Music streaming contrasts sharply with video streaming. While the video marketplace is characterised by unique catalogues, a variety of pricing and diverse value propositions (including a host of niche services) music streaming services are all at their core fundamentally the same product. When the market was in its hyper-growth phase and there were enough new users to go around, it did not matter too much that the streaming services only had branding, curation and interface to differentiate themselves from each other. Now that we are approaching a slowdown in the high-revenue developed markets, more is needed. Which is where Hi-Res comes in.
Now that streaming is, as Will Page puts it, in the ‘fracking stage’ in developed markets, success becomes defined by how well you retain subscribers rather than how well you acquire them. As all the key DSPs operate on the same basic model, they need to innovate around the core proposition in order to improve stickiness and reduce churn. Spotify started the ball rolling with its podcasts pivot, but the fact that its podcasts can be consumed by free users means it is not (yet) a tool for reducing subscriber churn.
On top of this, when podcasts are mapped with other positioning pillars, Spotify’s competitive differentiation spread is relatively narrow. Because Apple and Amazon now both have Hi-Res as standard, they not only boost audio quality but value for money (VFM) as well. Bearing in mind, both companies already scored well on VFM because they have Prime Music and Apple One in their respective armouries.
It is Amazon, though, that looks best positioned of the four leading Western streaming services. In addition to audio quality and VFM, it is building out its podcasts play (as compared to the Wondery acquisition) and it has the potential to bundle in the world’s leading audiobook company, Audible. Given that spoken-word audio consumption grew at nearly twice the rate music did during 2020, being able to play in all lanes of audio will be crucial to competing in what will become saturated streaming markets.
Immersive audio storytelling
Finally, Dolby Atmos is more than simply Hi-Res audio; it is an immersive format that enables the creation of spatial audio experiences. If we are truly on the verge of a spoken-word audio revolution, then immersive audio may have a central role to play. Surround sound has been a slow burner for home video, but that may be because the video experience itself has improved so much (bigger screens, HD, more shows than ever) that the audio component has been less important (though the growing soundbar market suggests that may be beginning to change). However, in audio formats there is only the audio to do the storytelling. This could mean that tools like immersive audio become central to audio storytelling, which means, you guessed it, Amazon and Apple would then have a competitive advantage in podcasts and audiobooks that Spotify would not.
The major labels saw streaming revenue grow by just 0.8% between Q4 2020 and Q1 2021, while Spotify saw revenues fall by 1%. Seasonality plays a major role here (a similar trend was seen last year) and year-on-year revenues were up by around a quarter. Nonetheless it reflects a maturing market.
Back in 2019 Spotify’s revenues grew 15.7% from Q4 2018 to Q1 2019, while the majors’ streaming revenue was up 3% between Q4 2017–Q1 2018. In short, when the market was growing faster, seasonality did not result in flat / negative growth. Streaming is still in good shape and is going to remain the core of recorded music revenues for the foreseeable future, and Spotify’s price increases will bring a little extra revenue in 2021, but it is clearly time to start thinking about what comes next.
There is an argument that in today’s post-format world, we should not even be thinking about the next thing. So, it is better to think about what new business models and user experiences can grow alongside streaming, to diversify the music industry’s income mix.
Music businesses, labels in particular, are busy exploring where future growth will come from. The more pessimistic argue that this is largely as good as it gets, that there will not be a ‘next streaming’. That might be right in terms of a single revenue source, but the early signs are that there is enough potential in a range of sources to collectively drive growth. Here are a few of the music industry’s potential growth drivers:
Social: Revenue from the likes of TikTok and Facebook finally became meaningful in 2020, accounting for around three quarters of the growth registered in ad supported. We are still scratching the surface of what social can do for music, but building tools for users to create their own music and audio will be key. Facebook’s Sound Studio could prove to be a defining first step towards the establishment of the consumer’s version of the social studio.
Creator tools: As regular readers will know, MIDiA considers the current revolution in the creator tools space to be one of the most important shifts to the entire music business in recent years. Not only is it transforming the culture of music creation, it represents a new set of opportunities for deepening artist-fan relationships and a set of new facets for the future of music companies.
