The COVID Bounce: How COVID-19 is Reshaping Entertainment Demand

The economic disruption and social dislocation caused by the COVID-19 pandemic is not evenly distributed. Some business face catastrophe, while others thrive. Across the entertainment industries the same is true, ranging from a temporary collapse of the live business through to a surge in gaming activity. As we explain in our free-to-download COVID-19 Impact report, the extra time people have as a result of self-isolation has boosted some forms of entertainment more than others – with games, video and news the biggest winners so far.

midia research - the covid bounceTo further illustrate these trends, MIDiA compiled selected Google search term data across the main entertainment categories. The chart below maps the change in popularity of these search terms between the start of January 2020 up to March 27th. Google Trends data does not show the absolute number of searches but instead an index of popularity. These are the key findings:

  • Video streaming: All leading video subscription services saw a strong COVID-19-driven spike, especially Disney+ which managed to coincide its UK launch with the first day of national home schooling.
  • Music streaming: Little more than a modest uptick for the leading music services, following a long steady fall – reflecting a mature market sector unlike video, which has been catalysed by major new service launches.
  • Video demand: With the mid- to long-term prospect of a lot more time on their hands, consumers have been strongly increasing searches for TV shows, movies and games to watch and play. The fact that ‘shows for kids to watch’ is following a later but steeper curve reflects the growing realisation by locked-down families that they have to stop the kids going stir crazy while they try to work from home.
  • Music demand: Demand for music has been much more mixed, including a pronounced downturn in streams in Italy. Part of the reason is that music is something people can already do at any time in any place. So, the initial instinct of consumers was to fill their newfound time with entertainment they couldn’t otherwise do at work/school. As the abnormal normalises music streaming will pick up, as the recent increase in searches for music and playlist terms suggests. Podcasts, however, look like they will take longer to get a COVID bounce.
  • Games: Games activity and revenues have already benefited strongly from the new behaviour patterns, as illustrated by the fast and strong increase in search terms. However, the recent slowdown in search growth suggests that the increase in gaming demand may slow.
  • News: The increased searches correlate strongly with the growth of the pandemic, but the clear dip at the end provides the first evidence of crisis-fatigue.
  • Sports: The closure of all major sports leagues and events has left a gaping hole in TV schedules and the lives of sports fans. The sudden drop in search terms shows that sports fans have quickly filled their lives with other entertainment and have little interest in keeping up with news of sports closures.
  • Leaders: Finally, Boris Johnson has seen his search popularity grow steadily with the pandemic, while Donald Trump’s has dipped.

Spotify Q4 2019: First Signs of the New Spotify

Spotify’s Q4 2019 results reflect another strong quarter and a good year for Spotify. Look a bit deeper, however, and there are the first signs of the new company that Spotify is building – and they point to a very different and much bolder future.

First, here are the headline metrics:

  • 124 million subscribers (exactly in line with MIDiA’s forecast built earlier in the year. In fact, we’ve been pretty good with our quarterly subscriber forecasts throughout the year – see the chart at the bottom of this post).
  • Six million inactive subscribers (flat from Q3 2019).
  • 271 million monthly average users (MAUs) and 153 million ad-supported MAUs, which is a paid conversion rate of 45.8%, down a little from Q3 2019 and Q4 2018 with Rest of World the fastest-growing ad-supported region. This fits with early-stage growth for Spotify in new markets. Unlike markets in Europe and the Americas, Spotify will likely see ad supported remaining a much larger share of the user base long term in markets like India, with less ability to monetise via ad revenue. Spotify needs some big telco deals, especially in India.
  • Subscriber churn was down to 4.8% from 5.2% one year earlier. This is slow but steady progress that helps stabilise Spotify’s business and helps net adds grow faster.
  • Subscriber average revenue per user (ARPU) was €4.65, down 5% on Q4 2018. Spotify stated that much of this decline was down to “the extension of the free trial period across our entire product suite in the quarter”.
  • Total revenue was €6.8 billion, up 29% from 2018 with ad supported just 10% of that.

