Apple, Spotify and YouTube have all been grabbing the streaming headlines of late, albeit for different reasons. While these companies will continue to set the pace over the next couple of years (again, for different reasons) there is much more to the streaming market than these three. Here’s what three of the other main streaming contenders have been up to in recent weeks:
Apple today announced a much anticipated refresh to Apple Music at its WWDC event. Apple Music has found itself at the centre of long running criticism from many parts due to its perceived product weaknesses. This is the bar against which Apple is measured. It has spent years building a well earned reputation for high quality products so its users understandably measure its services by the same standards. Apple Music was a highly ambitious version 1.0 that has since been iterated to iron out user journey kinks. Now today’s feature announcements look set to move Apple Music onto its next stage.
Being An Early Follower Requires Super High Standards
As an early follower rather than a leader Apple always sets itself the challenge of being measured against incumbents that have had years to refine their product offerings. With hardware, Apple normally meets and exceeds those standards. With Apple Music it launched a product that was light years ahead of where most of the incumbents were at launch, but that didn’t compare as favourably against their current offerings. Google Music Play All Access faced a similar challenge. The streaming music market has evolved so much since Spotify and Deezer’s inceptions that a music service cannot now afford to simply launch with the basics. It must do so much more.
Image courtesy of the Verge
The revamped Apple Music includes a new simplified white interface, lyrics integration and better interaction with cloud libraries (a long running bug bear). These are not exactly step change innovations but they are a significant move forward in what is proving to be a process of continual change. Ultimately this update is about making Apple Music more intuitive and for it to make more sense to mainstream users. Is all this enough to blow Spotify and Tidal out of the water? No, but add in Apple’s bottomless pockets for exclusives and marketing, and you have a potent mix.
Apple also announced a subscriber milestone, hitting 15 million subscribers. The number suggest that Apple’s growth is beginning to outpace that of its key challenger Spotify. Last year I suggested Apple would reach 20 million subscribers by the end of 2016. These numbers show it is well on track. Apple could yet be the leading music service by the end of 2017 if it starts to fully leverage all its ‘unfair advantages’.
Other metrics that Apple announced included:
- 130 billion App Store downloads
- 2 million apps available
- $50 billion paid out to developers
- 60 million Apple News users
10 Years On, Music Matters To Apple Once Again
Apple Music matters to Apple not because it will generate large profits (it won’t) but because it is the pace setter for Apple’s strategic shift towards being a services company. Apple is building a new narrative for Wall Street that focuses on the revenue it generates from its existing customer base (in order to distract attention from slowing device sales). Apple Music is the proof of concept. If it gets Apple Music right it will demonstrate its ability to deliver on best-in-class digital services. And because Apple still hasn’t been able to launch its TV subscription (it instead launched a partnership integration with Sling TV) it needs to get Music right until it is able to get the requisite TV deals in place.
This why the stakes are so high for Apple Music. Get it right, Apple re-establishes its market leadership role. Get it wrong, Apple’s own rescue plan goes down the pan. Music was so important to Apple in the mid 2000’s because it helped sell the iPod which in turn became the platform for growth that Apple trades upon today. Now 10 years on music has just reassumed its importance, this time to help sell Apple itself not just its hardware.
This post has been updated following a conversation with the IFPI
The IFPI today announced its annual assessment of the size of the global recorded music business. For the first time in a long time the music industry has been able to announce a significant growth in revenue: 3% up on 2014 to reach $15 billion. Except that the growth isn’t quite what it first appears to be. In fact, the IFPI reported $15 billion last year for 2014, and for 2013 too. So on the surface that appears to actually be three years of no growth.
The IFPI has done this before. For example, it had previously announced a small 0.2% growth in 2013 (which was the big headline of the numbers that year). But it then downgraded that to a small decline the following year before then upgrading it to a small growth again in 2015.
The IFPI explained that they have retrospectively downgraded their 2014 number to $14.5 billion to reflect some changes in the way they report performance royalties (a minor revenue impact) and, more importantly, to create ‘constant currency’ numbers i.e. to try to remove the impact of currency exchange fluctuations. That approach works well for company reports but less well for the macro picture. The IFPI have to report this way as they are essentially summing up company reports, however when we are talking about global macro markets we run into difficulties, for example looking at music revenue as a % of GDP etc.
