Spotify pushes prices up, but do not expect dramatic effects

Spotify finally announced a significant price increase, raising prices in the UK and some of Europe, with the US set to follow suit. The increases affect Family, Duo and Student plans. The fact that streaming pricing has remained locked at $9.99 since the early 2000s is an open wound for streaming, so this news is important – but less so for actual impact than statement of intent.

Back in 2019 MIDiA showed that since its launch, Spotify’s $9.99 price point had lost 26% in real terms due to inflation while over the same period Netflix (which increased prices) saw a 63% increase. Price increases are a must, not an option. Not increasing prices while inflation raises other goods and services means that streaming pricing is deflating in real terms. In this context, Spotify’s move is encouraging, but it is not yet enough. The increases of course do not affect the main $9.99 price point, currently apply to a selection of markets and do not address the causes of ARPU deflation (promotional trials, uptake of multi-user plans, emerging markets). But let’s put all that aside for the moment and look at just what impact these changes will have:

  • Pricing: The increase is 13% for a Family plan and 20% for Student, both meaningful but below the 26% real terms deflation that was hit back in 2019. Averaged across all price points, the price increase represents a 10% uplift (in the markets where this is being done). By comparison, Netflix’s last major price hike averaged out at 11% across all price points, so it is line with that, though obviously Netflix had numerous other previous increases.
  • ARPU: ARPU (i.e. how much people are actually spending) matters more than nominal retail price points, which are subject to promotions and discounts. Spotify ARPU fell from €4.72 in 2019 to €4.31 in 2020. Let us conservatively estimate that would fall to €4.00 in 2021 without any price increases. Let us also assume that the announced price increases roll out to every single Spotify market (which of course they won’t) and let’s assume it all happened on January 1st 2021 (which of course it didn’t). On that basis, and factoring in what share of Spotify subscribers are on family and student plans, total revenue and premium ARPU would increase by 6.2%. ARPU would hit €4.25 (still below 2020) and premium revenue would hit €9.5 billion.
  • Income: Spotify would earn an extra €166 million gross margin, music rights holders would earn an extra €388 million, record labels €310 million and the majors €212 million, representing 2% of their total income. UMG would earn €95 million. Meanwhile, a recouped major label artist could expect to see a million streams generate €1,487 rather than €1,400 (assuming all the streams were premium).

All of these assumptions are based on this rollout being global and FY 2021, neither of which are the case. So the actual effect will be markedly less. The key takeaway is that this is an important first step on what needs to be a continual journey, and one followed by the other streaming services. Spotify was previous locked in a prisoner’s dilemma where no one was willing to make the first move. Spotify had the courage to jump first. What needs to happen next are (though not necessarily in this order):

  • Pricing increase to all remaining tiers, especially $9.99
  • Other streaming services follow suit
  • Tightening up of discounts and promotional trials in well-established markets

Good first step by Spotify; now let the journey begin.

Take Five (the big five stories and data you need to know) October 7th 2019

Take5 7 10 19Streaming pricing, emerging questions: Music Business Worldwide raised the question of why streaming is discounted in emerging markets when BMWs and Amazon Echoes are not. There are many layers to this, but the key one is – who is going to pay? High income urban elites can afford Western prices; the mass populous cannot. BMW is targeting thousands, not tens of millions, in India.

Streaming wars heat up: Video streaming competition is unlike music, with big studios launching their own services and thus competing with distribution partners. Disney’s decision to ban Netflix ads hints at just how messy the video streaming wars are going to get.

Air Jordan meets AI meets social commerce: Snapchat, Shopify, Nike and Darkstore teamed up to create an AI/social commerce push for the new Air Jordans. While this is clearly a tightly controlled marketing push, it nonetheless hints at how digital tech mash-ups can push boundaries.  

The Yogababble index:As we approach peak tech, the semi-mystical power of inflated company mission statements is beginning to lose its lustre. Scott Galloway has created his Yogababble index to illustrate the contribution of overzealous comms in peak tech.

