the inflection point on the s-curve, where more numerous early followers adopt. The rapid revenue and subscriber growth will continue for the remainder of 2017 and much of 2018. The demographics are shifting, with gender distribution roughly even, but there is a very strong focus on 25-35 year olds who value paid streaming for the ability to listen to music on their phone whenever and wherever they are. Curation and playlists have become more important in order to help serve the needs of these more mainstream users—still strong music fans— but not quite the train spotter obsessives that drive phase one. A growing number of these users are increasing their monthly spend up to $9.99, helping ensure streaming drives market level growth.
  3. Maturation: As with all technology trends, the phases overlap. We are already part way into phase three: the maturing of the market. With saturation among the 25-35 year-old music super fans on the horizon in many western markets, the next wave of adoption will be driven by widening out the base either side of the 25-35 year-old heartland. This means converting the fast growing adoption among Gen Z with new products such as unbundled playlists. At the other end of the age equation, it means converting older consumers— audiences for whom listening to music on the go on smartphones is only part (or even none) of their music listening behaviour. Car technologies such as interactive dashboards and home technologies such as Amazon’s echo will be key to unlocking these consumers. Lean back experiences will become even more important than they are now with voice and AI (personalizing with context of time, place and personal habits) becoming key.

It has been a great 18 months for streaming and strong growth lies ahead in the near term that will require little more effort than ‘more of the same’. But beyond that, for western markets, new, more nuanced approaches will be required. In some markets such as Sweden, where more than 90% of the paid opportunity has already been tapped, we need this phase three approach right now. Alongside all this, many emerging markets are only just edging towards phase 2. What is crucial for rights holders and streaming services alike is not to slacken on the necessary western market innovation if growth from emerging markets starts delivering major scale. Simplicity of product offering got us to where we are but a more sophisticated approach is needed for the next era of paid streaming.

NOTE: I’m going on summer vacation so this will be the last post from me for a couple of weeks.

 

 

Quick Take: IFPI Revenue Numbers

Today the IFPI published their annual assessment of the global recorded music business. The key theme is the first serious year of growth since Napster kicked off a decade and a half of decline, with streaming doing all the revenue heavy lifting.

The findings won’t come as much of a surprise to regular readers of this blog, as at MIDiA we had already conducted our own market sizing earlier in the year. The IFPI reported just under a billion dollars of revenue growth in 2016 (we peg growth at $1.1 billion) with streaming driving all the growth (60% growth, we estimate 57%). IFPI also reported 112 million paying subscribers (our number is 106.3 million, but the IFPI numbers probably include the Tencent 10 million number as reported, while the actual number is closer to 5 million).

IFPI report physical sales declining by 8% (we have 7%) and downloads down by 21% which is 3 percentage points more decline than the majors reported; this implies the IFPI estimates the indies to have had a much more pronounced decline than the majors. MIDiA is currently working with WIN to create the 2017 update to the global indie market sizing study, so we’ll be able to confirm that trend one way or another in a couple of months’ time.

Overall, the IFPI numbers tell the same good news story we revealed back in February, namely that streaming is finally driving the format replacement cycle that the recorded music business has not had since the heyday of the CD. Without streaming, the recorded music market would have declined in 2016. Streaming is driving revenue growth by both growing the base of users and, crucially, increasing the spend of more casual music spenders, changing them from lower spending download buyers into monthly 9.99 customers.

Also, streaming is unlocking spending in emerging markets (especially Latin America). The old model was based on people being able to afford a CD player and being able to afford to buy albums. The new model monetizes consumption on smartphones (which are becoming ubiquitous in emerging markets). Expect each year from now to see a reallocation of recorded music revenue towards emerging markets. It will be a long process but an irresistible one. Indeed, as Spotify’s Will Page put it:

“Spotify’s success story has expanded beyond established markets, with Brazil and Mexico now making up two of our top four countries worldwide by reach. Back when the industry peaked in 2000, Brazil and Mexico were 7th and 8th biggest markets in the world respectively. A combination of increasing smartphone adoption [reaching far more users than CDs ever did] and Spotify’s success makes the potential for these emerging markets to ‘re-emerge’ and to exceed previous peaks.”