Next-generation sync: Although traditional music sync revenues fell in 2020, music production libraries (including royalty free) grew. We are on the cusp of a major new wave of opportunity in sync, with social content, platform and creators representing a scale of demand that far exceeds that of the traditional sync market. And it is the slow-moving nature of that traditional sector which means that the likely winners in the social sync market will be the new generation of companies that offer solutions that are sufficiently agile and fast to meet the scale of micro-sync demand.
Fitness: Another of the pandemic’s second order effects was a surge in consumer spending on home fitness equipment, including Peleton. Right now there is some meaningful music licensing revenue building around the space, but Beyoncé’s Peleton partnership shows that the opportunity goes way beyond simply piping music into workouts. Crucially, the Beyoncé partnership creates an audience that is focusing their entire attention on the artist, which is rarely the case when people are listening to music on audio streaming services.
To reiterate, streaming is, and will remain for many years, the beating heart of recorded music revenue. In fact, more than that, most of these new opportunities exist at such scale because of streaming. Until now, streaming enabled revenue growth in its own right, now it will enable growth in new adjacent markets.
The attention economy defines and shapes today’s digital world. However, we have long since reached peak in the attention economy with all available free time now addressed. What this means is that previously, when digital entertainment propositions grew, they were often using up users’ free time. Now though, every minute gained is at someone else’s expense. The battle for attention is now both fierce and intense. What is more, it will get worse when much of the population finally returns to commuting and going out, as 2020 was defined by entertainment filling the extra 15% of free time people found in their weekly lives. But there is an ever bigger dynamic at play, one which gets to the very heart of entertainment: the attention economy is becoming a malign force for culture. Consumption is holding culture hostage.
The increasingly fierce competition for consumers’ attention is becoming corrosive, with clickbait, autoplay and content farms degrading both content and culture. What matters is acquiring audience and their time, the type of content and tactics that captures them is secondary. It is not just bottom feeder content farms that play this game, instead the wider digital entertainment landscape has allowed itself to become infected by their strategic worldview.
The attention dependency goes way beyond media
Do not for a minute think this is a media-only problem. The corrosive impact of the attention economy can be seen right across digital entertainment, from hastily churned out scripted dramas, through to music. Artists and labels are locked in a race to increase the volume and velocity of music they put out, spurred on by Spotify’s Daniel Ek clarion call to up the ante even further. In this volume and velocity game, algorithm-friendly A&R and playlist hits win out. Clickbait music comes out on top. And because music attention spans are shortening, no sooner has the listener’s attention been grabbed, then it is lost again due to the next new track. In the attention economy’s volume and velocity game, the streaming platform is a hungry beast that is perpetually hungry. Each new song is just another bit of calorific input to sate its appetite.
In this world, ‘streamability’ trumps musicality, but it is not just culture that suffers. Cutting through the clutter of 50,000 new songs every day also delivers diminishing returns for marketing spend. Labels have to spend more to get weaker results.
Music subscriptions accentuate the worst parts of the attention economy
Perhaps most importantly of all though, music subscriptions are the worst possible ecosystem in which to monetise the attention economy. In online media, more clicks means more ads, which means more ad revenue. In music subscriptions it is a fight to the death for a slice of a finite royalty pot. A royalty pot that is also impacted by slowing streaming growth and declining ARPU. The music industry has developed an attention dependency in the least healthy environment possible.
This is not one of those market dynamics that will eventually find a natural course correction. Instead, the music industry has to decide it wants to break its attention dependency and start doing things differently. Until then, consumption and content will continue to push culture to the side lines.
It is time to take hold of the wheel
Some years ago, Andrew Llyod Webber said this: “The fine wines of France are not merely content for the glass manufacturing business”. Although those words are of someone from the old world grappling with the new, the underlying premise remains. None of this is to suggest that streaming consumption is not the future. Nor is it to even suggest that all of the changes to the culture of music that streaming has brought about are negative. In fact, it may be that streaming-era music culture is simply what the future of music is going to be. But what is crucial is that artists, labels, songwriters and publishers take an active role in steering the ship to the future rather than simply getting pulled along by the streaming tide.
