Everyone hurts – the problem with ‘fixing’ streaming

Apple’s Q4 2022 revenue fall was further illustration that the global economic environment is affecting everyone. During such times, companies look for ways to avoid the worst of the impacts, partially through ‘efficiencies’ but also through growth, by exploring new income streams and improving deal terms. The music industry is no exception. With global streaming revenues slowing – despite a strong performance from Spotify– there is growing pressure on music rightsholders to identify new growth drivers. This is especially the case for major labels, who have new institutional investors who have become acclimatised to rapid growth. All of which leads to streaming royalties taking centre stage. But the problem is that everyone in the streaming ecosystem has problems with the model. So, can any fix make everyone happy? [TL;DR, no]

To heavily oversimplify, streaming has three main constituents:

• Creators (songwriters, artists, etc.)
• Rightsholders (labels, publishers, distributors, CMOs, etc.)
• Streaming services 

At the start of 2023, all three have issues with streaming:

1. Songwriters continue to push for higher royalties while long and mid-tail artists cannot make streaming economics add up
2. Publishers continue to lobby for higher rates while UMG is now advocating for a new royalty system
3. Spotify just reported a net loss of nearly half a billion dollars for 2022

Then add in all the perennials: too much music being released; no artist longevity; the commodification of music; listening fragmentation; the decline of superstars etc.

We have a streaming market in which none of the stakeholder groups feel entirely content with the current market and all would like a larger share of the revenues to flow to them. Because they all extract value from the same revenue pot, the arithmetic is simple: one stakeholder’s gain is another’s loss.

None of this is an argument for, or against, the relative merits of the case of any of the three main interest groups. But it does mean that any change to the system will leave someone unhappy. This is the impossible equation that must be balanced.

What further complicates matters is that market benefits to different stakeholders can be perceived as negatives to others. For example:

• Streaming helped democratise the means of production and distribution. Long-tail and mid-tail artists benefit, and superstars lose their share
• Streaming helped make music the soundtrack of daily routines. Suppliers of mood music benefit, traditional artists, and labels lose listening share
• Streaming helped level the playing field, making it easier for smaller labels to compete. Larger labels faced stronger competition

The debate around new royalty regimes has been around for some time, but momentum is picking up. When the CEO of the world’s biggest record label weighs in, then you know that change is going to come. But as the above illustrates, what might make a major label happy, has the potential be detrimental to other stakeholders. There is no ‘make everyone happy’ fix.

Here are two pragmatic alternatives:

Lean forward premium 

One of the cleanest fixes would be to create a two-tier royalty system based on the nature of the plays:

1. Lean forward plays (higher royalty): when a consumer plays from their own collection or seeks out a song to play it
2. Lean back plays (lower royalty): when a consumer listens to music in an algorithmic ‘radio’ channel or listens to curated playlists

As with all streaming ‘fixes’, the approach would not be without problems. Mood-based music would certainly find itself generally collecting a smaller share of royalties, but also, many of streaming’s hits (including those from majors) rely on driving larger numbers of streams in curated playlists and ‘stations’ – which in turn help fire up the algorithms and power songs to further success.

Penny per stream

Another approach would be a fixed stream rate, which would effectively mean metered streaming. For example, if every stream generated $0.01, a subscriber would be able to listen until their subscription fee was used up, with the ability to top up to listen further or upgrade to a higher capacity tier. This would certainly help drive increased ARPU (something all parties want) but could deter some subscribers as it would mean an end to the all-you-can-eat (AYCE) proposition. But maybe it is time for that. Music is not a scalable resource in the way that, say, mobile data is. Everyone’s song is someone’s creation. Also, there would need to be a solution for free streams.

Don’t forget the listener, ever

Of course, there is a massive missing detail in all of this, the missing stakeholder in the streaming economy: the listener. Crucially though, for all the problems creators and rightsholders face, consumers are not complaining en masse. They are content with a proposition that not only represents exceptional value for money but that also evolves to meet their tastes and behaviours. 

Streaming’s problems are supply side issues, not demand-side. All industry stakeholders should be careful about pushing solutions that could favour the supply side without proper consideration of the demand side. The history of business is littered with the corpses of companies that did not properly consider the needs of their customers.

Streaming was built for yesterday’s music business

The saying goes that in a good compromise, no one is truly happy. So, there is an argument that streaming is already the balance of compromise. Against this though, streaming was built for an industry that is very different than today, so it is only logical that the model needs honing to catch up, and many of streaming’s second-order consequences cannot be undone. On the demand side, music consumption has become commodified, transformed from a largely artist-centric fan experience (radio excepted) into an audio soundtrack to everyday life. On the supply side, there are simply more people than seats at the table.

