Ad Supported Is 56% Of US Streaming Revenue

Late 2014 a minor crisis emerged in the music industry, with major record labels at one stage looking like they were going to kill off freemium.  The outcome of the Freemium Wars was actually less dramatic, resulting instead in an effective continuation of the status quo.  The labels had however made it very clear to Spotify who held the whip hand.  Though their tones have softened, major label execs retain an at best sceptical view of free streaming.  The net result is that freemium has almost become the inconvenient streaming truth that no one really talks about.  However free is too big to ignore.  In fact free is much bigger than some would like to admit.

freemium what freemium

According to the IFPI ad supported streaming accounted for just 19% of all US streaming revenues in 2014, down from a high of 30% in 2011.  Which points to the success of subscriptions.  Except that those numbers ignore a major part of the equation: Pandora (and other semi-interactive radio services).  The IFPI has Pandora hidden away with cloud locker services, SiriusXM and a mixture of other revenues in ‘Other Digital’.  Extracting the semi-interactive radio revenues that count as label trade revenues wasn’t the most straight forward of tasks but it was worth the effort.  Once Pandora is added into the mix it emerges that 56% of US streaming revenues are from free, ad supported services.  While that share is down from a high of 66% in 2012 it remained flat in 2013 and 2014.  Which means that however fast subscriptions grew Pandora, Slacker, Rhapsody UnRadio and co grew even faster in order to offset the decline in on demand ad supported income.

us subscriber growth and pandora

Semi-interactive radio revenues grew by 40% in 2014 compared to 35% for subscriptions.  Subscriptions had grown much faster in 2013 (76% compared to 25%) but Pandora and co found their mojo again in 2014.  None of this is to suggest that subscriptions aren’t making great progress but it does show us that free is more than an inconvenient truth, it is both the most widely adopted behaviour and the largest revenue source in the US (which accounts for 48% of global digital revenues).

The music industry is beginning to get its head around the fact that the role of streaming as a retail channel (i.e. subscriptions) is always going to be smaller (in reach terms at least) than its role as a radio channel (i.e. free streaming).  This more accurate view of the US streaming market shows us that free is even more important than many thought.

Free streaming also has much bigger growth potential. The percentage of consumers that have the inclination to pay 9.99 a month for music is inherently limited, thus constraining subscriptions to a niche addressable audience.  Music radio listening by contrast has near ubiquitous reach.  Most significantly Pandora currently only represents about 10% of all US radio listening time.  The addressable market is much bigger and the vast majority of it remains untapped.

The Real Problem With Streaming

Much of the debate around the sustainability of streaming has understandably focused on artist and songwriter income and transparency.  It is a debate that I have contributed to frequently.  But the more fundamental structural issues are whether the business models are commercially sustainable and if they are, what the implications are.  Music consumption is inarguably moving towards access based models so the question is not whether streaming should happen or not, but how to make it work as well as it possibly can for all parties.  As unfair as it might seem, the baseline issues regarding creator income could go unchanged without streaming business models falling apart.  But, as I will explain, if broader commercial sustainability issues are not fixed then many streaming businesses will collapse leaving just a couple of companies standing.  And that scenario would almost certainly be worse for creators than the current one.

The Steve Jobs Revenue Share Legacy

As I revealed in my book ‘Awakening’, when Steve Jobs struck the original iTunes Music Store deal he walked away a happy man despite having given the major labels the big revenue percentages they wanted.  Why?  Because it meant that it was really hard for anyone without ulterior business aims like Apple had, to make money from selling tracks as a standalone business.  The revenue shares negotiated back then set the reference point for all digital deals since.  The fact that streaming services pay out more than 70% of revenues to rights holders can be traced back to that deal.

The Great Role Reversal And The De Facto Label Monopoly

In the digital era the record labels undisputedly hold the whip hand, and some.  In the analogue era the roles were reversed.  Retailers were the dominant partners and they knew it.  Record labels actually paid retailers for placement to promote new releases.  Compare and contrast that with labels contractually compelling services to provide placement.  Both models are wrong and both engender corrosive behaviour.  Because the major labels account for the majority of music sales it is nigh on impossible for a non-niche music service to operate without all three on board.  This gives each label the effective power of veto.  So even though no major label is a monopoly in its own right each has an effective monopoly power in licensing.  These factors give labels them the strength and confidence to demand terms that would not take place in an openly competitive market.  This, for example, is very different to how digital deals are done in the much more fragmented TV rights landscape.

Loading The Risk Onto Music Services

Why all this matters for the sustainability of streaming services is because of how it manifests in commercial terms.  Recent contract leaks have revealed to everyone the details of what insiders long knew, that labels and publishers front-load deals.  Services both have to pay large amounts up front and agree to guaranteed payments to rights owners regardless of how well the service performs.  (Some labels proudly state they don’t charge advances but instead charge a ‘set up fee’ for every track in their catalogue. Call it what you like, making a music service pay money up front is an advance payment.)  Even without considering the entirely intentional complexity of details such as minimas, floors and ceilings, the underlying principle is simple: a record label secures a fixed level of revenue regardless, while a music service assumes a fixed level of cost regardless.

Labels call this covering their risk and argue that it ensures that the services that get licensed are committed to being a success.  Which is a sound and reasonable position in principle, except that in practice it often results in the exact opposite by transferring all of the risk to the music service.  Saddling the service with so much up front debt increases the chance it will fail by ensuring large portions (sometimes the majority) of available working capital is spent on rights, not on building great product or marketing to consumers.