The UK parliament is currently running an inquiry into the streaming music economy, having called for evidence from across the music business. Earlier this week were the first verbal submissions, from a number of UK artists including Tom Gray (Gomez), Guy Garvey (Elbow), Ed O’Brien (Radiohead) and Nadine Shah.MPs heard impassioned but balanced submissions that shone a light on the reality of what it means to be an artist in the streaming era. Mercury Prize-nominated Shah explained that she makes so little money from streaming that she is struggling to pay her rent. Clearly, the demise of live during the pandemic has created a uniquely difficult period for artists, but it has spotlighted that streaming on its own is not working for artists. The fact that policy makers are hearing this viewpoint (albeit later rather than sooner) suggests that change will be coming. But, while the focus is understandably on how to ‘fix’ streaming, it might be that efforts would be better placed building a complementary alternative.
In Steve McQueen’s new film Mangrove, there is a intense scene in which Darcus Howe implores café owner and community leader Frank Crichlow that after Frank’s fruitless attempts to fix the problem via the system that direct action is the only way to change things: “self-movement – external forces acting on the organism”.
The equivalent of direct action in the commercial world is innovation – it comes from the ground up. In 2008 Spotify came up with an innovation that made the problem of the time –piracy – effectively redundant. What’s required now are new innovations that make the current streaming model look like an alternative, not the only choice – to enjoy music.
Now is the time
Now is the right time to be assessing the long-term impact of streaming. It is a mature business model and is the largest revenue driver in most of the world’s leading music markets. Whatever streaming is now, is pretty much how it is going to be. The future of what streaming can be is already here, today. Assessments must be on what the model delivers now, not some future potential.
Streaming’s current performance can be assessed as follows:
Record labels and publishers have experienced strong revenue growth and improving margins. Their businesses have been improved
Artists and songwriters have more people listening to their music than ever before and more creators are able to earn income than ever before
However, beyond the superstars, most do not earn a sustainable income from streaming alone and cannot see a pathway to this ever changing. This is Guy Garvey’s reference to the lack of any new (financially viable) music artists in the future.
A model for rights holders more than creators
Streaming benefits rights holders more than it does creators. It is far easier to enjoy the benefits of scale if you have scale. Here is a simple illustration: if a label has 100,000 tracks played 10 times each in a month (i.e., a million streams) it will earn around £/$5,000. But a self-released artist with just 100 tracks with 10 plays each (i.e., 1,000 streams) will only earn £/$5. Though this is the product of simple arithmetic, the first amount is the foundation of a small business, the other buys you a cup of coffee.
Record labels and publishers with large catalogues benefit from scale in a way that artists and songwriters do not, unless they have a megahit – and although streaming is great for megahits, they are few and far between. Changes to licensing (and there are many ways to do that) may make things better – but they will not change the underlying dynamic; it is simply how the model is.
We have a model that works for rights holders that is fuelled by artists and songwriters. Now we need an additional, parallel, model that works for artists.
Streaming music services are incentivised to drive consumption. What we need are additional models, incentivised to drive fandom. Streaming is a song economy, and we now need a parallel fan economy.
Music used to be all about fandom. It was the way in which people identified and expressed themselves – a badge of honour and a symbol of personality. Streaming has industrialised music, turning it into a convenient utility that acts as a soundtrack to our everyday life. That may be fine, but it has simultaneously supressed those ways to express fandom. It’s not easy to express your fandom on a streaming platform, while on a social platform money must change hands.
Music fandom hasn’t died, but it just has fewer places to live.
The fan economy
So, what is a fan economy? A fan economy is one in which the value resides in the artist-fan relationship. Currently this model is pursued actively in Asia (e.g., Tencent Music in China, K-Pop in Korea) but far less so in the West. The fan economy will be defined by diversity but what its constituents will have in common is being built around micro-communities of fans.
Micro-communities that are built around an artist’s 1,000 true fans (or even fewer) allow the artist’s most loyal and dedicated fans to drive revenue that is small to the industry but large to the artist. For example, an artist with 1,000 subscribers paying $5 a month would generate the same $5,000 a month that a million streams would deliver a record label.
There are a number of platforms that are making a start, but now is the time for this to become a central music industry focus. Music rightsholders have a model that works well for them, so now they need to ensure that their artists and songwriters have models that work for them too. There is thus an onus on rights holders helping drive the fan economy, but to drive creator income rather than simply be another rights holder income.