Any significant ‘fix’ is going to come at one, or more, stakeholder’s expense. And even then, increased royalties will only go so far. For example, an independent label artist might expect to earn around $2,000 from a million streams (after distribution and label deductions). Members of a four-piece band would thus take home $250 each. Even doubling the standard royalty rate (which could not happen without breaking the entire model) would still only mean $500 each, which is not going to turn streaming into a living wage for most mid-tail artists, let alone the long-tail. So, ‘fixes’ will only go so far. Perhaps it is time to double down on building new things on top of and around streaming, and nurture those that already exist (Bandcamp, etc.). 

Absolutely continue to focus on improving streaming economics but do so alongside building a new industry infrastructure that is built to meet the needs of today’s creators and business rather than those of the noughties. In short, grow the pie rather than simply look at how to re-slice it.

Has the streaming slowdown arrived?

ERA, The UK trade association for entertainment retailers released its annual estimates for the UK entertainment market, showing strong growth for video but less impressive increases for music and games. The streaming slowdown has been on the cards for some time now and there is an argument that the strong growth recorded in 2021 was boosted by the combination of the global economy’s catch-up process that year, following the pandemic-depressed 2020 and the extra impetus delivered by upfront payments for non-DSP streaming. By Q3 2022, global label streaming revenues were up by 7%, compared to 31% for the same period one year earlier. Now ERA estimates* that UK retail streaming revenues were up by just 5%. Meanwhile, the BPI – whose numbers are based on actual market data – reported total audio streams were up by 8% in the UK. A clear streaming market trend is beginning to emerge.

There are no two ways about it, 2023 is going to be a challenging year. The sheer volume of disruptive trends is unprecedented in modern times, and this comes at the exact same time that the Western music streaming market is beginning to slow. A perfect storm. But slowdown does not need to mean decline, at least not for subscriptions. MIDiA’s data shows that consumers are going to cut down on going out and on real live events before cancelling subscriptions, and because they will be going out less, they will need more to keep them occupied at home. So, streaming subscriptions (music, video, and games) may prove to be the affordable luxuries that keep consumers entertained throughout the coming year. Holding onto subscribers should, therefore, be an achievable goal – adding large numbers of new subscribers, though, may be a step too far, particularly in markets most impacted by the economic headwinds. Emerging markets might be a different story.

Ad supported though, is a different story. If overall consumer spending softens, then so too will ad spend. With ad revenues representing 27% of all streaming revenues, a significant drop in ad revenue in 2023 (e.g., -8%) could, in a bear-case scenario, be enough to slow overall global streaming revenue growth almost to a halt. Non-DSP was a major driver of industry growth in 2020 and 2021, but as most of it is ad supported, this segment is far more vulnerable to economic pressures than subscriptions. Non-DSP is a segment for periods of plenty, perhaps less so for times of scarcity.

If the global streaming market finishes 2022 with the 7% growth that it is currently tracking to be, it will be entirely in line with the bear-case scenario that MIDiA published last year. We would much rather have had it tracked to our growth-case rate of 27% but, unfortunately, this looks like it may be one of those situations where MIDiA’s glass-half-empty view proved to be on the money.

The next few months will provide a much clearer picture, with the big labels, publishers and DSPs reporting their full year figures. Until then, consider this the first note of caution.

For more insight on what 2023 may hold, join the MIDiA analyst team for our free-to-attend 2023 predictions webinar on Wednesday 11^th January.

* ERA did a major restatement of its 2021 figures – upscaling them by a fifth from the £1.3 billion that it reported in 2021 to £1.6 billion, having changed the underlying assumptions for its estimates.

Why Amazon Music is primed for success

Amazon Music today announced that it was extending the number of songs available on its Prime Music tier from two million to one hundred million. It is kind of a big deal, but not that big a deal when you consider the actual value of these additional 98 million tracks. With around 2.5 million new songs being uploaded to streaming services every single month, the simple truth is that most people will not listen to most of the catalogue. Prime Music already had a good chunk of the most valuable tracks, now it has all of them, alongside tens of millions of streaming detritus. And yet, the catalogue increase is actually really important, but because of what it represents rather than what it actually is.

A dark horse no longer

Back in the mid-2010s, MIDiA first identified Amazon as being the dark horse of streaming music, but these days there is no doubting Amazon Music’s thoroughbred pedigree. It has the third-largest subscriber count of any Western streaming service and will likely pass Apple Music in second place sometime within the next twelve months, quite possibly sooner. But what makes Amazon Music so important to the music industry is not just its size but its audience segmentation. Which is a good part of the reason it just unlocked those extra 98 million tracks for Prime Music users.

Prime Music has come a long way

When Amazon launched Prime Music, it was not exactly with exuberant support from music rightsholders. So much so that Universal Music did not license it until 15 months later (making Amazon the only global scale streaming service that was able to successfully launch without all three majors on board). At the time, Prime Music looked risky to rightsholders: just as subscriptions were beginning to get traction, along comes a service that gives consumers a music subscription experience, free at point of access. So, rightsholders insisted on a limited catalogue size to ensure that it did not risk cannibalising potential 9.99 subscriptions. Over the years, rightsholders unlocked extra slices of catalogue, but today’s announcement is the genuine step change. 