The approach also has the effect of generating very different growth rates. For example, if we assume that the top 10 music markets each grew at 3% in local currency terms in 2015, using the exchange rates the years took place (i.e. 2014 USD to local currency and 2015 USD to local currency) there would only have been 0.48% growth in US dollar terms. If, however, we take the constant currency approach we see 3.2% growth. When we are talking about individual companies there is a lot of value in reporting at constant currency rates as those companies are dealing with repatriating and recording revenue from across the world into their local reporting HQs. But when we are talking about global markets comprised of many local companies (e.g. the vast majority of South Korean and Japanese revenues stay in local companies so are not directly shaped by currency fluctuations) the methodology is less useful. The cracks really begin to show when you take the long view. For example if we went back 5 years with constant currency rates the value of the music business as a % of the global economy would be over stated.
So, with all that said, for the purposes of this analysis I am going to use as my baseline for comparison the IFPI’s previously reported 2014 numbers stated in its ‘Recording Industry In Numbers, 2015 Edition’. Here are some of the key takeaways (further charts at the end of this post):
- Revenue was flat: Despite all of the dynamic growth in streaming declining legacy formats (CDs and downloads) offset their impact, keeping revenues flat. Also, once performance and synchronization revenues are removed from the mix, revenue fell slightly. This highlights the industry’s transition from a pure sales business into a multi-revenue stream model. It also emphasises the fact that we are still some way from a recovery in consumer spending on music
- Downloads and physical still both falling: Download revenue was down 16% while physical was down 4.5%. The physical decline was lower than the 8% decline registered in 2014 and played a major role in helping total revenues grow. If physical revenue had fallen at the same rate as 2014 there would have been $0.25 billion less revenue which in turn would have brought total revenues down into decline. The Adele factor can once again be credited for helping the industry out of a sticky patch. The download decline was more than double than in 2014 (6.6%) and that drop is accelerating in 2016, with Apple Music playing a major role in the cannibalization / transition trend (delete as appropriate depending on your world view). What is clear is that downloads and subscription growth do not co-exist. Though it is worth noting that the move away form purchase and ownership is a bigger trend that long preceded Spotify et al.
- Streaming growth accelerating, just: Total streaming revenue was up 31% in 2015, growing by $0.69 billion compared to 39% / $0.62 billion in 2014. This is undeniably positive news for subscriptions and a clear achievement for the market’s key players. However, it is worth noting that over the same period the number of subscribers by 63%, up from 41.4 million to 68 million (for the record MIDiA first reported the 67.5 million subscribers tally last week based on our latest research). So what’s going on? Well a big part of the issue is the extensive discounting that Spotify has been using to drive sales ($1 for 3 months) coupled with 50% discounts for students from both Spotify and Deezer and finally the surge in telco bundles (which are also discounted). The number of telco partnerships live globally more than doubled in 2015 to 105, up from 43 the prior year. But even more significant was…
- Ad supported revenue fell: Ad supported streaming revenue was just $0.634 billion in 2015, down very slightly from $0.641 billion in 2014. YouTube obviously plays a role, and that was a key part of the IFPI’s positioning around these numbers. You’ll need to have been on Mars to notice the coordinated industry briefings against YouTube of late, and these numbers are used to build that narrative. But YouTube is far form the only ad supported game in town, with Soundcloud, Deezer and Spotify accounting for well over a quarter of a billion free users between them. Also, the IFPI doesn’t count Pandora as ad supported, one of the most successful ad supported models. Then there are an additional quarter of a billion free users across services like Radionomy, iHeart and Slacker. So the music industry doesn’t just have a YouTube problem, it has an ad supported music problem.
