How YouTube’s Domination of Streaming Clips the Market’s Wings

Firstly, happy new year to you all. Now on to the first post of 2019.

The Article 13 debate that shaped so much of the latter part of 2018 will continue to play an important role throughout 2019 while European and then national legislators deliberate on the provision and the wider Digital Copyright Directive of which it forms a part. Regular readers will know that MIDiA first highlighted the risk of unintended consequences of Article 13. Today we present the case for the impact YouTube has on the broader streaming market, driven by the advantages of its unique licensing position. (This is a complex and nuanced topic with compelling evidence on both sides of the debate).

To illustrate YouTube’s impact on the streaming market this post highlights a few of the findings from a new MIDiA report: Music Consumer Behaviour Q3 2018: YouTube Leads the Way But At What Cost?

YouTube is the dominant music streaming platform, with 55% of consumers regularly watching music videos on YouTube, compared to a combined 37% for all free audio streaming services. YouTube usage skews young, peaking at nearly three quarters of consumers under 25. Although YouTube leads audio streaming in all markets — even Spotify’s native Sweden — there are some strong regional variations. For example, emerging streaming markets Brazil and Mexico see much higher YouTube penetration, peaking at close to double the level of even traditional music radio in Mexico. Indeed, radio is feeling the YouTube pinch as much as audio streaming. 68% of those under 45 watch YouTube music videos compared to 41% that listen to music radio. The difference increases with younger audiences and the more emerging the market. For example, in Mexico YouTube music penetration is 84% for 20–24 year olds, compared to 37% for music radio. Streaming may be the future of radio, but right now that streaming future is YouTube.

YouTube’s advantage

While cause and effect are difficult to untangle, the implied causality here is that YouTube’s unique value proposition steals much of the oxygen from the wider streaming market. Due to its unique licensing position – which Article 13 would likely change, YouTube has more catalogue and fully-on-demand free streaming, not to mention standout product features such as complete music video catalogue and social features such as song comments, likes / dislikes. Services that do not use safe harbour protection (i.e. the vast majority of audio streaming services) do not have these assets and so are at a distinct market disadvantage to YouTube. If you are a consumer in the market for a free streaming service, you have the choice between everything that you want, with complete control or constraints and restrictions, with fewer features. It’s not hard to see why consumers from Mexico through to Sweden make the choice they do. With a free proposition this good (especially when you factor in stream ripper apps and ad blockers), who needs a subscription?

A new value gap emerging?

Against this though, must be set two crucial factors:

1. Audio streaming services would fare better if they had more of the features YouTube and Vevo have
2. YouTube and Vevo are still the best ad monetisation players in the global market (i.e. discounting Pandora as it is US only). What’s more, (annual) audio ad supported ARPU declined in 2018 to $1.23, while video ad supported ARPU rose to $1.08. Ad-supported users grew faster than revenue while the opposite was true of video. There is a real risk here of an audio ad-supported value gap emerging. Spotify needs to get better at selling ads, fast.

Fully committed to subscriptions?

The final part of the YouTube impact equation is premium conversion. Since appointing Lyor Cohen, YouTube has taken a much more proactive approach to subscriptions, heavily touting its, actually-really-quite-good, YouTube Music premium product. Whether Alphabet’s board is equally exuberant about subscriptions, and whether YouTube Music’s launch lining up with the Article 13 legislative process was coincidental, are both open questions…

But politics and intent aside, YouTube is always going to be far poorer at converting to paid subscriptions because a) its user base is vast, and b) that user base is there for free stuff. So, while 58% of Spotify’s weekly active users (WAUs) are paid, the rate for YouTube Music weekly active usership is in single digit percentage points. That dynamic is not going to change in any meaningful way. In fact, YouTube has a commercial disincentive for pushing subscriptions too hard. It makes its money from advertising, and advertisers pay to reach the best possible consumers. Subscription paywalls lock away your best users, out of the reach of ads, which in turn reduces the value of your inventory to advertisers, which leads to declining revenues. YouTube is not about to swap a large-scale high-margin business for a small-scale low-margin one. Moreover, this issue of advertisers trying to reach paywalled consumers is going become a multi-industry issue in 2019. See my colleague Georgia Meyer’s excellent ‘Marketing to Streaming Subscribers’report for a deep dive on the topic.