A segment-based approach

So what changed? The market did. Now, as subscriptions reach maturing in most of the world’s bigger music markets, rightsholders are shifting focus from full frontal growth to a more segmented approach that can unlock growth pockets in otherwise mature markets. This is no easy task when they provide broadly similar licenses and the same catalogue to all streaming partners. But Amazon has managed to make a silk purse out of sow’s ear, launching a stack of different streaming products and deploying them strategically across different markets. If you need convincing, take a look at its product availability list. While most streaming services have built their audiences around mobile-centric millennials, Amazon has managed to build an audience that looks very different. 34% Prime Music users listen to music on a smart speaker compared to 14% overall consumers, while 22% are aged 55+ compared to 9% Spotify users. 

Competing around everyone else

Rather than just competing with the other streaming services, Amazon Music has competed around them. In doing so, it has expanded the addressable market for streaming, helping mature markets still grow strongly (while YouTube Music has been having a similar effect at the opposite end of the age spectrum, converting younger subscribers at scale). It is in this later stage of streaming growth that the more segmented partners, like Amazon and YouTube, become so important to music rightsholders. Unlocking 98 million more tracks, reflects both this elevated importance and an understanding among rightsholders that enhancing Prime Music will grow the market around Spotify and co., not at the expense of them. 

Another super power

On top of all this, Amazon Music has another super power at its disposal: emerging markets. These regions have long been identified as the driver of future growth, but they have also struggled to deliver in many cases. Markets like India and China number their free streaming users in the hundreds of millions, but paid users in the tens of millions (in China’s case) and single millions in India. Ad-supported revenue massively lags subscription revenue, even in Western markets, but in lower per capita GDP markets, ad spend is even smaller. Prime Music is proving to be a happy middle ground in markets like Brazil and India, striking the balance between scale and ARPU. With premium subscriptions needing time to find their audiences, Amazon looks set to become an ever more important partner in some of the key emerging and mid-tier markets.

When Amazon first launched Prime Music, the value proposition: pay for free shipping and get a music service for ‘free’, or as Amazon puts it, as a perk of membership. Now though, Prime is becoming much more than just free shipping, it is an ever-expanding household subscription in which entertainment now plays a central role (the recently announced Amazon Music Live / Thursday Night Football line-up is a case in point). As we enter a global recession, where consumers will likely cut back on buying things, a free shipping subscription could look like an unaffordable luxury. But a music and video service that has the benefit of free shipping suddenly looks like a value-for-money proposition. Prime may not be recession proof, but music and video certainly reduce its exposure to risk. The value equation in Prime Music is beginning to shift, as is Amazon’s role in the global music business. From dark horse to top-tier player in half a decade is no mean feat. 

Music and podcasts are competing for the same time

The pandemic changed media consumption. Consumers acquired an extra 12% of entertainment time and though everything was up, some categories grew much faster than others. One of the biggest gainers was spoken word audio, with podcasts and audiobooks seeing dramatic rises and while music hours grew too, the increase was below 12%, which means that music lost share. In the current entertainment environment of plenty this may be an academic concern, but when life returns to some form of normality (commutes, going out, gyms etc.) some or all of that extra 12% of entertainment time will go, which means that growing by less than the market average could translate into decline.

The data in MIDiA’s latest podcast report (Podcasts audiences: Competing for Attention) shows that the audience behaviour is lighter touch than either music or radio, with the majority of users listening to a smallish number of episodes and subscribing to relatively few podcasts. This matters because if this growing audience sticks with podcasts, then they will listen to more podcasts content as their habits deepen. So podcasts will have two key growth drivers:

1. More listeners
2. More time per listener

This is a very different story than for streaming music, especially in developed markets, where growth is slowing in both consumption and audience. Music is just one lane in the audio market and its fortunes ever more intertwined with podcasts and audiobooks. Which means that spoken word audio plays a role in slowing audio consumption. To illustrate the point, here is what is happening on Spotify:

• European and North American MAUs grew by just 1.4% (Q1 2021)
• In some emerging markets consumption levels had not only fallen during the pandemic but remained below pre-COVID levels (Q1 2021)
• Global consumption hours continued to ‘grow meaningfully’ (Q1 2021)
• Podcast hours reached an ‘all time high’ (Q1 2021)
• Total content hours per MAU fell by 1% (FY 2020)

In short, Spotify’s total consumption is relatively flat on a per user basis, with podcast growing fast, which means the average Spotify user is listening to less music. As Spotify is both the leading music streaming platform globally and the most widely visited podcast platform, what happens on Spotify has a big impact on the wider market.

The Spotify metrics present a clear correlation but are not evidence of causality, i.e., are podcasts directly cannibalising music streaming? Which is where we get to turn to MIDiA’s latest podcast data again. Although more than a third of music streaming users are listening to more audio overall because of podcasts, more than a quarter are listening to less music directly because of podcasts and a slightly higher share the same for radio (again, because of podcasts).