Skewing The Market To Big Tech Companies

None of this matters too much if you are a successful service or a big tech company (both of which have lots of working capital).  Both Google and Apple are rumoured to have paid advances in the region of $1 billion.  While the payments are much smaller for most music services, Apple, with its $183 billion in revenues and $194 billion in cash reserves can afford $1 billion a lot more easily than a pre-revenue start up with $1 million in investment can afford $250,000.  Similarly a pre-revenue, pre-product start up is more likely to launch late and miss its targets but will still be on the hook for the minimum revenue guarantees (MRG).

It is abundantly clear that this model skews the market towards big players and to tech companies that simply want to use music as a tool for helping sell their core products.   Record labels complain that they don’t get enough value out of big companies like Google and Samsung, but unless they make the market more accessible to companies that are only in the business of selling music they can have no room for complaint.  The situation is a direct consequence of major label and major publisher licensing strategy.

Short Termism And From Evil To Exceptional

Matters are compounded by an increasingly short term outlook from label licensing divisions, with the focus on internal quarterly revenue targets, or if you are lucky, annual targets.  The fact that much of label and publisher digital revenue comprises guarantees and advance payments means that their view of the digital market is different from how the market is performing.  If our small start up that pays $250,000 in rights payments doesn’t even get its product to market, the rights holders still see that digital revenue even though the marketplace does not.  (One failed music service that didn’t even launch went into bankruptcy owing two major labels $30 million).

This revenue comfort blanket insulates labels and publishers from much of the marketplace pain.  So if/when things go wrong, they feel it later, delaying their response.  There is also a cynicism in much deal making, with rigid templates applied to deals and a willingness to compromise principles if the price is right. The latter point was illustrated by the leaked negotiations between UMG and industry bête noir Kim Dotcom in which former digital head Rob Wells referred to being able to ‘downgrade’ Dotcom from ‘evil to bad’ and then from ‘bad to good and from good to exceptional partner’.  The message is clear, if there is enough money on the table, anyone can be a business partner whatever the implications might be for the rest of the market.

Wafer Thin Margins, Deep Pockets And The Innovation Drain

Current licensing strategy biases the market towards those with deep pockets and fatally compromises profitability.  Once all costs are factored in, a music subscription can theoretically have an operating margin of between 3% and 5%. Though only if it doesn’t invest sufficiently on marketing, customer retention and product innovation. But of course the streaming market is in early growth stage so every service has to spend heavily which means that profitability becomes a hostage to fortune. No wonder Daniel Ek is clear that Spotify is a growth business rather than on a profit crusade.

The market dynamics also create an innovation talent drain.  If you were a would-be start up founder the huge up front costs, non-existent margins, and complex time consuming licensing do not exactly make building a music app a welcome experience.  Building a games app however is an entirely different proposition: you own 100% of the rights, you don’t pay a penny to 3rd party rights holders and consumers actually pay for your product.  Music is already a problematic enough sector as it is without burdening it with a punitive licensing framework.

These are the structural challenges that could yet bring down the entire edifice of the streaming music economy.  The irony is that if Spotify has a successful IPO (sans profit of course) it will trigger a wave of copycat services and investment that will perpetuate the status quo a little further.  But it will only be a temporary delay.  Sometime or another the hard questions must be answered.

Apple Music And The Listener-to-Buyer Ratio

The next 6 to 12 months could prove to be some of the most disruptive record labels have ever experienced, and nowhere will this pain be felt more than among smaller independent record labels with strong digital sales.   At the heart of this disruption will be Apple Music and the wider continued ramping up of streaming. If Apple Music is a success over the coming year it will do one or both of the following:

  1. It will convert / cannibalize non-subscribing download buyers
  2. It will convert / cannibalize existing subscribers

The probability is that it will do a bit of both with an emphasis on #1. The market level net impact of #1 will depend on the degree to which Apple converts lower spending iTunes buyers versus higher spending ones i.e. whether it increases or lowers the average spend.   But even if it is the latter the effect for smaller labels could still be net negative over the coming year. If you are a big label with hundreds of thousands or millions of tracks then you have enough catalogue to quickly feel major revenue uplift from 5 or 10 million new subscribers. If you only have a few hundred or a few thousand tracks though then the picture is less rosy.

The Listener-to-Buyer Ratio

At the core is the listener-to-buyer ratio i.e. how many new listeners you get for each ‘lost’ buyer. Let’s say that for every download sale lost due to an iTunes customer becoming an Apple Music subscriber transforms into 10 listens by 3 people within 12 months. So 30 streams instead of one download. The listener-to-buyer ratio here is 3:1. A generous assumption perhaps but let’s work with it. Against a base of $25,000 of download revenue that would translate into $6,250 less download revenue and $2,365 more streaming revenue. So a net loss of $3,885, a 16% decline.

If we reduce the average plays to 5 per user the revenue decline becomes 20%. In order for the revenue impact to be neutral the total new streams would have to be 80, which with a listener-to-buyer ratio of 3:1 would require each person to stream the track 27 times. Or alternatively a 8:1 listener-to-buyer ratio with 10 plays per user would also deliver no change in revenue. A great track could feasibly have an average of 27 plays per user per year, a good track could have 10. But an average track is going to be below both. So realistically, more than an 8:1 ratio is going to be required.

Scale Looks Different Depending On Where You Are Sat

What quickly becomes apparent is that the most viable route to ensuring Apple Music streaming revenue offsets the impact of lost iTunes sales revenue is as big an installed base of streaming users as possible. The more Apple Music users there are, the more likely more of them will find and listen to your music. This is why the scale argument so is so important for streaming and also why small labels feel the effect less quickly. If you have a vast catalogue you don’t need to worry too much about the listener-to-buyer ratio because you have so many tracks that you are a much bigger target to hit. The laws of probability mean that most users are going to listen to some of your catalogue.

