Can’t cross the moat? Walk around it

The music business is bifurcating. On one side, a new AI, fandom, and creation centred business is coalescing. On the other, the traditional business is pulling the draw bridge over its moat by pushing up streaming royalty thresholds to ensure the soon-to-explode long tail knows it is not welcome. AI has arrived at just the right time, acting as the change catalyst that will propel the consumerisation of creation to the fore. The news of music AI start up Udio’s $10 million raise is just another piece in the puzzle.

The traditional music business has a long tradition of building moats. The genesis of the recorded music business was the first moat. Until the phonograph, everyone and anyone could be a performer and take part in music. Then suddenly, a business was built around those deemed ‘good enough’ to be able to record. The music business’ moat was thus dug, with the audience on one side and the artists firmly on the other. In later years, the moat was widened with a succession of developments, such as record label marketing budgets, TV appearances, exclusive licensing deals, expensive recording technology, and so forth.

The rise of the creator economy, AI, and consumer creation will probably not drain that moat. High quality music and artists are not going to be replaced – that is simply not the point of AI. Virtual artists are an entirely different proposition (!) but AI and consumer creation open up another, entirely new path. Instead of having to swim across the traditional industry’s century-old moat, this new, parallel movement / industry can, and will, simply walk around it and carve out its own space. This will be a good thing for both sides of the future industry and mirrors what already happens in video.

No one confuses a TikTok short for a Netflix original because they operate in entirely different lanes. Right now, both sides of music occupy the same places (streaming and social). For as long as it was only the long tail of single millions of independent artists, that awkward cohabitation just about worked. But not for much longer. Now, we have tens of millions of creators uploading music to social (but not streaming) and we face the prospect of hundreds of millions of consumer creations, perhaps even a billion, according to BandLab’s Meng Ru Kuok.

And as much as this consumerisation trend will largely happen outside of the moat, some of it will happen inside it too. Look no further than the reports that Spotify is planning to allow users to modify songs. So, perhaps the demarcation will be modification within the moat and fully fledged creation outside of it.

What is fast approaching in the music industry’s rear view mirror is what MIDiA termed ‘Music’s Instagram Moment’, where making music becomes just as accessible to the average consumer as photos and video are now. Thom Yorke might have uttered the words ‘anyone can play guitar’ but in practice, most people don’t – either because they do not have a guitar or the will to learn. But anyone can write a text prompt. The traditional music industry’s moat kept the accomplished safely clear of the enthusiast. AI changes all of that.

Of course, the counter argument is that all this consumer creation will likely be garbage. But that misses the point. This is not about music as consumption, nor even fandom. It is music as expression and identity. Professional photographers did not look at Kodak and call them merchants of garbage because they enabled millions of consumers to take overly exposed holiday snaps with fingers obscuring the lens. 

The current fear around AI is it creating million stream songs, but that is not the point either. Don’t worry about the one AI track with a million streams, worry about the million AI tracks with one stream.

After all, who is going to listen to all this consumer creation? The friends and family of those who make it.  If each consumer creator has, say, ten people who will listen to what they create, and they make a track a month, that results in 120 streams minimum per year (assuming each person only listens once). Turn that one consumer creator into 100 million people (15% of Spotify’s current user base) and you end up with 12 billion streams. Now imagine that 25% of those 100 million consumer creators make two tracks a month, have more than 30 friends that listen, and that their music is good enough for those friends to each listen twice, then the total annual streams becomes 45 billion. Now imagine if those consumer creators make music every single day….

It is when you consider this sort of scale that it becomes clear why it is good for both sides of the business that they occupy different spaces, because they serve different purposes. 

Yes, consumer creation will compete for time. It will turn a considerable amount of time that is currently spent listening into time spent creating. Surely that is only a positive thing. Music as a form of expression and creation. It can – and should – be for everyone. 

If this kind of thing interests you, then keep an eye out for a major new report coming from MIDiA: Bifurcation theory: How today’s music business will become two. More on that soon!

Fan economy: expanded rights are worth $3.5 billion, now what?

MIDiA recently, and exclusively, revealed that expanded rights now represent 10% of the recorded music market with revenues of $3.5 billion. These revenues, derived principally from monetising the brand of the artist (merch, sponsorships, branding, live, etc.), represent a shift in strategic focus for the global music business. It is moving from a consumption economy to a fan economy. This is only the start. To truly harness the vast potential of a fan economy, three key things need to be addressed:

1. Image and likeness: The music industry’s current social media focus might be the UMG / TikTok spat, but the real battle will be over the cultural value of artists on social. As music creators invest increasingly more time into making social content, their images and likenesses are powering social media engagement and revenues. We are at the point where some value exchange needs to be established. Back in 2021, we laid out the case for a creator right (the linked report is free to download) that ensures creators are remunerated whenever they generate value, regardless of whether their music is being performed. With the ascent of generative AI, the concept is needed more than ever. The music business is waking up to the importance of image and likeness. The catalogue deal for Tina Turner included these rights, while Bob Marley’s estate sold his catalogue but retained his image rights because they have used them to create a global Marley branded empire. Likeness rights have a long history, with the first big ‘win’ being actor Crispin Glover settling with Universal Studios in 1990 for infringing his likeness when they altered the appearance of another actor to look like him with prosthetics as George McFly in Back to the Future Part II. This resulted in The Screen Actors Guild prohibiting its members from mimicking other actors. Music needs a George McFly moment. The state of Tennessee protecting artists’ voice and likeness may be a first step.
   
