Can Spotify break out of its lane?

After years of relative stability, music consumption is shifting, with the DSP streaming model beginning to lose some ground as illustrated by the major labels growing streaming revenue by 33% in Q2 2021 while Spotify was up by just 23%. It is never wise to read long-term market trends into one quarter’s worth of results, but there was already enough preceding evidence to suggest we are entering a genuine market shift. The question is whether Spotify and the other Western DSPs are going to find themselves left behind by a fast-changing market, or can they innovate to keep up the pace?

Social music is streaming’s new growth driver, generating around $1.5 billion in 2020 and growing fast in 2021. It represents a natural evolution of social media rather than an evolution of streaming. Audio is just another tool for social expression, along with video, pictures and words. MIDiA has long argued that Western streaming focuses too heavily on monetizing consumption, at the expense of fandom. While social video does not fix the fandom problem, it does cater to some of the key elements of fandom: self-expression, identity and community. Which means that, in some respects, Spotify and the other DSPs only have themselves to blame for having kept fandom out of their propositions. In doing so, they created a vacuum that TikTok and Instagram eagerly filled.

The data in the above chart comes from MIDiA’s latest music consumer survey report which is available now to MIDiA clients and is also available for purchase here.

Rights holder licensing met market demand

Spotify and the other DSPs are the dominant, core component of recorded music and they will remain so for the foreseeable future. But whereas a couple of years ago it looked like they might be the entire story, now music consumption is moving beyond, well, consumption. Finally, we are seeing music becoming an enabler of other experiences. Historically this was restricted to non-scalable, ad hoc sync deals. Now rights holders have established licensing frameworks that are flexible, dynamic and scalable enough to enable a whole new generation of experiences with music either in a central or supporting role.

DSPs occupy one of streaming’s lanes

The implication of this is that Spotify and the other DSPs now risk looking like they are stuck in just one lane of the streaming market. What looked like a highway is now just a single lane – and Spotify, Apple and Amazon do not have the assets to build propositions that can get them out of it. Being part of this social music revolution requires both massively social communities and video. They could all build that, of course, but with little guarantee of success. YouTube is a different case, having launched Shorts in a belated bid to ward off TikTok’s audience theft – but at least it is now running that race, and Alphabet reported 15 billion daily global views for Q2.

An increasingly segmented market

Spotify and other DSPs now find themselves not being part of streaming’s new growth story and, YouTube excepted, with no clear path to becoming part of it. To be clear, Spotify will continue to be the world’s largest subscription revenue generator and the DSP subscription model will continue to be the biggest source of revenue, at least for the foreseeable future. But revenue growth will increasingly come from elsewhere. In many respects this simply reflects the maturation of the music streaming market. Consider video streaming. Netflix added just 1.5 million subscribers in Q2 2021 while YouTube grew by 84% and TikTok went from strength to strength. Netflix occupies just one lane in a multifaceted streaming market. The same is now becoming true of the DSPs.

Time to do a Facebook?

So, what can Spotify and the other DSPs do about it? If Spotify really wants to ‘own’ audio, then it will have to do what Facebook did to ‘own’ social: create a portfolio of standalone sister apps. Facebook would have become the Yahoo of social media if it hadn’t bought / launched Instagram, WhatsApp and Messenger. The signs are already there for Spotify. Even ignoring the slowdown in monthly active user (MAU) growth in Q2 2021, podcast users stopped meaningfully growing as a share of overall MAUs in Q4 2020. It turns out that trying to compete with yourself in your own app is hard to do. The time may have come for a standalone podcast / audiobook app (by the way, I’m just taking it as read that Spotify is going to take audiobooks a whole lot more seriously). If Spotify does launch a podcast app, then the case suddenly becomes a lot clearer for other audio-related apps, all of which could include subscription tiers, such as social short video, karaoke, and artist channels.

The more probable outlook however is for specialisation, with segments going deep and vertical rather than wide and horizontal. While Spotify, and other DSPs, might have success in one or more side bets, it will be the specialists who lead in streaming’s other lanes. Whatever the final market mix looks like as a result of this change, the streaming market is going to be more diverse and innovative for it.

Growth drivers – what comes after streaming

The pandemic-defined 2020 was an outlier year across digital entertainment, with the extra 12% of time consumers spent with entertainment boosting everything, including music. One of the effects was that streaming grew more than it would have otherwise, delaying the inevitable slowdown in streaming revenue growth. This artificial 2020 boost meant that the slowdown impact was felt even more strongly when it arrived in Q1 2021. 

