The Frank Ocean Days May Be Gone, but Streaming Disintermediation Is Just Getting Going

At the start of this month Apple struck a deal with French rap duo PNL. PNL are part of a growing breed of top-tier frontline artists that have opted to retain ownership of their masters. In our just-published Independent Artists report (MIDiA clients can read the full report here)we have sized out the label services marketplace, and when it is coupled with artists direct (i.e. DIY) the independent artist sector was worth 8% of the entire recorded music business in 2018.

While that number may sound relatively modest, it is growing fast and represents the future. Traditional label deals are not disappearing, but they are becoming just one component of an increasingly complex recorded music revenue mix. This is the industry context that enables initiatives such as Apple’s PNL deal and both Spotify and Apple backing Aaron Smith, who incidentally is signed to artist accelerator Platoon, which is a company that Apple acquired in December 2018.

Independent artists open up new opportunities for streaming services

When Apple did its exclusive with Frank Ocean back in 2016it caused such an industry backlash that UMG head Lucian Grainge banned his labels from doing exclusive deals and the movement seemed dead in the water. If there was any doubt, Spotify kicked up so much label ill will when it launched its Direct Artists platform that it officially shuttered the initiative in July. However, now we are seeing that there many more ways to skin the proverbial cat. It is perfectly possible to disintermediate labels without having to actually disintermediate them. Doing an exclusive with an independent artist or giving him / her priority promotion is doubly effective for streaming services as:

1. Record labels have no right to complain because independent artists have just the same right of access to audiences as label artists
2. The more exposure independent artists get, the more their market share will grow, which will lessen record labels’ market share, which makes it harder for them to resist and easier for the streaming services to start making bolder moves down the line

Ambiguity will be the shape of things

Even this structure plays into the traditional view of labels versus the rest. The new truth is much more nuanced. For example, when Stormzy was duetting with Ed Sheeran at the Brits, signed on a label services deal to WMG’s ADA, was he a Warner artist or an independent artist? He was, of course, both. The evolution of the market will be defined by progressively more of this ambiguity, which will give streaming services equally more ability to not only play to these market dynamics but to stress-test the boundaries. The simple fact is that streaming services will become ever-agnostic with regards to artists’ commercial partnerships and in turn they will become a more important component of the value chain. Apple Music did the PNL deal because they had much more commercial flexibility dealing with an independent artist than dealing with a label artist. At some stage, labels will have to decide whether they want to revisit the exclusives model. Without doing so, they may not get a seat at the new table.

Streaming Music Health Check Deep Dive: Trial Hopping

At MIDiA we have just published our latest streaming report: ‘Streaming Music Health Check: Streaming’s Watershed Moment’. In it we combine the latest streaming revenue data, subscriber numbers and consumer data to create the definitive assessment of where the streaming music market is now at. The report and accompanying dataset is available to MIDiA Research clients here. For more on how to become a MIDiA client to get access to this report email us at info AT midiaresearch DOT COM

The full details of the report and key findings are listed below, but here’s a small excerpt from the report exploring the issue of trial hopping.

Free trials are a crucial means of converting streaming users to paid subscriptions, especially when deployed with auto opt-in billing. Although often close to half of these opted in users cancel after their first payment (ie immediately after they realize they have been billed), trials are a proven conversion tactic. That is, until users game the system by hopping from one free trial to another by simply signing up with multiple different email accounts. In the case of Apple Music (which has a 3-month free trial), this means that a user can get a full year’s worth of music by simply changing email address (and iTunes account) three times.

Although this phenomenon is fairly niche across the total population, more than a quarter of respondents that identify themselves as music subscribers do this according to MIDiA’s latest consumer survey data (fielded in September). This means that in a worst-case scenario, between a fifth and a quarter of music subscribers are in fact freeloading trialists hopping from one trial to another.

Nearly a fifth of subscribers also use free trials to get access to exclusive albums. Combine this with email hopping, and Apple and Tidal may find their exclusives strategies are less effective at winning over Spotify subscribers than they had hoped.

Key Findings (data points have been removed from this preview but are included in the full report):

• By September 2016, Spotify had X million subscribers while Apple had X million
• Competition is hotting up with announcements from Amazon, Pandora and Vevo
• Each of the three major labels experienced strong streaming year-on-year revenue growth in Q2 2016: Sony (X%), Universal (X%) and Warner (X%)
• In Q2 2016, major label download revenue fell by $X million quarter-on-quarter
• Subscribers rose from X million in Q2 2015 to X million in Q2 2016 with Spotify and Apple driving the growth
• X% of all streams were mobile, rising to X% for Napster
• X% of all streams come from playlists, however, just X% come from push playlists
• X% of UK subscribers say that playlists are replacing albums, while X% are using curated playlists more than 6 months ago
• Just X% of Swedes spend more than $10 on music, reflecting that subscriptions have capped spending of super fans
• X% of subscribers have changed subscription service, falling to just X% in Sweden thanks to Spotify loyalists
• X% of UK subscribers sign up to multiple streaming trials with different email addresses, while X% use free trials to get access to exclusive albums

Companies mentioned in this report: Alphabet, Amazon, Anghami, Apple, Beatport, Deezer, Google, iHeart, KKBox, Last.FM, MelOn, MP3.com, Napster, Orange, Pandora, QQ Music, Rdio, Sony Music, SoundCloud, Spotify, Tidal, Universal Music, Vevo, Warner Music, YouTube

