Could Spotify Buy Universal? 

Vivendi is reported to be proposing to its board a plan for spinning out Universal Music. It is certainly the right time for a spin off (always sell before the peak), but a full divestment would leave Vivendi unbalanced and a shell of its former self. Canal+ is facing the same Netflix-inspired cord-cutting pains as other pay-TV operators (and is relying heavily on sub-Saharan Africa for subscriber growth), while other assets such as those in Vivendi Village have failed to deliver. With CEO Vincent Bolloré having invested heavily in Vivendi, he would be devaluing his own wealth. For a man who is not shy of saying that he’s in the game to make money, this scenario simply doesn’t add up. As one investment specialist recently suggested to me, this talk of a spin-off is probably exactly that, talk. Talk aimed at driving up Vivendi’s valuation by association and, at most, potentially resulting in a partial spin-off or partial listing. However, it is not beyond the realms of possibility that a big enough offer for Universal would persuade Bolloré to sell. So, let’s for a moment assume that Universal is on the market and have a little fun with who could buy it.

The Chinese option

It is widely rumoured that Alibaba was in advanced discussions with Vivendi to buy some size of stake in Universal. Those conversations derailed when the Chinese government tightened up regulations on Chinese companies buying overseas assets, which is why we now see Tencent buying a growing number of minority stakes in companies rather than outright acquisitions. So, an outright Chinese acquisition is likely off the table. This doesn’t rule out other Asian bidders (Softbank had an $8.5 billion bid rejected in 2013), though perhaps Chinese companies are the only ones with the requisite scale and access to cash that would meet a far, far higher 2018 price point.

The tech major option

The most likely scenario (if Universal were for sale) is that one of the tech majors (Apple, Alphabet, Amazon, Facebook) swoops in. Given Google’s long-held antipathy for the traditional copyright regime, Alphabet is not the most likely, while Facebook is too early in its music journey (though check back in 18 months if all goes well). Apple and Amazon are different cases entirely. Both companies are run by teams of older executives whose formative cultural reference points were shaped by traditional media companies. These are companies that, even if they may not state it, see themselves as the natural evolution of media, moving it from the physical era of transactions to the digital era of access. Thus far, Apple and Amazon have focused principally on distribution, although both have invested in rights too. Apple less so, (e.g. Frank Ocean, Chance the Rapper) but Amazon much more so (e.g. Man in the High Castle, Manchester by the Sea). Acquiring a major media company is a logical next step for Amazon. A TV studio and, or network would likely be the first move (especially as Netflix will likely buy one first, forcing Amazon’s hand), but a record label wouldn’t be inconceivable. And it would have to be a big label – such as UMG, that would guarantee enough share of ear to generate ROI. Apple though, could well buy a sports league, which would use up its budget.

The Spotify option

While the tech majors are more likely long-term buyers of Universal, Spotify arguably needs it more (and is certainly less distracted by other media formats). Right now, Spotify has a prisoner’s dilemma; it knows it needs to make disruptive changes to its business model if it is going to create the step change investors clearly want (look at what happened to Spotify’s stock price despite an impressive enough set of Q1 results). But it also knows that making such changes too quickly could result in labels pulling content, which would destroy its present in the hope of building a future. Meanwhile, labels are worried Spotify is going to disintermediate them but can’t risk damaging their business by withdrawing content now – hence the prisoner’s dilemma. Neither side dares make the first move.

That’s the problem with the ‘do a Netflix’ argument: do it too fast and the whole edifice comes tumbling down. Moreover, original content will not be the same silver bullet for Spotify as it was for Netflix. This is mainly because there is a far smaller catalogue of TV content than music, so a dollar spent on original video goes a lot further than a dollar spent on original music. It is not beyond the realm of possibility that Spotify will get to a tipping point, where the labels see a shiny-toothed wolf lurking under the lamb’s wool, and with its cover blown it will be forced to go nuclear. If this happened, buying a major label would become an option. And, as with the tech majors, it would have to be a major label to deliver enough share of ear.

But that scenario is a long, long way off. First, Spotify has to prove it can be successful and generate enough revenue and market cap to put itself in a position where it could buy a major. And that is still far from a clear path. For now, Spotify’s focus is on being a partner to the labels, not a parent company.