The major labels saw streaming revenue grow by just 0.8% between Q4 2020 and Q1 2021, while Spotify saw revenues fall by 1%. Seasonality plays a major role here (a similar trend was seen last year) and year-on-year revenues were up by around a quarter. Nonetheless it reflects a maturing market. 

Back in 2019 Spotify’s revenues grew 15.7% from Q4 2018 to Q1 2019, while the majors’ streaming revenue was up 3% between Q4 2017–Q1 2018. In short, when the market was growing faster, seasonality did not result in flat / negative growth. Streaming is still in good shape and is going to remain the core of recorded music revenues for the foreseeable future, and Spotify’s price increases will bring a little extra revenue in 2021, but it is clearly time to start thinking about what comes next.

There is an argument that in today’s post-format world, we should not even be thinking about the next thing. So, it is better to think about what new business models and user experiences can grow alongside streaming, to diversify the music industry’s income mix. 

Music businesses, labels in particular, are busy exploring where future growth will come from. The more pessimistic argue that this is largely as good as it gets, that there will not be a ‘next streaming’. That might be right in terms of a single revenue source, but the early signs are that there is enough potential in a range of sources to collectively drive growth. Here are a few of the music industry’s potential growth drivers:

• Games: Ever since the Marshmello Fortnite event, games has acquired a new degree of importance for the music business. WMG’s stake in Roblox points to just how serious labels are taking the opportunity. With global games revenues hitting $120 billion in 2020 (around $100 billion more than the recorded music market) and more than a third of those revenues being driven by cosmetic (i.e., non-gameplay) spend, there is a wealth of opportunity. But to succeed, music companies will need to think about creative ways to enhance the gaming experience rather than simply seeing it as another licensing play.
  
• Social: Revenue from the likes of TikTok and Facebook finally became meaningful in 2020, accounting for around three quarters of the growth registered in ad supported. We are still scratching the surface of what social can do for music, but building tools for users to create their own music and audio will be key. Facebook’s Sound Studio could prove to be a defining first step towards the establishment of the consumer’s version of the social studio.
  
• Creator tools: As regular readers will know, MIDiA considers the current revolution in the creator tools space to be one of the most important shifts to the entire music business in recent years. Not only is it transforming the culture of music creation, it represents a new set of opportunities for deepening artist-fan relationships and a set of new facets for the future of music companies.
  
• Next-generation sync: Although traditional music sync revenues fell in 2020, music production libraries (including royalty free) grew. We are on the cusp of a major new wave of opportunity in sync, with social content, platform and creators representing a scale of demand that far exceeds that of the traditional sync market. And it is the slow-moving nature of that traditional sector which means that the likely winners in the social sync market will be the new generation of companies that offer solutions that are sufficiently agile and fast to meet the scale of micro-sync demand.
  
• Live streaming: The pandemic virtually created the live stream marketplace, resulting in a tidal wave of new start-ups rushing to fill the void left by live. While the results have been a mixed bag, there have been enough high-quality successes to suggest that this is a sector with longevity that will outlive lockdown. The services that will prosper when IRL returns are those that deliver genuinely differentiated experiences that complement rather than try to replace IRL live. 
  
• Fitness: Another of the pandemic’s second order effects was a surge in consumer spending on home fitness equipment, including Peleton. Right now there is some meaningful music licensing revenue building around the space, but Beyoncé’s Peleton partnership shows that the opportunity goes way beyond simply piping music into workouts. Crucially, the Beyoncé partnership creates an audience that is focusing their entire attention on the artist, which is rarely the case when people are listening to music on audio streaming services.
• Fandom: Fandom is the next frontier for music monetisation. Western streaming services monetise consumption, whereas Tencent Music Entertainment monetises fandom, with two thirds of its revenue coming from non-music activity. We are beginning to see a flurry of activity in artist subscriptions and meanwhile, Patreon goes from strength to strength. Check out this free MIDiA report for more on how to tap the fandom opportunity.

To reiterate, streaming is, and will remain for many years, the beating heart of recorded music revenue. In fact, more than that, most of these new opportunities exist at such scale because of streaming. Until now, streaming enabled revenue growth in its own right, now it will enable growth in new adjacent markets.

