Why Netflix Can Turn A Profit But Spotify Cannot (Yet)

Having just celebrated its 10th (streaming) birthday, Netflix followed up with a strong earnings release, announcing 5.8 million net new paid subscribers in Q4, sending its share price up by 9%. This wraps up a stellar year for Netflix, one in which it doubled down on original programming and delivered acclaimed hits such as Stranger Things and The OA, shows that don’t fit the traditional TV mould. In fact, Stranger Things was turned down by 15 TV networks before finding a home at Netflix and The OA’s oscillating episode lengths (from 1 hour 11 mins to 31 mins) would have played havoc with a linear TV schedule (not even considering its mind bending plot).

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Netflix closed 2016 with 89.1 million subscribers and the temptation to benchmark against Spotify’s equally strong year is too strong to resist. Spotify (which celebrated its decade in June 2016) closed the year with around 43 million subscribers, 48% the size of Netflix. But a closer look at the numbers tells another growth story.

Read the full post on the MIDiA blog by clicking here.

Music Subscriptions Passed 100 Million In December. Has The World Changed?

In streaming’s earlier years, when doubts prevailed across the artist, songwriter and label communities, one of the arguments put forward by enthusiasts was that when streaming reached scale everything would make sense. When asked what ‘scale’ meant, the common reply was ‘100 million subscribers’. In December, the streaming market finally hit and passed that milestone, notching up 100.4 million subscribers by the stroke of midnight on the 31st December. It was an impressive end to an impressive year for streaming, but does it mark a change in the music industry, a fundamental change in the way in which streaming works for the music industry’s numerous stakeholders?

Streaming Has Piqued Investors’ Interest

The streaming market was always going to hit the 100 million subscriber mark sometime around now, but by closing out the year with the milestone it was ahead of schedule. This was not however entirely surprising as the previous 12 months had witnessed a succession of achievements and new records. Not least of which was the major labels registering a 10% growth in overall revenue in Q2, driven by a 52% increase in streaming revenue. This, coupled with Spotify and Apple’s continual out doing of each other with subscriber growth figures, Spotify’s impending IPO and Vevo’s $500 million financing round, have triggered a level of interest in the music business from financial institutions not seen in well over a decade. The recorded music business looks like it might finally be starting the long, slow recovery from its generation-long recession.

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Spotify Continues To Set The Pace

Spotify has consistently led the streaming charge and despite a continually changing competitive marketplace it has held determinedly onto pole position since it first acquired it. Even more impressively, it has also maintained market share. According to data from MIDiA’s Music Streamer Tracker, in Q2 2015 Spotify’s share of global music subscribers was 42%, H2 15 41%, H1 16 44%, H2 16 43%. Not bad for a service facing its fiercest competitor yet in Apple, a resurgent Deezer and an increasingly significant Amazon. Spotify closed out the year with around 43 million subscribers, Apple with around 21 million and Deezer with nearly 7 million. 2nd place is thus less than half the scale of 1st, while 3rd is a third of 2nd place. Meanwhile Apple and Spotify account for 64% of the entire subscriber base. It is a market with many players but only 2 standout global winners. Amazon could change that in 2017, largely because it is prioritising a different, more mainstream market (as long as it doesn’t get too distracted by Echo-driven Music Unlimited success). Meanwhile YouTube has seen its music streaming market share decline, which means more higher paying audio streams, which means more income for rights holders and creators.

A Brave New World?

So far so good. But does 100 million represent a brave new world? In truth, there was never going to be a sudden step change but instead a steady but clear evolution. That much has indeed transpired. The music market now is a dramatically different one than that which existed 12 months ago when there were 67.5 million subscribers. Revenues are growing, artist and songwriter discontent is on the wane and label business models are changing. But 100 million subscribers does not by any means signify that the model is now fixed and set. Smaller and mid tier artists are still struggling to make streaming cents add up to their lost sales dollars, download sales are in freefall, many smaller indie labels are set to have a streaming-driven cash flow crisis, and subscriber growth, while very strong, is not exceptional. In fact, the global streaming subscriber base has been growing by the same amount for 18 months now: (16.5 million in H2 2016, 16.5 million in H1 2016 and 16.4 million in H2 2016). Also, for some context, video subscriptions passed the 100 million mark in the US alone in Q3 2016. And streaming music had a head start on that market.