So much for the old, now in with the new…

Spotify’s uphill journey towards profitability is well documented (net margin fell into negative territory again in Q4 2019, to -€77 million). The circa-70% rights costs base is the core issue here, and rights holders have little (no) desire to go any lower – in fact, publishers want increases. Spotify has had to explore where else it can grow its business with cost bases that are less than 70%. Podcasts, marketing and creator tools are the three publicly stated places where Spotify has placed its bets, and the Q4 results show small and early – but nonetheless crucially important – movements in each:

  • Podcasts: As MIDiA reported last month, Spotify has been growing its audience very quickly and is now the second-most widely used podcast platform. 44.8 million Spotify users now listen to Spotify podcasts, with total usage up 200% year-on-year (YoY). Though podcast revenue is still only around 1% of Spotify’s total revenues, this reflects Spotify’s overall relative underperformance in ad revenue. This needs to be fixed – at least in a few of the bigger digital ad markets – but podcasts have the additional benefit for Spotify of diluting the royalty pot and thus improving gross margin. Current license agreements have a strict cap on how much the pot can be diluted (and labels have no intention of increasing that cap). But by MIDiA’s estimates, even within the current deals, Spotify could potentially shave off up to seven points of music royalty payments. Little wonder, then, that Spotify said this in its earnings report: “Any decision to accelerate our investment in podcast and technology spend should be viewed as an indication of our belief that our strategy is having tangible results. We have gained even more confidence in the data, particularly around the benefits from podcasts, and as a result, 2020 will be an investment year.”

  • Marketing: Spotify launched its paid ad tools for labels and artists in beta in Q4 2019. Early results are positive: +30% click-through and listener conversion rates, and on the sponsored recommendations side, Caroline Music’s Trippie Redd’s fourth album was helped to #1 with sponsored recommendations. Though there has been some pushback from labels feeling that they shouldn’t have to pay to reach their own audiences, Spotify is not doing anything particularly unusual here. The strategy is directly comparable to what Facebook and YouTube do. In fact, record labels spend about a third of what they earn from YouTube on YouTube advertising. The impact of that sort of revenue exchange on Spotify’s commercial model cannot be understated.
  • Creators: 2020 is going to be a massive year for creators. Our early estimates are that artists direct generated around $820 million in 2019, growing more than twice as fast as the overall market. 2019 was another big year for the top of the funnel, but we think the even more interesting space is one step earlier: creator tools. Creator tools are the new top of the funnel, before music even makes it onto streaming services. In fact, we think this might be the music industry’s next big growth area – and Spotify is already betting big, with acquisitions like online collaboration tool Soundtrap and artist marketplace SoundBetter. The music industry was, understandably, preoccupied with Spotify competing with it by signing artists and ‘becoming a label’. Spotify backed off from this strategy, but by focusing its efforts on the creator end of the spectrum it is building the foundations for what a record label of the future will look like. Spotify may just be competing with the labels’ future business before they have even realised it. Spotify’s quote says it all (at least to those who are listening for it): “We will continue to grow and expand the marketplace strategy, including with services such as Soundtrap and Soundbetter.As an example, while still early days, Soundtrap doubled its paying subscriber base in Q4. Expect more innovation of products over the coming years.”

 The margin impact of these three business areas is already being felt: “The largest driver of outperformance stemmed from slight improvement in the non-royalty component of Gross Margin, including payment fees, streaming delivery costs, and other miscellaneous variances.” 

Picks and Shovels

These are the three pillars of the new Spotify – one that will continue to be powered by music, but with profit coming from ancillary services. In the California Gold Rush in the 19th century, the first person to make a million dollars was a man called Samuel Brannan. But he wasn’t a miner; he sold mining equipment. If there is a gold rush, you want to be selling picks and shovels. Spotify has found its picks and shovels.

spotify subscribers by quarter 2019

The Song Economy

The following is a guest post from MIDiA’s Consulting Director Keith Jopling

When Journey’s song Don’t Stop Believin’ was originally released as the second single from the album Escape in 1981, it was a modest US chart hit (Billboard Hot 100 no. 9). Fast forward 28 years, in 2009 the track had two very prominent syncs: The Sopranos finale and Glee (the song featured in six episodes). From there, the song’s ascendance into global popular culture (and commerce) is well known. In 2009 it re-entered the Billboard Hot 100, this time peaking at no. 4, and finally became a UK top 10 hit following several renditions on The X Factor. However, it is on streaming platforms where the song truly thrives, steadily working its way into the ‘one billion club’ (at 757 million just now, but clearly in it for the long game).