Let’s say you are a big major with 1 million tracks out of the 5 million tracks that get played to any meaningful degree in streaming services. That gives you a 20% market share. But if you are an independent with 50,000 tracks that gives you 1%, 20 times less than the major. Which means that you are 20 times less likely to have your music listened to. And that is without even considering the biases that work in favour of the majors such as dominating charts and playlists, and other key discovery points. So in effect the major record label in this example could be 30 to 40 times more likely to have its music listened to. Which is why the listener-to-buyer ratio is unlikely to keep the major label’s exec up at night but could be the difference between sinking or swimming for the independent.

In all probability Apple Music will make streaming revenue a truly meaningful income stream for all record labels but in the near to mid term big record labels are likely to see a very different picture than the smaller independents.

‘Awakening’ Now Available In Paperback

UnknownRegular readers will know that I recently published the Kindle version of my book “Awakening: The Music Industry In The Digital Age”.  Many of you have already bought it (thank you!) but some of you also wanted to know when the paperback edition was going to be available. Well you need wait no longer, you can buy the paperback version of ‘Awakening’ right now by clicking here.

If you are interested in the music industry then this is the book for you. Whether you are a label executive, music publisher, artist, songwriter, entrepreneur or simply interested in what you can learn from the music industry’s experience and want to know what the future holds then this is the book for you.

I wrote this book with three key objectives in mind:

1.    To provide the definitive account of the music industry in the digital era, as an antidote the distorted picture that is painted by the biased and often poorly informed extremes that dominate the industry narrative

2.    To help anyone in the music business better understand how the other parts of the industry work, what they think and what their priorities are

3.    To act as a primer for anyone wanting to build career or business in the music industry, so they know exactly what they’re getting in to, how the business works, the relationships, the conflicts and what’s been tried before.  I want to help people not waste energy making the same mistakes others have, and to also benefit from the insight and experiences of the super smart people I interviewed in the book

The book is full of data, analysis and interviews with more 50 interviews with the CEOs, senior decision makers, artists, managers, start up founders and other decision makers that have shaped the music industry over the last 15 years.  It includes chapters on every key part of the industry (labels, artists, songwriters, start ups, tech companies etc.) and is split into three sections:

  1. How We Got Here
  2. The Digital Era
  3. A Vision For The Future

This really is the only book you need to read on the music industry’s digital transition.  But don’t just take my word for it, check out these 5 Star Reviews:

“I really enjoyed this book. It gives a wide view to music industry, consumption tendencies and much other useful information. Is a must for all of the music industry professionals.”

“Great book on today’s digital music business – how we got here, who did what and most crucially why they did it. There’s no shortage of firmly held opinions and theories about the music industry and how it has navigated its digital transformation and Mulligan’s book is an essential analysis of what’s actually been going on. Insightful, non-judgemental and very well researched and informed, if you want to understand today’s digital music business, read this book.”

And if you’re still not convinced, take a read of the sample chapters on Amazon.  ‘Awakening’ is also available on iTunes and Google Play.

I hope you find the book as interesting to read as I did writing it.

Apple, The Indies And The Rise Of The Digital Monopsony

Much of the independent label community have come out in public opposition to Apple’s request for a 3 month free trial that crucially would not involve any royalty payments to labels. Besides the fact this has revealed inconsistency in major label licensing strategy (some services have to pay royalties for their free trials) it also raises questions about Apple’s growing role as a content platform. In the old model (i.e. selling CDs on the high street and mall) retailers held all the power, charging labels for prime placement, priority shelf space and carving out additional commercial benefits such as breakage (whereby they were given a discount on a set assumption of a % of shipments that would break in transit, even if they didn’t). In the old new model (i.e. where we are now) the power shifted to the labels with music stores and services having to pay advances, minimum guarantees etc. in order to sell the labels’ content. Even breakage got reinvented and turned into a commercial benefit for labels (they get paid for under usage of services). Now a new model is emerging where a few big platforms are beginning to exercise the power they have been quietly building for the last half a decade or so.

Apple, Amazon And Google – The Digital Superpowers

Apple, Amazon and Google are all digital content platforms. They each own the customer, control billing, know everything about him/her, control some or all of the hardware and have a diverse portfolio of content assets. Each has also become super important to media company partners. For music labels Apple has become the dominant source of digital retail revenue, Amazon the dominant source of physical retail revenue and Google the dominant digital discovery platform. Each holds the whip hand in their respective area of dominance. Now they all want more. They may each want slightly different things but none are shy of wielding their respective spheres of influence to get to what they want. This is where the indies’ dispute with Apple comes into play. Apple is in the business of music in order to sell hardware and has known for a number of years that streaming is going to be how it transitions that role in a post-download world. It has thus far taken a very responsible approach to its sales role and has been sensitive to the risk of decimating label revenue if it does not time its streaming transition properly. But the first step on that journey has now been taken and the point of no return is fast approaching. Which is why it is crucial that all rights holders have the right agreements in place and which is why the indies are making the noise they are.

The Power Of The Platform

In an echo of Google’s heavy-handed YouTube Music Key negotiations with indies and DIY artists, one independent artist has claimed that Apple has threatened to remove his music from the iTunes Store if he does not allow his music to be used in the free trial. Whether this is true or not (and it may well not be) is almost not the point. What it highlights is Apple’s power as a platform. Artists and labels alike simply cannot do without iTunes revenue. Whether Apple needs to overtly play the card or not, the implication of the veiled threat is clear. And Apple is not exactly alone. Last year Amazon clashed with book publisher Hachette over eBook pricing and during the dispute employed a number of pressure tactics including: refusing to take pre-orders on Hachette titles, placing a 6 week delay on delivery of them and even pointing users to competitor titles when they searched for an Hachette book. All of these were clear misuse, possibly even abuse, of Amazon’s role as distribution platform but no regulatory body even raised an eyelid. Apple will have watched the development with acute interest.