At some stage, perhaps in 2017, we will see streaming in many markets hit the glass ceiling of demand that exists for the 9.99 price point. Additionally the streaming-driven download collapse and the impending CD collapses in Germany and Japan all mean that it would be unwise to expect recorded music revenues to register uninterrupted growth over the next 3 to 5 years. But growth will be the dominant narrative and streaming will be the leading voice. 100 million subscribers might not mean the world changes in an instant, but it does reflect a changing world.

Here’s Why Vinyl Isn’t About To Save The Music Business And Why Albums Need Rethinking

The BPI announced that ‘album equivalent sales’ were up by 1.6% in volume terms in 2016, with vinyl and streaming identified as the key drivers. Many people retain a nostalgic soft spot for vinyl, so an apparently vinyl led revival is always going to get people’s attention. But not only is vinyl not the future (it was just 2.6% of sales in 2016), the big differences between the most popular vinyl, streaming, singles and album artists reveal just how fragmented the music business has become.

Each of the top 10 charts (album sales, singles, top streaming artists, vinyl sales) almost reads as a standalone group of artists with remarkably little cross over. In fact, only 2 artists (the ubiquitous Drake and Justin Bieber) appear across streaming, singles and albums. None appear across all four charts.

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The fragmentation adds complexity to an already sophisticated and nuanced landscape:

  • Two tribes: Only one of the top single artists of 2016 (Justin Bieber) was also a top album artist. This is why the album vs playlist album argument will continue way beyond 2017. Both realities co-exist with one catering more towards older audiences and the other to younger ones. The top 10 albums list is like browsing through a high street music store CD rack circa 2005: Elvis Presley, David Bowie (twice), Coldplay, Michael Ball. Of course, there is some overlap with streaming, an inescapable overlap considering that streams are now (for all the wrong reasons) counted towards album sales. Thus, we see contemporary artists Little Mix, Drake and Jess Glyn fill the 7,8 and 9 slots, while Justin Bieber is at #4. But first and foremost this is a tale of 2 tribes, 2 groups of music fans whose tastes and consumption patterns rarely overlap.
  • Old format, old bands: Vinyl sales may have hit their highest level in the UK since 1991 but this is hardly a sign of what is to come. Indeed, a quick look through the top 10 vinyl albums of 2016 reveals that all but one of the artists were releasing music back in 1991! The exception is Amy Winehouse and she’s dead. The majority of the volume of vinyl sales is driven by nostalgic older music fans. Of course, younger people do buy vinyl too, but interestingly they generally do so as either a form of merch or as a way of supporting their favourite artist. In fact, many under 30’s vinyl buyers don’t even have turntables.

The really important takeaway from all this though, is what it means for driving sales and marketing artists in 2017. One size stopped fitting all long ago, but now there are clearly two broad groups of music audiences which must be addressed in entirely different ways, across different channels and with different tactics. At the most base level this is a case of youth versus grey, of digital native versus digital immigrant, of playlist versus album, of sales versus consumption. But it is also more complex and nuanced than that. There are overlaps and cross pollination. They may be relatively thin on the ground right now, but like some long-lost treasure map, they may point to how bridges can be built across these two worlds. If no such links can be made then ultimately this will be a story of one world hurtling to oblivion while the other booms. That is of course the more likely scenario, highlighted by the fact that (in volume terms) UK CD sales fell by 12% and download sales by 26% in 2016 while streams were up 67%.

As large volumes of older consumers switch to streaming (and Amazon should play a key role here) there will be more opportunity to join the dots. But do not mistake this simply as an opportunity to try to revive yesterday’s formats in today’s platforms. The album is clearly fading. According to MIDiA Research survey data, 68% of subscribers state that playlists are replacing albums for them. It is time to start investing though and effort in rethinking what album experiences should be in the digital era. And that conversation should have no bounds, everything should be on the table (number of tracks, street date vs continual updates, interactivity, changing content etc.).

The 2016 sales figures show us that the album in its traditional format still has a very solid, albeit quickly declining, audience. But if it is to outlive that dwindling customer base it must be rethought for the streaming era.