- Streaming ARPU is up but subscription ARPU is down: The net effect of streaming users growing faster than revenue is that subscriber Average Revenue Per User (ARPU) fell to $2.80, from $3.16 in 2014, and $3.36 in 2013. Ad supported ARPU was down from $0.10 to $0.08 while subscription ARPU was down. The fall in subscriber ARPU is down to a number of factors including 1) discounting, 2) bundles, 3) churn, 4) growth of emerging markets services such as QQ Music (monthly retail price point $1.84) and Spinlet (monthly retail price point $1.76). For a full list of emerging markets music service price points check out the MIDiA ‘State Of The Streaming Nation’ report. The irony is that the major record labels are increasingly sceptical of mid tier price points yet they have inadvertently created mid tier price points via discounted pricing efforts. Total blended monthly streaming ARPU for record labels was $0.37 in 2015. And if you’re wondering how ad supported and subscription ARPU can both be down but total ARPU up, that is because subscriptions are now a larger share of total streaming revenue (up to 78% compared to 71% in 2014).
So the end of term report card is: an ok year, with the years of successive decline behind us, but long term questions remain about sustainability and the longer term impact of incentivized growth tactics.
So the Beatles are finally coming to streaming…well much of the Beatles’ catalogue is at least. Is it a big deal? Kind of. The Beatles were late to iTunes and they’re now late to streaming. Fashionably late though. No so soon as to be left standing awkwardly waiting for something to happen and not too late to miss the real action.
The Beatles are unique enough, and important enough to dictate their own terms and set their own timetable. For streaming services the Beatles catalogue is strategically important in the way it was for iTunes in that it helps communicate the value proposition of all the music in the world…well most of it. For the Beatles it represents the opportunity to reach younger audiences that sales are currently missing (which in large part explains why the catalogue is being made available on free tiers too).
It’s All About Targeting
20 years ago everyone pretty much bought the same product, the CD. Now though the music consumer landscape is fragmented and siloed. The fact that Adele’s ‘Hello’ simultaneously delivered stellar performance across audio streaming, video streaming, download sales and radio illustrates that there are many highly distinct groups of consumers that do one but not the other. This what Universal will be banking on with bringing the Beatles to streaming: they’ll be hoping that most of the future prospective buyers of Beatles albums are not streaming. For as long as this elongated transition phase continues, this sort of approach can work.
What Happens When The Bottom Falls Out Of the Catalogue Business?
The business model of record labels has long depended on revenue from back catalogue propping up the loss-leading new artists, on whom labels have to spend heavily to break. That model works as long as back catalogue sales are vibrant. But cracks are now showing in that model. Labels, especially the big ones, are increasingly spending even more heavily on a smaller number of big bets. For major labels many of these are either manufactured or laser targeted pop acts that grow big fast but like genetically modified crops, soak the nutrients out of their fan-base soil and are less likely to have long term careers. This means breaking artists are costing more to break and have less long term revenue potential.
That double whammy in itself would be bad enough, but there is an even more important structural factor at play. Catalogue sales depend on people buying classic albums, reissues and retrospectives. The secret is in the term ‘sales’. The model does not translate the same way to sales. Getting someone to spend $10 on an album for old times’ sake that they might listen to a handful of times but value having in their collection is very different from earning $0.20 or so from the same number of listens. But that is the way the world is heading. Older music buyers (i.e. from late 30’s onwards) are the lifeblood of catalogue sales.
That model works for older consumers that grew up buying music and thus have the habit. But what happens what happens when the first millennials enter their late 30s? Which is exactly what is going to start happening from 2016 onwards. As each new cohort of aging millennials passes 35 a smaller percentage of them will have ever regularly bought music. Thus from 2016 onwards every year will mean an ever smaller number of catalogue buyers coming into the top of the funnel.
The long term implications are clear. While this will not be anything like an instant collapse, the impact will be progressively more painful as each year passes. The old label model of developing a vast bank of copyrights will become less and less relevant.
So Beatles, welcome to streaming, this will be your last new format hurrah.
The following are excerpts from recent MIDiA Research blog posts. If you’re not already signed up to the newsletter type your email address in the box on the blog home page and you’ll get analysis and data on the digital content economy straight to your inbox every Monday.
