What Spotify Can Learn From The Roman Slave Trade

OK, you’re going to have to bear with me on this one, but let me take you back to 2nd century Rome….

Roman Slaves

Roman Slaves

The Roman Empire was at the peak of its powers. Its borders stretched from Scotland down to Syria and across to Armenia, and across its dominions Rome spread its culture, language, administration and of course, military prowess. It brought innovations such as under floor heating, running water, astronomy and brain surgery but the consensus among many modern day historians is that the Roman Empire could have been much more. Rome was fundamentally a military, expansionist state. Its endless conquests produced a steady flow of captured people that fuelled Rome’s most important economic interest: the slave trade. By the mid 2nd century around 1 in 4 Romans were slaves. It was common for wealthy citizens to have 40 or more household slaves while the super-rich had hundreds.

The Importance Of Economic Surplus

The problem was that the over-supply of labour meant that wages were horrifically low for the masses while the rich over spent on slaves to keep up with the neighbours. The net result is that the Roman Empire was not able to create an economic surplus across its population, which meant that there was insufficient investment in learning, science and culture. If that surplus had been created, Rome would have spawned a generation of innovators, inventors and entrepreneurs that should have created an industrial revolution. This raises the tantalizing possibility of steam power and steel emerging before the middle ages, which in turn could have meant that today’s technology revolution might have happened hundreds of years ago by now.

Instead, the Roman Empire eventually crumbled with Europe forgetting most of Rome’s innovations, paved roads weeding over, aqueducts running dry and heated floors crumbling. We had to wait until the second half of the 18th century for the Industrial Revolution for the change, which crucially followed and overlapped with the Age of Enlightenment, a period of learning unprecedented since the Renaissance (when everyone busied themselves relearning Rome’s lost secrets) which was fuelled by Europe’s economies have developed sufficiently to create enough surplus for more than just the aristocracy to learn, invent and create. 

So, Rome inadvertently held back human progress by half a millennium because of its obsession with slaves. But what does that mean for Spotify? The key lesson from the Roman experience is that being saddled with too large a cost base may not prevent you from becoming big but it will hold you back from fulfilling your potential and from building something truly lasting. You can probably tell now where I am heading with this. Spotify’s 70% rights cost base is Rome’s 1 in 4 are slaves.

Product Innovation Where Are You?

Spotify has made immense progress but it and the overall market have done too little to innovate product and user experience.  There’s been business and commercial innovation for sure but looking back at the streaming market as a whole over the last 5 years, other than making playlists better through smart use of data and curation teams, where is the dial-moving innovation? Where are the new products and features that can change the entire focus of the market. Compare and contrast how much the likes of Google, Facebook and Amazon have changed their businesses and product offerings over that period. Streaming just got better playlists. Musical.ly shouldn’t have been a standalone company, it should have been a feature coming out of Spotify’s Stockholm engineering team. But instead of being able to think about streaming simply as an engine, Spotify has had to marshal its modest operating margins around ‘sustaining’ product development and marketing / customer acquisition.

Post-Listing Scrutiny

Spotify will likely go public sometime next year as a consequence. But once public it will need to be delivering demonstrable progress towards profit with each and every quarterly SEC filing. Growth alone won’t cut it. Just ask Snap Inc. Spotify does not have a silver bullet but it does have a number of different switches it can flick that will each contribute percentages to net margin and that collectively can help Spotify become commercially viable and in turn enable it to invest in the product and experience innovation that the streaming sector so crucially lacks.  Spotify hasn’t done these yet because most will antagonize rights partners but it will be left with little option.

spotify full stack midia

Spotify The Music Company

To say that Spotify will become a label is too narrow a definition of what Spotify would become. Instead it would be a next generation music company, encompassing master rights, publishing, A+R, discovery, promotion, fan engagement and data, lots of data. If Spotify can get a couple of good quarters under its belt post-listing, and maintain a high stock price then it could go on an acquisition spree, acquiring assets for a combination of cash and stock. And the bigger and bolder the acquisition the more the stock price will rise, giving Spotify yet more ability to acquire. This is the model Yahoo used in the 2000s, with apparently over-priced acquisitions being so big as to impress Wall Street enough to ensure that the increase in market cap (ie the value of its shares) was greater than the purchase price. Spotify could use this tactic to acquire, for example, Kobalt, Believe Digital and Soundcloud to create an end-to-end, data-driven discovery, consumption and rights exploitation music power house.

What other ‘label’ could offer artists the end-to-end ability to be discovered, have your audience brought to you, promoted on the best playlists, given control of your rights and be provided with the most comprehensive data toolkit available in music? And of course, by acquiring a portion of the rights of its creators though not all (that’s where Kobalt / AWAL comes in) Spotify will be able to amortize some of its content costs like Netflix does, thus adding crucial percentages to its net margin. It will also be able to do Netflix’s other trick, namely using its algorithms to over index its own content, again adding crucial percentages to its margin.