2. Reconfiguring streaming: MIDiA has been saying for years now that there is a lot Western streaming can learn from China’s fandom-focused approach to streaming. While Chinese fandom revenues have recently taken a hit due to governmental policy shifts, the underlying premise of making streaming about fandom and expressing identity remains crucial. Artist subscriptions are an obvious next step, making streaming about lean in fandom rather than lean back consumption. We have written about artists subscriptions a lot – recently; more than a decade ago; and in governmental policy submissions. James Blake’s escapes may have soured appetite, but that is, in part, because stand alone subscription apps face an uphill struggle. The most obvious opportunity is to make them part of the core streaming experience. The old internet was ‘build it and they will come’, today’s is ‘go where the audience is’. But there is more to do than artist subscriptions. Giving users profile pages where they can buy and earn fandom badges is probably the most important first step, something pioneered in the West by Audiomack and also seen on apps like Fave and Renaissance. HYBE is prepping Weverse for international expansion, Spotify looks set to make some moves soon, and both Sir Lucian Grainge and Rob Kyncl are leading their respective companies in this direction too.
   
3. Nurturing, not harvesting, fandom: There are two dangers inherent in record label superfan strategies: 1) weaned on lean back streaming, superfans might not be super enough, and 2) it is all  too easy to focus on monetising fandom rather than nurturing it. As much as Korean labels like HYBE, SM, and JYP might be industrialising fandom and exploiting fans, they at least understand the importance of building and nurturing fandom (take a look at the chart from JYP’s earnings to understand their fandom approach). Record label expanded rights were up 16% in 2023 and will continue to grow strongly. It is incumbent on record labels to consider fans as a scarce resource to be cultivated, not simply monetised, otherwise the soil will be left exhausted and barren.

Along with non-DSP and vinyl, expanded rights represent part of the modern music industry’s multi-faceted fan strategy and 2023 was arguably the first year of this new music business era. Streaming is not going away. Indeed, it will be part of this future, but the consumption-focused approach of the 2010s is going to be shunted to the side as fandom takes centre stage. Not a moment too soon.

Music subscriber market shares 2023: New momentum

With UMG leading the charge to reshape the music industry into a more label-friendly form, 2023 may, with hindsight, go down as the year before everything changed. Whatever lies ahead though, new models will take time to deliver benefits. Music subscriptions are therefore going to remain the bedrock of music rightsholder revenues for the foreseeable future. So, it is a good thing that music subscriptions had such a good year in 2023.

As of Q3 2023, there were 713.4 million music subscribers globally, which was 90 million up on the 623.4 million one year earlier in Q3 2022. This matters for two reasons:

1. We are already nearly three quarters of the way to having one billion music subscribers globally. That is no small achievement. For context, as recently as five years ago, we had only just passed the quarter of a billion subscriber mark
   
2. The 90 million subscribers added in the 12 months to Q3 2023 was more, yes more(!), than the 83.5 million added one year earlier. In fact, the number added was nearly as many as those added in 2020. Not bad for a maturing category with key markets hitting near-saturation

However, there is a bit of a problem with looking at the global market: it is increasingly no longer a global market, but instead, one of two halves: the West and the Global South, with each region throwing off dramatically different metrics and growth narratives.

Nowhere is this better illustrated than in the market share rankings:

• Spotify dominated the global music subscriber base in Q3 2023 with 31.7% market share. More than that, it actually increased its share from 0.4 points from Q3 2022. So, for all the flak Spotify has thrown at it, it outgrew the market in 2023. Newer, emerging market territories were central to this growth, but it was Spotify’s traditional heartland (North America and Europe) that drove the majority (59%) of its subscriber growth. Compare and contrast this with the all-DSP picture, where North America and Europe drove just 29% of subscriber growth, with Asia Pacific accounting for nearly two thirds of all non-Western subscriber growth
  
• China, a market in which only Apple of the Western DSP operates, underpins this non-Western growth, and the clearest manifestation of this is Tencent Music Entertainment (TME). With 102.7 million subscribers in Q3 2023, TME represents 14.4% of all global subscribers, despite this being an effectively China-only number. NetEase Cloud Music (6.1% share and China-only) and Yandex (3.4% share and Russia-only), further represent the dynamic growth from regions where Western DSPs largely do not operate. This is the new, bifurcated nature of the global music subscriber market
  