We Are At a Turning Point for Social Music

In recent days we have seen three major developments that, collectively, are a potential pivot point for social music:

1. TikTok close to a US-entity buyout by Microsoft to avoid potential sanctions, following hot on the heels of an India blackout
2. Facebook launched a (US-only) YouTube competitor for music videos
3. Snap Inc signed a licensing deal with WMG and others, also for music videos

As cracks begin to appear in the audio streaming market, there is a growing sense in the music industry of the need for a plan B. This has been driven by growing discontent among the creator community, and a slowdown in revenue growth (UMG streaming revenues actually fell in Q2 as did Sony Music’s); the tail wagging the artist-and-revenue (A&R) dog. The search for new growth drivers is on, and social music – for so long a promise unfulfilled in the West – is one of the bets. TikTok was meant to be a major part of that bet. But with the US future of the app so at risk that a Microsoft US-entity buyout may be the only option, and the continued impact of COVID-19 on core revenue streams, the future is beginning to look a little more troublesome. Perhaps now more than ever, the music industry needs social music to start delivering.

There are three key issues at stake here:

1. How consumers discover music
2. How (particularly younger) consumers engage with music
3. Competing with YouTube

How consumers discover music

Among the under-aged 35 demographic, YouTube is the primary music discovery channel, followed by music streaming, then radio, and only then by social. Streaming discovery is heavily skewed towards tracks and playlists, and away from artists and release projects, which is fine for streaming platforms but impedes building sustainable artist careers. Radio is losing share of ear and YouTube… well, YouTube is YouTube (more on that below), so the music business needs a new discovery growth driver. Social has the potential to be just that. But spammy artist pages on Facebook and more-than-perfect Instagram photos are not it. TikTok, for all its amazing momentum, actually has a really uneven impact on discovery. Some tracks blow up out of nowhere while most do little, and rarely is it because of a smart label marketing strategy but instead because certain tracks just work on the platform and the community leaps on them. For now, TikTok is too unpredictable to plan around. Facebook (Instagram especially) and Snap Inc have a fantastic opportunity to do something special here. They have the audience and the social know-how. Whether they can deliver is a different matter entirely.

How (particularly younger) consumers engage with music

What TikTok lacks in consistent marketing contribution it makes up in consumption. Following on from Musical.ly’s start, TikTok has reimagined how music can be part of social experiences for young audiences. It has made music a highly relevant and integral part of self-expression, something that CD collections and music dress codes used to do in the pre-digital world but that soulless, ephemeral playlists wiped out. While labels pin hopes on TikTok successes to drive wider consumption, the discovery journey is also the destination for most TikTok users – they hear the track in a video and swipe onto the next one. That is no bad thing. This is a new form of consumption, and if TikTok were to disappear or fade then someone else needs to pick up the baton. Whether Facebook and Snap Inc can do so is, again, an open question.

Competing with YouTube

Now we get to the heart of the Facebook and Snap Inc deals. As important as the previous two points are, they were not the overriding priorities of the commercial teams driving these deals. Instead they were focused on expanding the revenue mix and part of that is creating more competition for the notoriously low-paying YouTube. Well, maybe not that low paying after all.

The internet is full of statements from trade associations, rightsholders and creators about how much less YouTube pays than Spotify. YouTube does pay less, because it manages to escape paying minimum per-stream rates for ad-supported videos – but it is a more nuanced picture than lobbyists would have you believe. Firstly, in terms of its Premium business, Google is entirely on par with Spotify. But then, that is the part that is licensed in the same way as the rest of the market.

Ad-supported is a mixed story. In North America, where there is a mature digital ad market, YouTube’s ad-supported average revenue per user (ARPU) is entirely on par with Spotify’s. However, on a global basis, ad-supported ARPU is dragged down by its large user base in emerging markets where digital ad markets are nascent. Spotify’s ARPU is 66% higher, in part because it has to pay minimum per-stream rates, i.e. it pays a fixed rate per stream regardless of whether it has sold any ad inventory against the track. This boosts ad-supported ARPU but it risks making the model unstainable, to the extent that Spotify reported -7% gross margin for ad-supported in Q1 2020 (and note, that’s gross margin, not net margin).