All of this talk might sound outlandish but it was not so long ago that an internet company (AOL) co-owned Warner Music and a drinks company (Seagram) owned Universal Music, before selling it to a water utilities company (Vivendi), and, long before that, EMI was owned by a light bulb company (Thorn Electrical Industries). We have got used to this current period of corporate stability for the major record labels, but this situation is a reflection of the recorded music business being in such a poor state that there was little M&A interest. Nonetheless it is all changing, potentially heralding a return to the past. Everything has happened before and will happen again.

Global Recorded Music Revenues Grew By $1.4 Billion in 2017

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

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

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

MRM1804-fig0.5.png

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

 

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

A Growing and Diversified Market

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

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

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

The Three Eras Of Paid Streaming

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

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

the 3 eras of streaming

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

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

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

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

 

 

Who’s Leading The Streaming Pack?

At MIDiA Research we are currently in the final stages of producing the update to our annual landmark report: The State Of The Streaming Nation, a report which compiles every streaming market data point you could possibly need.

In advance of its release in June we want to give you a sneak peak into a couple of the key areas of focus: streaming app usage and major label streaming revenue.

music apps slide

Subscriber numbers only tell part of the streaming story. They are solid indicators of commercial success, but can often obscure how well a service is doing in terms of engaging its user base. That’s why we track the main music services’ active user bases every quarter. But rather than tracking Monthly Active Users (MAUs), we track Weekly Active Users (WAUs). The MAU metric is past its sell by date. In today’s always on, increasingly mobile digital landscape, doing something just once a month more resembles inactivity rather than activity. The bar needs raising higher. Companies like Snapchat, Facebook and Supercell measure their active user bases in terms of Weekly Active Users (WAUs) and Daily Active Users (DAUs). It is time for streaming services to step up to the plate and employ WAU as the benchmark.

Using this approach, YouTube and Spotify emerge as the leading services with 25.1% and 16.3% WAU penetration respectively. However, at the other end of the spectrum, Deezer swaps its top half of the table subscriber count ranking for the bottom ranking for WAUs with just 2.3%. Google Play Music All Access does not fare much better on 5.5% and even this likely reflects survey respondent over-reporting for what has proven to be a lacklustre effort from the search giant.

Streaming music finally returned recorded music revenue to sizeable growth in 2016, driving the year-on-year growth of 6%, increasing revenues by $0.9 billion. Label streaming revenue was up $1.6 billion, finally offsetting the impact of declining revenue from the legacy formats of the CD and downloads.

label streaming revenues midia

The growth continued in Q1 2017, albeit at a slightly slower rate. Among the major labels, streaming revenue grew by 35% to reach $1.1 billion in Q1 2017, up from $0.8 billion in Q1 2016. The major labels respective share of cumulative revenue in streaming largely reflects that of total revenue. Streaming was the lynchpin of 2016’s growth and will be even more important in 2017.

Streaming represented 33% of major label revenue in 2016. That share rose to 42in Q1 2017. Streaming is now the stand out revenue source, far outstripping physical’s $0.6 billion. Though a degree of seasonality needs to be considered, the streaming trajectory is clear. Record labels are now becoming streaming businesses. The independent label sector experienced strong streaming growth also, powered in part by licensing body Merlin. Merlin paid out $300m to its independent label members over the last 12 months, leading up to April 2017, to an increase of 800% on the $36m it paid out in 2012. The streaming business is no longer simply about the likes of Spotify and Apple Music, it is the future of the labels too.

These findings and data are just a tiny portion of the State Of The Streaming Nation II report that will additionally include data such as: streaming behaviour, YouTube, role of trials and family plans, playlist trends, average tracks streamed, subscriber numbers for all leading music services, service availability, pricing and product availability, revenue forecasts and user forecasts. The report includes data for more than 20 countries across the Americas, Europe and Asia and forecasts to 2025.

To reserve your copy email Stephen@midiaresearch.com

Global Recorded Market Music Market Shares 2016

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

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

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

The Recorded Music Market In 2016

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

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

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

Just How Well Is Streaming Really Doing?