Sony Music understands this success very well indeed. Don’t Stop Believin’ is an evergreen streaming success for the label. It is revered. Sony Music also has similar success with another 1981 song, Toto’s Africa (actually a 1982 release chosen as the third single from Toto IV). Africa was a much bigger hit on first release than Don’t Stop Believin’ and has had continual success on radio. And again, Africa has seen a meteoric rise on streaming – sitting at 711 million. Both these early eighties tracks are millennial sensations, and both are mini-industries in their own right.

My third example just happens to be another Sony Music track, though this post is not about Sony as such. Nevertheless, there is no doubt that SME has been instrumental in the calculated success of Mariah Carey’s All I Want For Christmas. This 1994 release was in fact the number-one streamed song in Germany for all of 2019.  Consistently a top 10 streaming catalogue hit for the label since the dawn of the streaming era, 2019 (thanks to a finely-tuned and bigger marketing campaign) amounted to a new peak for the track – the year in which it finally made the holy grail some 15 years after release: Billboard no. 1.

As I said, to even out the copy a bit – every label and publisher with known catalogue – Queen, Elton John, Radiohead, Led Zeppelin, R.E.M. to name just a few, is operating at full-tilt utilisation of song assets – even if that means investment in other media assets. It’s movies, documentaries, new videos, re-masters, re-issues and myriad of strategies to generate more and more streams. No wonder Def Leppard, Peter Gabriel and other long-term streaming hold-outs finally succumbed only last year. They saw the future clearly but took their time to realise they will just have to learn to love it or lump it.

The three songs illustrate the development of the song economy. The Song Economy is the new music industry’s growth engine. It’s why publishing and songwriter catalogues are being acquired at multiples of between 10-20 of annual royalty revenues. It’s why playlists are the most valuable real estate on streaming platforms. It’s why labels and publishers are staffing up their sync teams around the world. It’s why some publishers – the administrators of the music business – are investing in creative and marketing talent and signing artists with great songs before their record label counterparts. And it’s why those publishers and labels are being pulled together under one leadership, from Downtown to Sony Music.

The Song Economy is critical for new songs just as it is for old ones. Hit songs are more important than they have ever been. That’s why, according to New York-based Hit Songs Deconstructed (which does indeed deconstruct the elements that make a major hit song, so that others can do their best to emulate that success) has been reporting a steady rise in the number of songwriters per hit (in 2018-19 a quarter of Billboard top 10 hits had no less than four songwriters) as well as producers (two per hit is more usual than just a single producer).

In all of our future-gazing industry work at MIDiA, we often look at what will drive the next big growth curve for music (indeed, we report on that very thing here), expecting that to be a new tech platform or a brand new music format. However, the real driver perhaps for the next few years at least, will be the micro-growth driven by individual songs – those big enough to qualify as mini industries. 

Sure – streaming has made it much more competitive for songs, composers, artists and their representatives. But those songs that break through into millennial streaming culture (or blow-up in Gen Z streaming culture as memes and TikTok sensations) will be pinching share of ear from the rest. At the same time, songs in popular culture are helping to keep music up there in the attention economy – competing with TV, games, books, spoken word and sports. Indeed, it is only those mini-industry songs that can claim a spot across every slice of media, through sync to podcasts to multiple forms of video. Those are the songs we want to know all about and hear over and over again.

Those songs have always been pots of gold to the industry, but in the global streaming economy they have become something quite different. They can be revived and multiplied. They can be hits over and over again. They are, in fact, industries in themselves. Welcome to The Song Economy. Don’t Stop Believin’!

Keith Jopling is MIDiA’s Consulting Director – contact him on keith@midiaresearch.com. He also helps drive The Song Economy via the discovery & playlist venture https://www.songsommelier.com/

Amazon Music: From Dark Horse to Thoroughbred

Neatly ahead of Spotify’s Q4 earnings, Amazon has taken the rare step of announcing subscriber metrics for Amazon Music (inclusive of Prime Music and Music Unlimited). Amazon Music closed 2019 with 55 million ‘customers’ across free and paid. Based on our Q2 2019 numbers for Amazon and the fact that Amazon’s free tier was only rolled out in late 2019 across a few markets, MIDiA estimates Amazon Music’s actual subscriber number to be 50 million. This implies a subscriber growth of 16 million on 2018. Make no mistake, this is a really strong performance. From a bit-part player in 2015 and 2016, Amazon Music is now firmly established in streaming’s leading pack and looks set to overtake Apple Music in 2020. What’s more, unlike Apple and Spotify, Amazon’s wider business is not a top-tier player in dozens of countries, so Amazon Music’s geographic footprint is uneven – making its global figure even more impressive. Indeed, underneath this headline figure Amazon is the number two player in some of the world’s biggest music markets. Amazon is now in the big league.