A multi-pronged approach
This is the three-pronged approach we propose:
Governments, support new, innovative companies building fan economy models and ensure that they provide equitable remuneration for creators
Record labels, build teams geared at helping their artists find fan economy income streams (and take a service fee or revenue share)
Streaming services, allow artists more real estate to showcase where fans can find other content and experiences
None of this is to say that efforts to make streaming more equitable should not be pursued; they absolutely should. However, it should be done with a clear understanding of the ‘art of the possible’. Even if rates were doubled, the self-released artist with 1,000 streams would still only earn £/$10. For an artist with a million streams a month on a big label it would change monthly income from £/$1,250 a month to £/$2,000, i.e., £/$24,000 a year. Not a sustainable annual income.
Our case is that streaming should indeed be made more equitable, but alongside proactive investment in a new generation of innovative fan economy apps. This is an opportunity to make UK Plc the innovation driver for the global music business. A unique opportunity that is there for the taking with the right strategy and support, from all vested interests.
The opportunity for the UK streaming inquiry
With the streaming inquiry, the UK government has an unprecedented opportunity to set a global standard for building a vibrant and viable future for music creators, but it is an opportunity that needs seizing now. In partnership with music creators and rightsholders, it can create a structure that supports the innovation and change the industry needs. Now that streaming has come of age, we can see both its strengths and weaknesses. Let’s use the weaknesses as a foundation for building something new, exciting and equitable. It is time to bring ways to allow music fans to express themselves and their support to artists more directly. That will keep music the uniquely valuable product it is, and not just the grease in the wheels.
Nicely timed to (accidentally!) coincide with YouTube’s announcement is third edition of MIDiA’s biannual ‘State of the YouTube Music Economy’ report. This report, which provides a detailed analysis of YouTube’s contribution to the music business, put YouTube’s music user number at 1.2 billion for the end of 2019. Of course, all this comes at a time when European legislators are discussing how Article 17 of the European Copyright Directive will be implemented and therefore impact YouTube’s business (potentially a very convenient time to release a stat of this magnitude?). 2020 has proven to be a big year for YouTube – but equally, make no mistake: YouTube and music rightsholders are still not on the same page.
One of the biggest issues regarding the YouTube music economy is that music, while performing and growing strongly, still underperforms commercially compared to other content genres on the platform. This is because music videos are not as well suited to YouTube’s monetisation mechanics as genres such as games. For example, the videos are too short to have mid-roll video ads and most music channels (Asian and Latin American ones excepted) are artist-centric, so simply do not have enough content to drive channel engagement. While there are constraints on what can be done with a music video, there is nonetheless a lot of scope for innovation and increasing music’s share of YouTube revenue.
Google is now the second largest global payer of music royalties, with $5.2 billion across free and paid as well as masters and publishing. Spotify is comfortably ahead, but the scale of Google’s royalty contribution is pronounced.
In 2019, YouTube generated $15.2 billion in ad revenue with $4 billion of that music related (this figure includes income for labels, publishers and YouTube etc.). While that was an impressive increase of 18% on 2019 it was much slower than the 36% growth in overall ad revenue. Consequently, music’s share fell from 31% to 26%. Music rightsholders might point to this being evidence of YouTube not paying enough for music, but it pays pretty much the same revenue share to all of its creators. So, there is clearly more that music can be doing to ensure that it can grow at a rate closer to that of other content genres.
Currently, YouTube is becoming more important to music than music is to YouTube. The one billion views club is becoming the de facto Platinum ‘sales’ award for the streaming era, and there are now 208 music videos that have reached the milestone with 74 videos reaching it in 2019/20 alone. YouTube continues to dominate the global music streaming market, with 47% music weekly active user penetration, ahead of Spotify in second place at 29%. Being the most widely used music streaming app across all ages, with weekly active usage highest among 16-19 year olds at 70% penetration, YouTube is simultaneously a key ad-supported, premium, marketing and discovery asset for artists and labels. Against this setting, the debate around rights holder royalty rates continues to rage.
Firstly, for sake of clarity, MIDiA firmly believes that copyrighted work should be used correctly and remunerated. We are not, in any way, suggesting that a platform should be able to use music without permission. However, the current licensing structures are:
YouTube and Twitch represent an opportunity to create new growth drivers, especially for artists, that can help fix the ‘broken record’
A lack of sync in sync
Let’s address the first point, well, first. Platform-native creators on YouTube, Twitch and TikTok create content so frequently they make the music industry’s volume and velocity problem look like child’s play. Usually, creators who want music in their videos have a choice: 1) get sync licenses, 2) get library music, 3) use music without permission and get taken down or demonetised.