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

The Global Streaming Market

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

Spotify’s Contribution

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

This results in 2 interesting points:

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

major label streaming

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

Universal Is The Big Streaming Winner

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

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

The Role Of Advanced Payments

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

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

Streaming Will Continue To Grow, But Haunted By Advanced Payments

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

Quick Take: Sony Music UK Buys Ministry Of Sound Recordings

Leading UK indie Ministry of Sound Recordings today announced its sale to Sony Music UK. While this is undoubtedly another case of a big major swallowing up a smaller indie, there is a much more important angle to this – surviving in the streaming era. Ministry of Sound is unusual in that it is a label with a relatively small catalogue, instead its business is built around compilations. In doing so it has built an incredibly robust and profitable business. No mean feat in the current climate. But Ministry’s core strength has also become an Achilles Heel with the onset of streaming.

Ministry licenses music from other labels to build its compilations. This approach works well in a sales model where proceeds are split between the respective parties. But in the context of streaming, any money generated by plays of tracks on a compilation go to the label that owns the track not to the label that curated the compilation. This is why Ministry compilations have been conspicuously absent from streaming services and it is also why Ministry ended up in conflict with Spotify when the streaming service initially refused to take down user playlists that replicated Ministry compilations and that used Ministry artwork.

At the time, the Spotify case raised the still-to-be-answered question of just how much curation is actually worth. Spotify and Ministry settled their differences but the underlying economics remain, and meanwhile Spotify also upped its curation game. Ministry thus faced the double whammy of increased curatorial competition and an inability to make streaming pay. Enter stage left, Sony Music.

With its co-owned Now brand, Sony is as good a fit as Ministry could find in a major. Sony for their part are getting one the most valuable compilation brands and immediate dance music culture credibility. Sony also has big digital plans for Now, which Ministry will no doubt slot into nicely. On top of this, because Sony own so much catalogue themselves, they can make the economics of compilations work in the streaming environment.

The fact that 25% of music subscribers still buy compilation albums show that however a good job streaming playlists might be doing, there remains a big demand for compilations, even within the core of streaming music aficionados. Curated playlists will continue to gain importance but compilations are going to live alongside them for a good long time to come. And all the while the distinction between what constitutes a playlist and a compilation will continue to blur.

Warner’s Streaming Equity Pay Out Is Commendable But Not Enough

During his latest investor conference call Warner Music’s CEO Stephen Cooper announced that the label will pay artists a portion of any income it earns from equity stakes in services such as Spotify and Soundcloud. With Spotify potentially announcing its IPO next quarter the announcement is more than a token gesture. It is a bold move by Warner and follows on from Sony and Universal both announcing last year that they will pay artists a portion of streaming breakage revenue (the difference between what services pay labels in guarantees and how much royalty revenue they actually generate – WMG has been doing this since 2009). The big labels are waking up to the fact that transparency is key if they are going to keep artists on side. Streaming is where consumer behaviour is going, but currently YouTube is growing quicker than everyone else. The labels need premium and freemium services to make up ground fast. Which is why they cannot afford the Black Keys-Taylor Swift-Adele-Coldplay trickle to turn into a torrent. They need artists to be as vested as they are.

Streaming Hostilities May Have Thawed But Underlying Issues Remain

With the exception of the songwriter class action suits that closed out the year, 2015 was actually a pretty good year for streaming service – artist relations. Artists became a little more accustomed to streaming and many started to see a meaningful in their streaming income. But there is still much distance to go. The crucial issue for the majority of mid ranking and lower artists is how to deal with sizeable up front payments being replaced by a long term flow of micro payments. If you are a sizable label or a big artist you won’t feel the pain too much, but for the rest it normally means a very serious tightening of the belt.

The True Value Of Streaming Doesn’t Lie In Equity Stakes After All

There has, wrongly, long been a suspicion among many that streaming services are some sort of elaborate money making scam for labels, with the real value hidden in the money they will earn from their equity stakes. But as the ever excellent Tim Ingham explains, Warner is likely to only make around $200 million from a successful Spotify floatation. Of course $200 million is no small amount of money, and would represent more than half of Warner’s quarterly digital income. But it represents just 16% of the money Warner has earned from streaming since 2010 and just 2% of all global streaming revenue in 2015 (at retail values). Thus the label equity stakes in Spotify & co. are meaningful but they are far from where the real label value exists. Indeed as Cooper stated: “the main form of compensation we receive from streaming services is revenue based on actual streams”.