Spending money on recorded music has become a lifestyle choice, an honesty box for the conscientious consumer. No one really needs to pay for music anymore. That much is familiar to most, but what is new is that it is now manifesting itself in a new worrying way. In 2014 consumers actually spent less on digital music than they did in 2013. Though the drop was small – 1% – it was still nonetheless a drop at a period when digital spending should be booming. In some key markets the consumer spending decline was significantly larger, such as a 3% fall in the UK. Of course, overall digital music revenue grew globally in 2014 but all of that growth came from the 37% increase in digital music B2B revenues, such as advertising income and telco bundles. In short, the music industry is getting better at selling to businesses and worse at selling to consumers in the digital arena.
With B2B digital revenues 6 times smaller than consumer digital revenues the music industry is not about to suddenly become a B2B2C business. But the direction of travel indicates that there is a problem.
The music industry has long been viewed as a canary in the mine for how media industries transition into the digital era. In many respects that role has now been outlived. Book publishers quickly realised that after a few short years they had moved beyond where the labels had got to in 10. Meanwhile games publishers (mobile, console and PC) have learned how to monetize their super fans in a way the music industry could only dream of. But it is the video sector that provides the starkest contrast.
39% of consumers regularly stream music for free, nearly four times the rate that pay for music subscriptions. While free tiers of paid services play a clearly defined subscriber acquisition role, the purpose of standalone free services is becoming less clear-cut:
- Old favourites trump new gems: Half of free streamers say they use these services mainly to listen to music they already know. While it would be unrealistic to expect anything other than the most on-trend of super fan to be spending all their time sampling new tunes, these trends illustrate that free on demand streaming services are most used as consumption destinations.
- The end goal has changed: Just under a third of free streamers go onto buy the music of artists they discover on these service while 37% simply stream newly discovered artists more. Both use cases will coexist for some time, but with with music purchasing fading phenomenon, the latter will dominate.
The TV business is of course a vastly bigger one than music but it is, in years spent terms at least, at far earlier stage of its streaming subscription transition. And yet already there are more than twice as many online video subscribers as there are music subscribers and the nascent online video subscription market is already bigger than the entire recorded music business.
Even discounting the relative scales of each business, the comparisons illustrate the contrast between what can be achieved with a niche product aimed at largely male, high spending super fans (music) and the reach a lower priced, more broadly targeted product can do (even with the hindrance of limited catalogues).
The days of other media industries learning from the music industry are gone. Now it is time for the music industry to heed its lessons from its peers.
I just published a post over on MIDiA on why Apple Music has launched on Android. You can read the post here.
I’m going to continue to blog as usual here, especially the bigger think pieces – there’s one on next-gen labels coming tomorrow, but I’ll be using the MIDiA blog for more of the news-led quick takes.
We’ve launched a weekly MIDiA newsletter too which you can sign up to by adding your email in the box on the right hand side of our blog home page here. The newsletter comes out each Monday and includes analysis, research and data on music, online video and mobile content. Newsletter subscribers also get a free 28 page MIDiA report ‘The State Of Digital Music’.
The outstanding success of Adele’s single ‘Hello’ has stoked up the already eager debate around whether Adele’s forthcoming ‘25’ album is going to be a success. Indeed some are asking whether it is going to ‘save the industry’. One of the aspects that is getting a lot of attention is whether the album is going to be held back from some or all of the streaming services. The parallels with Taylor Swift’s ‘1989’ are clear, especially because both Swift and Adele are strong album artists, which is an increasingly rare commodity these days. But the similarities do not go much further. In fact the two artists have dramatically different audience profiles which is why streaming plays a very different role for Adele than it does for Swift.
Lapsed Music Buyers Were Key To the Success Of ‘21’
Adele’s ’21’ was a stand out success, selling 30 million copies globally. Core to ‘21’s commercial success was that the album touched so many people and in doing so pulled lapsed and infrequent music buyers out of the woodwork. The question is whether the feat can be repeated? In many respects it looks a tall ask. We’re 4 years on since the launch of ‘21’ and the music world has changed. Music sales revenue (downloads and CDs) have fallen by a quarter while streaming revenues have tripled. And the problem with pulling lapsed and infrequent buyers out of the woodwork is that they have receded even further 4 years on. In fact a chunk of them are gone for good as buyers.