The problem with option one is that sync clearance is a lengthy process that can take weeks and cost a lot. Not a great fit for creators who create and upload videos the same day. Companies like Lickd are trying to fix this with catalogues of pre-cleared music, but the industry as a whole is moving too slowly. For the record, MIDiA’s preferred solution is for platforms securing large ‘sandboxes’ of pre-cleared tracks for creators and developers to work with. An early example of this is the NFL making all of its soundtracks available for creators on a Synchtank powered site.Unless music rights holders want to cede the growth in the music UGC space (which will be worth $5.9 billion by end 2022) to library music companies, they need to put alternative approaches at the core of their licensing strategy, not simply pursue them as interesting ‘edge’ experiments.
Going beyond the stream
However, the biggest music industry opportunity is not licensing music. It is monetising fandom. The #brokenrecord debate has shone a light on how streaming’s scale benefits do not trickle down at a sufficient rate to creators. Artists compete for tiny bits of highly valuable ‘real estate’ – playlists, artist profiles etc – but most often do not get enough to earn a living. While efforts like user-centric licensing and better songwriter rates will help, they will not change the underlying fundamentals of streaming economics. The counter argument is that scale will change everything, but:
Average revenue per user (ARPU) is falling. Spotify’s premium ARPU fell 34% between Q1 2016 and Q3 2020, a 34% decline
Streaming growth is slowing in developed markets
Consumption is slowing – last quarter Spotify reported an increase in consumption hours to pre-COVID levels but as there were 49 million new monthly active users (MAUs) compared to pre-COVID this implies a reduction in hours per user
Emerging markets are growing but a) ARPU is lower and b) domestic repertoire will drive most of the long-term consumption – so this means only a small uplift for Western creators
Before live stopped, streaming existed in a mutually beneficial ecosystem, giving artists more fans for concerts and merch. Now that live is out of the equation, streaming isn’t enough.
This is where platforms like YouTube and Twitch can come in. They enable creators to build loyal fanbases of which they can monetise the loyal core to build sustainable careers. The idea of ‘1,000 True Fans’ was first put forward years ago by Kevin Kelly but now the dynamics of social platforms have made this a realistic possibility for any creator. Nevertheless, music artists are still way off the pace.
Twitch and YouTube enable creators to build (often small) loyal fanbases that can generate them income that far exceeds what artists get from streaming. MIDiA terms this dynamic ‘micro-communities’ and we think it will be one of the trends that will shape the music business in 2021 and beyond. As part of our creator tools research we will be exploring how platforms like Splice and Landr will be able to build their own artist-fan communities that can be as valuable to artists as Bandcamp is to many already.
Streaming created a superstar economy where even within the non-superstars, superstars exist. For example, Tunecore states it has ‘thousands’ of artists that make more than $100,000 a year. A simple bit of arithmetic shows that this means the remainder make less than $100.
Micro-communities represent an opportunity for artists to fill the income gap that streaming leaves without live in the mix. This probably does not reflect a direct revenue opportunity for rights holders – indeed, that would be missing the point. Instead, they can ensure those platforms are supported to empower artist monetisation without speed bumps. Why? Quite simply, rights holders have a model that works for them (streaming), so now they need to support a model that works for their creators so that they can in turn continue to support the streaming model that works for rights holders.
If the industry does not support this new virtuous circle ecosystem, then it could bring the streaming model crashing down due to creator discontent.
Apple officially announced its long anticipated all-in-one content bundle: Apple One. $14.99 gets you Apple Music, Arcade, Apple TV+ and 50GB of iCloud storage. A family plan retails at $19.95 and a premier plan includes 1TB storage, News and Apple’s new Fitness+ service. While the announcement was expected (and you may recall that MIDiA called this back in our December 2019 predictions report) it is important nonetheless.
As we enter a global recession, the subscriptions market is going to be stressed far more than it was during lockdown. With job losses mounting, and many of those among Millennials – the beating heart of streaming subscriptions – increased subscriber churn is going to be a case of ‘how much’ not ‘if’. In MIDiA’s latest recession research report, we revealed that a quarter of music subscribers would cancel if they had to reduce entertainment spend and a quarter of video subscribers would cancel at least one video subscription.