Rightsholders will be hoping for Facebook and Snap Inc to bring a similar level of competition to music video as exists in streaming audio, which in turn may give them a path to higher global ad-supported ARPU rates and a healthier marketplace. However, what will determine that objective is not business strategy but product strategy. The key question is what can they both do with music videos that YouTube cannot? YouTube has years of experience and user data around music videos, Snap Inc and Facebook do not. They will be playing catch-up with a weaker portfolio of content assets: Snap Inc is only partially licensed and both it and Facebook have only licensed official music videos. Unofficial videos (mash ups, covers, lyrics, TV show appearances etc.) account for 25% of the views of the top 30 biggest YouTube music videos. Those videos are crucial in that they provide the lean-forward element for viewers; they are crucial to making YouTube music social rather than just a viewing platform.

YouTube has dominated the music video globally for more than a decade. This might just be the time that this position starts to be challenged. But if Facebook and Snap Inc are going to do that, they will have to bring their product strategy A-game to the field. If they can, then the we may indeed witness a social music turnaround in the West.

The Music Industry’s Next Five Growth Drivers

The risk with trying to imagine what the future might look like is to simply think it is going to be a brighter, shinier version of today. At this precise moment in time, this has perhaps never been truer.

The COVID-19 lockdowns were a seismic shock to the economy, one which will take months, possibly years to recover from. Entertainment consumption patterns have been transformed, with some need states becoming void states in an instant, while new ones have filled their place.

Whether COVID-19 goes for good in the coming months or whether it is with us for years to come, some behaviour patterns have changed for good, creating new opportunities, many of which (e.g. virtual events) have yet to be properly monetised. So at a time when it seems that the whole world is creating music forecasts, it is now the time to think about what comes next rather than just predicting how big the long established revenue streams will get.

With streaming growth slowing and creators feeling short changed, it is time to think about what plan B is, for the sakes of both the industry and the creator community.

At MIDiA we are currently compiling our music industry forecasts with a lot of detailed work being put into estimating how COVID-19 and the coming recession will impact a revenue growth. We’re modelling everything from ARPU, churn, net adds, and disposable income patterns through to store closures. We’re confident that this new methodology will make our already reliable forecasts even better (for the record our 2019 subscription forecasts with within 4.5% of the actual figures).

We’re also going to push ourselves out of our comfort zone and over the course of the year forecast some new revenue streams for which a comprehensive set of historical data does not exist. This means our chances of making incorrect calls is higher, but we’re doing it because we think it is crucial to start trying to frame what the future landscape will look like.

Here are the five emerging revenue sectors that we think could collectively be the music industry’s next growth driver

1. Contextual experiences: Two big lockdown winners have been mindfulness / meditation apps and online fitness training. With it looking likely that consumers will be spending more time at home and away from public places for some time to come, the opportunity for these categories is twofold: 1) build audience now, 2) establish behaviour patterns that will outlive lockdown.

   Music is often a core part of these but it is not always licensed. The example of artists and rightsholders making music available to fitness trainer Joe Wicks illustrates the point. To date, streaming services have provided the soundtrack to such activities with contextual playlists (chill, study, workout). But it is of course far better for the context itself to deliver the music. We expect the next few years to see categories like online wellness and fitness to eat into the time that people were previously using streaming for the soundtrack. Instead of bring your own music, the trend will be the context will bring it. UMG’s Lego partnership is a case in point.

2. Creator tools: There is an increasingly diverse mix of tools for music creators, including production, collaboration, sounds, reporting, mastering and marketing. The vast majority of the millions of independent artists will spend much more on creator tools than they will ever earn from their music. The revenue opportunity is clear, but there is more to it than that.

   Artist distribution platforms built a role as top of funnel tools, helping labels find the next big hit. But the music creation itself, enabled through online SAAS tools is in the fact the real top of funnel. Anyone who can establish relationships there does so before they release music. Right now, Spotify looks better placed to capitalise on this opportunity than labels. But labels should be paying close heed. Just in the way that distribution platforms came out of nowhere to become an established part of the label toolkit, so will artist tools. Simply put, creator tools will become part of what it is to be a music company.