• Apple Music (12.6%), Amazon Music (11.1%) and YouTube Music (9.7%) represent the remainder of the leading Western DSP pack. Along with Spotify, these three DSPs represent 65% of the global market, but only 59% of 2023 growth. Western DSPs are still the core of the market, but they are collectively losing share. But, even within these four, there is a diverging picture, with YouTube Music and Spotify gaining share in 2023 while Amazon and Apple lost share. Between Q3 2022 and Q3 2023, Spotify added more subscribers than all three other leading Western DSPs combined

2023 was a strong year for music subscriptions, delivering more growth than perhaps had been expected in such challenging macro-economic and geo-political circumstances. Even North America and Europe grew slightly faster in 2023 than in 2022. But, as commendable as squeezing more growth out of otherwise mature markets is, the inescapable paradigm shift is the emergence of the Global South as the growth driver of tomorrow’s music subscriber base.

Want even more detail? Check out the full music subscriber market shares report and data set, with data for more than 20 DSPs across more than 40 territories, with data for every quarter from Q4 2015 to Q3 2023.

For more info email stephen@midiaresearch.com

Spotify re-positions two-tier licensing (we are getting closer, and it can be even better)

Spotify released a blog post laying out how it wants the world to understand its new two-tier royalty system. The positioning is clear, leading with the statement that it will drive “an additional $1 billion toward[s] emerging and professional artists” and the PR push included several supporting quotes from the independent sector (with no major label quote to be seen). Positioning-wise, this is certainly now a case of ‘where it started’ (reverse Robin Hood) and ‘how it is going (everyone is a winner). Of course, the truth lies somewhere in between, but we are getting to a better place and there are some really important positive points made by Spotify. 

The main benefits outlined by Spotify are:

• Reducing fraud (financial penalties for actors that manipulate streams)
• Cutting back on ‘noise’ (increasing the minimum stream length to two minutes)

The cumulative impact of these measures will be more money going into the royalty pot for ‘honest hard-working artists’. This is all positive and represents part of a much needed recalibration of the wider model to tackle the long-term rise of unintended consequences of the streaming economy.

However, because the two-tier royalty system is also deployed alongside these measures, it will still be bigger artists that benefit from the larger royalty pool. Spotify states that redistributing the revenues from the end of the tail will be more impactful for ‘these tens of millions of dollars per year to increase payments to those most dependent on streaming revenue — rather than being spread out in tiny payments that typically don’t even reach an artist’. Spotify also makes the important point that most of the royalties from <1,000 stream tracks do not even make it to the artists because they do not meet the minimum payout levels set by labels and distributors.

Of course, this means that labels and distributors who have a substantial numbers of songs with <1,000 streams will see portions of their income withheld. For smaller labels this could be impactful. All labels shoulder risk knowing that a majority of their artists are unlikely to deliver them a profit. Bigger labels, major labels especially, hedge this bet by only paying artists royalties once they have generated more income than the advances the labels pay them. Smaller labels can rarely afford to pay advances and they also typically pay a higher share of royalties (e.g., 50%) to artists. So, having a payout threshold of, say, $50 per track, is their means of hedging risk. Some of that hedged risk will go out of the window for smaller labels. 

And to be clear, I am referring here to genuine smaller labels, not to synical ones that who trade in 30 second noise clips to gain the system. Those labels will suffer in this system, and rightly so.

A larger label might argue that smaller labels should simply focus on signing tracks with more potential, but the label marketplace is a competitive one. The ‘bigger artists want to go to bigger labels’ dynamic applies to the bottom of the tail too – it just translates to ‘not-so-small artists want to go to not-so-small labels’. Unless a label is investor backed, they all need to start small. There is a risk that these smaller labels do not have a voice in this debate.

But, let’s revisit this objective: ‘increase payments to those most dependent on streaming revenue — rather than being spread out in tiny payments’. 

(It is also important to note that the 1,000 streams threshold is for songs, not artists. So, many artists (and labels) will receive royalties for some, but not all of their songs. So this is not just about artists with <1,000 streams.)

While this is true at the input stage, it does not necessarily translate on the output stage. Assuming that the <1,000 streams revenue was worth around $60 million in 2023 (Spotify says “tens of millions”). Then, taking Spotify’s own Loud and Clear figures, applying the $0.03 per stream royalty, and distributing that on a share-of-streams basis for all other artists, provides an income translating to an extra +/- 1% of annual Spotify royalty income for those artists. So, the system takes money that is insignificant to the bottom of the tail and then divides it up into amounts that are insignificant, in relative terms, to the rest.