A $15.99 bundle giving you video, music, games and storage will have strong appeal to cost conscious consumers who are loathe to drop their streaming entertainment but need to cut costs. As with Amazon’s Prime bundle, Apple One is well placed to weather the recession. They may not be recession proof – after all, entertainment is a nice-to-have, however good the deal – but they are certainly recession resilient.
Which may explain why music rights holders have been willing to license the bundle which almost certainly included a royalty haircut for them, to accommodate the other components of the bundle. While rights holders will not have been exactly enthusiastic about further royalty deflation (one for artists and songwriters to keep an eye out for when Apple One starts to gain share) they are also keenly aware of the need to ensure they keep as many music consumers on subscriptions as possible.
One key learning of the impact of lockdown has been that new behaviours learned during a unique moment in time (eg not commuting to an office, doing more video calls) can result in long term behaviour shifts. Lower music rightsholder ARPU may be a price worth paying for shoring up the long term future of the music subscriber base.
It’s complicated. The short version is that we have a superstar economy in streaming quite unlike the old music business, one in which artists on smaller independent labels have just as much chance of breaking into that exclusive club as those on bigger record labels. Given that AWAL states its cohort of $100k+ artists grew by 40% (assuming they mean annually) while global label streaming revenues grew by 23%, the implication is that AWAL is getting better at doing this than the wider market. And it is the implied growth of the rest of the market where things get really interesting.
(A model with more than 50 lines of calculations was required to build this analysis so I am going to walk through some of the key steps so you can see how we get there. Bear with me, it will be worth it I promise you!)
Finding the third data point
To do this analysis I am going to share one of MIDiA’s secrets with you: finding the third data point. Companies, understandably, like to share the numbers that make them look good and hold back those that do not help their story. Often though, you can get at what that third number is by triangulating the numbers they do report. A really simple example is if a company reports its revenues and subscribers but not its average revenue per user (ARPU), you can get to an idea of what the ARPU is by dividing revenue by subscribers (and if you have a churn number to work with, even better).
Spotify generated 73 billion hours of streams in 2019, which equates to around 1.3 trillion streams. Interestingly, taking its roughly $7.6 billion of revenue, this implies that its global per-stream royalty rate (masters and publishing, across free and paid) stood at $0.00425 – which is a long way from a penny per stream. This highlights how promotions, multi-user plans, free tiers and emerging markets are driving royalty deflation. But that’s a discussion for another day…
For the purposes of this work let’s assume that the average artist royalty rate (across standard major, indie and distribution deals) is 35%. Spotify’s 90% of streaming label royalties in 2019 was $3.9 billion, which translates to an average artist royalty income of $29,221 for each of those 43,000 artists. That is obviously south of AWAL’s $100k cohort, which illustrates that those AWAL artists are not just superstars but an upper tier of superstars.
$66,796 is good, as long as you don’t have to split it
But how does this look outside of Spotify? Firstly, the top 90% of global streaming label revenues was $10.8 billion in 2019. We then scale up Spotify’s 43,000 top-tier artists to the global market and deduplicate overlaps across services and we end up with a global base of around 56,000 top-tier artists earning an average of $66,796 per year from streaming (audio and video).
$66,796 is a decent amount of annual income but it looks a lot better if you are a solo artist than, say, a four-piece band splitting that revenue into $16,699 slices. Interestingly, AWAL seems to skew towards solo artists (94% of AWAL’s featured artists are solo acts) so the $66,796 goes a lot further for them than an average indie label rock band.
And then there’s the remaining 99% of artists…
But of course, this is how things look for the most successful artists. What about the remainder that have to share the remaining 10% of streaming revenue? That remaining label revenue is $1.2 billion of which $0.7 billion (i.e. 57%) is Artists Direct. That means the entire global base of label-signed artists that are not in the top tier have to share 4% of global streaming revenues. This translates to an average annual streaming income of $425. Artists Direct meanwhile earn an average of $176 (only 59% less than those non-superstar label artists).
The 90/1 rule
The key takeaway then is that streaming is levelling the playing field for success. Consistently breaking into the top bracket is now achievable for artists on major and indie labels alike and, if anything, independents are enjoying progressively more success. But this is a very different thing from all artists doing well. Music has always been a hits business. Streaming is widening the distribution but with less than 1% of artists generating 90% of income, the spoils are far from evenly shared. Music streaming has taken Pareto’s 80/20 principle and turned it into a 90/1 rule.