amazon music 55 million users 50 millionn subscribers midia research

Since Q4 2016, Spotify has averaged 34.8% global music subscriber market share, meaning that despite fierce competition it has managed to stay ahead of the pack, actually increasing share slightly from 34.2% to 35.3%. Amazon’s success is in some respects even more impressive. In Q4 2015 Amazon Music’s subscriber base was just 18% of Spotify’s. By Q4 2019 (assuming Spotify hit the 124 million that MIDiA predicted for Q4 2019) Amazon’s 55 million subscribers represented 40% of Spotify’s – more than doubling its relative scale.

However, the DSP that should be paying most attention is Apple Music. Over the same period Amazon Music went from 49% of Apple’s subscriber base to 82%. At this rate Amazon could trump Apple for second place in 2020. It has already done so in a number of major music markets, including Germany, the UK and Japan – three of the world’s top four recorded music markets.

Extending the market

Amazon is often competing around, rather than with, Spotify and Apple. The combination of Prime Music and Echo / Alexa means that Amazon is extending the addressable market for streaming by unlocking older, higher-income households that do not fit the young, mobile-first demographic mold that the streaming market generally trades upon. Ellie Goulding’s Amazon exclusive ‘River’ claiming the UK Christmas number one spot illustrates that this under-served segment is far from a niche. Of course, Amazon is now also competing for the younger, mobile-centric consumer – Music Unlimited grew by more than 50% in 2019 – but, along with its new ad-supported and HD tiers, Amazon is pursuing a segmented strategy that is pushing beyond its older Prime Music beachhead.

Amazon Music’s success trades heavily on Amazon’s overall brand reach and existing customer relationships, so its global brand reach will always be less evenly distributed than Apple and Spotify’s. However, throughout 2018 and 2019 Amazon has been assertively building its reach in non-core markets through music and video. Traditionally Amazon has been a retailer first and a content brand second. Now, in newer markets across the globe, Amazon is building a reputation as a digital content provider first and retailer second. Though Amazon is clearly going to remain a retailer first globally, streaming is proving to be a powerful tool for establishing the company in markets that would have previously taken years and hundreds of millions of dollars to set up as fully functioning e-commerce markets.

While rightsholders will have well-grounded concerns about Amazon’s corporate objectives of using content to help sell consumer products, what is now undeniable is that Amazon Music and Video are both top-tier content services. Back in 2017 we suggested that the dark horse of Amazon was emerging from the shadows; now it is clear to see it is a thoroughbred in its own right.

Ellie Goulding and Billie Eilish Are Streaming’s New Normal

Less than a week into the new decade and we already have the first indications that the streaming rulebook continues to be rewritten faster than the ink can dry on its last entry. Three separate articles, on the surface unrelated, when stitched together create the outline of a new streaming narrative that while firmly rooted in recent developments represents an entirely new chapter for the music industry:

  1. Ellie Goulding’s ‘River’ was the UK Christmas number one despite being an Amazon exclusive
  2. Jimmy Iovine claims Drake and Billie Eilish each have more streams than the entirety of the 1980s
  3. UK streaming revenue growth slowed, adding £191 million in 2019 compared to £210 million in 2019

Fusing consumption and retail

Streaming’s impact is both commercial and cultural, in large part because it fuses what used to be retail and radio. Like some kind of musical nuclear fusion, it smashes discovery and consumption together to create a chain reaction with explosive implications. In the old world, repeated radio spins drove awareness and then sales. In streaming environments, lean-back streams are simultaneously radio-like listens and sales. The distinction does not matter for streaming services – they are focused on user acquisition, engagement and retention, but for labels it challenges the very premise of what marketing campaigns are meant to achieve. It is in this environment that today’s streaming stars are made.

‘More of more’

With streaming services lacking any meaningful way to differentiate, they are forced to compete on who can deliver their users’ the most new music to drive the most listening. This strategic imperative of ‘more of more’ is at direct odds with the objective of any label campaign, which is inherently about ‘more of less’, i.e. listen to this song more instead of more songs. The net result is vast amounts of streams spread widely, but also an environment in which hits become megahits. The songs that get traction experience a domino effect of successive algorithmic decisions, rapidly pushing songs with buzz to a progressively wider number of playlists and users. In the old world this would have been radio airplay success; now it is just volume of streams.