There are only so many hours in the day and while the pandemic gave many consumers more hours for entertainment, even in that environment, music hours lost out to podcast hours. Right now that will not feel like much of a problem because there are more people listening to and paying for streaming now than before the pandemic. So everything is bigger than before. But with the slowdown coming, the beneath-the-surface, per user metrics are going to start translating into much more obvious, above the line trends. Audio is booming, of that there is no doubt. The question is whether there is enough space for streaming, podcasts and audiobooks to all grow?

Assessing the streaming opportunity: You’re doing it wrong

Buoyed by lockdown, streaming enjoyed another strong year in 2020, up 17.1% on 2019 according to MIDiA’s recorded music market shares report. But the revenue slowdown will come in 2021, driven by the maturation of the big music markets (e.g. US, UK, Australia) and the growth of emerging markets. Identifying emerging markets growth as a slowdown factor might sound oxymoronic but the lower ARPU in these markets means that subscriber growth and revenue growth are becoming uncoupled. Look no further than Spotify’s earnings: subscribers were up 25% in 2020 but premium revenue was up just 17%, driven by a premium ARPU decline of -9%. Despite the dampening effect of emerging markets, they will be crucial to future growth – yet much of their potential may go untapped. The reason is all to do with how the music industry measures the opportunity, and that approach needs to change.

Anyone who has seen, or prepared, an investor presentation will be familiar with the total addressable market (TAM) concept. It is the big number that is used to impress investors with just how big the market opportunity is. The framework is also widely used in the music business to illustrate how much growth remains for streaming. But it only tells part of the story, and crucially it can be highly misleading – especially so for the streaming music market.

When MIDiA works on market opportunity projects for clients we always take the next two steps in the TAM approach: serviceable addressable market (SAM) and serviceable obtainable market (SOM). Here’s how it works:

• TAM is how big the pond you are fishing in is
• SAM is how many fish there are in the pond
• SOM is how many fish you are likely to catch

TAM: you’re doing it wrong

The obsession with the TAM can be problematic because, while it results in impressive-sounding numbers, it is not a useful measure for understanding what a company or sector can actually do. If you are one person fishing in a lake, it does not matter how big the lake is nor how many fish there are; you and your fishing rod can only catch so many fish. When Spotify announced its extra 85 markets in February it said it was bringing its service to ‘more than a billion people’. That might give the impression of representing massive future growth, but it is simply the TAM. In fact, the figure is more than the TAM because only a sub-component of that one billion have mobile data plans – the industry’s principal TAM measure. In order to understand where the streaming market can really go, we need to go deeper and lay out the SAM and SOM.

The SAM and SOM layers are even more important for emerging markets than developed markets. There is a tendency to assume that because most people listen to music in some way or another, they are all addressable by music. But this is not the case. Most people, at least in developed markets, read – but that does not mean they all buy books, magazines or newspapers. The same applies for music.

Going beyond the TAM hype

In order to get beyond the TAM hype, MIDiA is building a new TAM, SAM, SOM model for music and we are for the first time going to use it to drive our forecasts (we have previously used a weighted scorecard methodology). One of the key reasons for the shift is to better understand just how much, or little, opportunity can be tapped in emerging markets with currency pricing strategies. Although subscriptions are much cheaper in emerging markets in dollar terms, when they are looked at in affordability terms, a very different picture emerges. Take India: the average headline cost of a subscription is just 15% of what it costs in the US. But when looked at on a purchasing power parity (PPP) basis (i.e. a measure of relative affordability) it is five times more expensive. Therefore in India, one of the world’s lower per-capita GDP markets, music streaming has been priced for the well-off, urban elites. And that is fine, as there are plenty of them. But it means that streaming subscriptions are out of reach for the majority of the population, which means that it is irrelevant to refer to India’s 1.4 billion people when talking about the opportunity, unless prices are reduced by a fifth – something music rights holders, at least Western ones, are currently loathe to do.

To better determine the market opportunity, MIDiA is using the following approach:

• TAM: A hybrid measure of people with smartphones and data plans (including assessing the ratios between them)
• SAM: The share of the TAM that is interested to some degree in paying for music
• SOM: The SAM with additional discounts for factors such as a PPP measure of streaming pricing and urbanisation rates

Although this approach results in much smaller end figures, it is a much more useful way of understanding where music subscriptions are likely to get to in the next five to ten years. It also helps us better segment the emerging market opportunity, with some regions, such as the Middle East and North Africa, coming out much stronger – in large part because of better affordability in relation to per-capita GDP.

I appreciate we are giving away some of MIDiA’s ‘secret sauce’ here, but we think that this is such an important issue that we want to highlight it to as many people as possible. If your research provider (internal or external) is providing you with TAM figures to assess the market opportunity, then they are simultaneously under-selling you and over-selling the market opportunity.