The #brokenrecord debate continues to build momentum and new models such as user-centric are getting increased attention, including at governmental level in the UK. But as Mat Dryhurst correctly observes, there is a risk of the market falling into streaming fatalism; that the obsession with trying to fix a model that might not be fixable distracts us from focusing on trying to build alternative futures.
I have previously explored what those new growth drivers might be, but now I want to explain the unfixable problems with the current streaming system for creators and smaller labels. Streaming’s remuneration model cannot be ‘fixed’, but that is mainly because of its inherent structure. Tweaking the model will bring improvements but not the change artist and songwriters need. Instead of exploring sustaining innovations for streaming, it is time to explore new disruptive market innovations
Product remuneration versus project remuneration
Smaller independent artists and labels are outgrowing the majors and bigger indies on streaming, so why are we having the #brokenrecord debate? Why isn’t it adding up? The answer lies in how artists and songwriters are remunerated. In all other media industries other than music and books, creators are primarily remunerated on a project basis. An actor will be paid an appearance fee for a film or TV show; a games developer will be paid for their time on a project; a sports star paid a salary; a journalist paid for a story. In many of those cases the creator will sometimes have the opportunity to negotiate a share of profit too, an ability to benefit in the upside of success. But, crucially, the media company has assumed all of the risk. Also, of course, the media company owns the copyright.
Artists and songwriters might get an advance, but that is a loan against future earnings, not a project fee. Artists and songwriters, like authors, are remunerated via product performance. They shoulder the risk, and most of the time they do not even own the copyright. Actors and sports stars do not have to worry about slicing up a royalty pot; they have been paid for their creativity whatever the outcome of the project. Any royalty splits are an upside, an ability to benefit from success rather than a dependency for income.
The consumption hierarchy has become compressed
Music used to be split into a neat hierarchy, with radio and social being about passive enjoyment and generating usually small royalties, while albums were about active fandom that generated large income. Streaming fused those two together into one place and created a royalty structure that, in artist income terms, resembles radio more than it does album sales. The problem does not lie with how much streaming services pay (c.70% of income is a hefty share to pay out), but instead:
how those royalties are divided up
the way they monetise consumption
the fact royalty rates are determined by how much streaming services charge
Streaming rates are going down because users are listening to more music and streaming services are charging less per user due to promotions, trials, multiple-user plans, telco bundles, student plans etc. Even before you start thinking about how the royalty pie is sliced, it is getting ever smaller in relation to consumption – and there is no onus on streaming services to protect against rates deflation because they pay as a share of income rather than a fixed per-stream rate (for subscriptions).
Music fans care about artists and songwriters, and given the opportunity and the right context many fans will support them. But that context is often artificial and happens outside of the normal consumption experience; for example, a music fan listening to a band on Spotify then going to Bandcamp to buy an album. It requires a conscious decision for the fan to say ‘I want to support this artist’. No such decision is necessary for a sports fan or movie fan because the remuneration system already ensures the talent has been adequately remunerated. On top of this, most music consumers are not passionate fans of most artists, so most will not make that step.
There are two natural paths that follow:
Build fandom monetisation into the streaming platforms, e.g. virtual artist fan packs, virtual gifting, premium performances, creator support etc. I have written at length about how Chinese streaming services do well at monetising fandom, but there it is the platform that benefits most, not the artists. Western streaming services have an opportunity to monetise fandom for the creators, not for the platforms.
Create new models where consumers pay for artist-centric experiences. These will always be more niche and have the challenge of building new audiences rather than tapping into existing streaming audiences, but the decision does not need to be ‘either/or’.
The third way
There is additionally a less obvious third path, that would reframe the entire basis of artist/label/publisher/songwriter/streaming service relationships: direct licensing for creators. No streaming service is going to want to do this (they already prefer to negotiate with aggregators rather than small labels) and labels and publishers are unlikely to want to cede such power. But a pragmatic compromise could be a new generation of artist and songwriter contracts that provide for the creators to set stipulations for royalty floors to ensure that they do not pay for streaming services cutting their prices via promotions and multi-user plans. This would also require rightsholders to ensure that streaming services set a royalty floor which in turn would compel streaming services to start pushing up the average revenue per user and perhaps even introduce metered access for users.