Experience Should Be Everything In 2017

 

2017 is going to be a big year for streaming. Spotify will likely IPO, paid subscribers will pass the 100 million mark in Q1, playlists will boom. 2017 will build upon an upbeat 2016 in which the major labels saw streaming drive total revenue growth. This stirred the interest of big financial institutions, companies that had previously avoided the music industry like the plague. These institutions are now seriously assessing whether the market is finally ready to pay attention to. The implication of all of this is that if Spotify’s IPO is successful, expect a flow of investment into a new wave of streaming services. But if these new services are to have any chance of success they will need to rewrite the rules by putting context and experience at the centre of everything they do.

Why User Experience Often Ends Up On The Back Seat

Putting experience first might sound like truism. Of course, everyone puts user experience first right? Wrong. You may be hard pushed to find many companies that do not say that they put user experience first, but finding companies that genuinely walk the talk is a far harder task. Just in the same way that every tech company worth its salt will say they are innovation companies, only a minority do genuine, dial-moving, innovation. Prioritising user experience is one of those semi-ethereal concepts that may be hard to argue against in principle, but that is much more difficult to actually build a company around. Why? Because the real world gets in the way. In the case of music services ‘the real world’ translates into (in no specific order): catering to rights holders’ requirements, investing in rolling out to new territories, paying out 81% of revenue to rights holders on a cash flow basis, spending on marketing etc.

The distinct advantage that the next generation of streaming services will have is that they will sit on the shoulders of the streaming incumbents’ innovation. Instead of having to learn how to fix stream buffering, drive compelling curation, make streaming on mobile work and define rights holder licenses for freemium, they can take the current state of play as the starting point. They are starting the race half way through and with completely fresh legs. They come into the market without the same tech priorities of the incumbents and also without any of their institutional baggage (baggage that, whether they like it or not, shapes world views and competitive vision).

Streaming Music Is Not Keeping Digital Pace

During the last 5 years, users’ digital experiences have transformed, driven by apps like Snapchat, Instagram and Musical.ly. Video has been at the heart of most of the successful apps, as has interactivity. Music services though have struggled, not only with how to make video work, but also with how to give their offerings a less 2 dimensional feel. They have lagged behind in the bigger race. For all of the undoubted innovation in discovery, recommendation, personalization and programming, the underlying streaming experience has changed remarkably little. We are still fundamentally stuck in the music-collection-as-excel-spreadsheet paradigm. Underneath it all is the same static audio file that resided on the CD and the download. Granted, there have been some major improvements in design (such as high resolution artist images, full screen layouts and strong use of white space). Now though, is the time to apply these design ethics to streaming User Interface (UI) and User Experience (UX).

Successful (non-music) apps are multidimensional, highly visual and often massively social. These are the UX and UI bars against which streaming services should benchmark themselves, not how other streaming services are doing. Of course, a key challenge is that music in not inherently a lean forward, visual experience. Most people want much of their listening time to be lean back, without interruptions. Nonetheless, Vevo and YouTube have shown us that there is massive appetite, at truly global scale, for lean forward, highly social, visual music experiences.

Fixing A Plane Mid-Flight

The streaming incumbents could all do this, but they will be at distinct disadvantage compared to potentially well-funded new entrants. It is no easy task to refit a plane mid-flight. Also, Spotify, Deezer and Napster are built on tech stacks with origins more than a decade old. All have made massive changes to those original tech stacks (Spotify in particular, shifting from a monolithic structure to a modular one) but in essence, all these companies were first built as desktop software providers in an era when Microsoft and Nokia were still technology leaders. They have adapted to become app companies but that change did not come naturally and took a huge amount of organizational discipline and resource. This next market phase will require exactly the same sort of discipline, but more effort and at a time when competition is fiercer and costs are higher.

Streaming Services Need To Know Who They Are Really Competing With

The streaming services might think that they are competing with each other but in reality they are competing in the digital economy as a whole. Their competitors are Snapchat, Instagram and Buzz Feed. Right now, music listening accounts for 36% of consumers’ digital media time but that share is under real threat. Over the course of the millennium, music has relied increasingly on growth in lean back environments and contexts. The rise of listening on the go via MP3 players and then smartphones created more time slots that music could fill, while media multitasking has been another major driver of listening. All of this works well when whatever else is going on does not require the listener to be using their ears. The rise of video is, paradoxically, creating more competition for the user’s ear. Even though we are seeing the 2nd coming of silent cinema with social video captioning, there are many more calls to action for our eyes and ears. Even a Facebook feed 24 months ago would have been something that could in the large be safely viewed in silence. Now it is full of auto playing videos, willing the user to unmute. As soon as s/he does so the music has to stop. On video-native platforms like Snapchat the view is even starker for music. Killing time in the Starbucks queue is now as likely to involve watching a viral video as it is listening to a song.