Catalogue Darwinism

Because of the focus on new, streaming-era artists end up with far bigger streaming volumes than older artists that were ‘bigger’ in their respective eras, but an afterthought in the streaming era. Hence, Drake and Billie Eilish being bigger than the entirety of the 1980s. Back in mid-2018 MIDiA published a report predicting that music catalogue was going to decline. We faced a lot of opposition then but now we are beginning to see that catalogue is indeed undergoing a fundamental change. For deep, legacy catalogue, streaming dynamics are stripping out the long tail and boiling down entire decades to a handful of tracks. Think of it this way: if 10% of the artists released in the 1980s were ‘successful’ at the time, and 10% of those were successful enough for their music to still be listened to now, and that the songs that are still listened to are 10% of these artists’ entire 1980s output, then you end up with 0.1% of the music from the 1980s being streamed at any meaningful scale now. Added to that, new music gets pushed to more lean-back playlists so is listened to more times. The multiplier effect for new music acts as a divider for older music. As an illustration, 40 music videos on YouTube have more than one billion views but in October 2019 Guns ‘n Roses ‘Sweet Child o’ Mine’ was the only one from the 1980s that had a billion views.

If you own the rights to those catalogue gems then the value of that asset is arguably higher now than ever before, because it has won the Darwinian game of catalogue evolution. But the rest fall by the wayside.

Ellie Goulding: niche mainstream

So, the current dynamics of streaming programming favour new versus old. It may not always be so, but this is where we are right now. These same dynamics can then be used to create hits – demand creation, if you like. This is where Ellie Goulding comes in. Goulding’s Joni Mitchell cover ‘River’ was an Amazon exclusive yet became the overall UK number one in large part because Amazon ensured it was on just about every holiday-themed playlist. Every time someone asked Alexa to play Christmas music, ‘River’ soon found its way there. Because Echo listening skews so heavily lean-back, ‘River’ simply became part of the sonic festive wallpaper, much in the same way ‘All I Want for Christmas’ did on radio. Just like with radio, lean-back listeners are unlikely to stop whatever else they are doing in order to change the track. Because streaming economics do not differentiate with lean-back and lean-forward listening, passive listening is just as valuable as active listening. Radio has become as valuable as retail but is much easier to manipulate.

The other crucial aspect of this is that Amazon has shown that you only need to find and activate a small slice of the mainstream to have a mainstream hit. As MIDiA first said last year, niche is the new mainstream.

At the start of this post I stated that streaming’s effects are both cultural and commercial. The commercial backdrop to all of these consumption and programming shifts is that the rate of revenue growth is beginning to slow (not just in percentage terms – that is a natural effect of markets getting bigger) but also in absolute terms. Early last year we predicted that streaming growth would start to slow towards the end of 2019 in developed markets and the ERA figures for the UK are the first evidence of this shift. Globally, growth will be sustained by emerging and mid-tier markets, but in markets like the UK and US, growth is peaking. The significance is that the conflation of radio and retail does not matter so much when everything is growing. When growth slows, however, quirks of the market can become business challenges. The ROI of throwing money at campaigns to cut through the audio clutter becomes problematic when the promise of the pie getting ever bigger begins to wane.

All of these things are of course simply part of a maturing and changing market. Nevertheless, the marketing strategies currently employed have been developed in an environment of growth abundance. The challenge for streaming’s next chapter is finding the new rules that are more ROI focused but can still play to streaming’s consumption strengths. Delineating different rates for lean-forward and lean-back streams feels like a logical place to start, but more evolution will need to follow – each iteration of which will trigger its own waves of unintended consequences. Exciting times.

Music Subscriber Market Shares H1 2019

Music Subscriber Market Shares 2019 MIDiA Research

The global streaming market continues to grow at pace. At the end of June 2019 there were 304.9 million music subscribers globally. That was up 34 million on the end of 2018, while the June 2018 to June 2019 growth was 69 million – exactly the same rate of additions as one year earlier.

Spotify remained the clear market leader with 108 million subscribers, giving it a global market share of 35.6%, EXACTLY the same share it had at the end of 2018 AND at the end of 2017. In what is becoming an increasingly competitive market, Spotify has continued to grow at the same rate as the overall market.