The COVID Bounce and the coming Attention Recession

2020 was by any measure a unique year in modern times. While the societal impact of the pandemic was, and continues to be, horrific, for the entertainment industries it was a year of plenty. At the start of the pandemic, MIDiA Research estimated that there would be an extra 15% of consumption time for the average working consumer. Well, now that the end of year data is in, we can confirm that this ‘COVID bounce’ did in fact happen, with overall consumption time up by 12%. When you consider that the working population is only a subset of the overall population, that 12% means that we were pretty much on the money with our prediction. But while this uplift was seen right across entertainment, some formats did better than others and, crucially, some of that extra time will diminish whenever it is that the population starts returning to work and going out again. Which means that for the first time ever in the Attention Economy, there will be an Attention Recession, with very obvious potential ramifications for all entertainment companies.

The full results of MIDiA’s highly detailed COVID media consumption study is now available to MIDiA clients in the report ‘Media consumption: Lockdown’s attention boom’ and the accompanying dataset. Here are a few of the high-level findings.

• Everything was up: 2020 was a case of a high tide rises all boats, with all forms of entertainment increasing average consumption time. Video consolidated its position as the leading format in terms of hours spent, but the largest percentage gains were in games (30%) and non-music audio (24%). Consumers even increased their time doing nothing / chilling, illustrating that despite the unsettling chaos of the pandemic, consumers found more time to relax and also to contemplate. Interestingly, doing nothing increased by a greater rate than listening to music.
  
• Audiobooks were audio’s big winner: While podcast listening was up by an impressive 35%, audiobooks were lockdown’s biggest winner, increasing average time by nearly 50%. The radio and music businesses’ obsession with podcasts is understandable given how much focus the likes of Spotify, Amazon and Apple have placed on them, but the audiobooks category has emerged as the dark horse of the piece. When all audio time is considered together (radio, music, streaming, podcasts, audiobooks), audiobooks now account for a similar share of total time as podcasts do. Though music streaming was up too during lockdown, it grew more slowly than podcasts and audiobooks so was flat in terms of total share. Radio lost share. The shift is reflected in Spotify’s numbers: its average content hours per monthly active user (MAU) fell by 1% in 2020. Given that this figure includes podcasts, the inferences are: a) Spotify lost share of audio time, and b) music hours fell. It wasn’t just Spotify that did not keep pace with the audio boom. Even apps like the BBC’s Sounds saw a fall in the ratio of weekly to daily users. 
  
• Casual gamers boosted games: Games’ growth was driven both by core gamers using the former commute time to get in some extra time on their consoles and gaming PCS. But the biggest growth was driven by mobile casual games. In previous years, mainstream consumers had driven a games surge, adopting titles like Candy Crush, but then shifted much of this time to the likes of Netflix and Spotify as the Attention Economy saturated. With more time on their hands in lockdown, mainstream consumers flocked to casual games once again. This will be a likely casualty of the coming Attention Recession.
  
• Music is just one lane in audio: COVID-19 catalysed many pre-existing trends; the audio shift was one of those. Just as Netflix took TV out of the TV, podcasts took radio out of radio and contributed to a wider trend of consumers taking an increasingly format-agnostic view of audio. Breaking long-held habits in lockdown, audiences were able to try out new things and, given that we are nearly a year into the lockdown era, establish new behaviours that will remain to some degree post-pandemic (if that is ever a phrase that will really ring true). Traditional habits like the commute and exercise will now see audiobooks and podcasts competing for music time like never before. For music companies, this means that they need to understand they are now in the audio business and they are predominately just competing in one lane. This does not mean that they inherently need to become ’audio businesses’, but it does mean that they need to build strategies that account for this shift. Meanwhile, Amazon once again emerges as the dark horse with music, podcasts and – via Audible – audiobooks. Amazon looks set to be a big beneficiary of the lockdown legacy.

If you are not yet a MIDiA client and would like to learn how to get access to the ‘Media consumption: Lockdown’s attention boom’ report and data then please email stephen@midiaresearch.com.

Why Spotify needs Russia

Spotify’s delayed Russia launch finally happened this week. While it did not drive a stock price growth like the Josh Rogan deal did (the stock closed just 1 cent higher than the previous day’s close) it will actually prove much more important in the medium term.

Podcasts are Spotify’s long-term bet, the moon shot that keeps investors excited and that points to a future where Spotify is better able to plot its own destiny without being constrained by record labels. But that future destination does not mean anything if Spotify is unable to maintain strong growth in its core business in the interim. Which is where Russia comes in.

Spotify has an Apple-like problem but chose a very non-Apple solution

Global streaming revenue growth was 22% in 2019 and growth will slow significantly in the COVID-19 impacted 2020. Growth rates however were already slowing due to the maturation of developed western markets, while subscriber numbers were growing faster than revenues, pushing down ARPU. Spotify has the same challenge as Apple.

