Kobalt is a Major Label Waiting to Happen

Disclaimer: Kobalt is a label, a publisher as well as a Performing Rights Organisation (PRO). This post focuses on its label business, but does not presume to overlook its other aspects.

Lauv Kobalt

News has emerged of Kobalt potentially looking to raise an additional $100 million of investment, following a 2017 round of $89 million and a 2015 $60-million round led by Google Ventures. Kobalt has been the poster child for the changing of the guard in the music business, helping set the industry agenda by pursuing a creators-first strategy while

building an impressive roster of songwriters and artists at a scale that would have most indies salivating. But it does not have its sights set on being the leading player of the indie sector, instead playing for the big game: Kobalt is the next major label waiting to happen.

So, what makes Kobalt so different? In some respects, nothing. Most of what Kobalt is doing has been done before, and there are others plotting a similar path right now (e.g. BMG, United Masters, Hitco). What matters is how it is executing, how well backed it is and the scale of its ambitions:

  • Moving beyond masters: In the old model, artists signed away their rights in perpetuity to record labels, with nine out of ten of them permanently in debt to the label not yet having paid off their advances. The new model (i.e. label services) pursued by the likes of Kobalt, reframes the artist-label relationship, turning it one more akin to that of agency-client. In this rebalanced model artists retain long-term ownership of their copyrights and in return share responsibility of costs with their label. This approach, coupled with transparent royalty reporting, lower admin costs and continual tech innovation has enabled Kobalt to build a next-generation label business.
  • Laser focus on frontline: In a label services business the entire focus is on frontline, as there isn’t any catalogue. An artist signed to such a label therefore knows that they have undivided attention. That’s the upside; the downside is that the label does not have the benefit of a highly-profitable bank of catalogue to act as the investment fund for frontline. This means that a label like Kobalt often cannot afford the same scale of marketing as a major one, which helps explain why Kobalt is looking for another $100 million. However, there is a crucial benefit of being compelled to spend carefully.
  • Superstar niches: In the old model, labels would (and often still do) carpet-bomb TV, radio, print and digital with massive campaigns designed to create global, superstar brands. Now, labels can target more precisely and be selective about what channels they use. Kobalt’s business is based around making its roster superstars within their respective niches, finding a tightly-defined audience and the artists they engage with. The traditional superstar model sees an artist like a Beyoncé, Ed Sheeran or a Taylor Swift being a mass media brand with recognition across geographies and demographics. The new superstar can fly under the radar while simultaneously being hugely successful. Take the example of Kobalt’s Lauv, an artist tailor-made for the ‘Spotify-core’ generation that hardly registers as a global brand, yet has two billion audio streams, half a billion YouTube views and 26 million monthly listeners on Spotify. By contrast, heavily-backed Stormzy has just three million monthly Spotify listeners.
  • Deep tech connections: The recent WMG / Spotify spat illustrates the tensions that can exist between labels and tech companies. Kobalt has long focused on building close relationships with tech companies, including but not limited to streaming services. This positioning comes easier to a company that arguably owes more to its technology roots than it does its music roots. The early backing of Google Ventures plays a role too, though with some negative connotations; some rights holders fear that this in fact reflects Google using Kobalt as a proxy for a broader ambition of disrupting the traditional copyright regime.
  • A highly structured organisation: One of the key differences between many independent labels and the majors is that the latter have a much more structured organizational set up, with large teams of deep specialisation. This is the benefit of having large-scale revenues, but it is also a manifestation of ideology. Most independents focus their teams around the creative end of the equation, putting the music first and business second. Major labels, while still having music at their core, are publicly-traded companies first, with corporate structures and a legal obligation on management to maximise shareholder value. Kobalt has undoubtedly created an organisational structure to rival that of the majors.

Earned fandom

Kobalt is a next-generation label and it is plotting a course to becoming a next generation-major. That success will not be reflected in having the rosters of household names that characterise the traditional major model, but instead an ever-changing portfolio of niche superstars. The question is whether the current majors can respond effectively; they have already made big changes, including label services, JV deals, higher royalty rates, etc.

Perhaps the most fundamental move they need to make, however, is to understand what a superstar artist looks like in the era of fragmented fandom. The way in which streaming services deliver music based on use behaviours and preferences inherently means that artists have narrower reach because they are not being pushed to audiences that are relevant. This shifts us from the era of macro hits to micro hits ie songs that feel like number one hits to the individual listener because they so closely match their tastes. This is what hits mean when delivered on an engagement basis rather than a reach basis. Quality over quantity.

Majors can still make their artists look huge on traditional platforms, which still command large, if rapidly aging audiences. But what matters most is engagement, not reach. It is a choice between bought fandom and earned fandom. In the old model you could build a career on bought fandom. Now if you do not earn your fandom, your career will burn bright but fast, and then be gone.

How Spotify Can Become A Next Generation “Label”

Spotify on iPhoneOne of the themes my MIDiA colleague Tim Mulligan (the name’s no coincidence, he’s my brother too!) has been developing over in our online video research is that of next generation TV operators. With the traditional pay-TV model buckling under the pressure of countless streaming subscriptions services like Netflix (there are more than 50 services in the US alone) pay-TV companies have responded with countless apps of their own such as HBO Go and CBS All Access. The result for the consumer is utter confusion with a bewildering choice of apps needed to get all the good shows and sports. This creates an opportunity for the G.A.A.F. (Google, Apple, Amazon, Facebook) to stitch all these apps together and in doing so become next generation TV operators. Though the G.A.A.F. are a major force in music too, the situation is also very different. Nonetheless there is an opportunity for companies such as these to create a joined up music experience that delivers an end-to-end platform for artists and music fans alike. Right now, Spotify is best placed to fulfil this role and in doing so it could become a next generation “label”. I added the quote marks around the word “label” because the term is becoming progressively less useful, but it at least helps people contextualise the concept.