Meanwhile both Apple and Amazon have grown market share, though Apple is showing signs of slowing. At the end of 2017 Amazon (across all of its subscription tiers) had 11.4% global market share, pushing that up to 12.6% by end June 2019 with 38.3 million subscribers. Apple went from 17.3% to 18% over the same period – hitting 54.7 million subscribers, but while Amazon added share every quarter, Apple peaked at 18.2% in Q1 2019 before dropping slightly back to 18% in Q2 2019. Though at the same time, Apple increased market share in its priority market – the US, going from 31% in Q4 2018 to 31.7% in Q2 2019 with 28.9 million subscribers.

Google has been another big gainer, particularly in recent quarters following the launch of YouTube Music, going from just 3% in Q4 2017 to 5.3% in Q2 2019. Google had a well-earned reputation for being an under-performer in the music subscriptions market, a company that did not appear to actually want to succeed. Now, however, Google appears to be far more committed to subscriptions, pushing both YouTube Premium and YouTube Music hard, with a total of 16.9 music subscriptions in Q2 2019, compared to just 5.9 million at the end of 2017.

With the big four all gaining market share, the simple arithmetic is that smaller players have lost it. The share accounted for by all other services fell from 32.8% end-2017 to 28.4% mid-2019. This of course does not mean that all of these services lost subscribers; indeed, most grew, just not by as much as the bigger players. Of the other services, most are large single-market players such as Tencent (31 million – China), Pandora (7.1 million – US) MelOn (5.3 million – South Korea) with Deezer now the only other global player of scale (8.5 million).

In summary, 2019 was a year of growth and consolidation, with the global picture dominated by the big four players and Spotify retaining market share despite all three of its main competitors making up ground. 2020 is likely to be a similar year, though with a few key differences:

  • Key western markets like the US and UK will likely slow from Q4 2019 through to 2020. Meanwhile, emerging markets will pick up pace
  • This could shift market share to some regional players. For example, in Q3 Tencent’s subscriber growth accelerated at an unprecedented rate to hit 35.4 million subscribers. Tencent could be entering the hockey stick growth phase, and at just 2.6% paid penetration there is a LOT of potential growth ahead of it
  • Bytedance could create a new emerging market dynamic with its forthcoming streaming service. Currently constrained to India and Indonesia, Western rights holders may remain cautious about licensing it into Western markets. The unintended consequence is that the staid western streaming market could by end 2020 be looking enviously upon a more diverse and innovative Asian streaming market

These figures and findings are taken from MIDiA’s forthcoming Music Subscriber Market Shares, which includes quarterly data from Q4 2015 to Q2 2019 for 23 streaming services across 30 different markets. The data will be available on MIDiA’s Fuse platform later this week and the report will follow shortly thereafter.

If you are not yet a MIDiA client and would like to know how to get access to this report and dataset, email stephen@midiaresearch.com

Why the Music Industry Needs Bytedance to Disrupt It

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

Change, but remain the same

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

Do first, ask forgiveness later

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

The music market needs Bytedance to do something transformational

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

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

Emerging markets testbed

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

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

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

Songwriters Aren’t Getting Paid Enough and Here’s Why

Music Business Worldwide recently ran a story on how Apple has proposed a standard streaming rate for songwriters, with Google and Spotify apparently resistant. Of course, Apple can afford to run Apple Music at a loss and has a strategic imperative for making it more difficult for Spotify to be profitable, so do not assume that Apple’s intentions here are wholly altruistic. Nonetheless, it shines a light on what is becoming an open wound for streaming: songwriter discontent. In the earlier days of streaming artists were widely sceptical, but over the years have become much more positive towards the distributive medium. The same has not happened for songwriters for one fundamental reason: they still are not paid enough. This is not simply a case of making streaming services pay out more; rather, this is a complex problem with many moving parts.

Songwriters don’t sell t-shirts

Streaming fundamentally changes how creators earn royalties, shifting from larger, front-loaded payments to something more closely resembling an annuity. In theory, creators should earn just as much money, but over a longer period of time. If you are a larger rightsholder then this is often wholly manageable. If you are a smaller songwriter or artist, then the resulting cash flow shortage can hit hard. Many artists, especially newer ones, have made it work because a) streaming typically only represents a minority of their total income, and b) the increased exposure streaming brings usually boosts their other income streams such as live performances and merchandise. Professional songwriters however – i.e. those that are not also performers – do not sell t-shirts. Royalty income is pretty much it. There is a greater need to fix songwriter streaming income than there was for artists.