One surprising point is that the IFPI reported a total of $4.5 billion for streaming ($3.9 for freemium and $0.6 billion for YouTube, etc.). However, the major labels alone reported revenues of $3.9 billion (see my previous post for more detail on label revenues). That would give the majors an implied market share of 87% in streaming. Which seems like a big share even accounting for majors including the reveue of the indie labels they distribute in their revenue numbers (eg Orchard distributed indie label revenue appearing in Sony’s numbers). Last year the IFPI appeared to have put Pandora revenues into US performance revenues rather than treat them as ad supported streaming, so that could account for an extra $400 million or so.

Nonetheless, taking the IFPI’s $3.9 billion freemium revenue and the 112 million subs number both at face value for a moment, that would equate to an average monthly label income of $2.90 per subscriber or a combined average monthly income of $1.53 for total freemium users (including free). These numbers are skewed in that they are year end numbers (mid year user numbers would be lower, so ARPU would be higher) but they are still directionally instructive ie there is a big gap between headline 9.99 pricing and what label revenue is actually generated due to factors such as $1 for 3 month trials and telco bundles.

All in all, a great year for recorded music. And despite a slow-ish Q1 2017 for streaming and the impending CD revenue collapse in Japan and Germany, it looks set to be another strong year ahead for streaming and, to a lesser extent, the broader recorded music business.

Global Recorded Music Revenues Grew By $1.1 Billion In 2016

Following on from the global market share numbers we released on Sunday, here are our findings regarding the growth of the overall market.

Throughout 2016 as the major label earnings were coming in there was a growing awareness that 2016 was going to be a landmark year for the recorded music business. It finally looked like streaming was going to push the industry into growth. Now with full year numbers in, the picture is even more positive than it first appeared. The recorded music market grew by 7% in 2016, adding $1.1 billion, reaching $16.1 billion, by far the largest growth the recorded music business has experienced since Napster and co pushed revenues into free fall.

2nd-release-graphic

While it is too early to state that the corner has been turned, this is clearly a turning point of some form for the business. Underpinning the growth was streaming which grew by 57% in 2016 to reach $5.4 billion, up from $3.5 billion in 2015. Spotify has been key to this growth, accounting for 43% of the 106.3 million subscribers at the end of 2016. 2017 should see further strong streaming growth with another 40.3 million subscribers added, more than the 38.8 added in 2016. Apple Music and Deezer also both contributed strongly to growth and market share. Additionally, Amazon upped its game in 2016 and the introduction of the $3.99 Amazon Prime Music Unlimited Echo bundle could open up swathes of new, more mainstream users.mrm1703-fig0-5

Based strictly upon the recorded music revenue that is reported in financial accounts by the major record labels and / or their parent companies combined with trade association and collection society data, the 3 majors labels collectively generated $11 billion of gross revenue in 2016. Universal Music generated the most with $4.6 billion representing 28.9% of the market total. Sony followed with $3.6 billion (22.4%) and Warner with $2.8 billion (17.4%). These numbers do not include any corrections for any independent revenues that are recognised by major labels because they are distributed by majors or major owned distributors. Thus the ‘actual’ independent share will be higher but can only be accurately measured with a separate survey, so watch out for WIN’s forthcoming indie market share study that will do exactly this.

Volatile currency markets played a role in shaping the 2016 picture, with Sony’s revenues at the original Yen values increasing by just 0.9% but 13% in US dollar terms. In original currency terms, Warner Music was the standout success of 2016, with revenues increasing 11%.

To be utterly clear, these numbers represent the recorded music revenue that each of these companies report to their shareholders and to the financial markets. This is market share based purely on publically stated, financially regulated and audited filings. No more, no less. In this specific context record label recorded market share is simple arithmetic: the record label’s reported recorded music revenue divided by total global recorded music.