But beneath the headline numbers the picture is more nuanced (see graphic). Looking at mid-year 2015 consumer data from the US we can see that music buyers (i.e. CD buyers and download buyers) are still a largely distinct group from free streamers (excluding YouTube). While this may seem counter intuitive it is in fact evidence of the twin speed music consumer landscape that is emerging. This is why ‘Hello’ was both a streaming success (the 2nd fastest Vevo video to reach 100m views) and a sales success (the first ever song to sell a million downloads in one week in the US). These are two largely distinct groups of consumers.
Streaming A Non-Issue?
As a reader of this blog you probably live much or most of your music life digitally, but for vast swathes of the population, including many music buyers, this is simply not the case. Given that the mainstream audience was so key to ‘21’s success we can make a sensible assumption that many of these will also fall into the 27% of consumers that buy music but do not stream. The implication is thus that being on streaming really is not that big of a deal for ‘25’ one way or the other. Whereas Taylor Swift’s audience is young and streams avidly, Adele’s is not. That is not to say there aren’t young Adele fans, of course there are, but they are a far smaller portion of Adele’s fan base than Swift’s.
60% of 16-24 year olds stream while just 20% buy CDs. Compare that to 40-50 year olds where 34% stream and 43% buy CDs. These are dramatically different audiences which require dramatically different strategies. Audio streaming is unlikely to be a major factor either way for Adele, neither in terms of lost sales nor revenue. Unless of course she ‘does a Jazy-Z‘ or ‘does a U2’ and takes a big fat cheque from Apple to appear exclusively on Apple Music. But I’d like to think she’d like to think she’d have the confidence of earning sales the real way.
The Importance Of The Digitally Engaged Super Fan
What unites Swift and Adele is that they are both mass market album artists and as such are something of a historical anomaly. Swift bucked the trend by making an album targeted at Digital Natives shift more than 8 million units. Adele will likely also buck the trend. But paradoxically, considering the above data, in some ways it will be a harder task for Adele. Swift has a very tightly defined, super engaged fan base that identifies itself with her. Adele’s fanbase is more amorphous and pragmatic. You don’t get ‘Adelle-ettes’. Swift was able to mobilise her fanbase into music buying action like a presidential candidate with a passionate grassroots following and big donors. The importance of digitally engaged super fans is the secret sauce of success for digital era creators. It is the exact same dynamic that ensured UK YouTuber Joe Sugg was able to leverage his fanbase to give his debut book ‘Codename Evie’ the biggest 1st week sales for graphic novel EVER in the UK this year.
If Adele and her team do pull off a sales success with ‘25’ they will owe a debt of gratitude to that 27% of consumers. While the odds are against it being quite as big as ‘21’ (simply because the market is smaller) it still has every chance of being a milestone event that will out perform everything else. But do not mistake that for this being ‘Adele saves the music industry’. Album sales are declining. Success from Taylor Swift and Adele are (welcome) throwbacks and they are most certainly not a glimpse into the future.
Back in August when Apple announced it had hit 11 million subscribers I predicted that would result in around 6 million paying subscribers. Yesterday Tim Cook announced that Apple Music now has 6.5 million paying subscribers, which translates into a 59% conversion rate. Or at least 59% of trialists paid for at least one month. As I wrote back in August, Apple will lose a share of those subscribers who will cancel after one payment (i.e. the ones who’d forgotten to cancel their payment details). Somewhere north of 1.5 million of those subscribers will likely not make it through to a second month’s payment. Which would leave around 5 million of those as long term subscribers.
The Acquisition Funnel Needs Widening
Cook also stated that the total number of users is 15 million which means that there are 8.5 million active trialists. Given that all the 11 million trialists reported 6 weeks after launch are now either gone or are subscribers that means all of those are additional trialists which gives us a monthly trialist rate of under 3 million or a little under 100,000 a day. Which is way below the 315,000 a day Apple had during the first 6 weeks (which is to be expected) but also below the 175,000 rate I had conservatively predicted back in August. So Apple’s funnel is not yet performing as strongly as expected. Given that most of Apple’s advertising for Apple Music is branding focused at the moment, we could expect that rate to augment steadily over the coming year as that brand message beds in. And it could lift significantly if Apple shifts focus to product centric marketing i.e. what it normally does. (The Apple Music ad campaign is rare for Apple in that it doesn’t involve any product imagery).