The four factors shaping songwriter income

There are four key factors impacting how much songwriters earn from streaming, and most of them can be fixed. To be clear, though, just fixing any single one of them will not move the dial in a meaningful-enough way:

  1. Streaming service royalties: Songwriter-related royalties are typically around 15% of streaming revenues, which represent around 21% of all royalties paid by streaming services – around 3.6 times less than master recordings-related royalties. This is better than it used to be, when the ratio was 4.8. However, there is clearly still a large gap between the two sets of rights. Labels argue that they are the ones who take the risk on artists, invest in them and market them. Therefore, they should have the lion’s share of income. Publishers, on the other hand, argue that they are increasingly taking risks with songwriters too (paying advances) and working hard to make their music a success, e.g. with sync streams. They also argue that everything is about the song itself. Both arguments have credence, but the fact that streaming services have historically negotiated with labels first helps explain why there isn’t much left of the royalty pot when they get to publishers. There is clearly scope for some increase for songwriters, but if there is not an accompanying reduction in label rates – not exactly a strong possibility – then the net result will be reduced margins for streaming services. Given that Spotify has only just started generating a net profit, the likely outcome would be to weaken Spotify’s position and skew the market towards those companies who do not need to see streaming pay – i.e. the tech majors. If the market becomes wholly dependent on companies that thrive on squeezing suppliers… well, good luck with that.
  2. CMOs: Many songwriter royalties are collected by collective management organizations (CMOs). These (normally) not-for-profit organisations administer rights, take their deductions and then either pay to songwriters directly or to publishers who then pay songwriters (after taking their own deductions). It gets more complicated than that, however. If a songwriter is played overseas, the local CMO collects, deducts and then sends the remainder to the CMO where the songwriter is based (however there are a good number of exceptions to this with a number of CMOs not deducting for overseas collections). That CMO takes its deduction and then distributes. It gets more complicated still – some CMOs apply an additional ‘cultural deduction’ on top of their main fee before distributing. So, if a US hip-hop artist gets played in Europe, the local CMO will take its cut, and an administration fee. Then it goes to his local CMO which takes its fee before sending it to the publisher which then takes its own cut (typically just 25%) which however is much better than label shares.
  3. The industrialisation of song writing: With more music being released than ever, songs have to immediately grab the listener. To help ensure every part of the song is a hook and to try to de-risk their artists, bigger labels commission songwriter teams and hold song writing camps, where many song writers get together and write the tracks for albums. This means that the royalties for every song are thus split into small shares across multiple songwriters. Drake’s ‘Nice for What’ has 20 songwriters credited. That means the already small royalties are split 20 ways.
  4. The unbundling of the album: When music was all about selling physical albums, songwriters used to get paid the same mechanical royalty for every song on the album, regardless of whether it was the hit single or filler. Now that listeners and playlists dissect albums, skipping filler for killer, a weak song simply pays less. Tough luck if you only wrote the filler songs on the album. On the one hand, this is free market competition. If you didn’t write a song well, then don’t expect it to pay well. Some songwriters argue that it should go the other way too, though – if they wrote the song that made the artist a hit, then shouldn’t they be paid a larger share? 

Here’s another way of looking at it. With the above analysis, this is how many streams the songwriter needs to earn income based assuming the songwriter is equally sharing income four ways with three additional songwriters:

songwriter streaam income

It is incumbent on all of the stakeholders in the streaming music business to collectively work towards making earning truly meaningful income from streaming a realistic objective for songwriters. No single tactic will move the dial. Increasing the streaming service pay-out from 15% to 20%, for example, would still see the above-illustrated songwriter only earn 25% of that. All levers need pulling. Until they are, songwriters will feel short-changed and will remain the open wound that prevents streaming from fulfilling its creator potential. Ball in your court, music industry.

Note – since originally publishing this post I have had useful feedback from a number of rights associations and publishers. My assumptions actually translated (unintentionally) into a worst case scenario that was not representative of usual practise. The post has been updated to show a more typical revenue flow. The underlying arguments of the piece remain unchanged.