Streaming Is The Engine Not The Vehicle

The way to think about Spotify right now, and indeed streaming as a whole, is that we have built a great engine. But that’s it. We do not have the car. Streaming is not a product, it is a technology for getting music onto our devices and it is a proto-business model. While rights holders can point to areas where Spotify is arguably over spending, fixing those will not be enough on their own, they need to accompany bolder change. Once that change comes Spotify can start to fulfil its potential, to become the butterfly that is currently locked in its cocoon. While rights holders we be understandably anxious and may even cry foul, they have to shoulder much of the blame. Spotify simply doesn’t have anywhere else to go. Unless of course it wants to end up like Rome did….overrun by barbarians, or whatever the music industry equivalent is…

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Is QQ Music Worth $10 Billion?

Western appetite for the Chinese market has long been based upon accessing the 1.4 billion consumers. This has in turn impacted valuations of Chinese companies, particularly when eager western investors are involved. However, there is a growing realisation that market potential does not always translate to [performance]. Now we have Chinese tech major Tencent seeking pre-IPO investment in its music streaming service QQ Music, against a valuation of $10 billion. That is only $3 billion less than Spotify’s valuation. So, is QQ Music worth $10 billion?

qq music.png

Valuations in isolation can be misleading and therefore need context and scale. For example, Deezer had a valuation of $1.25 billion for its aborted IPO, while Spotify’s valuation is nearly 10 times higher. Moreover, Spotify’s subscriber count (60 million) is nearly 10 times higher than Deezer’s was (6.5 million), leading up to the aborted IPO. So, the best way to make meaningful comparisons between streaming music valuations is to look at the valuation divided by the number of subscribers, to give us a valuation per subscriber metric (see above). Here are a few ways to assess the value of QQ Music compared to other streaming services:

  • Valuation per subscriber: On the valuation per subscriber basis Spotify and Deezer’s valuations per subscriber are quite similar ($217 for Spotify, compared to $198 for Deezer). Tidal is significantly higher at $300 (well done that man Jay-Z for talking up the value of his service to Sprint), while QQ Music with its reported 10 million subscribers comes in at $1,000. This obviously begs the question, are QQ Music subscribers worth 5 times more than Spotify subscribers?
  • Subscriber revenue: The headline consumer retail price for Spotify is $9.99, while the headline price for QQ Music is $1.60. Spotify’s actual average revenue per user (ARPU) in 2016 was around $6.10, so if we scale QQ Music by a similar rate we get an ARPU of $0.98. If we multiply those ARPUs by the current subscriber number for each company, we end up with a monthly subscription revenue of $366 million for Spotify and $9.8 million for QQ Music. Therefore, rather than QQ Music subscribers being worth 10 times more than Spotify subscribers, they actually generate just 3% of Spotify’s subscriber revenue each month.
  • Addressable market: Valuations are of course based on potential, not just actual. China has 717 million smartphone owners (30% of the global total) and a GDP of $11.2 trillion (14% of the total). Given QQ Music’s Chinese positioning, that is its addressable market. By contrast, Spotify is a global service, though pointedly not in China, so its addressable market (excluding China) is technically 1.7 billion smartphone owners, and $67 trillion of GDP. QQ Music’s addressable market is in fact smaller, unless of course it decides to roll out to more territories. Likewise, Spotify could also roll out to China.
  • Like-for-like comparisons: We also need to be careful about the numbers behind QQ Music. 10 million QQ Music subscribers may not be the same as 10 million Spotify subscribers. Firstly, QQ Music [subscription] includes karaoke features, such as Bullet Screening, which many would not consider to be music subscribers as such. Additionally, 10 million might not actually be 10 million. Back in Q1 2016, Tencent reported to the markets that it had a little under four million QQ Music subscribers. Then in July 2016, in a Mashable piece, it claimed to have 10 million subscribers. Then nothing until January 2017, when it did another media push, announcing…10 million subscribers. If we take these reports at face value, it means QQ Music had an incredible Q2 2017 then did absolutely nothing, and I mean nothing, thereafter. Whatever the subscriber number actually is for QQ Music, the 10 million figure, at the very least, merits some scrutiny.

So, to answer the opening question, is QQ Music worth $10 billion? That depends. Compared to other streaming music services, the metrics suggest that it isn’t. But, to Tencent’s local investor market, maybe so. 80% of Chinese stock market transactions are from small retail investors, i.e. not institutional investors. So, while a $10 billion valuation might look high to institutional investors, to enthusiastic local retail investors who know QQ Music and have read all the stories about the booming streaming music market, this will appear to be a golden opportunity to get in on the great streaming boom.

Is QQ Music worth $10 billion? It depends on who you are!

Quick Take: Spotify And Hulu Partner In The US

Spotify just announced it is bundling in the Hulu No Commercials plan into its $4.99 student offering in the US. Given that the Hulu product retails at $7.99 and Spotify at $9.99, this is unmistakably a good value for money deal – even compared to the standard $4.99 student Spotify tariff. In the Spotify blog post announcing the tie up, it is made clear that this is the start of something bigger: “This is the first step the companies are taking to bundle their services together, with offerings targeted at the broader market to follow.”