Conclusions

The recorded music industry changed gear in 2016 and the outlook is positive also with revenue looks set to be on an upward trajectory over the next few years. However, successive quarterly growth is not guaranteed. Streaming will have to work extra hard to offset the impact of continued legacy format declines as the 18% download revenue decline in 2016 illustrates. Thus, the midterm outlook is as much about legacy format transition as it is streaming growth. If streaming can outrun tumbling download and CD revenues as those walls come crashing down, then good times are indeed here.

Global Recorded Market Music Market Shares 2016

MIDiA and Music Business Worldwide have been tracking record label and publisher financial releases throughout 2016. In addition MIDIA has conducted market sizing work on the publishing sector and research for the Worldwide Independent Network’s (WIN) indie label market share project. Pulling all of these inputs together, along with reports from country trade bodies and PROs, MIDiA has created a recorded music market share model to provide a unique view of where the revenue flows in the global business. To ensure as representative a picture as possible all local currency data has been converted into US dollars at the currency conversion rates for the respective quarters. This removes the distortion effect that occurs when data historical data is retrospectively converted at today’s conversion rates.

midia-research-recorded-music-market-shares-2016

(MIDiA Research subscription clients can access the full 15 page excel spreadsheet with all of the underpinning data right now by clicking here.)

The Recorded Music Market In 2016

2016 was a big year for the global recorded music business, with record labels and publishers reporting growth almost across the board. Unsurprisingly, streaming was the driver of growth, increasing its share of label revenue from 23% in 2015 to 34% in 2016. However, the experience was far from uniform across the various corporate groups:

  • Universal: Universal is the world’s leading music group and that status remains firmly the case for 2016. Universal Music’s global record label revenue share was 28.9%, far ahead of the nearest rival Sony Music which had a 22.4% share. However, despite registering a 2.4% growth in USD terms (1.8% in euros), UMG’s share feel slightly from 30.2% in 2015. As with all labels, UMG had a big streaming year, seeing revenue increase by 56%, though this was just below the total market growth of 57%.  Universal Music Publishing’s market share was largely flat at 16.7% for 2016. Note: Although the Universal market share number reported here is smaller than numbers previously reported elsewhere it is grounded in widely accepted industry numbers. The IFPI reported global revenues of $14.95 billion for 2015 while Vivendi reported UMG recorded music revenues of €4.11 billion, which translated to $4.54 billion, which is a 30.2% market share for 2015. Also please note that a previous post had incorrectly reported a 32% decline in physical revenue for UMG in Q4 2016. 
  • Warner: Warner Music had the best major label performance in local currency terms, growing its revenue by 11% and its market share from 16.8% to 17.4%. On the streaming side Warner actually lost a little ground, seeing its market share fall from 19.3% in 2015 to 18.4% despite registering an impressive 51% annual growth in streaming revenue. What helped Warner’s total market share was the smallest local currency fall in physical revenue (just -1%) and the strongest local market currency growth in ‘other’ revenue, up 7%. Warner Chappell had a good year, growing revenue by 9% year-on-year and increasing its market share from 9.6% in 2015 to 10% in 2016.
  • Sony: Sony registered a US dollar growth of 13% in 2016, the highest of all the majors, increasing its market share from 21.3% in 2015 to 22.4% in 2016. However, Sony was helped markedly by the growing strength of the Yen against the dollar. In Yen terms SME’s revenue grew by just 0.9% in 2016. Streaming revenue was up 41.8% in Yen terms and 57% in dollar terms. SME’s streaming market share was flat year-on-year. Sony Music Publishing (including ATV) revenue fell by 1% resulting in market share falling from 24.3% in 2015 to 23% in 2016.
  • Independents: Independent labels saw revenue increase by 6% but that was not enough to prevent market share fall slightly from 31.6% in 2015 to 31.3% in 2016. However, these numbers reflect share according to distribution rather than ownership of copyright. Because so much independent label catalogue is distributed either directly via major labels or via distributors wholly owned by the majors, the actual market share is significantly higher. Watch out for WIN’s forthcoming 2017 indie market share report for a clearer picture of the indie sector’s contribution. On the publishing side independents had a strong year, seeing revenue grow by 6%, and market share grow from 49.4% in 2015 to 50.1% in 2016. Note that the independent numbers include revenue from leading labels in Japan (the world’s 2nd biggest music market globally) and South Korea (another top 10 market) where the western major labels are minor players.