Options 1 and 3 are not exactly easy to do and they would require seismic industry change with wide-reaching impact. But if the industry wants a significant change in creator remuneration, then it needs to embrace truly disruptive innovation rather than spend its time tweaking a model that simply cannot change in the way many want it to.
How (particularly younger) consumers engage with music
Competing with YouTube
How consumers discover music
Among the under-aged 35 demographic, YouTube is the primary music discovery channel, followed by music streaming, then radio, and only then by social. Streaming discovery is heavily skewed towards tracks and playlists, and away from artists and release projects, which is fine for streaming platforms but impedes building sustainable artist careers. Radio is losing share of ear and YouTube… well, YouTube is YouTube (more on that below), so the music business needs a new discovery growth driver. Social has the potential to be just that. But spammy artist pages on Facebook and more-than-perfect Instagram photos are not it. TikTok, for all its amazing momentum, actually has a really uneven impact on discovery. Some tracks blow up out of nowhere while most do little, and rarely is it because of a smart label marketing strategy but instead because certain tracks just work on the platform and the community leaps on them. For now, TikTok is too unpredictable to plan around. Facebook (Instagram especially) and Snap Inc have a fantastic opportunity to do something special here. They have the audience and the social know-how. Whether they can deliver is a different matter entirely.
How (particularly younger) consumers engage with music
What TikTok lacks in consistent marketing contribution it makes up in consumption. Following on from Musical.ly’s start, TikTok has reimagined how music can be part of social experiences for young audiences. It has made music a highly relevant and integral part of self-expression, something that CD collections and music dress codes used to do in the pre-digital world but that soulless, ephemeral playlists wiped out. While labels pin hopes on TikTok successes to drive wider consumption, the discovery journey is also the destination for most TikTok users – they hear the track in a video and swipe onto the next one. That is no bad thing. This is a new form of consumption, and if TikTok were to disappear or fade then someone else needs to pick up the baton. Whether Facebook and Snap Inc can do so is, again, an open question.
Competing with YouTube
Now we get to the heart of the Facebook and Snap Inc deals. As important as the previous two points are, they were not the overriding priorities of the commercial teams driving these deals. Instead they were focused on expanding the revenue mix and part of that is creating more competition for the notoriously low-paying YouTube. Well, maybe not that low paying after all.
The internet is full of statements from trade associations, rightsholders and creators about how much less YouTube pays than Spotify. YouTube does pay less, because it manages to escape paying minimum per-stream rates for ad-supported videos – but it is a more nuanced picture than lobbyists would have you believe. Firstly, in terms of its Premium business, Google is entirely on par with Spotify. But then, that is the part that is licensed in the same way as the rest of the market.
Ad-supported is a mixed story. In North America, where there is a mature digital ad market, YouTube’s ad-supported average revenue per user (ARPU) is entirely on par with Spotify’s. However, on a global basis, ad-supported ARPU is dragged down by its large user base in emerging markets where digital ad markets are nascent. Spotify’s ARPU is 66% higher, in part because it has to pay minimum per-stream rates, i.e. it pays a fixed rate per stream regardless of whether it has sold any ad inventory against the track. This boosts ad-supported ARPU but it risks making the model unstainable, to the extent that Spotify reported -7% gross margin for ad-supported in Q1 2020 (and note, that’s gross margin, not net margin).
Rightsholders will be hoping for Facebook and Snap Inc to bring a similar level of competition to music video as exists in streaming audio, which in turn may give them a path to higher global ad-supported ARPU rates and a healthier marketplace. However, what will determine that objective is not business strategy but product strategy. The key question is what can they both do with music videos that YouTube cannot? YouTube has years of experience and user data around music videos, Snap Inc and Facebook do not. They will be playing catch-up with a weaker portfolio of content assets: Snap Inc is only partially licensed and both it and Facebook have only licensed official music videos. Unofficial videos (mash ups, covers, lyrics, TV show appearances etc.) account for 25% of the views of the top 30 biggest YouTube music videos. Those videos are crucial in that they provide the lean-forward element for viewers; they are crucial to making YouTube music social rather than just a viewing platform.
YouTube has dominated the music video globally for more than a decade. This might just be the time that this position starts to be challenged. But if Facebook and Snap Inc are going to do that, they will have to bring their product strategy A-game to the field. If they can, then the we may indeed witness a social music turnaround in the West.