The Fall 2019 TV shows to look out for: TV’s biggest ad buyers give their take on which new shows they think will fly. Winners: Mixed-ish, The Unicorn, Prodigal Son. Losers: Carol’s Second Act, Sunnyside.

10 Trends That Will Reshape the Music Industry

The IFPI has reported that global recorded music revenues have hit $19.1 billion, which means that MIDiA’s own estimates published in March were within 1.6% of the actual results. This revenue growth story is strong and sustained but the market itself is undergoing dramatic change. Here are 10 trends that will reshape the recorded music business over the coming years:

top 10 trends

  1. Streaming is eating radio: Younger audiences are abandoning radio for streaming. Just 39% of 16-19-year olds listen to music radio, while 56% use YouTube instead for music. Gen Z is unlikely to ever ‘grow into radio’; if you are trying to break an artist with a young audience, it is no longer your best friend. To make matters worse, podcasts are looking like a Netflix moment for radio and may start stealing older audiences. This is essentially a demographic pincer movement.
  2. Streaming deflation: Streaming music has allowed itself to be outpaced by inflation. A $9.99 subscription from 2009 is actually $13.36 when inflation is factored in. Contrast this with Netflix, for which theinflation-adjusted price is $10.34 but the actual 2019 price is $12.99. Netflix has stayed ahead of inflation; Spotify and co. have fallen behind. It is easier for Netflix to increase prices as it has exclusive content, but rights holders and streaming services need to figure out a way to bring prices closer to inflation. A market-wide increase to $10.99 would be a sound start, and the fact that so many Spotify subscribers are willing to pay $13 a month via iTunes shows there is pricing tolerance in the market.
  3. Catalogue pressure: Deep catalogue has been the investment fund of labels for years. But with most catalogue streams coming from music made in this century, catalogue values are being turned upside down (in the streaming era, the Spice Girls are worth more than the Beatles!). Labels can still extract high revenue from legacy artists with super premium editions like UMG did with the Beatles in 2018, but a new long-term approach is required for valuing catalogue. Matters are complicated further by the fact that labels are now doing so many label services deals, and therefore not building future catalogue value.
  4. Labels as a service (LAAS): Artists can now create their own virtual label from a vast selection of services such as 23 Capital, Amuse, Splice, Instrumental, and CDBaby. A logical next step is for a 3rdparty to aggregate a selection of these services into a single platform (an opening for Spotify?). Labels need to get ahead of this trend by better communicating the soft skills and assets they bring to the equation, e.g. dedicated personnel, mentoring, and artist and repertoire (A+R) support.
  5. Value chain disruption: LAAS is just part of a wider trend of value chain disruption with multiple stakeholders trying to expand their roles, from streaming services signing artists to labels launching streaming services. Things are only going to get messier, with virtually everyone becoming a frenemy of the other.
  6. Tech major bundling: Amazon set the ball rolling with its Prime bundle, and Apple will likely follow suit with its own take on the tech major bundle. Music is going to become just one part of content offerings from tech majors and it will need to fight for supremacy, especially in the ultra-competitive world of the attention economy.
  7. Global culture: Streaming – YouTube especially – propelled Latin music onto the global stage and soon we may see Spotify and T-Series combining to propel Indian music into a similar position. The standard response by Western labels has been to slap their artists onto collaborations with Latin artists. The bigger issue to understand, however, is that something that looks like a global trend may not be a global trend at all but is simply reflecting the size of a regional fanbase. The old music business saw English-speaking artists as the global superstars. The future will see global fandom fragmented with much more regional diversity. The rise of indigenous rap scenes in Germany, France and the Netherlands illustrates that streaming enables local cultural movements to steal local mainstream success away from global artist brands.
  8. Post-album creativity: Half a decade ago most new artists still wanted to make albums. Now, new streaming-era artists increasingly do not want to be constrained by the album format, but instead want to release steady streams of tracks in order to keep their fan bases engaged. The album is still important for established artists but will diminish in importance for the next generation of musicians.
  9. Post-album economics: Labels will have to accelerate their shift to post-album economics, figuring out how to drive margin with more fragmented revenue despite having to invest similar amounts of money into marketing and building artist profiles.
  10. The search for another format: In 1999 the recorded music business was booming, relying on a long established, successful format that did not have a successor. 20 years on, we are in a similar place with streaming. The days of true format shifts are gone due to the fact we don’t have dedicated format-specific music hardware anymore. However, the case for new commercial models and user experiences is clear. Outside of China, depressingly little has changed in terms of digital music experiences over the last decade. Even playlist innovation has stalled. One potential direction is social music. Streaming has monetized consumption; now we need to monetize fandom.