Apple is the market leader in smartphones but does not own the majority of the market and the overall smartphone market is slowing, which means that iPhone sales have slowed. Apple could have decided to go ‘down market’ and created cheaper devices for less affluent consumers and emerging markets. It decided not to, and instead to start pushing its top-end devices even higher up the market with higher price points. Spotify has taken the opposite approach. Rather than increase prices in high-value markets, it is prioritising lower ARPU emerging markets. Spotify has done so because a) it does not have a diversified product like Apple so is less able to risk slowing sales, and b) its product is not sufficiently differentiated from other streaming services to prevent churn if prices went up.

Betting big on emerging markets

Instead of focusing on maximising revenue growth among existing subscribers, Spotify is rolling the dice on subscriber growth. It keeps telling investors to measure it on growth and market share, and that is exactly the game Spotify has chosen to play. Which is where Russia comes in.

Emerging markets are where the subscriber growth lies: Asia Pacific, Latin America and Rest of World combined will drive 71% of global music subscriber growth between 2019 and 2027. Spotify is already committed to this strategy and is already seeing results. In its Q1 2020 earnings, Latin America and Rest of World were the workhorses of Spotify’s growth during the quarter, accounting for 73% of all new subscribers; one year previously the share was just 30%.

But emerging markets take time to convert, users need to get familiar with the service via ad supported and extended trials before slowly converting to paid, though always at lower rates than in developed markets due to lower spending power. So, Spotify needs to keep expanding the user acquisition funnel which means launching in populous new markets such as Russia.

Russia’s contribution to the global picture is what matters for Spotify

The question many are asking is, has Spotify left it too late for Russia? There is no doubt that 2019 was a big year for streaming in Russia, with revenues growing at 79% to reach $249 million in retail terms, which makes it a sizeable, but not (yet) a large market. By way of comparison, Brazil’s streaming revenues are comfortably more than double that. As of Q1 2020 there were 7.4 million subscribers with Vkontakte and Yandex commanding a combined market share of 80%, so Spotify is entering an established market with well-established indigenous players.

This is not Spotify’s modus operandi and the last time it took this approach was India, which is yet to deliver results. So Russia is unlikely to be a runaway success for Spotify, but it is entirely reasonable for it to expect to pick up three million subscribers there over the next three years, which in turn will help sustain Spotify’s global subscriber growth. This is not about winning in Russia but instead winning globally. Or put another way, Spotify needs Russia more than Russia needs Spotify.

Why the Music Industry Needs Bytedance to Disrupt It

Back in September 2018 I suggested that Spotify faced a Tencent risk,with the potential of Tencent launching a competitive offering in markets that Spotify is not yet in. This would effectively divide the world between Spotify in Europe, Americas and some of Asia, and Tencent potentially everywhere else. Since then, Tencent has been distracted by acquiring a 10% stake in Universal Music. The fact it is now reportedly looking for partners to share the investment could point to Tencent getting spooked by slowing streaming growth in the second half of the year, something MIDiA predicted in November last year. Meanwhile, as all this was happening, Bytedance’s TikTok has become a global phenomenon – adding 500 million users in 2019 to reach 1.2 billion in total. On the back of this success, Bytedance has picked up Tencent’s dropped baton and has been working on a subscription service that now looks set for a December launch. The streaming market desperately needs a breath of fresh air; the only question is whether music rights holders feel bold enough to let Bytedance launch something truly market changing.

Change, but remain the same

TikTok has undeniable scale, even though the 1.5 billion figure likely refers to installs rather than active users. While it is certainly bigger than previous music messaging apps, the tech graveyard is full of once-promising, now-dead or near-obsolete ones (Musical.ly, Flipagram, Dubsmash, Ping Tunes, Music Messenger etc). In order to ensure it does not go the way of its predecessors (i.e. burn bright but fast) TikTok must learn how to expand and evolve its content offering but remain true to its users’ core use cases. The smart digital content businesses do this. Facebook and YouTube have both dramatically changed their content mixes since launch, yet fundamentally meet the same underlying use cases they started out with. It is essential for TikTok to ensure it grows with its young audience in the way Instagram has – otherwise it risks following the unwelcome path of its predecessors.

Do first, ask forgiveness later

The three global-scale consumer music apps which are genuinely differentiated from the rest of the streaming pack are YouTube, Soundcloud and TikTok. All three have one thing in common: they did first and asked forgiveness later. Rather than coming to music rightsholders to acquire rights and then building platforms around whatever rights they were able to secure, they built apps, built scale and then entered into serious licensing conversations. Crucially, they did so from a position of strength. The rest managed to secure fundamentally the same sets of rights, resulting in a marketplace of streaming services that lack differentiation. They all have the same catalogue, pricing and device support. They are even competing largely in the same markets. They are forced to differentiate with extras, such as playlists, personalisation and branding. This contrasts sharply with the highly-differentiated streaming video market and is the equivalent of the automotive market telling everyone they have to buy a Lexus but can choose what colour paint they want. Those three disruptors did exactly that: they disrupted, and in doing so fast-forwarded the rate of innovation.