Putting aside for a moment how the economics of this bundle might work for Spotify, this partnership gives us a clear pointer as to Spotify’s video strategy going forward. The other part of the puzzle is the news that Spotify is hiring former Maker Studios exec, Courtney Holt, to head up its original video and podcast strategy.

Spotify knows that it needs to have a video play of some kind, despite the failure of its previous attempt. Unfortunately, everyone else is thinking the same – with Snap Inc, Facebook and Apple now committing billions to original content, in an already inflated market for video. Hulu will spend $2.25 billion on original content in 2017, matching Amazon’s original content budget for the year. This is the barrier to entry for video, and its simply too high for Spotify to justify.

Instead, it has focused on working with one of the leading streaming video services in the US, and is building complimentary music-orientated video in house. Thus, through this Spotify bundle a user gets their scripted drama hit from Hulu and their music video hit from Spotify.

Spotify’s Hulu partnership is a smart way to get into the video market without getting in over its head. While for Hulu, Spotify gives it clear differentiation from Netflix and Amazon. Which is given extra significance by the announcement that T-Mobile Netflix for free for its premium customers. Whether the economics of this deal add up for either party is another question entirely.

What’s In A Number: Can Streaming Really Be Worth $28 Billion?

Goldman Sachs just made some headlines with its assessment that Universal Music is worth $23.5 billion and that the paid streaming market will be worth $28 billion in 2030 (up from $3.5 billion in 2016 and close to double the size of the entire recorded music business in 2016). For a little bit of perspective, the entire recorded music business generated $27.4 billion at its peak in 1996. Goldman Sachs’ numbers provide us with a salutary reminder of the risk that comes with taking a short-sighted view when building forecasts, or, to put it another way, predicting tomorrow based on what happened today.

Regular readers will know that I have been a music industry analyst since the end of the 1990s, witnessing enough industry cycles and getting close enough to business to build a deep understanding of the industry and its potential. As anyone involved in the business knows, the recorded music industry is more complex and more idiosyncratic than most other industries. Predicting its future is complicated by three factors:

  • Market concentration: Three companies (UMG, SME and WMG) control the majority of revenues, and four companies (Alphabet, Amazon, Apple and Spotify) control the majority of the streaming market. Such concentration of power makes for an unpredictable market that can be reshaped by the decision of one company. For example, if HBO decided it was going to move out of streaming for good, Netflix would still be a viable business. Spotify though, would not if Universal made the same decision.
  • Scarcity is gone: When Napster launched in May 1999 it threw scarcity out of the window. Until then, music had been a scarce commodity. Scarcity was the foundation upon which the glory days of the business was built. Unless you bought a CD, you had no other way of getting a high quality copy of the music. Nearly 20 years on from Napster, P2P may have faded but YouTube and Soundcloud have met the now-permanent demand for free music. Even if Safe Harbour legislation gets tightened up and YouTube scaled down, on demand free music will remain. The illegal sector will sprout a YouTube replacement in an instant. $27.4 billion in 1996 was a scarcity high-water mark.
  • $9.99 is not a mass market price point: 9.99 is more than most people spend on music. In fact, it is what the top 10% of music buyers spend in the US and in the UK. Once the first two waves of adopters (early adopters and early followers) have been converted to subscriptions, growth will slow unless pricing changes. We are already seeing this happening in mature markets. More than 90% of the opportunity has been tapped in Sweden, while across the US, UK, Canada and Australia paid streaming growth has slowed over the last three quarters. So much of the subscriber growth Apple and Spotify have been reporting is coming from other, often emerging, markets. Eventually the 9.99 (or local currency and purchasing power parity equivalent) opportunity will be tapped there too. In 2016, 106 million subscribers drove $3.5 billion of growth, which translated into an annual ARPU of $32.79. Taking this as our anchor point (and ignore the fact streaming ARPU has actually been declining) then Goldman Sachs’ $28 billion would require 853 million paid subscribers. If we factor in emerging markets having much lower ARPU and driving much of the growth, the figure would be closer to one billion paid subscribers. Even with the most radical price point innovation it takes quite a leap of faith to support one billion subscribers.
  • The world changes: It is very easy to think of tomorrow as being a bigger, shinier version of today. But things change, fast. Streaming is the driver now, but if it still is by 2030 then that will be a serious failure of innovation. When I first saw the Goldman Sachs numbers they reminded me of a similar report put out back in 1999 by another financial institution when the music business was last in vogue among that sector. It was a 130 page report called the Music and The Internet: A Celestial Jukebox and it predicted that online CD sales and downloads would be the future of the music market, because that was what the emerging market was then. It too had uber bullish predictions, claiming that the European music business alone would be worth $12 billion by 2010. It in fact reached $7.7 billion and in 2016 was $6.9 billion. With no little irony, the company that wrote the report was—Lehman Brothers. Look where they are now.

Conflicts of Interest

There is one final important factor to consider regarding both Lehman Brothers and Goldman Sachs. In fact, it is probably the most important thing of all: conflicts of interest.