Here’s How Spotify Can Fix Its Songwriter Woes (Hint: It’s All About Pricing)

Songwriter royalties have always been a pain point for streaming, especially in the US where statutory rates determine much of how songwriters get paid. The current debate over Spotify, Amazon, Pandora and Google challenging the Copyright Royalty Board’s proposed 44% increase illustrates just how deeply feelings run. The fact that the challenge is being portrayed as ‘Spotify suing songwriters’ epitomises the clash of worldviews. The issue is so complex because both sides are right: songwriters need to be paid more, and streaming services need to increase margin. Spotify has only ever once turned a profit, while virtually all other streaming services are loss making. The debate will certainly continue long after this latest ruling, but there is a way to mollify both sides: price increases.

spotify netflix pricing inflation

When Spotify launched in 2008, the industry music standard for subscription pricing was $9.99. So, when its premium tier was launched in May 2009, it was priced at $9.99. Incidentally, Spotify racked up an initial 30,000 subscribers that month – it has come a long way since. But now, nearly exactly ten years on, Spotify’s standard price is still $9.99. Its effective price is even lower due to family plans, trials, telco bundles etc., but we’ll leave the lid on that can of worms for now. Over the same period, global inflation has averaged 2.95% a year. Applying annual inflation to Spotify’s 2009 price point, we end up at $13.36 for 2019. Or to look at it a different way, Spotify’s $9.99 price point is actually the equivalent of $7.40 in today’s prices when inflation is considered. This means an effective real-term price reduction of 26%.

Compare this to Netflix. Since its launch, Netflix has made four major increases to its main tier product, lifting it from $7.99 in 2010 to $12.99 in 2019. Crucially, this 63% price increase is above and beyond inflation. An inflation-adjusted $7.99 would be just $10.34. Throughout that period, Netflix continued to grow subscribers and retain its global market leadership, proving that there is pricing elasticity for its product.

Spotify and other streaming services are locked in a prisoner’s dilemma

So why can’t Spotify do the same as Netflix? In short, it is because it has no meaningful content differentiation from its competitors, whereas Netflix has exclusive content and so has more flexibility to hike prices without fearing users will flock to Amazon. If they did, they’d have to give up their favourite Netflix shows. Moreover, Netflix has to increase prices to help fund its ever-growing roster of original content, creating somewhat circular logic, but that is another can of worms on which I will leave the lid firmly screwed.

If Spotify increases its prices, it fears its competitors will not. Likewise, they fear Spotify will hold its pricing firm if any of them were to increase. It is a classic prisoner’s dilemma.  Neither side dare act, even though they would both benefit. Who can break the impasse? Labels, publishers and the streaming services. If they could have enough collective confidence in the capability of subscriptions over free alternatives, then a market-level price increase could be introduced. Rightsholders are already eager to see pricing go up, while streaming services fear it would slow growth. Between them, there are enough carrots and sticks in the various components of their collective relationships to make this happen.

However – and here’s the crucial part – rightsholders would have to construct a framework where streaming services would get a slightly higher margin rate in the additional subscriber fee. Otherwise, we will find ourselves in exactly the same position we are now, with creators, rightsholders, and streaming services all needing more. When Netflix raises its prices it gets margin benefit, but under current terms, if Spotify raises prices it does not.

The arithmetic of today’s situation is clear: both sides cannot get more out of the same pot of cash. So, the pot has to become bigger, and distribution allocated in a way that not only gives both sides more income, but also allows more margin for streaming services.