To be clear, some artists will get a good payout, peaking at somewhere around $20,000 for the top artists. However, as they already earn over a couple of a million each, that amount is probably not meaningful to them in relative terms.

So, where am I driving at with all this? How about we take the proposed system and instead of dividing into micro payments for everyone, just target it at one small group of emerging artists with potential. Turn it into an artist development fund rather than an inverted redistribution of wealth. That way the money can be put to really good use, investing in the very part of the market where the money came from in the first place. 

In summary, Spotify’s new positioning of two-tier licensing is fair, reasonable and positive in most respects. The associated (but separate) noise and fraud measures are super important and will help bring greater fairness and equity to the system. But distribution of the <1,000 stream royalties remains a sticking point. As it will have such a small impact on the income of other artists, surely funnelling these “tens of millions” into an artist development fund is a win-win that the industry can get behind?

Music has become a ‘just-in-time’ economy

The modern day economy is built upon ‘just-in-time’ supply chains. This framework has enabled the benefits of consumerism that we have come to enjoy, such as next day delivery, out of season foods on our shelves, and the digital devices we live our lives through. Each component of the just-in-time economy works in tightly coordinated partnership, from factories, through transport, to point of sale. The underlying principle is that every component is manufactured and delivered at just the right time, to ensure that there is a continual throughput of production, assembly, and consumption. Gone are the old days of large warehouses containing product, just in case it is needed. Instead, just the right amount makes its way around the world in shipping containers to meet demand. Most of us never even knew this system existed until the pandemic, when it suddenly broke down and we found ourselves short of essentials, like toilet paper. Perhaps without even realising it, the music business has become a just-in-time economy too, and that is not a good thing.

The music business used to be characterised by artists disappearing into the studio for months on end and emerging with an album for expectant fans to get their hands on at some time in the future. Bands like the Red Hot Chili Peppers were able to average four years between their albums and still expect their fanbase to be there, waiting eagerly for the next release. Streaming and social media combined to turn that model on its head, heralding the era of the always-on artist. Now, artists fear the consequences of not putting out a single every month. Heck, even Daniel Ek said it is “not enough” for artists to release albums “every 3-4 years” and that they need to create “continuous engagement with their fans”.

Add this to the very real fear that the algorithm will ‘forget’ artists if they do not keep up a steady flow of social posts and releases, and you have the foundation stones for music’s just-in-time economy. The implication, no, the reality, is that if artists do not conform to the always-on model then they will be lost by (not in) the system. Artists (and their rightsholders) have become just-in-time suppliers, with the subtle, yet seismic, shift from delivering art to their fans when they have finished their creative process, at their pace, to filling a slot in the never ceasing supply chain. It is an environment that, unsurprisingly, has created the hit today, gone tomorrow world that today’s music business operates within.

The model works well for platforms, and consumers, but less so for artists, due to misaligned incentives across the industry. The underlying problem with the system is that the content platforms that shape today’s entertainment business (TikTok, YouTube, Twitch, Spotify, etc.) value creation more than they do creators. The more creation that there is, the more that the platforms’ algorithms are able to target users with ever more specific and personalised content. The platforms all, of course, talk a good talk about creators, but what matters most to them is that their users get the right content. It does not matter whether that means a thousand creators delivering one piece of content to a thousand users, or one creator to one thousand users. With the pervasive obsession with ‘new’, as soon as one piece of content has been served, another is needed.

This is how we described this dynamic back in early 2021:

“In the attention economy’s volume and velocity game, the streaming platform is a hungry beast that is perpetually hungry. Each new song is just another bit of calorific input to sate its appetite.”

And it is not just the consumer platforms that fuel this fire. Artist distribution platforms play a role too. The unspoken promise of the platforms is that artists have a chance to compete with the likes of Taylor Swift. Of course, 99.99% of the nearly six and a half million self-releasing artists will never get into the same race, let alone win it. 

We are at the point where there needs to be a duty of care to creators, from both distributors and platforms. This starts with selling the right dream. Some artists may only ever have a thousand fans (or fewer) who want to listen to their music. That should be embraced as an aspirational goal, not failure. Service offerings should be geared around helping creators understand what their realistic (but aspirational) goals should be, and helping them achieve them. Not a nudge and a wink implication that they can all become superstars.

If this does not happen, we are heading towards a massive creator backlash, driven by a generation of creators wondering why they are not superstars yet. And that is not in the interest of any of the industry’s stakeholders, except perhaps the homes of superstars.

The just-in-time model in the wider economy has underpinned an unprecedented amount of consumption, and that comes with its own set of challenges, especially with regards to sustainability. It has also contributed to, as the Guardian put it, “the growth of low-wage, often more precarious jobs, with workers recruited only when they would beneeded. This constant squeezing of workers has fuelled our 24/7 work culture and the mental health problems that go with it, while attempts to cut the price of labour have added tothe growth of economic inequality, regardless of who sits in government”. All of which sounds remarkably similar to the plight of many of today’s artists.