Report Details

Pages: 16
Words: 3,985
Figures: 8

For more on how to become a MIDiA client to get access to this report email us at info AT midiaresearch DOT COM

How Apple Music And Tidal Transformed Streaming (And Why Apple May Be Buying Tidal)

 

It is 15 months since the launch of Tidal (which was 2 months after Jay-Z’s Project Panther Bidco bought Aspiro) and it is 12 months since the launch of Apple Music (which was a year after Apple bought Beats Music). The streaming world has changed a lot in that time and both those companies have had a disproportionately large amount on influence on the market’s direction of travel. Their arrivals defined Spotify’s role as incumbent while simultaneously casting Apple and Beats as challengers. They have performed their roles of disruptive entrants well, reshaping the competitive marketplace with a strong focus on brand and artist exclusives. Now reports emerge that Apple is in talks to buy Tidal. First victory in the exclusives war or overspending for market share?

When Is An Exclusive And Exclusive?

In the streaming video world an exclusive means exactly that. If you want to watch ‘House Of Cards’ you need Netflix, if you want to watch ‘Man In The High Castle’ you need Amazon Prime. But in music the rules are far more flexible.

Looking at the flagpole exclusives across Apple Music, Tidal and Spotify, most of these are available on other platforms as downloads, while many are available to stream. For example, Beyoncé’s ‘Lemonade’ is only available to stream via Tidal but was available to download on iTunes within 24 hours of release. Understandably, the exclusive albums of each company’s respective godfather are genuinely exclusive. But Rihanna’s ‘Anti’ was given away by Samsung while Spotify’s rock legends exclusives are streaming only.

Apple is beginning to push the envelope though, pitching creative solutions to labels and artists, resulting in output like videos for The Weekend and Drake. At the same time it is beginning to look suspiciously like a record label with the release of Chance The Rapper’s ‘Colouring Book’ mixtape. The net result of all this clamouring to be seen as the ‘home’ of an artist is resounding confusion and frustration for music fans. An avid TV fan may well accept the need to have both a Netflix and Amazon subscription because no video service claims to have all the TV shows and movies on the planet. However, the central proposition of streaming music services is exactly that…or at least it was until Tidal and Apple Music upset the the apple cart (ahem). The irony is that in scoring a quick win against Spotify, Tidal and Apple may have fundamentally undermined the long term positioning of the entire streaming music product.

Exclusives Cannot Recreate The 1990s

Apple Music’s head of original content Larry Jackson has said he wants to make Apple Music to emulate the success of MTV in the 80’s and the 90’s, creating the sense that artists ‘live there’. It is an admirable goal but the music world of the 2010’s is a dramatically different one. In those days there was scarcity (you had to buy music to listen on demand) and there was a finite amount of radio and TV. It was possible to control both the message and the audience. Now we are in the Era of Distributed Audiences where people are simultaneously in multiple digital places, with artists and labels racing after them in all those places. No amount of exclusive windowing is going to change that. The genie is well and truly out of the bottle.

The Economics Of Exclusives

Where the streaming video and streaming music markets match up is that content budgets are currently being used to drive user acquisition. While streaming services have a long way to go before they reach Netflix’s $6 billion annual content budget, both types of streaming service will overspend to get market share and will reel budgets back in later. So it should be no surprise that the amounts being spent on artists don’t really add up.

For example, Apple is reported to have spent $19 million on Drake and was rumoured to have bid up to $25 million for Harry Styles. If Styles had signed, even if he had racked up the same number of streams as Drake on Spotify in 2015 (1.8 billion, the highest number of any artist) he would still only have generated gross revenue of $18 million and net revenue of revenue of around $14 million, leaving something like an $8 million loss for Apple when Apple Music’s additional retailer margin is factored in. Apple would however have been able to make up the remainder on album sales, but Styles would have needed to have shifted a good number of albums. (Adele’s ‘25’, the biggest selling download album in the US in 2015 drove around $15 million in label revenue.) So for now, it takes selling albums to make the economics of streaming exclusives add up.

Jay-Z paid $56 million for Aspiro’s 512,000 subscribers, $110 per subscriber. Assuming he’d want a similar per subscriber price, that would put Tidal’s price tag at around $440 million. That’s no small amount of money for around 5% of the global subscriber market. Or to put it another way, Apple could another 23 Drake exclusives for that money which most likely would have a bigger impact on subscriber growth. Indeed, on all growth measures Apple Music has outperformed Tidal over the last 12 months, adding 12.5 million new subscribers to Tidal’s 3.1 million, growing by an average of 1.4 million subscribers a month compared to 0.3 million for Tidal. Apple even has the edge in % growth terms (352% compared to 328%).

So why is Apple in the market for Tidal (albeit reportedly)? Probably more than anything it is about taking an irritatingly threatening competitor out of the market. Tidal has been stealing Beat’s core customer base from right under its nose. It’s no coincidence that Apple Music’s exclusives strategy has had a strong urban bias. Apple wants its Beats customers back, just like it wants its iTunes customers back from Spotify.

Even if Apple does buy Tidal, don’t expect the exclusives wars to go away. Indeed, Spotify just acquired its own exclusives supremo in the shape of Troy Carter, and Apple clearly has its mind set on continuing to spend heavily. So the next few years of streaming will be  defined by streaming services getting closer to artists (with Connect becoming much more important for Apple) which in turn will see the distinctions between what constitutes a streaming service and a record label blur all the more.

As science fiction write William Gibson wrote: the future is already here, it’s just not evenly distributed yet…