The Rise Of The Digital Monopsony

Apple, Amazon and Google are all unique cases. They have become de facto monopolies for their respective sectors, exercising control over the entire platform of user, supplier and interaction between them. There isn’t really an economic term that properly explains them but monopsony is the closest: a company that is the only effective buyer and seller of a product and can thus dictate terms at both ends of the equation. These digital monopsonies are growing pains of the digital economy. After all, we are still in the very early stages of the digital economy. If this were the industrial revolution Robert Stephenson wouldn’t have developed the steam locomotive yet. Consider this phase market adolescence. This raises challenges for regulation with regulatory bodies largely unable to deal with companies that exercise effective monopoly power but that do not meet the criteria of a pre-digital era economy monopoly. Of course the indie labels cannot afford to wait for that dynamic to change so in the meantime they must seize the initiative in this issue and others like it.

An Opportunity To Change The Narrative

Right now though the indies have an opportunity to use this case to genuinely move the needle. Apple has pushed them out of their comfort zone. Instead of just digging in their heels they can decided to push Apple out of its comfort zone and request something similarly game changing of Apple in return. In short, turn a defensive move into an offensive one and help set the agenda rather than being stuck in the familiar rut of responding to the one set by the major labels and Apple. Apple Music may have underwhelmed at launch but the company still has the most important music monetization platform on the planet. Most indie labels and majors alike would all but collapse if iTunes revenue disappeared overnight.

Right now Apple still wants to play the role of good partner, albeit one that negotiates hard. So the labels still have a chance to help shape what the next chapter in Apple’s music story can look like. That may not always be the case, especially if Artist Connect has developed into a label like service layer 3 years from now, which I suspect will be the case. Apple is no Google, it still wants first and foremost to sell music rather than give it away. That may not always hold true.   Similarly the power of the digital monopsonies will likely strengthen over the coming half decade or so. So right now the indies are probably in the strongest position they will be in for some time, even if it might not feel like it to them. They need to seize this moment.

Five Long Term Music Industry Predictions (And How Disney Will Rule The World)

The new year is typically a time for predictions for the year. But at the midway point of the decade, rather than do some short term predictions I think this is a good time to take a look at the longer term outlook for the music industry. Here are five long term music industry predictions:

1 – Disney will become the world’s biggest music company

Consumers are buying less music and there are more ways to easily get free music than ever before, both of which make selling music harder than ever. Major labels have addressed this by doubling down on pop acts (Rihanna, Katy Perry, Rita Ora, Ariana Grande etc.) which have a more predictable route to market. Video (YouTube) and very young audiences (also YouTube) underpin the success of these artists. While the majors have been pivoting around this very specific slice of mainstream, Disney has quietly been building an entire entertainment empire for this generation of pop focused youth. Unlike the majors, Disney has TV shows and channels targeted at each key kids and youth age group and uses them to bring artists through. They start them out kids TV shows such as The Wizards of Waverly Place (Selena Gomez), Hannah Montana (Miley Cyrus) and Sonny With A Chance (Demi Lovato). Disney then very carefully matures these fledgling stars as their audiences age so that by the time they and their audiences are fully fledged teens, they are fully-fledged pop stars. At which point they have shaken off most of their bubble gum imagery and have conveniently acquired a little edge, a specific positioning and a personality. It is a highly effective process. Each of those three Disney stars are only in their early 20’s but already have multiple albums under their belt. Disney will not only continue to excel at this model, they will most likely become the biggest pop label on the planet. Which given where music sales are heading (pop accounted for 44% of the top 10 US album sales in 2014) could well mean Disney even overtakes Universal to become the biggest music company of all.

2 – The western pop music industry will increasingly resemble Bollywood

2014 was the first year film soundtracks accounted for 2 of the top 10 selling US albums (‘Frozen’ and ‘Guardians Of The Galaxy’), generating 4.4 million sales and 30% of the top 10 overall. And both albums were Disney. In India music plays a supporting role to film in revenue terms but is culturally centre stage, the beating heart of Bollywood film. The music and film require depend on each other for context and relevance. We are set for this model to become increasingly pervasive in western markets. Just as video underpins the success of pop stars, it creates an audience bond to music in film and TV, turning the music into the soundtrack of memorable, fun and moving moments. Triggering the same emotional chemistry music does in real life. With music sales still tumbling but movie sales holding up, expect movie soundtracks to become an ever bigger part of music sales, and for the dividing line between film star and pop star to blur entirely. Expect Disney to, again, be the key force.

3 – Live music will lose ground to other live entertainment

Live has been the music industry’s ‘get out of jail free’ card, holding up total revenues while sales revenue declined. The balance of power has shifted with sales revenue now just a third of the total revenue mix, down from 60% at the start of the century. But cracks are already appearing with price increases underpinning much of the live revenue growth in recent years and the big revenue polarised between ageing rockers and pop divas of the moment. There are only weak signs of a next generation of stadium filling rock bands. The big live venues are already looking for alternative ways of getting bums on seats, with TV show spin offs in particular proving successful. Venues and promoters love TV show tie-ups because they bring big TV cross promotion which helps ensure commercial success.   TV comedy shows are now doing 10 to 12 night sell outs in 10,000 capacity venues. You don’t see many artists doing that. Shows like Disney On Ice (yes, Disney again) fill out the biggest venues with ease. And it is not just the top end that is moving away from music. Comedians like the UK’s John Bishop play tours that happily play a small club one night and an arena the next. Expect the live market to shift more towards a broader range of entertainment, especially TV tie ins, squeezing out many music acts in the process.