Spotify’s audiobooks move is another brick in the audio wall

Streaming has come a long way since its days as a pure music service for super fans. Spotify’s announcement that it is making 15 monthly audiobook hours available to premium subscribers is simply the latest step in a journey that has seen streaming become the 21^st century’s take on radio. This has been achieved with the steady addition of non-music content (podcasts and audiobooks especially) and a growing emphasis on programmatic lean back consumption. As with all change, when it sits in an extended period of transformation, its immediate impact is often under-recognised. Audiobooks are the completely natural and logical progression for Spotify (and other DSPs), but they are also another waymarker in the journey away from being a pure play music service.

The pandemic was a catalyst for audiobook consumption. Audiobooks had been around for a long time already, with Audible leading the charge, but it was the sudden increase in non-allocated time that people found themselves with that triggered a coming of age for the format. Listening surged, including of podcasts, but as normal life slowly returned, audiobook consumption dipped again, though to a higher point than pre-pandemic levels. 

In many respects, Audible never really managed to push the format out of its niche foundations, with weekly active user (WAU) penetration still stuck at around 10% (Q1 23). DSPs though, represent the opportunity to mainstream the proposition – something that Deezer identified many years ago by becoming the first DSP to integrate audiobooks. Deezer was, however, probably a little too early, launching audiobooks when streaming was still almost entirely about music and still very lean-forward. Now, streaming is the soundtrack to our everyday lives. It is about filling the silence (or blocking out the noise) more than active listening. In this use case, spoken word audio is just as good a fit as music. In fact, it can often be a better fit. For example, getting lost in the narrative of an audiobook can make a daily commute fly by a lot quicker than simply listening to a playlist, in large part because it commands your attention.

Spot the important shift there? Audiobooks can turn passive listening into active listening in a way that music cannot so easily do. Music carved out hours for streaming by being passive, and now audiobooks and podcasts can colonise those hours with active consumption. The more active usage becomes, the more engaged a user is and the less likely they are to churn. Music did the hard yards; audio reaps the rewards.

Music rightsholders have long been concerned about audio eating into listening hours, less because of the cannibalisation of hours and more so because of the risk of DSPs using that as a basis for negotiating down the share of the subscription fee that gets paid to them. 15 hours of audiobooks may not sound like a lot but it represents close to 40% of the monthly music listening hours of the average subscriber. There is a good chance that there will be strong uptake, not least because over half of audiobook WAUs are also Spotify WAUs (which will probably give Audible pause for thought).

Of course, from Spotify’s perspective at least, the benefit of reducing music rightsholder fees simply to replace them with book publisher fees would be self-defeating. That is unless Spotify can secure the latter for less. But there is another crucial variable at play: original content. Back in 2020, when Spotify was hiring its head of audiobooks, the job description included the following: “Develop, pitch and oversee production of high-quality content”.  Just as with podcasts, audiobooks represent an opportunity for Spotify to develop original content and improve its margins.

Forget peak Netflix, this is the attention recession

Netflix’s Q1 2022 results caused a stir, with subscriber numbers down by 0.2 million from one quarter earlier. Some are calling this ‘peak Netflix’, but this is not a Netflix-specific issue. The decline illustrates that Netflix does not operate in isolation, and is, instead, but one part of the interconnected attention economy – an attention economy that is now entering recession. This is a recession that MIDiA first called back in February 2020, and that the wider marketplace has started to wake up to.

The attention recession – after the boom

When MIDiA made the prediction of ‘the coming attention recession’ over a year ago, we identified that once the world started returning to pre-pandemic behaviours, the Covid-bounce in entertainment time would recede, creating an attention recession. The attention economy had already peaked back in late 2019, which meant that the pandemic and its lockdown attention boom delayed the inevitable negative effects of companies that are competing in a now saturated attention economy. During the lockdown boom, media time went up by 12% and all forms of home entertainment boomed, but as we warned at the time, the effects were temporary, so entertainment companies needed to plan for post-lockdown life. 

A return to a smaller and recently constrained, pre-pandemic attention economy was always going to be painful. We termed this contraction a recession because we knew there would be clear economic aftershocks. Not least because the impact has been unevenly felt. As the first signs of contraction showed, not all sectors were impacted evenly. Pandemic boom sectors, like audiobooks and podcasts, saw larger chunks of their newly-found consumption time disappear. Music clawed back some of its lost share. Video (Netflix included) fell, but social and social video buckled the trend entirely, not simply clawing back some lost share, but actually growing throughout the entire pandemic period to end it with more hours than when it entered it. The arithmetic is simple: total attention hours are falling, social is growing hours, therefore, the remainder of the attention economy collectively experiences a double whammy of decline of time and money. 