Article 13 as a platform for innovation?

The overarching dynamic here is of a leading service that constrains the opportunity for services that are not able to play by the same rules. A levelling of the playing field is needed, but this should not just be legislation (and of course should be careful not to kill music’s ad supported Golden Goose). It should also see labels and publishers finding some common ground between the Spotify and YouTube models, and making those terms available to all parties. Because if YouTube does one thing really well, it shows us how good the streaming music user proposition can be when it is not too tightly constrained by rights holders. Let’s use Article 13 to raise the lowest common denominator, not to bring YouTube down to it.

Streaming music services need a user experience quantum leap in 2019; wouldn’t it be great if Article 13 could be the springboard for transformation and innovation?

Artists Direct and Streaming the Big Winners in 2018

With less than two weeks of 2018 left, the die is largely cast for the year, but we’ll have to wait at least a couple more months for the major labels to announce their results (though WMG still hasn’t declared its calendar Q3 results), and then another month or so for the IFPI numbers. So, in the meantime, here are MIDiA’s forecasts for 2018 based on the first three quarters of the year and early indicators for Q4.

To create our end of year revenue estimate, we collected data from record labels, national trade associations and also confidential data from the leading Artist Direct / DIY platforms. We plugged this data into MIDiA’s Music Market Share model and benchmarked against quarterly and full year 2017 growth.

The headline results:

• Recorded music revenue will hit $18.9 billion this year: This represents an increase of 8.2% on 2017 which is a slight lower growth rate than 2016–2017, which was up 9%. However, net new revenue ($1.4 billion) – is almost exactly the same amount as one year previously. The recorded music market appears to be settled into a steady, strong growth pattern.
• Streaming revenue up to $9.6 billion: The 41% growth rate of 2017 may be gone, replaced by 29%, but the absolute amount of new revenue generated was, as with the recorded music total, the same as 2017 $2.2 billion. There was enough growth in the big mature streaming markets – the US especially – to ensure that streaming continued to plot a strong course in 2018. Though the fact that total revenues grew by $0.8 billion less than streaming revenue, indicates the pace at which legacy formats continue to decline.
• Artists Direct the big winners: MIDiA was the first to quantify the global revenue contribution of the Artists Direct (i.e. Independent Artists, DIY etc.) last year when we published our annual market shares report. Now we can report that the spectacular growth registered by this segment continued in 2018. Total Artist Direct revenue was $643 million, up an impressive 35% on 2017, i.e. more than three times faster than the market. Unlike the rest of the market, Artists Direct revenue growth is accelerating in both percentage and absolute terms, with market share up from 2.7% in 2017 to 3.4% in 2018. (It’s worth noting that only a portion of Artists Direct revenue is measured by the IFPI. Categories such as at-gig CD sales aren’t captured by either the labels or measurement companies that national trade associations depend upon to measure the market. So, expect the IFPI’s global recorded music total to come in closer to $18.6 billion).

It was another great year for the recorded music business, with streaming consolidating its role as industry engine room. Here are the key takeaways for 2019:

• Global recorded revenues will grow once again in 2019 – this rebound has a good number of years left in it. Even if label revenues hit $25 billion (where the market was at in 2000 before the decline) in real terms (i.e. factoring in inflation etc.), that would actually be around half the actual value. While it is not realistic to expect a $50 billion market, getting towards the inflation-reduced $25 billion is certainly a realistic target.
• Streaming growth will slow in the big mature markets (US, UK), but impact will be offset by growth in markets such as Japan, Germany, Brazil, Mexico. Overall market growth, though still strong, will be slower.
• 2019 will be a coming of age year for Artists Direct, label services companies, JVs and other alternative models that have been establishing themselves in recent years. It’s never been a better time to be an artist, as long as you and / or your management are clued up enough to know what to ask for.