3. Virtual events: As we wrote about earlier this week, there is a huge opportunity to make virtual events (live streaming, listening sessions, avatar performances) a major income stream. The sector is in desperate need of commercial structure and product tiering, but it can happen. A freemium model with free, pay to stay, premium and super-premium tiers will enable this fast-growing sector to be more than a lockdown stop gap.
4. Fandom: Regular readers will know that MIDiA has long argued that phase one of streaming was monetising consumption and that phase two will be about monetising fandom. Tencent Music Entertainment already does a fantastic job of this with live streams, virtual gifts and virtual currencies. So do K-Pop artists and Japanese Idol artists. Now is the time for western social and streaming platforms to wake up to the opportunity. Virtual merch, artist badges, premium chat, artist avatars—there are so many opportunities here waiting to be tapped.
5. Social music: As an extension of fandom, the fact that the vast amount of music-centred social activity on Instagram, Facebook, Snapchat and TikTok has not yet been properly monetised is a gaping hole of opportunity. TikTok will be crucial. As my colleague Tim Mulligan wrote, TikTok is having its ‘Snapchat moment’, trying to identify what commercial route it will take. I’d go even further and frame it as a YouTube or Facebook moment. Both those platforms went on to massively expand their remit and build diversified business models.

   TikTok clearly has momentum that far exceeds that of previous similar apps. It can either choose to just carry on being good at one thing or instead become the next big social platform, growing as its audience ages. Just like Facebook did. TikTok now is where YouTube was back in the late 2000s. If rights holders can establish an entirely new monetisation framework then TikTok could become the biggest single driver of future revenue.

As with any future gazing, the odds are that not all of these opportunities will transpire, but what is clear is that the current dominant format is not enough on its own. Rights holders and creators alike need new future revenue streams to offset the impact of slowing revenue growth and royalty crises.

The last time the music industry had one dominant format and no successor was the CD and we all know what happened then. The music industry is not about to enter a decade of freefall this time, but it is at risk of stagnating, especially as its leading music service is now so eager to diversify away from music that it offers a podcaster more money in one deal than most artists will ever earn in their lifetime from it. Let’s make this next chapter of the industry’s growth about innovation, growth, new opportunities and fresh thinking.

10 Trends That Will Reshape the Music Industry

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

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

Why Facebook Can Be the Future of Social Music, But Isn’t Yet

Facebook recently secured licensing deals with music rightsholders in India, an important step in what has thus far been an underwhelming social music strategy since first inking rights deals in June 2018. Facebook has the potential to be a giant in social music, in no small part because most streaming music apps do such a poor job of social functionality themselves. Instead it is Asian streaming apps that are largely setting the pace, with the occasional western breakthrough (normally from Chinese companies). So, what does Facebook need to do to deliver on its undoubted promise? Look east…

Facebook has little motivation to become a streaming service in a traditional sense. There is little room for a new global scale player in the streaming space and the wafer-thin operating margins are not so much well understood as they are simply an open wound for the sector. Facebook’s move was always going to be one that focused on creating social experiences centred around connections and personal expression. It is a sound strategy, but one that has not yet been executed. However, it is not alone; indeed, the streaming music marketplace is woefully non-social.

Personal identity has always been at the heart of what music is. The music we listen to helps express who we are and, especially in formative years, helps shape who we are. In the analogue era, music fans could immediately convey who they were with shelves of vinyl or CDs. The very act of buying an album or single once showed that you had skin in the game for your favourite artists. Saying ‘I’ve got that album’ meant you cared enough about that artist to part with cash. In the streaming era, however, those shelves have been replaced by lists of files stored in the cloud, and ‘I’ve listened to that song’ has little inherent weight.

The self-expression void

This self-expression void needs filling, but in the west YouTube and, to a lesser degree, Soundcloud are really the only global scale streaming services meeting this need with features such as comments, thumbs up/down etc. In Asia though, things look very different. Tencent has built a portfolio of music apps that are either highly social (e.g. Kugou, Kuwo) or that are social expression first and music second (WeSing). Japan’s Line has followed a similar path.

Social music apps serve young audiences

In the west, social takes centre stage outside of streaming apps. A number of smaller apps such as Vertigo are emerging that focus on creating engaged micro communities around music. The standout success story is TikTok, which is run by Chinese company Bytedance. TikTok picks up where Musically left off (which of course was bought and then killed off by Bytedance). But, as exciting as Musically was and TikTok is for giving consumers a way to express themselves through music and dance, they appeal first and foremost to tweens and teens. TikTok is used by 31% of 16-19s, but just 2% of the overall adult population (interestingly, Musically had exactly the same penetration rates at its peak).