The wider economy is beginning to bite too

But, unfortunately, there is more. Since MIDiA made the case for an attention recession, the global geo-political and economic situations have changed – to put it mildly. Inflation was already spiking before Russia invaded Ukraine, and the war’s impact on grain and energy supplies will only accelerate inflation even further. Put simply, consumers will feel growing pressure, with wages racing to keep up with price rises. Discretionary entertainment spend will be one of the earliest victims. Video subscriptions inadvertently made themselves an easy target. The sheer volume of choice and competition, combined with rolling monthly subscriptions, make it all too easy to drop one subscription without seriously denting your overall video experience. But while streaming services now face a potential savvy switcher cataclysm, traditional pay-TV companies have their subscribers locked into legally binding, long-term contracts. It usually costs consumers MORE money to cancel contracts, defeating the purpose of trying to reduce spend. Consequently, we may even see the cord cutting / SVOD growth dynamic invert for a while.

Back in 2020, when we first started writing about the potential impact that an economic recession would have on entertainment, we identified that 22% of consumers would cancel one or more video subscriptions, and that 22% would downgrade from paid to free on music. Netflix’s earnings are the first signs of this consumer intent manifesting. Other subscription video on demand (SVOD) services should not consider themselves immune. Even if the economy was to stabilise tomorrow, the long-term outlook for SVOD will most likely be defined by savvy switchers continually hopping across services to watch the shows they want. SVOD subscribers had found themselves thinking the new boss looked pretty much like the old boss, having to subscribe to so many services that their SVOD spend ended up looking a lot like those old pay-TV bills. In a recession, consumers will need SVOD to deliver on the price benefit more than ever before. 

When price increase can be hindrance, not a help

A lot has been made of how great a job Netflix has done in increasing its prices while streaming music has not – heck, even I did it. Increasing prices above the rate of inflation may a) reflect Netflix’s actual market worth, and b) help drive revenue growth, but it makes Netflix exposed in a hyper-competitive SVOD market that is entering an attention recession and, potentially, an economic recession. 

Circumstances may well look very different for music. Firstly, the vast majority of music subscribers only have one subscription, so if you cancel, you lose all the benefits of a paid account, not just a slice of choice. Secondly, music subscriptions have reduced in real terms because they have not kept track with inflation. In fact, prices have hardly moved at all in 20 years. While this has long been seen as a problem, in the current circumstances, it might be an asset. Music subscriptions represent good value for money, and with inflation pushing upwards, they will represent even better value for money as every month passes. Perhaps now is not the best time for music price increases.

Reasons, not ways, to spend attention

So, with all this doom and gloom, how can entertainment companies survive – perhaps even thrive? Long term, annual billing for digital subscriptions is a logical step, but for those who do not have them, now is not the best time to try to commit to large payments, unless there is some serious discounting in place. Multi-format bundles, like Apple One and Amazon Prime, will also be well placed. Ad supported services will also do well. But it will take more than clever billing and bundling. It will require a fundamental reassessment of the relationship with the audience.

One of the key calls MIDiA made in our 2022 predictions report was the new need for reasons, not ways, to spend attention in the attention recession:

“[Entertainment companies] will not only lose time, but end up lower than pre-pandemic levels. With such fierce demands on their time, audiences will need to be given reasons, not ways, to spend their attention.”

This might also be the moment for the next generation of emerging tech majors like Byte Dance and Tencent who’s businesses have a strong focus on ad supported and monetizing fandom rather than the commodified model of monetizing consumption. As Facebook’s declining user numbers showed, even in the booming social sector, a realignment of the marketplace is happening.

In the attention recession, entertainment companies need to start appreciating that consumer attention is a scarce resource, not an abundant one – a resource that must be won, not claimed. Those who do not will be the most vulnerable to the vagaries of the attention recession.

Spotify chose audio over music, but bigger decisions lie ahead

The symbolism behind Spotify’s support of Neil Young removing his music from the platform, rather than Joe Rogan’s podcast being removed for peddling vaccine misinformation was inescapable. For many, this was a highly public test of whether Spotify put audio or music first, and audio won. For a company that still makes more than 95% of its revenue from music, that is a big call. But, of course, in this particular instance we are talking about a catalogue music artist versus a superstar frontline audio creator. Rogan is one of Spotify’s biggest audio bets, and audio is Spotify’s biggest strategic bet, so it would take a lot – a real lot – to see Spotify consider pulling the plug on the controversial podcaster. Yet, that is exactly the sort of decision Spotify is going to have to start considering before long, and if it does not, then the decision might be made for them.