(MIDiA Research subscription clients can access the full 15 page excel spreadsheet with all of the underpinning data right now by clicking here.)

Have Spotify and Apple Music Just Won The Streaming Wars?

Spotify has just delivered 2 landmark data points: 40 million subscribers and $5 billion paid to rights holders to date. Although the 3 million added in Q3 was down on the 7 million added in Q2 (boosted by a summer pricing promo) there is no escaping the fact that Spotify’s momentum has accelerated rather than declined since the emergence of Apple Music. 2016 is proving to be Spotify’s year. The question is how well the rest of the market is performing beyond the 2 market leaders?

The streaming music market as a whole is experiencing unprecedented growth, with the major labels collectively reporting a 52% increase in streaming revenue in Q2 2016 compared to the same period 12 months ago. Given that total streaming revenues (including YouTube etc. but not Pandora) grew by 44% in 2015 (according to the IFPI) the picture that is emerging is one of, at worst, sustained growth, at best, accelerating growth.

Although the major label numbers have to be interpreted with caution due to factors such as Minimum Revenue Guarantees (MRGs) – see my previous post for much more detail on this – the headline trend is growth. However, headline growth is not necessarily a reflection of how most of the market is actually performing. In fact, a forensic examination of these numbers cross referenced against reported Apple Music and Spotify numbers reveals that the outlook for the rest of the pack is very different indeed.

streaming-market-share-q2-16

At the end of 2015 there were 67.5 million subscribers, by the end of June 2016 that had increased to 83.2 million – a 23% increase from the end of 2015 and a 63% increase on Q2 2015. Spotify’s subscriber count for Q2 2016 was 37 million (including super trialists) while Apple Music was just under 16 million. This gives them a combined market share of 56%, which in itself is not particularly surprising. However, when we look at what has happened to the rest of the pack that things start to get really interesting…

The Rest Of The Pack Is Getting Left Behind

By end Q2 2015 Spotify had 20 million subscribers and Apple Music none. This meant that the rest had 31 million between them. By Q2 2016 this ‘remainder’ had shrunk to 30.5 million. Among this chasing pack there is a diverse mix of stories, with some services showing solid growth, some losing lots of paid subscribers and some disappearing all together. Meanwhile Spotify and Apple Music added 32.7 million to the global subscriber base. Thus over the same 12 month period these two players combined, became bigger then the entire rest of the market in subscriber terms with a 63% combined market share. An interesting side note: Tidal’s reported revenues of $47 million in 2015 mean that it can’t have had more than around 800,000 commercially active subscribers by year end, which means that the reported and ‘implied’ 4.2 million current subscriber count is probably closer to half that.

Streaming revenue followed a similar trend with Apple and Spotify dominating and the rest falling slightly (by 1 percentage point year on year). Spotify paid around $1.6 billion in royalties in 2015 and a cumulative $6 billion by September 2016, implying about $1.1 billion in 2016 already. The amount that Spotify paid to record labels in Q2 was somewhere between $479 million and $622 million, depending on when and how Spotify paid for those 7 million new super trialists it acquired that quarter. Towards the lower end of that range is probably the safer bet. Apple by comparison paid around $220 million. And as with subscriber numbers, the rest of the pack lost revenue.

It’s A 2 Horse Race

When Apple launched Apple Music some less informed observers suggested that it was too late to the party and that there was only room for one big player. The numbers from Q2 2016 show that Apple was far from too late (fashionably late perhaps) and that the rather than being a winner takes all scenario, the streaming market is a 2 horse race. Unfortunately for the rest of the pack it does look like there is only space for 2 leading global players, with Apple clearly having played a key role in knocking Deezer out of 2nd place and racing on ahead.