4 – Old world copyright establishments will lose relevance 

The fragmented nature of global music rights, especially on the publishing side, has long been a thorn in the side of digital music.   The system of multiple national rights bodies and commercial rights owners administering different parts of music rights across the globe hinders the ability of the digital music industry to be truly global. A handful of rights bodies are pushing the innovation needle, others are not. The distinctions between recording, performance, mechanical etc. served well in the analogue era when there was a clear distinction between a sale and a performance. But in the streaming dominated landscape they are less useful. Additionally the entire range of audio visual elements that an artist comprises in the digital era can be prohibitively difficult to put into a single product. This is because the rights are usually held by so many different stakeholders, each with different priorities and appetites for risk. Expect music companies, artists and their managers to increasingly collect as many rights as possible into one place so they can create multimedia experiences without having to navigate a licensing minefield. In doing so, more and more monetization will happen outside of the traditional licensing frameworks. Whether that be because all of the revenue occurs in a single platform (e.g. YouTube) or because new licensing /collection bodies are used such as Audiam or Global Rights Management administer the rights. Creative Commons might play a bigger role but the real focus is going to be on being able to license more easily AND monetize more effectively.

5– Labels will become agencies

Finally we have agencies or what you might call labels, but I’m going to call them agencies, because that is what they need to become. The label model is already going under dramatic transformation with the advent of label services companies like Cooking Vinyl’s Essential and Kobalt’s AWAL, and of fan funding platforms like Pledge and Kick Starter. All of these are parts of the story of the 21st century label, where the relationship between label and artist is progressively transformed from contracted employee to that of an agency-client model.   Labels that follow this model will be the success stories. And these labels will also have to stop thinking within the old world constraints of what constitutes the work of a label versus a publisher versus a creative agency versus a dev company. In the multimedia digital era a 21st century labels needs to do all of this and be able to work in partnership with the creator to exploit all those rights by having them together under one roof.

Streaming is changing the music world right here, right now, and there is an understandable amount of focus on it. But it is just one part of a rapidly changing music industry. This decade has already wrought more fundamental change than any previous one and the rate of change is going to continue to accelerate for the next five years. All of the rules are being rewritten, all of the reference points redefined. This is nothing short of the birth of a new music industry. The blessing of a generation is to be born into interesting times, and these times are most certainly that.

Streaming, Change, And The Right State Of Mind

Disruptive technology and the change it brings can be overwhelming, particularly when it threatens to change forever all that we have known. Streaming clearly fits this bill. But the impact of change is as much in the eye of the beholder as the disruption itself. While it would be bland and disingenuous to say that change is merely a state of mind, a positive outlook that is focused on the opportunities can make the world of difference.

To illustrate the point, here are three examples from the last century of how vested interests have viewed revolutionary new media technology.

1-ebwhiteThis first quote is from the American author and essayist EB White writing in 1933 on the impact of radio. Here new technology is eloquently portrayed with an almost magical profundity.

2-sarnoffThis quote is from David Sarnoff, the Belorussian-American radio and TV pioneer who oversaw the birth of RCA and NBC. Here he is in 1939 talking about the advent of a TV broadcast network against the backdrop of the globe teetering on the brink of world war.

And then fast forward 70 odd years to the emergence of streaming music, and we get this….3-yorkeSomething certainly appears to have happened to the eloquence of observation over the decades. While I’m perhaps being a little unfair to our esteemed Mr Yorke his quote illustrates the stark contrast in how one can view impending change.

There is an inevitability about the shift in consumer behaviour of which streaming is merely a manifestation. We are moving from the distribution era when everything was about linearly programmed channels and selling units of stuff to the consumption era when consumers value access over ownership. Resisting fundamental shifts in consumer behaviour is a futile task. It’s what happened when the labels fought Napster tooth and nail and it took the best part of a decade for the music industry to recover from that mistake.

None of this is to say that the shift to streaming is going to be easy, but it is going to happen anyway. Artists, labels, managers, publishers all need to decide whether to work with streaming now, and have some control over the process, or wait until they have no choice at all.

Digital Ascendency: The Future Music Forum Keynote

I recently keynoted the annual Future Music Forum in Barcelona.  These are some highlights of the keynote.  If you would like the full slide deck please email me at mark AT midia research DOT COM.


Streaming is turning years of music business accepted wisdom on its head but did not arrive unannounced, it is just one chapter in the evolution of digital music. Each of the four phases of digital music have been shaped by technologies that solved problems. Now we are entering the fourth phase, bringing meaning to the 30 million tracks Spotify et al gave us access to. This might look like a simple honing of the model but it is every bit as important as the previous three stages. 30 million tracks is a meaningless quantity of music. It would take three lifetimes to listen to every track once. There is so much choice that there is effectively no choice at all. This is the Tyranny of Choice.


But the for all the evolution, today’s digital music marketplace is an unbalanced one. We have more than 500 music services across the globe but too many of them are chasing after the same customers with weakly differentiated offerings. This wouldn’t matter so much is if the competition was focused on where the consumer scale is, but this is anything but the case. The majority of paid music services are targeting the engaged, high spending Music Aficionados who represent just 17% of all consumers.