Becoming a media company

Spotify’s audio problem actually has remarkably little to do with the music business, and everything to do with media company regulation. Back in the mid-2010s, Facebook started its transition from platform to media company, pushing away from a pure focus on users’ content and towards professional created media. In doing so, Facebook found itself beginning to face the same sort of regulatory scrutiny as traditional media companies. It cried foul, trying to make the argument that it was more platform than media company and, therefore, not subject to traditional media company regulation. Facebook won some battles along the way, but it also lost a lot too, catalysed by milestones, such as the Cambridge Analytica debacle and Facebook’s use by Russian covert powers to influence the US presidential election. Throughout this, Facebook, now Meta, has fought tooth and nail to try to build a case of exceptionalism and for the internet to regulate itself. But for many regulators and law makers, the arguments do not pass muster. So much so, in fact, that the case for a new, dedicated regulatory body is building, and supported by no other than a former FCC chair.

Spotify’s case is even more complicated in that it is paying for the content in question, making it much more difficult to build a platform argument. Added to that, regardless of how much money Spotify has invested in Rogan, outspoken podcasters around the world will be looking at this as a test case for whether their freedom of speech is safe on Spotify.

The growing regulatory momentum matters to Spotify because:

1. It is going through the exact same platform-to-media company transition that Facebook went through
2. Support for regulation is stronger now than it was in the mid-2010s. Spotify could find itself getting caught in the same regulatory drag net as social media companies and regulated in the same way at the same time, or close to

Fragmented fandom looks very different in audio than music

Spotify’s audio challenges are not, however, limited to regulation. Spotify is learning the hard way that it is far, far easier to serve the fragmented fandom of music than it is of audio. There are not too many people in the world who feel the strength of antipathy towards other music genres as socialists do against conservatives, and so forth. There is no such thing as mass-market political opinion. Opinions polarise, more so now than ever. The best you can hope to address is a majority of opinion, but even that is scarce, and will be equally disliked by the remainder. This is the nature of modern-day politics and culture. Of course, Spotify understood this going into audio – it is why it has both Joe Rogan and Michelle Obama on its audio roster. But whereas having a diverse music catalogue is a consumer benefit (i.e., more choice) for audio, diversity can be divisive, as Joe Rogan’s continued presence illustrates.

Dealing with Neil Young is one thing, but if there is a flurry of younger, frontline artists that voice concern, then Spotify may need to take action. It will be betting that most, newer frontline artists lean towards political neutrality for fear of upsetting portions of their fanbases. Many artists, and their labels, will be asking themselves whether Rogan is too popular within their fanbases to make a stand. The days of the politically active, protest singer are a thing of the past. Perhaps more realistic an option is for artists somewhere between new and old (eg Beyonce, Coldplay) to take a stand, artists that feel confident enough in their beliefs and their fanbases to make a stand while still being culturally relevant.

Time to choose? 

So, Spotify’s future as an audio company may not only be shaped by external regulation, but it may also have to regulate itself – culturally and politically. There is good reason that the global media landscape is defined by three key types of outlet: liberal / left; neutral; conservative / right. That reason is that it is really hard (perhaps impossible) to simultaneously appeal to both sides of the political divide. If you want to pursue the middle path, that means removing much of the sort of content that drives streams. There is no Joe Rogan in the middle path. Which means that Spotify is probably going to have to decide upon a political leaning, even before it feels the heavy hand of media regulation.

Music subscriber market shares Q2 2021

MIDiA’s annual music subscriber market shares report is now available here (see below for more details of the report). Here are some of the key findings.

The global base of music subscribers continues to grow strongly with 523.9 million music subscribers at the end of Q2 2021, which was up by 109.5 million (26.4%) from one year earlier. Crucially, this was faster growth than the prior year. There is a difference between revenue and subscribers – with ARPU deflators, such as the rise of multi-user plans and the growth of lower-spending emerging markets – but growth in monetised users represents the foundation stone of the digital service provider (DSP) streaming market. So, accelerating growth at this relatively late stage of the streaming market’s evolution is clearly positive.

Spotify remains the DSP with the highest market share (31%), but this was down from 33% in Q2 2020 and 34% in Q2 2019. With Apple Music being a distant second with 15% market share, and Spotify adding more subscribers in the 12 months leading up to Q2 2021 than any other single DSP, there is no risk of Spotify losing its leading position anytime soon – but the erosion of its share is steady and persistent. Amazon Music once again out-performed Spotify in terms of growth (25% compared to 20%), but the standout success story among Western DSPs was YouTube Music, for the second successive year. Google was once the laggard of the space, but the launch of YouTube Music has transformed its fortunes, growing by more than 50% in the 12 months leading up to Q2 2021. YouTube Music was the only Western DSP to increase global market share during this the period. YouTube Music particularly resonates among Gen Z and younger Millennials, which should have alarm bells ringing for Spotify, as their core base of Millennial subscribers from the 2010s in the West are now beginning to age.