10 Million Cumulative Subscribers By Year End
If Apple continues at the current rate it should get to around 10 million subscribers by year end, of which 6 million or so will be active (i.e. not churned). Which is again below my August prediction of 8.7 million because the acquisition funnel isn’t delivering as anticipated. In revenue terms that would deliver cumulative subscriber revenue of $220 million by the end of the year. Apple has earned around $140 million in total so far, of which $100 has gone to rights owners.
And we shouldn’t understate the scale of Apple’s success so far, narrow funnel or not. It took Spotify 4 and a half years to get to 6.5 million subscribers. Granted, it was a very different world back then and much of that growth had come without the US and of course without the benefit of Apple’s integrated ecosystem. But even those considerations accounted for, Apple has gone from zero to hero in a flash. In August I stated ‘Apple is on track to be the number 2 streaming subscriptions provider after little more than 6 months in the game’ and that is exactly where they are now.
To Restate Or Not To Restate
Music Business Worldwide cites an insider source that Spotify is on the verge of announcing its own new numbers. It will be interesting to see the fine print of how those numbers are reported. Spotify has seen an uptick in subscriber growth at the same time it introduced its $1 a month for 3 months promotion, which is effectively a paid extended trial. Here’s the conundrum. If those numbers are reported as subscribers then expect terrible churn (for subscriber numbers) but if they are reported as trialists then conversion rates will be great but total subscriber numbers will not. Common sense would dictate Spotify reporting those numbers as subscribers (they are paying after all) but that means at some stage Spotify is going to have to restate its numbers or provide some additional guidance. Which incidentally Apple will also eventually have to do if it reports it cumulative 10 million subscribers at year end / early 2016 rather than the active subscriber number of around 6 million.
Apple and Spotify are now locked in a metrics arms race. Both will use every trick in their respective arsenals to make those numbers look as good as they possibly can. Whatever the outcome of that particular little spat, today’s numbers show us that even below its best, Apple just ran the first lap of a 5,000 metre race as if it was a 100 metre sprint. Let’s see if Apple can run an entire Mo Farah race at the speed of an Usain Bolt sprint.
Artist income is one of the most pronounced growing pains of the streaming era. While there are many contributory factors, such as transparency and non-distributable label payments, the most significant element by far is how much artists get paid. There are many moving parts to the equation, not least of which is how much labels themselves choose to pay artists, but even if labels doubled their payments to artists (which would be a good starting point for artists on 15% deals) the underlying dynamic would remain unchanged. Namely that consumers are switching from buying music (which generates large upfront payments) to accessing it (which generates smaller payments spread over a longer period that as things stand look like they could still add up to smaller amounts even in the longer run). If you’re a big super star artist or a major label this doesn’t affect you much as you get such a large chunk of the headline revenue. But a new approach is needed for the rest. Enter stage left the case for user centric licensing.
Under the current licensing model artists get paid on an ‘airplay’ basis i.e. what share of the total plays across the entire service the artist accounts for. This model can skew the revenue balance to the superstars who will get played by a very large share of the user base of a service. Under a user centric model an artist would get paid based on the share of an individual’s listening. So if a user spends half their time listening to an underground techno producer, half of the royalties go to that producer. In the existing model that producer would only get a tiny fraction of the royalties generated by that user.
Let’s take a look at how this could work (see figure). If a subscriber listens to Artist B 55% of the time but that artist only accounts for 0.5% of total listening, only 0.5% of the available royalties for that subscriber make it back to the artist. Whereas Artist A who the user didn’t listen to at all gets 10% of the royalty income. But in a user centric licensing model the artist would get 55%. The revenue changes from a paltry $0.004 to a more meaningful $0.49 (assuming a 15% royalty share from the label). And Artist A gets a fairer zero income for zero listening from that user.