Playlist Malfeasance Will Create a Streaming Crisis

Streaming economics are facing a potential crisis. The problem does not lie in the market itself; after all, in Q1 2019 streaming revenue became more than half of the recorded music business and Spotify hit 100 million subscribers. Nor does it even lie in the perennial challenge of elusive operating margins. No, this particular looming crisis is both subtler and more insidious. Rather than being an inherent failing of the market, this crisis, if it transpires, will be the unintended consequence of short-sighted attempts to game the system. The root of it all is playlists.

Streaming makes casual listeners ‘more valuable’ than aficionados

Streaming took the most valuable music buyers and turned them into radio listeners. Now, as the market matures, it is taking more casual music consumers and also turning them into radio listeners. Although curated playlist penetration is still low (just 15% of streaming consumers listen regularly to curated playlists, fewer than listen to podcasts), the impact on listening over indexes.

While a lean-forward, engaged music listener may select an album or a handful of tracks to listen to and then move on, casual listeners might put on a 60-track peaceful piano playlist in the background while studying, doing housework etc. The paradox here is that casual fans have the potential to generate more streams than engaged listeners.

With casuals being the next wave of streaming adopters, their impact will increase. But despite being ‘more valuable’ they will also reduce royalties, because more streams per user means revenue gets shared between more tracks, which means lower per-stream rates. The music industry thus has an apparently oxymoronic challenge: it is not in its interest to significantly increase the amount of media consumption time it gets per user, but instead it will be better served by getting a larger number of people listening less! 

Current market trajectory points to more streams per user, which – for subscriptions, where royalties are paid as a share of revenue – means lower per-stream rates.

Playing the game

Against this growing background consumption trend, streaming services, labels, songwriters and artists are all making matters worse by gaming the system whether that be by structuring songs to work on streaming, creating Spotify friendly soundsor simply gaming playlists.

With playlists being so important for both marketing and revenue, it was inevitable that people would seek out ways to attain any possible advantage. Consequently, playlists are becoming gamed, whether that be major labels getting more than their fair share of access to the biggest playlistsor ‘fake artists’filling them out.Most recently, Humble Angel’s Kieron Donoghue identified a cynically constructed playlist called ‘Sleep & Mindfulness Thunderstorms’(all terms optimised for user searches) that contained 330 one-minute songs of “ambient noise of rain and a few thunder storms thrown in for good measure”. The one-minute track length ensures they are long enough to qualify for a royalty share, but short enough to ensure that a typical listening session will generate a vast quantity of streams, thus generating more royalties.

The twist to this story is that this playlist was created by Sony Music and the artist behind all these tracks appears to be a Sony Music artist. Crucially Sony isn’t the only one doing this, with UMG getting in on the actand Warner Music signing an algorithm.

Playlist deforestation

This sort of activity may make absolute commercial sense but is creatively bankrupt. It certainly makes record complaints about ‘fake artists’ ring less true. Just because you can do something does not mean that you should. This model works until it doesn’t. In fact, there are parallels with deforestation. A logger in the Amazon will likely not be thinking about the destructive impact on the environment he is directly contributing to. In similar manner, it is unlikely that the people creating these playlists realise that they are contributing to a market-level crisis. This is because, the more of these types of playlists that are created, the lower per-stream rates they will generate for everyone.

Well, not ‘everyone’. If overall streaming revenue rises but stream rates decline, then the companies with large catalogues of music, especially those that are also creating arsenals of playlist-filler ammunition, will still feel revenue growth. For individual artists and songwriters, however, royalty payments could actually fall.

Fixing the problem

The casual listening problem will not fix itself. In fact, despite labels worrying about declining ARPUthe only way they can keep ahead of declining streaming rates is by increasing their share of streams. That means more of this sort of playlist gaming activity, which further accentuates the problem.

There is however a simple solution: reduce per-stream rates for lean-back playlist plays.This would ensure the songs people actively seek out get better pay-outs. The demarcations between lean back and lean forward used to be elegantly simple (e.g. Pandora versus Spotify), but now curated playlists and other forms of streaming curation are supporting radio-like behaviour on the same platforms as on-demand. It is time for royalty models to catch up with this new reality.

Spotify, the Decline of Playlists and the Rise of Podcasts

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

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

Spotify’s Two Phases of Growth

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

midia playlists and podcasts

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

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

Perhaps not the holy grail of promotion

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

Podcasts could be bigger than streaming

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

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