Still A Place For Regional Leaders

This does not mean that there is not space for other players, there is. Especially regional leaders like QQ Music, KKBox, Anghami and MelOn. But the consumer marketplace only has so much appetite for global scale $9.99 AYCE services. Which is why pricing and product innovation are so crucial if the recorded music business wants a vibrant streaming sector. Compare and contrast with the streaming video market where there is immense innovation with niche services and a diverse range of price points. Music streaming needs the same approach. Tidal may have (very successfully) differentiated on brand and content but it remains fundamentally an also-ran, $9.99 AYCE service. As things stand, the only really serious attempt to play by different rules is Amazon’s steadily emerging streaming strategy. Expect that dark horse to make up ground by playing by different rules. Perhaps even Pandora may be able to break the mould too.

But it is only through differentiated strategies that serious inroads can be made and unless pricing and product innovation occurs (and the labels and publishers need to enable it) expect the streaming race to continue to be a tale of 2 horses.

Just How Well Is Streaming Really Doing?

All of the three major record labels announced strong streaming music revenue growth in the 2nd quarter of 2016. On the surface it is a clear cut success story, but as is so often the case with music industry statistics, all is not quite how it seems.

The Global Streaming Market

First of all, let’s look at the global picture. According to the IFPI’s Recording Industry in Numbers (RIN) 2016 edition record label streaming revenue grew by 45% in 2015 reaching $2.9 billion, up from $1.9 billion in 2014. But even that number requires a little due diligence. The IFPI restates its historical numbers every year to reflect the current year’s exchange rates, which can, and does, overstate things. Indeed, a quick look at the 2015 edition of RIN shows that streaming revenue was reported as $2.2 billion for 2014. So on a non-adjusted basis (i.e. without restating the numbers) streaming revenue actually grew by 31%.

Spotify’s Contribution

31% is still impressive growth but the plot thickens when we factor in Spotify’s contribution to those label revenues. Spotify’s total royalty payments were $1.9 billion in 2015, of which around $1.4bn were label payments, and of those around $1.1 billion were royalty payments (i.e. minus advance payments such as Minimum Revenue Guarantees (MRGs) paid in anticipation of future growth). That $1.1 billion was up 85% from $610 million in 2014. As the IFPI numbers only represent payments in respect of actual royalties (i.e. minus advance payments) the Spotify label royalty payments can be considered as a share of that global total. That share was 39% of all label streaming revenue in 2015, up from 28% in 2014.

This results in 2 interesting points:

  1. Spotify’s share of the global music subscriber total was 35% in 2014 and 37% in 2015. So the label royalty payments over indexed in 2014 and under indexed in 2015. The fact that 2015 was a big year for heavily discounted promotional offers such as $1 for 3 months most probably plays a key role here.
  2. If we remove the Spotify label royalty payments from the equation, label payments from other streaming services grew by just 10% from $1.6 billion in 2014 to $1.8 billion in 2015. Not exactly the most robust of pictures for the wider streaming market place.

major label streaming

So much for 2015, let’s look at where we are now. All three major labels reported strong streaming growth in Q2 2016. Together they reported $918 million, up 51% from $607 in Q2 2015. That growth generated $311 million of new digital revenue. At the same time, and as a direct consequence, download revenue fell by 24% from $925 in Q2 2015 to $705 million. So streaming is now nearly as big as downloads were 12 months ago. The net increase in combined digital music revenue was $91 million, or a combined digital growth rate of 6%. Solid growth, but not far from treading water. This is a transition process, not a transformative growth process.

Universal Is The Big Streaming Winner

Each of the 3 majors had differing streaming experiences. Universal was the big winner, growing its share of major label streaming revenue from 38% in Q2 2015 to 42% in Q2 2016 (boosted more than other majors by ‘embedded’ independent label revenue). UMG’s streaming revenue grew by more than 60% while Sony and Warner grew by an average of 42%. However, it is important to note that UMG’s reported streaming numbers may be skewed more by currency restating than the other majors, so this share increase might be slightly on the high side.

Sony Music meanwhile lost share from 35% to 33% while Warner Music, which was most coy about its streaming revenue in its reporting, also saw a fall from 26% to 25%. Warner’s and Sony’s loss was Universal’s gain. An interesting side note: Sony was the only major that saw growth in physical music sales over the period. Yet more evidence of the Adele effect?