Lehman Brothers made money from buying and selling shares in the companies they wrote about. Goldman Sachs is the same. On its disclosures page there are no fewer than six items listed by Goldman Sachs’  for UMG’s parent company Vivendi. These include owning a substantial volume of Vivendi shares and providing investment banking services to the company. So, if Vivendi’s share price goes up as a result of Goldman Sachs’ report, Goldman Sachs’ Vivendi investment gains value. If Vivendi sells a stake in UMG at a price influenced by Goldman Sachs new valuation, Goldman Sachs will earn a bigger transaction fee if it provides the banking services. A Goldman Sachs hedge fund also has shares in Spotify while another division is helping Spotify prepare for its IPO. So, if Spotify’s IPO/direct listing is boosted by Goldman Sachs’ report, Goldman Sachs’ Spotify investment gains value and it earns a bigger fee for the listing.

No financial institution with a vested interest (unless its interest is betting against a company – which also happens­) is going to provide a cautious or skeptical view of the streaming market. It would go against its own interests to do so. But everyone likes big numbers, so big numbers do the rounds.

For the sake of utter transparency, MIDiA Research has among its research subscription client base both UMG and Spotify, along with the other majors, indies, the other streaming services, tech companies and telcos. In fact, anyone and virtually everyone of note in the streaming business is a MIDiA subscription client. But, unlike an investment bank, they pay to access our research because we tell them what they need to hear not what they want to hear. That can make the client-analyst relationship uncomfortable and tricky to navigate at times but I wouldn’t have it any other way. Nineteen years ago, I wouldn’t have put my name to research like Lehman Brothers’— nor would I do so today.

The Three Eras Of Paid Streaming

Streaming has driven such a revenue renaissance within the major record labels that the financial markets are now falling over themselves to work out where they can invest in the market, and indeed whether they should. For large financial institutions, there are not many companies that are big enough to be worth investing in. Vivendi is pretty much it. Some have positions in Sony, but as the music division is a smaller part of Sony’s overall business than it is for Vivendi, a position in Sony is only an indirect position in the music business.

The other bet of course is Spotify. With demand exceeding supply these look like good times to be on the sell side of music stocks, though it is worth noting that some hedge funds are also exploring betting against both Vivendi and Spotify. Nonetheless, the likely outcome is that there will be a flurry of activity around big music company stocks, with streaming as the fuel in the engine. With this in mind it is worth contextualizing where streaming is right now and where it fits within the longer term evolution of the market.

the 3 eras of streaming

The evolution of paid streaming can be segmented into three key phases:

  1. Market Entry: This is when streaming was getting going and desktop is still a big part of the streaming experience. Only a small minority of users paid and those that did were tech savvy, music aficionados. As such they skewed young-ish male and very much towards music super fans. These were people who liked to dive deep into music discovery, investing time and effort to search out cool new music, and whose tastes typically skewed towards indie artists. It meant that both indie artists and back catalogue over indexed in the early days of streaming. Because so many of these early adopters had previously been high spending music buyers, streaming revenue growth being smaller than the decline of legacy formats emerged as the dominant trend. $40 a month consumers were becoming $9.99 a month consumers.
  2. Surge: This is the ongoing and present phase. This is the inflection point on the s-curve, where more numerous early followers adopt. The rapid revenue and subscriber growth will continue for the remainder of 2017 and much of 2018. The demographics are shifting, with gender distribution roughly even, but there is a very strong focus on 25-35 year olds who value paid streaming for the ability to listen to music on their phone whenever and wherever they are. Curation and playlists have become more important in order to help serve the needs of these more mainstream users—still strong music fans— but not quite the train spotter obsessives that drive phase one. A growing number of these users are increasing their monthly spend up to $9.99, helping ensure streaming drives market level growth.
  3. Maturation: As with all technology trends, the phases overlap. We are already part way into phase three: the maturing of the market. With saturation among the 25-35 year-old music super fans on the horizon in many western markets, the next wave of adoption will be driven by widening out the base either side of the 25-35 year-old heartland. This means converting the fast growing adoption among Gen Z with new products such as unbundled playlists. At the other end of the age equation, it means converting older consumers— audiences for whom listening to music on the go on smartphones is only part (or even none) of their music listening behaviour. Car technologies such as interactive dashboards and home technologies such as Amazon’s echo will be key to unlocking these consumers. Lean back experiences will become even more important than they are now with voice and AI (personalizing with context of time, place and personal habits) becoming key.

It has been a great 18 months for streaming and strong growth lies ahead in the near term that will require little more effort than ‘more of the same’. But beyond that, for western markets, new, more nuanced approaches will be required. In some markets such as Sweden, where more than 90% of the paid opportunity has already been tapped, we need this phase three approach right now. Alongside all this, many emerging markets are only just edging towards phase 2. What is crucial for rights holders and streaming services alike is not to slacken on the necessary western market innovation if growth from emerging markets starts delivering major scale. Simplicity of product offering got us to where we are but a more sophisticated approach is needed for the next era of paid streaming.