The consequences of the imbalance in digital music strategy are also easy to see in total revenues. The last decade has been one of persistent decline in recorded music revenue and by 2018 the most likely scenario is one of stabilization rather than growth. This is because of a) the CD and b) the download.

No one has taken the demise of the CD seriously enough. It still accounts for more than half of global revenue and more than three quarters of revenue in two of the world’s biggest music markets. Yet far too many CD buyers are being left to simply stop buying entirely because they see no natural entry point into the digital services market. No one appears to be putting up a serious fight for them. Meanwhile the streaming services that have been chasing those same aficionados that Apple engaged are now busy turning that download spending into streaming spending, which ends up being, at best, revenue transition rather than growth. Consequently CDs and downloads will end up declining at almost the same rate over the next five years.


Nonetheless the imbalance remains. Part of the reason we got into this state of affairs is the music industry’s obsession with revenue metrics: chart positions, market share and ARPU. Compare and contrast with the TV industry’s focus on audiences. It is time for the music industry to start thinking in audience terms too.

When we do so we see a very different picture. Here we have the US digital music market plotted by revenue and by audience size. Subscriptions pack a big revenue punch but reach only a tiny segment of the market while YouTube has vast reach but delivers remarkably little in terms of direct revenue. Meanwhile downloads, for all their doomed future, are still by far the best combination of scale and revenue.

The issue of free services stealing the oxygen from paid ones is a perennial one and is effectively a digital rerun of the never-to-be-resolved radio driving or reducing music sales debate. But it has far more impact in digital. With services like YouTube and Pandora the discovery journey is indistinguishable from the consumption destination. When they don’t lead to sales can they really be called discovery anymore?

Free is of course the language of the web. The contagion of free is legion. And free is where the audience growth is. This is the circle the music industry must square.


For 15+ years the music industry has been running to catch up, never quite able to get ahead of the game, an unavoidable feature of the process of digital disruption.   But although the consumer behaviour shift is inevitable the future direction of the music business is not and it will be shaped most by three key factors:

  1. The continued evolution of consumer behaviour
  2. Technology company strategy
  3. Income distribution

Consumer behaviour. The most important consumer behaviour trends are not the steady transition of the Aficionados or even the Forgotten Fans but of the next generation of music consumers, the Digital Natives. Free and mobile are the two defining elements of their music behaviour. Of course younger people always have less disposable income, but there is a very real chance that we are beginning to see demographic trends locking in as cohort trends that will stay with these consumers as they age. For a generation weaned on free, the more free you give them, the more they will crave it. Whatever course is plotted, success will depend upon deeply understanding the needs of Digital Natives and not simply trying to shoe horn them into the products we have now that are built for the older transition generation.


Technology companies: Apple, Amazon and Google each in their own ways dominate digital music. But most importantly they all want very different things from it. For each of them music is a means to an end. All are willing to some degree to loss lead on music to achieve ulterior business objectives. All of which is great for labels and publishers as they get their royalties, advances and equity stakes. But for the pure play start up it means competing on an uneven footing with giant companies who don’t even need music to generate a revenue return for them.


Revenue distribution: Artists and songwriters found their voices in recent years. Partly because of the rise in social media but also because so many are now paying much more attention to the business side of their careers. The fact they are watching download dollars being replaced by streaming cents only intensifies matters, as does the fact that the top 1% of creators get a disproportionately large share of revenue. It has always been thus but the signs are that the disparity is becoming even more pronounced in the streaming age, with the effects felt all the more keenly because unless you have vast scale streaming can too easily look like chicken feed to an artist compared to download income.

But artist and songwriter discontent alone is not going to change the world. Their voices are just not powerful enough, nor do most fans care enough. Also labels and publishers remain the most viable route to market for most artists. Matters aren’t helped by the fact that artists who demand an audit of their accounts to work out where their streaming revenue has gone swiftly accept their label’s hefty silence payment and the accompanying NDA. Artist discontent while not decisive in impact is beginning to apply important pressure to the supply end of the music business.


So those are the three big challenges, now here are three sets of solutions. And I should warn you in advance that I am going to use the P word. Yes, ‘Product’.

I get why product sounds like an ugly word. It’s a term you use for baked beans, for fridges for phones. Not a cultural creation like music right? True enough, when we’re talking about the song itself, or the performance of it, product is irrelevant. But as soon as we’re talking about trying to make money out of it as a CD, download, stream or however, then we’re firmly in the territory of product. It is both naïve and archaic to think otherwise. When artists got megabucks advances and never had to worry about the sustainability of their careers and everything revolved around the simplicity of CD sales you could perhaps be forgiven for turning a blind eye. But now there is no excuse.

So with that little diatribe out of the way, on to the first solution.

Music product: The harsh reality is that music as a product has hardly evolved in the digital realm. A lot has been done around retailer and business model innovation, but the underlying product is the same static audio file that we found in the CD. Meanwhile the devices we are spending every growing shares of our media consumption have high definition touch screens, graphics accelerators, accelerometers…audio hardly scratches the surface of what tablets and smartphones do.

Music is always going to be about the song, but it is also about the artist and their story. That’s what a quarter of consumers think, and 45% of aficionados and a third of digital natives. Video, lyrics, photos, reviews, interviews, acoustic sets, art, these are all ways in which the artist can tell their story and they all need to be part of the product. Most of this stuff is already created by labels, artists and managers but it is labelled marketing. Putting this together into a curated, context aware whole is what will constitute a 21st century music product.