Streaming music in 2019 is under-priced compared to 2009. Netflix shows us that it need not be this way. A price increase would benefit all parties but has to be a collective effort. Where there is a will, there is a way.

Streaming Music Pricing: Inelastic Stretching

Pricing has long been an issue for streaming music subscriptions, with the $/€/£ 9.99 price point above what most people spend on music each month. Streaming services have navigated around the issue with a combination of tactics such as telco bundles and aggressive price discounts (e.g. $1 for 3 months). However, these tactics place long term pressure on the 9.99 price point as they create a consumer perception that streaming music should be cheaper than it is. There is no doubt that discounts are doing a great job of converting users and of easing otherwise reluctant consumers into the 9.99 pricing, but the next phase of the streaming market requires a more sustainable approach to pricing strategy, coupled with some serious product innovation.

To explore this issue in detail, MIDiA has published its latest music report: Streaming Music Pricing: Inelastic StretchingIn it we use proprietary MIDiA data to assess how much of the 9.99 opportunity has been tapped, how much further opportunity exists and what level of demand exists for different price points.

midia music subscriber projections

These are some of the key takeaways from the report:

  • 2017 will be a stellar streaming year: A combination of enough growth being left in the market and the continued success of pricing discounts should see subscriber numbers grow at a slightly faster rate in 2017 than they did in 2016, hitting 146.6 million. This is up 44.3 million from the 106.3 million hit in 2016. (That 2016 figure is 5.9 million more than our provisional estimate published back in the start of January, as the result of receiving a couple of slightly stronger than expected numbers. However, the increase is not due to the very high subscriber numbers reported elsewhere for some Chinese services. We consider these numbers to be high and we place our estimate closer to half of those.) By 2018, subscriber growth will begin to lessen and by 2019 we’ll be in market maturation phase. Around 2/3 of the readily addressable opportunity for 9.99 has already been tapped and this remainder is what will drive the 2017 growth. New tactics will be required for the rest of the cycle.
  • Beyond 9.99: Emerging markets, new partnerships and discounts will all be important growth tactics, but pricing will also be key. Many readers will be familiar with my longstanding enthusiasm for mid tier streaming pricing. Unfortunately, mid-tier pricing by stealth (e.g. price discounts, student offers) coupled with an overly resplendent free marketplace (YouTube, Vevo, Spotify free, etc.) have combined to suck most of the oxygen out of the mid tier sector. Nonetheless, there is a major need for something to cater for the lower end of the market. One of the key sections in the report reveals that streaming pricing is inelastic and the change in demand is smaller than the change in pricing. Even dropping the main price to $6.99 would only result in reducing the size of the streaming market.
  • Unbundling: So how do we square the circle? By using super low prices (e.g. 2.99; 3.99) to launch laser focused niche apps aimed at specific demographics and genres. This can be done both by standalone specialists (e.g. the Overflow, FreqsTV) and by the big incumbents taking a leaf out of Facebook’s app strategy and creating standalone, unbundled apps. In order for them to work, they cannot simply look like a thin slice of Spotify or Apple Music. They have to be as different from their parent apps as Instagram and Whatsapp are from Facebook. That means new user experiences, new functionality, different approaches to programming/ curation and standalone branding. To work, mid tier products have to look like something unique, not a compromised, watered down version of the full fat product. Mid tier services risk looking like low-fat, gluten-free, sugar-free, organic, diet, hand knitted soya milk. While there is a market for it, it shouldn’t come as a surprise that the market is in fact tiny.

So, a good 2017 looks on the cards for streaming, one which will confirm the maturity of the streaming sector as a whole. But the next stage of the market will require product and pricing innovation, at both the high end and the low end. Now is the time to start putting the pieces in place for 2018 and beyond.

The report from which this insight is taken (Streaming Music Pricing: Inelastic Stretching) is immediately available to MIDiA report subscribers. To find out how to become a MIDiA subscriber email info@midiaresearch.com.  If you just want to buy the report and the supporting data then visit our report store here.