The music market needs Bytedance to do something transformational

This is the context in which Bytedance is building a music subscription service. What the music market really needs is for this to be something that builds on the ethos and use cases of TikTok rather than becoming a cookie-cutter “all you can eat” service. Soundcloud and YouTube both found themselves dumbing down their core propositions in order to launch music subscriptions. Now, with streaming growth slowing, the market needs a disruption more than ever. It needs a Plan B to reinvigorate growth.

It is all too easy to say that rights holders have held back the market, and in some respects they have. But they also have an obligation to protect their rights and core revenue source: streaming. Indeed, there is an argument that YouTube is currently holding back streaming potential by delivering such a compelling free proposition – something that would not have happened if it had licensed first and launched later.

Emerging markets testbed

Music experiences from China, Japan and South Korea look very different from the ones that have come from the West, whether you are looking at Tencent’s music apps or K-pop artists. While there is a temptation to say that these reflect the unique cultural make ups of their respective markets, in all probability much of it will export. Indeed, we already see this happening with the success of BTS and of course TikTok in Western markets. What unifies these experiences is monetising fandom rather than consumption (which is what Western services do). The problem is that it is difficult for music rightsholders to agree with digital service providers (DSPs) on how much of the assets monetised in fandom platforms should bear royalty income, and just how much. This is one of the main stumbling blocks in monetising fandom.

Emerging markets may be the perfect testbed. We have already seen this approach in Brazil, where Deezer launched a prepay carrier-billing-integrated 60% discounted music bundle with local carrier TIM and has enjoyed strong subscriber growth as a result. The fact that Bytedance may launch first in emerging markets such as India, Indonesia and Brazil suggests that this approach may be being followed. If so, there is a chance that we might see something genuinely innovative coming to market.

While this may not yet constitute the Tencent risk model, there nonetheless remains a chance that Bytedance could end up being an emerging market counterweight to the Western market incumbents. The streaming market needs something new to up the innovation ante; let’s hope Bytedance can take on that mantle…

Why Music Streaming Could Really Do with a Disney+

The music and video streaming markets have long been best understood by their differences rather than similarities, but the flurry of video subscription announcements in recent months have upped the ante even further. New services from the likes of Disney, Warner Bros, Apple and AMC Cinemas point to an explosion in consumer choice. These are bold moves considering how mature the video subscription business is, as well as Netflix’s leadership role in the space. Nevertheless, Netflix is going to have to seriously up its game to avoid being squeezed. The contrast with the music streaming market is depressingly stark.

Diverging paths

The diverging paths of the music and video subscription markets tell us much about the impact of rights fragmentation on innovation. In music, three major rights holder groups control the majority of rights and thus can control the rate at which innovation happens. As a consequence, we have a streaming market in which each leading service has the same catalogue, the same pricing and the same device support. If this was the automotive market, it would be equivalent of saying everyone has to buy a Lexus, but you get to choose the colour paint. Compare this to video, where global rights are fragmented across dozens of networks. This means that TV rights holders have not been able to dictate (i.e. slow) the rate of innovation, resulting in dozens of different niche services, a plethora of price points and an unprecedented apogee in TV content.

Now, Apple and major rights holders Disney and Warner Bros have deemed the streaming video market to be ready for prime time and are diving in with their own big streaming plays. Video audiences are going to have a volume of high budget, exclusive content delivered at a scale and trajectory not seen before. There has never been a better time to be a TV fan nor indeed a TV show maker.

The music streaming market could really do with a similar rocket up its proverbial behind right now. The ‘innovation’ that is taking place is narrow in scope and limited in ambition. Adding podcast content to playlists, integrating with smart speakers and introducing HD audio all are important – but they are tweaking the model, not reimagining it. Streaming music needs an external change agent to shake it from its lethargy.

Do first, ask forgiveness later

The nearest we have to that change agent right now is TikTok. TikTok has achieved what it has by not playing by the rules. It has followed that long-standing tech company approach of doing first and asking forgiveness later. Sure, it is now locked in some difficult conversations with rightsholders – but it is negotiating from a position of strength, with many millions of active users. TikTok brought a set of features to market that rightsholders simply would not have licensed in the same way if it had gone the traditional route of bringing a business plan, pleading for some rights, signing away minimum guarantees (MGs) and then taking the neutered proposition to market.

I recall advising a music messaging app client who was just getting going to do the right thing. I hooked him up with some of the best music lawyers, made connections at labels, and basically helped him play by the rules. Two years later he still hadn’t managed to get a deal in place with any rightsholders – though he had racked up serious legal fees in the process. Meanwhile, Flipagram had pushed on ahead without licensing deals, secured millions of users and tens of millions of dollars of investment and only then started negotiating deals – and the labels welcomed it with open arms. To this day, this is my single biggest professional regret: advising this person who was betting his life savings to play by the rules. He lost. The ‘cheats’ won.