Make no mistake, this model will be very difficult to license and the vested interests would likely resist it. But until we get to scale with subscriptions, we need to explore all ways of ensuring revenues are distributed on as equitable a basis as possible. This approach won’t fix all the artist-income ills of streaming but it will help smooth the transition.
I’m not going to pretend to take credit for this concept, it’s been quietly gaining momentum for some time now and the Trichordist has been building the case too. But now is the time to really start giving this approach some serious consideration. And if the incumbent streaming services are unable to implement user centric licensing because they are too close to the superpowers, then this is an opportunity for a new streaming service to seize the initiative and start to make some meaningful change.
I’m attaching the excel of this model so please go and stress test it yourself. Let me know your thoughts below.
The next 6 to 12 months could prove to be some of the most disruptive record labels have ever experienced, and nowhere will this pain be felt more than among smaller independent record labels with strong digital sales. At the heart of this disruption will be Apple Music and the wider continued ramping up of streaming. If Apple Music is a success over the coming year it will do one or both of the following:
- It will convert / cannibalize non-subscribing download buyers
- It will convert / cannibalize existing subscribers
The probability is that it will do a bit of both with an emphasis on #1. The market level net impact of #1 will depend on the degree to which Apple converts lower spending iTunes buyers versus higher spending ones i.e. whether it increases or lowers the average spend. But even if it is the latter the effect for smaller labels could still be net negative over the coming year. If you are a big label with hundreds of thousands or millions of tracks then you have enough catalogue to quickly feel major revenue uplift from 5 or 10 million new subscribers. If you only have a few hundred or a few thousand tracks though then the picture is less rosy.
The Listener-to-Buyer Ratio
At the core is the listener-to-buyer ratio i.e. how many new listeners you get for each ‘lost’ buyer. Let’s say that for every download sale lost due to an iTunes customer becoming an Apple Music subscriber transforms into 10 listens by 3 people within 12 months. So 30 streams instead of one download. The listener-to-buyer ratio here is 3:1. A generous assumption perhaps but let’s work with it. Against a base of $25,000 of download revenue that would translate into $6,250 less download revenue and $2,365 more streaming revenue. So a net loss of $3,885, a 16% decline.
If we reduce the average plays to 5 per user the revenue decline becomes 20%. In order for the revenue impact to be neutral the total new streams would have to be 80, which with a listener-to-buyer ratio of 3:1 would require each person to stream the track 27 times. Or alternatively a 8:1 listener-to-buyer ratio with 10 plays per user would also deliver no change in revenue. A great track could feasibly have an average of 27 plays per user per year, a good track could have 10. But an average track is going to be below both. So realistically, more than an 8:1 ratio is going to be required.
Scale Looks Different Depending On Where You Are Sat
What quickly becomes apparent is that the most viable route to ensuring Apple Music streaming revenue offsets the impact of lost iTunes sales revenue is as big an installed base of streaming users as possible. The more Apple Music users there are, the more likely more of them will find and listen to your music. This is why the scale argument so is so important for streaming and also why small labels feel the effect less quickly. If you have a vast catalogue you don’t need to worry too much about the listener-to-buyer ratio because you have so many tracks that you are a much bigger target to hit. The laws of probability mean that most users are going to listen to some of your catalogue.
Let’s say you are a big major with 1 million tracks out of the 5 million tracks that get played to any meaningful degree in streaming services. That gives you a 20% market share. But if you are an independent with 50,000 tracks that gives you 1%, 20 times less than the major. Which means that you are 20 times less likely to have your music listened to. And that is without even considering the biases that work in favour of the majors such as dominating charts and playlists, and other key discovery points. So in effect the major record label in this example could be 30 to 40 times more likely to have its music listened to. Which is why the listener-to-buyer ratio is unlikely to keep the major label’s exec up at night but could be the difference between sinking or swimming for the independent.
In all probability Apple Music will make streaming revenue a truly meaningful income stream for all record labels but in the near to mid term big record labels are likely to see a very different picture than the smaller independents.