NOTE: I’m going on summer vacation so this will be the last post from me for a couple of weeks.

 

 

YouTube And Latin America Are Taking Over The World

Unless you have been on Mars for the last couple of days you will have seen the news that Luis Fonsi’s ‘Despacito’ has become the most streamed track in history with 4.6 billion streams. The figure includes a couple of versions of the track (ie the one include a certain Justin Bieber) but is an impressive tally nonetheless. The landmark raises 2 key trends:

  1. The role of the Latin American market
  2. The role of streaming

Latin Takeover

On the first point, Latin America is becoming a streaming powerhouse. This is a trend we have long anticipated at MIDiA and it is why we have a Latin American analyst (Leo Morel in Brazil) and have been fielding consumer surveys in the region since we launched the company. ‘Despacito’ is not an isolated event. For example, Shakira’s ‘Chantaje’ became the first Latin American Spanish language track to reach 1 billion views earlier this year. But Latin America’s contribution to streaming is uneven. It accounts for 17% of all subscribers globally but 27% of all streaming video users. Indeed, Brazil and Mexico are Vevo’s 2nd and 3rd largest markets globally, after only the US. The socio-economic realities of Latin America mean that it will always over index towards free streaming compared to European and North American markets. But the streaming appetite is clear. With such large streaming appetite, expect Latin American audiences to increasingly shape future hits. Once enough Latin American fans get behind a track the snowball effect kicks in: once in Spotify’s global streaming chart it then finds its way into curated playlists and then volumes grow even faster. A similar effect is felt as the momentum kicks YouTube’s and Vevo’s algorithms into gear. But because the region skews towards YouTube and Vevo the regional revenue impact under indexes. Thus we have an emerging dynamic where Latin American audiences create the hits and European and North American audiences pay for them. This is the new normal.

despacito midia 1

Just as important as the rise of Latin America, is the continued rise of YouTube. Value Gap or no Value Gap, YouTube’s role in breaking and making hits is clear. More so, it is becoming more pronounced. YouTube streaming growth might be slowing in the US but the same does not necessarily apply globally. Indeed, taking the time it takes for YouTube / Vevo music videos to reach 1 billion views we can see that the 2017 hits ‘Despacito’ and ‘Shape Of You’ got there 40% faster than the average for tracks from 2016, 2015 and 2012. Only Adele’s 2015 hit ‘Hello’ got there faster, and that was a highly anticipated event that is a unique case.

despacito midia 2

 

YouTube added 500 million users between 2012 and 2017. That is no mean feat but nor is it stellar growth. Over the same period Facebook added more than 1 billion users and WhatsApp came from next to zero to 1.2 billion. YouTube is a mature platform and so growth is not just measured in terms of users but also in terms of engagement, especially streams per user. And this is where YouTube really seems to be delivering. A way of relating the growth of 1 billion view music videos to the total user base is dividing the average number of monthly views each video had en route to 1 billion and dividing that by the total number of YouTube users. In 2012 this figure was 0.19, by 2017 it had fallen to 0.17. Thus, for the 1 billion club, more YouTube users are streaming these songs more times. Growth is coming both from audience and activity.

 

There are other mitigating factors. For example it is conceivable that YouTube and Vevo are simply becoming better at creating mega hits, concentrating the audience around big hits. Thus making YouTube/Vevo more of a superstar economy. Vevo’s recommendation algorithms and YouTube’s autoplay feature play a role too, contributing to more streams. The autoplay was negotiated, along with full albums, from the labels as part of YouTube’s Music Key service. A service that never even made it out of beta, but YouTube of course held onto the good parts of that deal. Spotify, that is how you do digital deals!

 

The fact that streaming records are now being broken with such regularity shows that we have arrived at a tipping point. Streaming is transitioning from fast growing digital revenue stream, to the centre of an entirely new business. As impressive as ‘Despacito’s numbers are, get used to these sorts of records being made and broken on a regular basis. And get used to Latin America and YouTube playing an ever bigger role.

 

Amazon Is Now The 3rd Biggest Music Subscription Service

At MIDiA we have long argued that Amazon is the dark horse of streaming music. That horse is not looking so dark anymore. We’ve been tracking weekly usage of streaming music apps on a quarterly basis since 2016 and we’ve seen Amazon growing strongly quarter upon quarter. To the extent that Amazon Music is now the 2nd most widely used streaming music app, 2nd only to Spotify which benefits from a large installed base of free users to boost its numbers. So, in terms of pure subscription services, Amazon has the largest installed base of weekly active users.