So If Artist Equity Income Isn’t Going To Fix Streaming, What Will?

All of which then raises the awkward question: if artists getting a Spotify IPO pay out isn’t going to ‘fix’ the model for artists, then what is? There is not really much scope for streaming services to pay out more to rights holders (80% of revenue doesn’t leave much scope for operating profit). While there is certainly scope for increasing ARPU among the super fan subscribers, there is little opportunity to raise prices for the majority of users ($9.99 is already more than most are willing to spend). So the only part of the equation left is how much labels pay artists.

Streaming Is Neither A License Nor A Sale And Its Time Artist Deals Recognise It

Right now the entire recorded music business is trying to figure out whether streaming is replacing radio or sales. The likelihood is that it is doing both and by doing so creating something new in between. That means that labels need to rethink how they pay artists, because currently they typically pay them on either one or the other of those models, and most often on the basis of a stream being a sale. A stream being the equivalent of a sale is completely counterintuitive because streaming is all about consumption not transaction. So why are labels most commonly treating streams as sales? Because the % they have to pay artists is so much lower, often in the 10% to 15% range rather than around 50% for a license. Of course there is as strong an argument to be made for streams not to be considered as a pure license as there is a sale, but there is an even stronger one for a hybrid rate that sits in the middle. Doing so would double the amount of money most artists make from streaming, instantaneously transforming its revenue impact for many. There is some precedent too. In 2012 Universal was successfully sued by FTB Productions over its treatment of Eminem downloads as sales rather than licenses, for which Eminem would have been paid a 50% rate instead of the much smaller sales rate.

Warner Music deserve credit for their commitment to paying artists a portion of equity related income (though no mention of how much of course) but it is just one step on a bigger journey. A wholesale reassessment of artist streaming compensation is required. Increasing artist streaming rates will dent label margins but ultimately the labels need to decide whether they want to build a business that is as sustainable for artists as it is for them.

Postscript: One interesting quote stood out from Cooper: “Although none of these equity stakes have been monetized since we implemented our breakage policy…there are some services from which we receive additional forms of compensation”. Translation(?): Sony used to get paid by the big streaming services on some sort of stock dividend basis and probably still does from some others.

Why Moving Video Centre Stage Is About More Than Just Doing Deals With YouTube Stars

 

 

This is the fourth post in my YouTube economy series. You can read the other posts here, here and here

The music industry has a long history of underplaying the role of video, insisting on seeing it as merely a tactic for driving sales.  In doing so it let two businesses that understood the wider value of music video become global superpowers.  MTV and YouTube knew that music fans, especially younger ones, could connect with their favourite artists via video in way that they could not with audio alone.  The labels were able to put MTV and YouTube down as an irritating mistake (albeit the exact same one made twice) because for a long while they were still selling units of music product, albeit in reducing numbers by the time YouTube arrived on the scene.  Now though, as we accelerate into the consumption era all bets are off.  Consumers want to pay for access to content – either with money (subscription) or with attention (ads).  With revenue generated by streams rather than up front transactions, both access models demand increased engagement.  This means that video must shift from marketing tactic to revenue bearing product.  Slowly but surely labels are waking up to this new reality and Sony Music’s deal with YouTube star Kurt Hugo Schneider hints at what the future may hold.

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Sony’s Schneider Deal Is A Nod To The Future Music Economy

Sony’s partnership with Schneider will see the creation of a 10 episode series of shows featuring Sony artists performing their songs with him.  Crucially the shows will be distributed via Schneider’s YouTube channel which has 6 million subscribers and 40 million monthly views.  5 years ago, even trying to build the business case for such a project around a frontline Sony artist would have been nigh-on impossible with production costs failing to justify likely TV licensing revenue.  But with YouTube Sony can both spend less on production and cut out the TV network middleman, going direct to the audience. Whilst a big part of the internal business case justification at Sony will likely centre around the ‘exposure’ Sony’s artists will get, there will be no small number of Sony execs who know that the real value of this is the video series itself, both in terms of audience engagement and revenue.