The Role Of Advanced Payments

But perhaps the most important element of the majors’ streaming reports is the difference between royalty payments (i.e. money earned for music streamed) and total streaming revenue (i.e. including advanced payments such as MRGs). Spotify states rights payments are 70% of its revenue though its 2015 accounts show royalty payments as 82% of revenue due in large part to advanced payments. Using this benchmark advanced payments represent around 16% of all label payments. Applying this to the label reported numbers we can extrapolate that $145 million of all major label streaming revenue is advanced payments.

Why does this matter? Because this is the major record label’s streaming reality distortion field. They get streaming revenue regardless of how well the marketplace actually performs. If a streaming service pays an MRG of $30 million but only earns $10 million the label still gets $30 million. So in that scenario the label’s view of that part of the streaming music market is 3 times better than it actually is. If the music service wins, the label wins, if the music service loses, the label still wins. This disconnect between how the market performs and how the label performs is one of the festering wounds of the streaming music market. And its revenue impact is massive. In fact, advanced label streaming payments were 158% of the $91 million that digital music revenue grew by in Q2 2016. Yes, that’s right, advanced streaming payments accounted for all of the digital music growth, and more.

Streaming Will Continue To Grow, But Haunted By Advanced Payments

So where does all this leave us? The streaming market is without doubt entering a phase of accelerating growth and is doing enough to counter the resulting decline in downloads to contribute to a combined total recorded music revenue growth of 4% for major labels in Q2 2016. But growth is not quite as stellar as the headline numbers would suggest, with the single most important factor being the impact of advanced payments distorting the bigger picture and crippling cash flow for streaming music services. Expect more impressive growth throughout the remainder of 2016 but also expect streaming music economics to continue to be fractured.

The Real Value Of The Independent Sector

Over the course of the last year MIDiA has been working with WIN (the global indie label trade body) on a major study to define the independent sector’s contribution to the global recorded music business. The default accepted wisdom is that the indies account for something like 20% of the global revenue total. However, this study revealed, that figure strongly underestimates the actual share…it is in fact 37.6%. This matters not for bragging rights but because in the digital marketplace, market share shapes the deals that are struck, with more market share translating into better terms. So a more accurate measure of share can help the independent sector compete on fairer terms.

Distribution Versus Ownership

Distribution is the largest single contributor to the variance in market share. The 20% refers to the labels that distribute the music while the 37.6% refers to which labels actually own the music. Indeed, 3rd party distribution is becoming an ever more central element of the independent sector. The growth of streaming services and social media have helped create a burgeoning international opportunity for independent labels across the world. However, because most of these labels do not have the international infrastructure required to tap this global opportunity they often utilise 3rd party partners for distribution and other services. Often these parties are major labels or major label owned distributors. As the music market becomes more global, 3rd party distribution becomes more important for indies. But while this gives the independent sector global scale it also means that much of their revenue ends up being accounted as major label revenue, creating a distorted view of the market.

Most Indies Use International Distributors

In fact, 72% of independent labels use a 3rd party international distributor while 52% use a major label owned one or go direct via a major for distribution. The impact on the global market is huge. Just look at 2 of the biggest independent artist albums recently: Taylor Swift’s ‘1989’ on Big Machine but distributed by Universal Music, and Adele’s ‘25’ on XL/Beggars but distributed by Sony in the US and South America. 2 leading independent success stories that now appear as major label success stories in investor decks. There is no questioning the value that majors and major owned distributors bring but just as importantly these are nonetheless indie label artists.

A Diverse Global Picture 

Even using the ownership approach, there is a massively diverse global picture, with indie market share ranging from just 16% in Finland, up to 64% in Japan and 88% in South Korea. In fact, Japan, South Korea and the US (where the distribution methodology has been in place for a few years now) account for 64% of all global indie revenue.

The disparity between ownership and distribution measures will only increase as music’s shift to streaming accelerates. The more that international markets open up, the more that smaller labels need to utilize international partners to reach music fans in those markets.  And the more that happens, the less relevant distribution market share becomes.

You can download the entire report by following this link.

Meanwhile, this graphic highlights some of the key findings.

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