We need insurgents with disruptive innovation

The moral of this story is that in the consumer music services space, innovation happens best and fastest when rights holders do not dictate terms. This is not necessarily a criticism. Rights holders need to protect their assets and their commercial value in the marketplace. They inherently skew towards sustaining innovations, i.e. incremental changes that sustain existing products. New tech companies looking to build market share, however, favour disruptive innovations that create new markets. Asking an incumbent to aggressively back disruptive innovation is a bit like asking someone to set fire to their own house. But most often it is the disruptive change that really drives markets forward.

Streaming subscription growth will slow before too long, and as a channel for building artist-fan relationships they are pretty much a dead end. There is no Plan B. Back in 1999 there was only one format; it was growing well, but there was no successor. Looks a lot like now.

Spotify, the Decline of Playlists and the Rise of Podcasts

The following is a small excerpt from MIDiA’s forthcoming third edition of its ‘landmark State of the Streaming Nation’ report. For more information about this report email stephen@midiaresearch.com

Most things that Spotify does are scrutinised and cross-examined within an inch of their lives, with vested interests trying to second guess what may be the intended or unintended consequences for them. Most actions are viewed through the disruption lens i.e. how will this hurt or compete with Spotify’s rightsholder partners? The streaming market is of course so much more than just Spotify, but the company acts as a lightning rod for the wider market and most often sets the strategic agenda.

Spotify’s Two Phases of Growth

Two of Spotify’s most significant moves have been playlist curation and podcasts. Spotify is moving into the second major phase of its existence. Phase 1 was about establishing itself as a streaming music powerhouse, Phase 2 is about what it becomes next, extending beyond the streaming music beachhead. This is the typical trajectory of tech companies, establishing themselves in their core competencies and then expanding. This can either be a dramatic expansion – e.g. Amazon moving from eCommerce into video and music – or a more focused value-chain extension – e.g. Netflix moving from simply streaming other’s shows to making its own. For Spotify, playlists were a Phase 1strategy and podcasts are very much part of Phase 2.

Podcasts may just have come in the nick of time for Spotify because curated playlists remain much more about potential than they do reality. Just 15% of streaming consumers listen to curated playlists. In fact, of all the key streaming feature activities, curated playlists come lowest. Curated playlists are clearly not to streaming music what binge watching is to streaming video. Instead streaming activity is fragmented across multiple features and just 10% of streaming consumers regularly do all four of the activities listed in the chart above.

‘But wait’ I hear you ask, ‘that doesn’t make sense, look at all these streams we’re getting from playlists’. The key factor here is the difference between the number of playlist users and the number of playlist streams. Playlists over index in terms of contribution to streams. With dozens of tracks per list, lean-back playlist listening can easily generate more streams per user than lean-forward listening. Thus, we have one of the great emerging paradoxes of streaming: passive audiences can generate more streams, and thus rightsholder pay outs, than engaged, aficionados. However, a word of caution, should casual playlist listening become large enough, then the net result will be a dilution of the royalty pool and thus diminishing per stream rates.

Perhaps not the holy grail of promotion

A few years ago, playlists looked like the future of artist marketing, now they are looking a bit like a busted flush. They may be great at generating streams but are not so great at building an artist’s story. The near-obsession with Spotify playlists in label marketing strategy reflects the fact that most record label executives use Spotify and thus often have a Spotify-centric (and therefore playlist-centric) worldview. But labels are now beginning to question the artist ROI of playlists. The growing adoption among casual listeners only compounds matters and means that a playlist ‘hit’ does not necessarily do much to help long-term artist brand building. To put it simply: a playlist is not a shortcut to cultural relevance.

Podcasts could be bigger than streaming

Enter stage left podcasts. With its acquisitions of Gimlet, Anchor and Parcast, Spotify is betting big on podcasts. Already, more streaming users (18%) listen to podcasts than curated playlists while overall consumer podcast penetration is 11%. In Sweden – the early adopter market that gives us a view of where other markets are heading – podcast penetration is 19%, rising to 28% among streamers. Podcasts are a Netflix moment for radio and may even have the potential to be bigger than streaming music (US radio ad revenues alone are $16 billion). Right now, the growth in overall podcast audiences is fairly slow, but engagement is accelerating as are content creation, monetisation and distribution. It is not entirely inconceivable to think that five years from now, podcasts could be a bigger business for Spotify than music. Certainly, creators could be making much more money, even now.

While it remains more likely that music will be the core of Spotify’s business half a decade from now, all the early indications are that Phase 2 will mean a degree of diversification of user experience, business model and revenue stream, with podcasts at the vanguard. Playlists are not dead, but nor are they the golden child anymore.