But the biggest subscriber growth came from emerging markets. Between them, Tencent Music Entertainment (TME) and NetEase Cloud Music added 35.7 million subscribers in the 12 months leading up to Q2 2021. Together, they accounted for 18% of global market shares, despite being available only in China. Yandex, in Russia, was the other big gainer, doubling its subscriber base to reach 2% of global market share.

Combined, Yandex, TME and NetEase account for 20% of subscriber market share, but they drive 37% of all subscriber growth in the 12 months leading up to Q2 2021.

The strong growth in subscribers holds an extra meaning going into 2022. The surge in non-DSP streaming in 2021 means that the streaming market is no longer dependent on the revenue contribution of maturing Western subscriber markets (nor indeed ARPU-diluting emerging markets). With non-DSP streaming revenue looking set to have contributed between a quarter and a third of streaming revenue increase in 2021, streaming revenues look set for strong growth, even if subscriber growth lessens. That is what you call a diversified market.

A little more detail on the subscriber market shares report:

The report has 23 pages and 13 figures featuring country level subscriber numbers, revenues and demographics by DSP. The accompanying data set has quarterly subscriber numbers and annual revenue figures from Q4 2015 to Q2 2016 by DSP by country, with 33 markets and 27 DSPs. The report and dataset is available to MIDiA subscribers hereand also available for individual purchase via the same link.

Email stephen@midiaresearch.com for more details.

Major label revenue surged in 2021, but what does that mean?

2021 was an anomalous year for the recorded music market. Two of the majors did an IPO, the pandemic continued to disrupt the marketplace, and major label revenues grew at unprecedented rates. If the fourth quarter majors’ earnings follow similar seasonality patterns to previous years, collective major label recorded music revenue will be up by 29% in 2021, reaching $19.6 billion (a more bearish estimate is $19.3 billion). By way of comparison, 2020 growth was 6%, and 2019 was 10%. To put it another way, major label revenue increased by $787 million in 2020, and in 2021 it was up by $4.4 billion. 2021 was a red-letter year for the major labels, but was it a one-off or an industry pivot point?

To get to the answer, we first need to contextualise major label revenue growth within the wider market. 

Streaming 

Predictably, streaming was the core driver of major label revenue growth in 2021, accounting for 67% of the revenue, and up by 31% to reach $12.8 billion. That level of annual streaming growth has not been seen since 2016. 2020 streaming growth was 18%. But streaming’s leading player, Spotify, did see that kind of growth. Spotify’s full year 2021 revenues look set to hit €9.6 billion (which would be up by 22% from 2020), and if we only consider premium growth (i.e., the part that is not boosted by podcast revenue), then growth was just 19%. And it is not as if Spotify is losing much ground in the global streaming market – its subscriber growth was largely in line with the global market average (excluding China). So, the majors grew streaming faster, somewhere beyond Spotify.

The total market

The major labels’ total revenue growth also follows a different trajectory to other parts of the market, The year-to-date performance of just one of the top four recorded music markets matches the majors’ trend (bear in mind that these four markets were 62% of global label revenues in 2020, so they shape global growth trends):

• US: 27.1% growth (H1) – RIAA
• Japan: -1.0% (Jan-Nov) – RIAJ 
• UK: 8.7% (FY) – ERA
• Germany: 12.4% (H1) – BVMI

(It will be interesting to see how the IFPI allocates the revenue. There may well be quite a gap between their global total and the sum total of all the individual countries if this is indeed largely attributable to one off payments rather than reflecting organic, country level revenue.)

All of this means that the additional major label growth is likely reflective of factors such as:

• Large, one-off payments from the likes of ByteDance, Twitch and Facebook
• Licensing income from the same parties
• Increased contribution from other markets
• Market share increase from catalogue acquisitions 
• Revenue growth from major-distributed independents
• Organic market share growth

While all of these factors will be at play, it is the first two factors that are likely the most consequential. MIDiA estimates that these new non-DSP streaming income sources accounted for between $0.8 and $1.2 billion in 2021. Even at the lower end of the estimates, that revenue alone would have driven the same amount of growth in 2021 as all major label revenue growth combined in 2020. 

There is a clear narrative that post-digital service provider (DSP) revenue is now becoming a central growth driver for the recorded music business. Clearly a very beneficial narrative to have had during an IPO year, especially if the trend was accentuated by one-off payments and settlements – which would help explain the divergence between major label growth and local market growth. 

There are two key potential scenarios:

1. Upfront payments for post-DSP streaming partners exceed organic mid-term revenue, resulting in slower growth rates in 2022 and 2023
2. Post-DSP streaming partners meet / exceed expectations, making 2021 and 2022 look much like the late 2000s and early 2010s did for DSP streaming, with minimum guarantees being more often than not 

So, by 2023 we should be able to tell whether 2021 was a spike or a pivot point. If I was a betting man, I would probably put money on the outlook being closer to 2 than to 1.