Fans: Artists and fans are closer than ever but this journey is only getting going and artists need to get smarter about how to monetize their fan bases. Artists need to find their popcorn. What do I mean by this? Well when the cinema industry started out it was a loss making business. To try to fix this cinemas started by experimenting with the product, putting on double bills but that wasn’t enough. Then came innovation in the format by adding sound. Then the experience itself by co-opting the new technology of air conditioning from the meat packing industry. Still no profit. Finally cinemas found the solution: popcorn. With a 97% operating margin, popcorn along with soda and sweets quickly became how cinemas become profitable entities. Artists need to find their popcorn. To find out what other value they can deliver their fans to subsidize releasing music. It’s what newspapers are doing with wine clubs and travel clubs, and in some instances even with Spotify bundles!


Labels: Finally we have agencies or what you might call labels, but I’m going to call them agencies, because that is what they need to become. The label model is already going under dramatic transformation with the advent of label services companies like Kobalt and Essential and of fan funding platforms like Pledge and Kick Starter. All of these are parts of the story of the 21st century label, where the relationship between label and artist is progressively transformed from contracted employee to that of an agency-client model.   Labels that follow this model will be the success stories. And these labels will also have to stop thinking within the old world constraints of what constitutes the work of a label versus a publisher versus a creative agency versus a dev company. In the multimedia digital era a 21st century labels needs to do all of this and be able to work in partnership with the creator to exploit all those rights by having them together under one roof.


And finally, the grand unifying concept to pull all this together: experience. Experience is the product. The internet did away with content scarcity. Now the challenge that must be met is to create scarce, sought after experiences that give people reasons to spend money on the artists and music they love.

The Great Music Industry Power Shift

The long drawn out demise of recorded music revenue is well documented, as is the story of artists, labels and managers all trying to make sense of a world in which music sales can no longer be counted upon.  But the contraction of recorded revenue has occurred at the exact same time that the live music sector has undergone a renaissance.  The net effect, when coupled with publishing revenue holding its own and  the growth of albeit modest, merchandise revenue, is that the global music industry has largely held its own, contracting by just 3% between 2000 and 2013 (see figure).  Compare and contrast with the 41% decline in (retail) recorded music revenue over the same period.  Indeed it is the 60% growth in live revenue that has done most to offset the impact of declining music sales.

music industry revenuePerhaps most significantly of all, the contrasting fortunes of the music industry’s two main revenue streams is that the share of total revenues accounted for by recorded income has dropped from 60% in 2000 to just 36% in 2013.  The balance of power has firmly shifted away from labels to the live value chain.  Yet it is not as clear a picture as might first appear:

  • Recorded music is still the main way people interact with music:  Whether it be on the radio, YouTube, Spotify, an iTunes or a CD, the vast majority of consumers spend the vast majority of their music consumption time with the recorded product not the live product.  In fact just 15% of people regularly go to gigs.  And even for these consumers live is, in terms of total time spent, just a small fraction of their music consumption.  So labels are faced with paradox of making less money from artists yet those same artists still needing the recording in order to drive live and merch income.  This is why we ended up with 360 deals.
  • Much of the market growth didn’t make it down to artists: The live music value chain is an incredibly complex one with multiple stakeholders taking their share (ticketing, secondary ticketing, venues, booking agents, promoters, tax, expenses etc.).  The share of live revenue that artists make from live has declined every year since 2000.  The impact on the total market is that  total artist income (i.e. from all revenue sources) has declined every year too since 2009.

The Next Music Industry

It is probably fair to say that we are approximately half way through a huge period of transition for the music industry.  The realignment of revenue is merely a precursor to the new business models, products and career paths that will emerge to capitalize on the new world order.  It is in this next phase that the real ‘fun’ will start.  Expect every traditional element of the industry to be challenged to its core, expect dots to be joined and old models to be broken.  But be in no doubt that what we will end up with will be an industry set up for success in the digital era.

NOTE: the figures quoted in this post are taken from a forthcoming MIDiA report: The Superstar Artist Economy: Artist Income and the Top 1%.  The report is a follow up to the previous MIDiA report ‘The Death of the Long Tail’



We Need To Talk About Streaming (again)

Last night I participated in a Music Tank seminar on streaming music.  It was a vibrant and valuable debate with a healthy diversity of opinion.  Below are brief highlights of my opening keynote, including some exclusive data from record labels and from Spotify.

Streaming isn’t the paradigm shift, increased convenience of music access is

Streaming is no new thing.  Napster, Rhapsody, YouTube have been with us for many years.  What changed is that Spotify made it work with elegant simplicity, wrapped up in a consumer-friendly value proposition.  Of course Spotify had timing on its side too, coming to market once most of us already had broadband and at a time when a rapidly growing share of us were getting smartphones with data plans.  And of course timing is everything in business.

Timing aside though, we should be careful not to get hung up on the idea of streaming as an alternative format to the download.  It is not.  It is simply a different delivery mechanism for digital music, and when you factor in cached streams the distinction blurs further.  Streaming versus downloading is tech speak.  All music fans are interested in is being able to listen to the music they want, when they want, where they want.

Rebooting the conversation

Streaming music, and Spotify in particular, has been cause of much controversy and debate of late.  I’ll come on to some of the causes later but it is first worth taking stock of what we actually do and don’t know about streaming.

  • What we know. Streaming is proving popular with consumers at a time when download growth is slowing. But many artists are not fully comfortable with the model and feel that they don’t get a fair enough deal.  A dynamic which is complicated by the fact there are many different types of artist deals.  Scale is key to streaming being successful (you don’t make money off dozens or hundreds of streams).
  • What we don’t know.  We don’t know yet whether streaming cannibalizes sales.  Whatever data you see on either side of the argument we are simply too early in the evolution of streaming to draw conclusions.  There simply isn’t enough empirical data.  We need a few more years yet and even then separating cause from effect is challenging at best.
  • What we suspect.  It is looking like streaming does help reduce the amount people use file sharing.  Again, the evidence isn’t definitive and there certainly isn’t sufficient evidence to suggest that the number of people using P2P etc is declining due to streaming, but intensity of usage perhaps.  Smaller artists don’t seem to do that well out of streaming.