But it’s not just in terms of active users that Amazon is making such headway. It is racking up subscribers too. Based on conversations with rights holders and other industry executives we can confirm that Amazon is now the 3rd largest subscription service. Amazon has around 16 million music subscribers (ie users of Amazon Prime Music and also Amazon Music Unlimited subscribers). This puts it significantly ahead of 4th and 5th placed players QQ Music and Deezer and gives it a global market share of 12%.

subscriber market share

But Amazon’s achievement is even more impressive than it first appears. Amazon’s music streaming adoption is concentrated among 4 of its Amazon Prime markets: US, Japan, Germany and UK. In these markets 35% of Amazon Prime subscribers are Amazon Prime Music or Amazon Prime Music Unlimited users. Most music subscription services think about their addressable market in terms such as total smartphone users with data plans, or in Apple’s case in terms of iTunes account holders. In both those scenarios subscribers have to be converted into paying users. But all Amazon has to do is persuade its 40 million odd Prime subscribers to start using its music app. Many of you will have seen blanket Amazon Prime Music advertising recently. Think about it. All that those ads have to do is persuade existing Prime subscribers to start using the music app for free, no new payment, no new commitment. It is as easy a sell as you could wish for. So, expect that 16 million number to grow strongly over the coming months. And of course, Amazon has another tool in its kit: the Echo. Having sold an extra 3.3 million Amazon Echos on Prime day (Tuesday 12th) Amazon now has around 13 million Echos in consumers’ hands.

The CD Factor

Amazon has one further ace up its sleeve: CDs. In Japan and Germany, the world’s 2nd and 4th largest recorded music markets, physical music sales are the majority of revenues, with streaming still getting going. As those market develop, the physical-to-digital transition will leap frog downloads, skipping straight to streaming. What better way to do that than having an established billing and subscription relationship with CD buyers. Enter stage left, Amazon. Amazon already has a very strong Prime Music base in Germany and could well become the leading subscription service there within 12 – 18 months.

Amazon is a secretive company and is unlikely to either confirm or deny these numbers, but we are confident they are an accurate reflection of its standing in the market. Amazon can now discard its dark horse guise and be revealed for what it is: one of the top streaming music players. Game on!

The Art of Windowing: Why 4:44 is a Different Kind of Exclusive

This is a guest post from MIDiA’s Media and Music Analyst Zach Fuller.

444.originalFor a brief moment last year, windowing seemed like the future of music streaming. Already common practice in the film-industry, the strategy was being touted as a way of utilising artist fan engagement to drive registrations (both freemium and paid) to streaming services, thus engendering the payment behaviours that would ultimately grow the industry. Yet, as MIDiA addressed last year, Frank Ocean’s bait-and-switch manoeuvre with Universal in August 2016 sent shockwaves through an industry still acclimatising to streaming economics. Arriving on the coat-tails of a windowing gold-rush that had seen releases by Beyonce, Kanye West and Chance the Rapper all utilising the strategy, Ocean’s move effectively put the brakes on the practice, leaving Universal CEO Lucian Grainge allegedly so infuriated that he ordered a company-wide halt to any further windowing projects.

Fast forward to 2017 and Jay-Z’s 4:44 has brought windowing back to the fore. Whilst numerous personal revelations (as well as receiving Jay-Z’s best critical response since 2003’s The Black Album) have meant blanket press coverage across social and traditional media, it is also notable that 4:44 is the first major windowing project to arrive this year. This is despite 2017 presenting two substantial windowing  opportunities with Ed Sheeran’s new album and Harry Styles’ self-titled debut  – however neither were windowed on any service. Jay-Z however, is in a very different position to most artists. Aside from owning his own streaming service, Jay-Z’s control over his artistic output extends back to the very beginning of his career. He co-founded his own label, Roc-A-Fella Records (distributed through Universal), to release his debut back in 1996, and as was reported last year, he is now in full control of his own master rights. Such self-determination over one’s career at the scale of his audience is rare, thus enabling 4:44’s window release while the rest of the industry retreats from such practices.

Audience reticence can also be attributed to the unlikelihood this is a move to build TIDAL’s user base. Kanye West claimed his 2016 release ‘The Life of Pablo’, ‘My album will never never never be on Apple. And it will never be for sale… You can only get it on Tidal.’ This position lasted around a week, with Kanye now allegedly having left TIDAL over unpaid royalties. Similarly, Beyonce’s TIDAL exclusive lasted just 24-hours. It is therefore fair to assume that music fans have become naturally suspicious about the nature of windowing and how long they will have access to exclusive content should they subscribe to a particular service. This accounts for the trend of free-trial hopping between streaming services as well as the fact that Jay-Z’s album has already been subject to high levels of piracy.

Streaming services themselves also continue to exhibit agnostic positions on windowing. Apple Music’s Jimmy Iovine earlier this year seemed to infer the company would move away from such practices, stating ‘We’ll still do some stuff with the occasional artist. The labels don’t seem to like it and ultimately it’s their content.’ Spotify on the other hand, having previously stated they were against windowing, have in recent months suggested they may transition towards windowing certain releases on their premium tier. For these reasons, 4:44’s window should be considered less about swelling the subscriber base, as was the intention of windowing efforts last year, but rather reaching his most engaged audience first. Jay-Z’s fanbase are likely to be already on the platform when taking into account the immediate rush of subscribers that followed its release last year. Interestingly MIDiA Research’s consumer survey data shows that Tidal subscribers over-indexing as older and more prominently male than on other competing streaming music services. Whilst TIDAL’s problems are therefore unlikely to subside with this release, 4:44 could at the very least resume the dialogue on how windowing will be employed going forward in growing streaming’s paid users.