Creating The Right Wall Street Narrative

When news emerged that Spotify was in negotiations to buy Soundcloud I highlighted a number of potential benefits and risks. One thing I didn’t explore was how useful Soundcloud could be in helping Spotify build out its role as a music platform (more on that below). As I have noted before, as Spotify progresses towards an IPO it needs to construct a series of convincing narratives for Wall Street. The investor community generally looks upon the music business with, at best, extreme caution, and at worst, disdain. To put it simply, they don’t like the look of low-to-negative margin businesses that have little control over their own destinies and that are trying to sell a product that most people don’t want to buy. This is why Spotify needs to demonstrate to potential investors that it is working towards a future in which it has more control, and a path to profitability. The major label dominated, 17% gross operating margin (and –9% loss) 9.99 AYCE model does not tick any of those boxes. Spotify is not going to change any of those fundamentals significantly before it IPOs, but it can demonstrate it is working to change things.

The Role Of Labels Is As Important As Ever

At the moment Spotify is a retail channel with bells and whistles. But it is acquiring so much user data and music programming expertise that it be so much more than that. The role of record labels is always going to be needed, even if the current model is struggling to keep up. The things that record labels do best is:

  1. Discover, invest in and nurture talent
  2. Market artists

Someone is always going to play that role, and while the distribution platforms such as Spotify could, in theory at least, play that role in a wider sense, existing labels (big and small) are going to remain at the centre of the equation for the meaningful future. Although some will most likely fall by the wayside or sell up over the next few years. (Sony’s acquisition of Ministry Of Sound is an early move rather than an exception.) But what Spotify can do that incumbent labels cannot, is understand the artist and music fan story right from discovery through to consumption. More than that, it can help shape both of those in a way labels on their own cannot. Until not so recently Spotify found itself under continual criticism from artists and songwriters. Although this has not disappeared entirely it is becoming less prevalent as a) creators see progressively bigger cheques, and b) more new artists start their career in the streaming era and learn how to make careers work within it, often seeing streaming services more as audience acquisition tools rather than revenue generators.

The Balance Of Power Is Shifting Away From Recorded Music

Concert crowd.In 2000 record music represented 60% of the entire music industry, now it is less than 30%. Live is the part that has gained most, and the streaming era artist viewpoint is best encapsulated by Ed Sheeran who cites Spotify as a key driver for his successful live career, saying “[Spotify] helps me do what I want to do.” Spotify’s opportunity is to go the next step, and empower artists with the tools and connections to build all of the parts of their career from Spotify. This is what a next generation “label” will be, a platform that combines data, discovery, promotion (and revenue) with tools to help artists with live, merchandise and other parts of their career.

How Spotify Can Buy Its Way To Platform Success

To jump start its shift towards being a next-generation “label” Spotify could use its current debt raise – and post-IPO, its stock – to buy companies that it can plug into its platform. In some respects, this is the full stack music concept that Access Industries, Liberty Global and Pandora have been pursuing. Here are a few companies that could help Spotify on this path:

  • Soundcloud: arguably the biggest artist-to-fan platform on the planet, Soundcloud could form a talent discovery function for Spotify. Spotify could use its Echo Nest intelligence to identify which acts are most likely to break through and use its curated playlists to break them on Spotify. Also artist platforms like BandPage and BandLab could play a similar role.
  • Indie labels: Many indie labels will struggle with cash flow due to streaming replacing sales, which means many will be looking to sell. My money is on Spotify buying a number of decent sized indies. This will demonstrate its ability to extend its value chain footprint, and therefore margins (which is important for Wall Street). It could also ‘do a Netflix’ and use its algorithms to ensure that its owned-repertoire over performs, which helps margins even further. But more importantly, indie labels would give Spotify a vehicle for building the careers of artists discovered on Soundcloud. Also the A&R assets would be a crucial complement to its algorithms.
  • Tidal: Spotify could buy Tidal, taking advantage of Apple’s position of waiting until Tidal is effectively a distressed asset before it swoops. Though Tidal is most likely to want too much money, its roster of exclusives and its artist-centric ethos would be a valuable part of an artist-first platform strategy for Spotify.
  • Songkick: In reality Songkick is going to form part of Access’ Deezer focused full stack play. But a data-led, live music focused company (especially if ticketing and booking can play a role) would be central to Spotify driving higher margin revenues and being able to offer a 360 degree proposition to artists.
  • Musical.ly: Arguably the most exciting music innovation of the decade, Musical.ly would give Spotify the ability to appeal to the next generation of music fans. The average age of a Musical.ly user is 20, for Spotify it is 27. Spotify has to be really careful not to age with its audience and music messaging apps are a great way to tap the next generation in the same way Facebook did (average age 35) did by buying up and growing messaging apps. (e.g. Instagram’s average age is 26).
  • Pandora: A long shot perhaps, but Pandora would be a shortcut to full stack, having already acquired Ticket Fly, Next Big Sound and Rdio. If Pandora’s stock continues to tank (the last few days of recovery notwithstanding) then who knows.

In conclusion, Spotify’s future is going to be much more than being the future of music retail. With or without any of the above acquisitions, expect Spotify to lay the foundations for a bold platform strategy that has the potential to change the face of the recorded music business as we know it.

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