Access based services are the first post-transition technology products

Any new technology looks more like what came before than what will come next.  After all we only have the past and present as our reference points. Thus when a new set of technologies emerge they begin with transition technologies.  The first car was a steam powered horse-less carriage (see figure 2).  It was a transition to the first internal combustion engine vehicle and it wasn’t until the 1950’s that we really started to see automobile form factors that had fully thrown off the horse drawn carriage heritage.  Digital music is no different.  The download was the steam powered horse-less carriage, a really useful transition tool to help us bridge the gap between analogue and digital, but just that.  Access based services are the first steps towards the internal combustion engine, services that leverage some of the unique capabilities digital presents, rather than just using the web as a delivery mechanism.  But it is still very early days, we are not even at the Model-T yet.

Putting streaming income into context

A number of record labels provided Music Tank with data illustrating the level of income across various platforms which can see here at aggregate level (see figure 3). This chart uses the income from a download as a base of 1 and then income from other sources as a multiple thereof, shown for labels and for artists.  Note that the artist data is 3rd party licensing income only and does not reflect songwriter income etc.   The data suggests that an artist requires 80 streams to match the income from one download.  However data from artists suggests it is more than 200 streams.  And this rate varies massively depending on the nature of the deal an artist has struck with their label (e.g. whether they are paid on a share of net income basis or on points) and what share intermediaries such as distributors take.  It is also impacted by what deal the label has struck with a service.   One smaller label claims, somewhat dubiously, that the rate for them is closer to 2,000 times.  Whatever the exact rate (and there isn’t just one) you have to  stream a lot of music to get the same income as a download, but much, much less than a web radio stream or radio listens.  It take more than 5,500 national BBC radio listeners to generate the same income as one download in the UK

The labels’ take on streaming

Some record labels also provided Music Tank with some of their views on streaming and how they see it in the bigger revenue picture. Quickly summarized these are:

  • Markets with a strong streaming sector also often have stronger overall digital growth
  • Streaming is now growing more quickly than downloads
  • Streaming can be 50% of an artist’s digital revenue in some markets
  • Streaming consumers and download buyers do not strongly overlap
  • Streaming subscriber ARPU is often higher than download buyer ARPU

Spotify’s take on streaming

Spotify also put some data on the table (see figure 4) showing how a major global artist’s catalogue fared following the release of their album the same day to stores as to streaming.  Obviously this data is positioned in the context of the cannibalization and ‘windowing’ debates (which I’ve contributed to here). The data doesn’t prove anything either way in terms of cannibalization (i.e. it could be interpreted as streaming activity does well when an album does well or it could also be viewed as lost buyer activity).  However it does make a compelling case for the degree to which an artist’s back catalogue can be significantly boosted on streaming following an album release. There are some well voiced concerns that streaming favours big name artists, the head rather than the long tail, but if it does then it appears to do a good job of mining the long tail of the head!

The potential of Spotify’s Developer API strategy: an API for Music?

In the last 6 months digital music has two developments of potentially seismic proportions that through their subtle brilliance many haven’t yet appreciated their actual importance.  One was Facebook’s content dashboard strategy.  The other was Spotify’s Developer API.  Of course APIs are no new thing, but if Spotify can reach a hundred million plus total users then its API has the potential of becoming a de facto API for music.   Allowing developers to skip seeking licenses from rights owners and using Spotify’s instead.  It is a crucially well timed move, coming just as investors are turning away from investing in services that require licenses (you may have noticed by now that impecable timing is one of Spotify’s strengths).  Investors have tired of funding license advances for services that often, as in the case of Beyond Oblivion, don’t even make it to market.  The labels still get their digital income but investors are left with a debt write off.  Index’s highly influential Saul Klein went as far as stating that he won’t even invest in  start-ups that require rights owner licenses.

Making the right comparisons

Crucial to the streaming debate is making the right comparisons.

  • Streaming does not = a download
  • Streaming does not = radio
  • But Streaming does = (download + radio) ÷ ??

The exact balance is in flux but the conversation must recognize that a direct comparison with either is off the mark.  What we don’t yet know, and won’t for a couple of years, is whether streaming is pulling its users from green field and thus growing the market in a truly additive manner, or whether it is instead catalysing the organic digital transition, converting those consumers who would have gone digital anyway.  If it is the latter then questions about the income from streaming users compared to other digital customers becomes a more pressing one.  If it is the former then it frees us up to look at the scale picture with fewer reservations.  If these customers simply weren’t ever going to adopt a different digital service then we can start to discuss how low we can bring pricing to drive even great numbers.  The elephant in the room is that £/$10 is just too much for mainstream consumers.  It needs to be close to £/$5 to really break into the mainstream.  And you can only make that business case with genuine scale.


  • It is too early to make conclusive judgements about streaming affecting sales or piracy in the near-to-mid term
  • Long-term, music consumption will shift from ownership to access
  • The streaming debate is clouded by conflicting artist statistics and concerns
  • More artists need to be better sold the story by labels and by the services themselves, and some deals may even need revisiting.  Greater transparency is key and record labels have a big role to play here – there’s only so much services can do themselves
  • Streaming is neither a radio replacement or a download replacement, it has some of the best of both

As for the legacy of streaming?  Streaming will help make Facebook the most important player in the digital music market by 2013.