How Soundcloud Could Transform Deezer’s Market Narrative

deezer soundcloud

News has emerged of Deezer being a potential buyer of troubled Soundcloud. This follows on from Spotify’s prolonged but ultimately abortive courting last year. Soundcloud was once a streaming powerhouse, with 175 million Monthly Active Users reported in October 2014. Though that number is still widely cited whenever Soundcloud is mentioned in the media, in truth its user base is now much smaller. Spotify, which now has around 150 million MAUs has a Weekly Active User penetration rate of 16% while Soundcloud’s WAU rate is just 6%. With the caveat that multiple additional variables impact WAU vs MAU rates, this would imply that Soundcloud’s MAU number is now closer to 70 million. Despite this shift in its public narrative, Soundcloud remains a uniquely valuable asset in the streaming landscape, one that would give another streaming service a distinct competitive advantage. Here’s why.

A Streaming Service Unlike Any Other (Except YouTube That Is)

Soundcloud first rose to prominence as a platform for artists before it rocketed into the stratosphere as a consumer destination with its new VC-powered mission statement ‘to be the YouTube of audio’. The legacy of its unique starting point is that Soundcloud:

  • Has a catalogue unlike any other streaming service, except YouTube (and to a lesser extent, Mixcloud)
  • Gives artists a direct connection with fans unlike standard streaming services
  • Gives up and coming artists a global platform for reaching fans with no intermediary

That unique combination of assets makes Soundcloud a highly valuable commodity despite its diminished user base and similarly reduced valuation (now said to be around $250 million from a high of $1 billion). Soundcloud has two crucial attributes that will enrich any streaming service:

  • A service tailor-made for Gen Z (ie those consumers currently aged 19 or under)
  • A crowd sourced platform for artist discovery

Soundcloud Is Built For The Era Of Mass Customization

As DJ Spooky put it:

“Artists no longer work in the bub­ble of a record­ing stu­dio. The stu­dio is the net­work.” … “The 20th cen­tury was the era of mass pro­duc­tion. The 21st cen­tury is the era of mass cus­tomiza­tion…”

Artist creativity is no longer a creative full stop, we are now in a phase of Agile Music. Even though the number of people that upload music is small (7% of consumers upload music to Soundcloud or YouTube, of which half upload their own music) their impact on the broader market is multiplied many times over as they provide the music others listen to. But even more importantly, the blurring of the line between audience and creator is the fuel in the engine of Gen Z experiences such as Snapchat and Instagram. Other than lip syncing apps like Musical.ly and Dubsmash, Soundcloud and YouTube are pretty much all the music business has in this space. That, coupled with a highly shareable, highly social UI makes Soundcloud tailor-made for Gen Z. The importance to the segment is clear: among 16-19 year olds, Soundcloud penetration is higher than Apple Music, Amazon Prime Music, Tidal and Deezer, with only Spotify boasting higher penetration for audio services.

Crowd Sourced Discovery

The other key asset Soundcloud brings is the bridge it provides between fans and artists. A host of diverse services like Tunecore, BandLab, Bandcamp and Reverb Nation provide an unprecedented range of tools to up-and-coming artists. But Soundcloud (along with YouTube) is still the only place where artists can reach such a large audience directly, without an intermediary. Layer on its massively social functionality and discovery algorithms and you have an unrivalled audio platform for new artist discovery.

Soundcloud Needs An Ecosystem

Unfortunately for Soundcloud, it has found it impossible to effectively monetize these assets (and aping Spotify’s freemium model has done little to move the dial). What Soundcloud needs is an ecosystem into which it can slot, bringing all of the great functionality but relying on another part of the ecosystem to do the monetization. Slotting Soundcloud into Deezer, Spotify or even Apple Music would create an entirely new layer in each of those propositions and would massively enhance market positioning.

It would also enable the service to start behaving more like a label, identifying and testing artists before moving them up into the main service. If done by Spotify or Apple Music, this would look highly disruptive to labels as it really would be a precursor to becoming a next-gen label. But for Deezer, the story is a little different. As part of the Access Industry potfolio, Deezer sits alongside talent management agency First Access Entertainment, live discovery platform Songkick and, last but most certainly not least, Warner Music. By acquiring Soundcloud, Access Industries would be rounding out the most complete Full Stack Music Company in the business.

YouTube Is Not For Sale But Soundcloud Is

YouTube might do most of what Soundcloud does, and at much larger scale, but Soundcloud is up for sale and YouTube is not. Right now, Soundcloud represents the best opportunity in the marketplace for an audio streaming service to make up the ground in user experience innovation that the streaming market lost over the last few years in comparison to Gen Z apps. And with Deezer at the front of the queue, the French streaming service could be about to transform its market narrative in an instant.