As I explained in my previous YouTube posts, the platform is emerging as the single most important content destination for Millennials and their younger siblings Generation Edge (i.e. those born since 2000).  Right now traditional music artists are at a marked disadvantage to native YouTube creators: they put out 1 music video maybe once every 3 months while a YouTuber will put out that many videos a week.  A middle ground exists between those two extremes, one that can provide the vital ingredients for helping music artists get more viewing time and help transition music video from low income marketing tool into a meaningful revenue generating product in its own right.

Universal’s KSI Deal Only Scratches The Surface

Universal Music have taken a more traditional approach to tapping YouTube, picking a successful YouTuber and turning him into a pop star.   The YouTuber in question is British gamer KSI who numbers 2 billion YouTube views, 11 million subscribers and $4.5 million in annual YouTube earnings, making him the fifth highest YouTuber globally.  So far his cross over pop/Grime singles have had modest success though Island will be hoping his latest collaboration with JME, ‘Keep Up’ will make bigger sales waves.  But even if it does that will be missing so much of KSI’s potential.  By his own admission KSI is a YouTuber first and a rapper second.  Island should be exploring all the ways they can make that distinction blur into insignificance.  Partnering with YouTubers like KSI is an invaluable first step, but the real opportunity for Universal is to explore how KSI can take them on a journey into the YouTube industry not for them to take KSI on a journey into the music industry.

Online Video Momentum Is Acclerating, And Some

The direction of travel of the video market is hard to discount.  Short form video is growing at an unprecedented rate: there were 5.9 trillion short from video views in in the first three quarters of 2015 with growth more than doubling from Q4 2014.  (See the MIDiA report ‘Short Form Video Growth’ for more).  Meanwhile the glut in online display ad inventory driven by content farms like Outbrain and Taboola is making video advertising an increasingly sought after commodity.  Will video revenue ever be enough to offset lost music sales revenue at an industry level? Perhaps not, but it certainly can at an artist level.  Not too many artists can boast KSI’s $4.5 million annual income.

The Business Case For YouTube’s Music Economy Role Needs To Be More Rounded

We need to take a realistic view of YouTube’s current role in the music ecosystem.  It can no longer be justified as a loss leader for driving sales and ‘exposure’.  The number one activity that consumers do after they discover a new artist on YouTube is….watch them on YouTube some more.  65% of under 25’s say they use YouTube this way. So more value needs to extracted from those users when they are on YouTube, rather than hoping for them to pop over to Spotify or iTunes to do something that creates bigger chunks of direct music industry revenue.  Sure some of that is still going to happen but it will do so in dwindling numbers over the next 5 years, with music sales revenue declining by 39% by 2020.

The business case for YouTube has to be much more rounded and nuanced while the industry continues through its transition phase. Sales and access will coexist for many years, occasionally giving the impression of a schizophrenic nature. Adele encapsulates the twin-speed nature of the music industry as it transitions between eras.  As impressive as Adele’s sales figures are they are an anomaly, a temporary high tide while the music sales waters continue to irretrievably recede.  Plotted against the longer music sales trend it is clear that ‘21’ followed exactly the same path – a dramatic stand out success that was a blip on the downward curve.  Adele is also unique in having such strong audience reach among older consumers that still buy music and younger ones that stream. So while she’s been busy breaking sales records she has also excelled on streaming, racking up half a billion views of her ‘Hello’ video.

For Better Or For Worse, YouTube Is Generation Edge’s Punk

Music fans exist in multimedia, on demand environments where video, social engagement are the norm and authentic connections with stars are the gold dust that they seek out.  YouTube is the punk movement of Generation Edge.  It is an antidote to the over-produced, generic, middle of the road, overtly commercialism of traditional media.  YouTube creators may still be finding their creative voices but the fact Sid Vicious couldn’t really play bass was part of the entire point of the Sex Pistols.  It was a big fat two fingers up at the establishment.  Sure, most YouTubers are hardly rebels without a cause but they are outside the traditional media establishment and therein lies the real power of video that the music most learn how to participate in without ending up looking like a dancing dad.

‘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.