Facebook is not fulfilling its potential

All of which brings us onto Facebook. Facebook, through its portfolio of social apps, has an opportunity to deliver a portfolio of social music experiences that appeal to multiple age groups and use cases. This could be TikTok-like experiences for younger Instagram users, music greetings on Messenger, sound tracked stories on Facebook, or even delivering social layers directly into the streaming apps themselves. Of course, it is doing some of this already but to really deliver, Facebook needs to go beyond – far beyond. Social music experiences have not hit mainstream outside of Asia because the right formats aren’t there yet. Facebook has the potential to deliver but needs to innovate out of its comfort zone to do so.

Social music could be the next format

The decline of closed-format consumer electronics was the death knell for music formats – streaming is a business model rather than a format. But it is clear that the market needs something new. Streaming growth will slow and user experience innovation there has been limited. There is a risk that 2019 can look a lot like 1999, i.e. a long-established format going strong in a growing industry with the prospect of a fall around the corner seemingly ridiculous. Social formats may be the next much-needed injection of growth. If streaming monetizes consumption, social can monetize fandom. The question is whether Facebook can seize the mantle.

Facebook Aims To Bring The Fun Back Into Music

Facebook has announced its long mooted move into music. As widely anticipated the service offering focuses on using music to add context to social experiences. The official blog outlines two key use cases:

1. Adding music to videos
2. Doing live stream lip syncs in Facebook Live videos

For now the roll out is limited, which will give Facebook the opportunity to hone the service and learn from the behaviour of a relatively narrow user group. A wider roll out will follow.

It’s not about subscriptions, nor should it be

Facebook was never going to try be a Spotify clone. Let me rephrase that, just in case anyone in Facebook’s management team is getting tempted to – wrongly – make the wrong move – Facebook should never try be a Spotify clone. Not only is it the wrong fit, it simply doesn’t need to. Streaming music is a low margin business that is being competed over by a number of very well established heavyweights. Facebook may be embarking on a content strategy like the other tech majors, but unlike Apple and Amazon, its core focus will be ad supported, not premium. (MIDiA subscribers – check out our forthcoming inaugural ‘Tech Majors Quarterly Market Shares’ report to see how Facebook’s content strategy stacks up against Apple, Alphabet and Amazon, and where it will be heading.)

YouTube now has a social music competitor worthy of note

For a whole host of reasons which warrant a blog post of their own, streaming music has coalesced around a very functional value proposition. In short, the fun has been taken out of music. Apps like Dubsmash and Musical.ly showed that it doesn’t have to be that way. These apps were small enough to be able to do first and ask forgiveness later. Even though Facebook has all the ingredients to do what those guys did, but at scale, it is far too big to try to get away with that strategy so had to get licenses in place first. YouTube is the only other scale player that really brings a truly social element to streaming. Now it has got a serious challenger that just upped the ante beyond comments, mash ups and likes / dislikes. The music industry so needs this right now. Especially to win over Gen Z.

Is Facebook bottling it when it comes to messaging apps?

For the moment, Facebook’s strategy is squarely focussed around its core platform. There’s no mention of Instagram (surely the best outlet for this kind of functionality). This hints at a degree of strategic wobbles in Facebook towers. By going all in with its messaging app strategy Facebook took a brave move few big companies do: it decided to disrupt itself before someone else did. It realised that the future of social was in messaging apps not traditional social networks. It is now the world’s leading messaging app company, with only Chinese companies truly challenging it (South Koreas’ Kakao Corp, Japan’s Line and Chinese players excepted). But that shift of user time to under monetized ad platforms threatens Facebook’s ad revenue growth. Hence the focus of music to drive usage back to its core platform where it can generate more ad revenue.

Not a Musical.ly killer, at least not yet

Although some have been quick to liken Facebook’s lip sync functionality to Musical.ly and co, in reality it is not competing head on with those apps because it is initially launched as a Facebook Live feature. Betraying Facebook’s strategic imperative of building its Live business. Expect a true Musical.ly ‘killer’ sometime within the next nine months.

Facebook is not here to compete with Spotify, but it is here to compete with YouTube and Snapchat and to steal some of the clothes of Musical.ly and co. The currently announced features just scratch the surface of what Facebook can do. In many respects music has taken a series of retrograde steps socially speaking since the days of imeem, MySpace and Last.FM. Now Facebook has picked up the dropped baton and is running with it.

Finally for anyone at MIDEM, I will be there from Weds PM to Thursday evening, including doing a keynote Q+A with Napster’s new CEO early Thursday evening. Hope to see you there. My colleagues Zach Fuller and Georgia Meyer are there too, both are speaking, so be sure to say hi.