 

Spotify Earnings: Growth Comes At A Cost

spotify metrics

Spotify has published its much anticipated 2016 revenues. Because the company is under so much analytical scrutiny, there is little that is particularly surprising but there is still plenty we can learn from the results:

  • Growth maintains momentum: Spotify recorded revenues of €2.9 billion in 2016, up 51% from €1.9 billion in 2015. Although that was a lower growth rate in % terms (80% for 14/15), it was a bigger net add in revenue terms (€989 million net new revenue in 2016 compared to €863 million in 2015). Spotify still has some way to go before it challenges Netflix’s $8.2 billion streaming revenue, but it is making clear progress.
  • Spotify is getting ready for public reporting: The 2016 accounts featured heavy restating of previous year figures and many line items from last year’s accounts were no longer reported. All of which points to an organization getting its reporting structures in place for a public listing of some kind.
  • ARPU is a mixed story: Spotify’s total monthly user ARPU increased from €1.82 in 2015 to €1.94, driven by a small increase in ad supported user APRU and, more importantly, a higher share of paid users (38% in 2016 compared to 31% in 2015). However, that increased paid conversion has come at the price of lower paid ARPU, with $1 for 3-month trials etc., pushing down paid ARPU from €5.16 in 2015 to €4.58 which in turn is more than an entire dollar a month less than the €5.85 paid ARPU figure Spotify enjoyed in 2014.
  • Losses are widening again: Spotify reported losses before tax of €539 million against revenues of €2.9 billion (i.e. 18% of revenue). This was up from 12% in 2015 although it had been as high as 17% in 2014. In order to keep up with the market, Spotify is having to spend heavily, and this is all without any major product or territory launch in 2016. You need deep pockets to play at streaming’s top table.
  • Rights costs may be on a positive trajectory: Spotify’s Cost of Sales (previously reported as Royalty Distribution and Other Costs) were €2.5 billion, or 84.6% of revenue, down slightly from 85.5% in 2015. The shrinking share of the loss-making ad supported user base is most likely the key contributor here. Though the new UMG and Merlin deals will help sustain this path.

In Search Of A Margin

So, what do Spotify’s results say about the economics that we didn’t already know. In truth, not much. The market has lots of growth in it yet; competing is expensive, growth has to be incentivized and rights are the main cost component.

As Spotify nears a public listing or an acquisition by Alibaba or Tencent, it remains the benchmark for the health of the streaming economy. With the underlying fundamentals remaining largely unchanged in 2016 despite stellar growth, here are a few thoughts on how the economics of streaming might change:

An often repeated argument from record labels is that streaming services will hit profitability when they reach scale. So, when does that happen? 48 million subscribers can lay a good claim to being ‘scale’, but it isn’t driving profit. While the market establishes itself, streaming services have to overspend on product innovation and marketing (and then, later, on user retention). So, these costs will likely rise in relative terms. Meanwhile, rights are always going to remain largely in line with revenue (though the UMG and Merlin deals reward growth with some discounting, which is a welcome innovation). But even these deals will not change the fact that rights will be large enough to challenge margins and will largely scale with growth. Which means no truly meaningful scale benefits. So here are a few alternative ways in which streaming margins might be improved:

  • Doing a Netflix: Because Netflix owns much of its own content, it is able to use its recommendation algorithms to ensure that content over-indexes, improving margin. It also amortizes costs against those content assets to help it register a profit. Spotify could do the same but is unlikely to do so anytime soon. It cannot afford to antagonize its major label partners, each of whom has a UN Security Council type power of veto (Spotify would falter if any one of them pulled out). Someday, Spotify probably will become a label, though not in the way most people would understand the term. However, it will wait for more scale and confidence before flicking the switch on that strategy.
  • Ecosystems: Apple has long demonstrated the value of competing right across value chains. Now Amazon is following suit (e.g. Amazon Video covers rights, infrastructure and distribution). Exercising control across the value chain gives a company more places to extract margin. Perhaps Alibaba or Tencent (or some other Chinese giant) could buy a major label and a streaming service? Access Industries is already on this path, wholly owning WMG and more than half of Deezer (though there doesn’t seem to be much in the way of dots being joined yet). And then the wildcard is a streaming service becoming so big that it can buy a major or a collection of big indies. Or of course Apple deciding to any of the above. Should this feel like wild conjecture, do not forget that it was not so long ago when an ISP (AOL) bought WMG, and a water and sewage conglomerate (Vivendi) went on a media company acquisition spree and bought UMG.
  • Ancillary revenue streams: The most pragmatic solution though is not a silver bullet, but instead a blended strategy of new revenue streams. These can range from B2B (e.g. Spotify selling its data to live companies like Live Nation and AEG to help them get more cost effective with better targeting), through premium user add-ons to new formats such as limited capacity, pay-per-view artist live streams.

Spotify played the starring role in streaming’s biggest year yet and looks well on track to do the same in 2017. But at some stage, the losses need to narrow. The industry needs to help ensure this happens, unless it wants the market to end up being dominated by companies that simply do not have to have streaming turn a profit because they are making money elsewhere.