Thus streaming music has to create a user experience renaissance, not just to keep up with contemporary digital experiences but in order to ensure it does not lose any more share of digital consumers’ consumption time. This is the new problem to fix. The Spotify generation fixed buffering and mobile streaming, the Apple Music generation fixed discovery, the next generation will fix UX. Just as Apple Music and Google Play Music All Access were able to skip the first lap of the race, launching with what Spotify and co took years to develop, so the next generation of streaming services, when they come, will take all of the recent innovation playlists, curation and user data analysis as the blank canvas. Which in turn will force the incumbents to up their game fast. Until then, the streaming incumbents have an opportunity to get ahead else get left behind.

Here’s Why The Music Industry Needs To Dump Non-Discretionary Pricing

Spotify’s 2015 UK accounts painted a vibrant picture with both profits and above average Average Revenue Per User (ARPU). However, a little caution is required before assuming all the answers to the streaming market’s woes can be found here. Firstly, only a portion of Spotify’s costs are based in the UK. For example, much of the (more highly paid) exec team is in the US and much of the development team is based in Sweden. Such are the vagaries of financial reporting for multi-territory companies. More importantly though, is Spotify’s higher UK subscriber ARPU (€6.47 per month compared to €5.20 per month globally according to the ever insightful Music Business Worldwide). On the surface this is clear success (and indeed the UK may well have a higher paid-to-free ratio). However, the main reason for the ARPU difference is the music industry’s fixation with non-discretionary pricing. 9.99 is 9.99 in the US, the UK and the Euro zone, even though each of those currencies have very different values. Especially now post-Brexit referendum.

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At current exchange rates, the Euro Zone €9.99 is equivalent $10.86 and the UK £9.99 price point is equivalent to $12.18. Thus Euro Zone subscribers are paying 9% more than US subscribers while UK subscribers are paying 22% more. What makes matters even worse is that US per capita GDP (a measure of relative wealth of the population) is 55% higher in the US than in the EU and 27% higher than in the UK. So in effect that means a combined pricing ‘swing’ of 63% for the US compared to the Euro Zone and 49% compared to the UK.

In short, European subscribers are getting doubly hit by the music industry’s insistence on non-discretionary pricing for music subscriptions. While there are a host of commercial factors that can be cited in favour of the approach (e.g. it helps mitigate against currency fluctuations) there is zero customer value, unless of course you happen to be a US resident consumer.

Regular readers will know I am a long term advocate of a more sophisticated approach to subscription pricing (e.g. mid tier products and super-premium options) but before we get there, a first step should be to ensure that European music fans get a fair deal compared to their US peers. Or of course, we could try the alternative: increasing US subscriptions by 63% which would mean a $16.32 price point. Sounds crazy right? Exactly…

How Spotify Can Become A Next Generation “Label”

Spotify on iPhoneOne of the themes my MIDiA colleague Tim Mulligan (the name’s no coincidence, he’s my brother too!) has been developing over in our online video research is that of next generation TV operators. With the traditional pay-TV model buckling under the pressure of countless streaming subscriptions services like Netflix (there are more than 50 services in the US alone) pay-TV companies have responded with countless apps of their own such as HBO Go and CBS All Access. The result for the consumer is utter confusion with a bewildering choice of apps needed to get all the good shows and sports. This creates an opportunity for the G.A.A.F. (Google, Apple, Amazon, Facebook) to stitch all these apps together and in doing so become next generation TV operators. Though the G.A.A.F. are a major force in music too, the situation is also very different. Nonetheless there is an opportunity for companies such as these to create a joined up music experience that delivers an end-to-end platform for artists and music fans alike. Right now, Spotify is best placed to fulfil this role and in doing so it could become a next generation “label”. I added the quote marks around the word “label” because the term is becoming progressively less useful, but it at least helps people contextualise the concept.

Creating The Right Wall Street Narrative

When news emerged that Spotify was in negotiations to buy Soundcloud I highlighted a number of potential benefits and risks. One thing I didn’t explore was how useful Soundcloud could be in helping Spotify build out its role as a music platform (more on that below). As I have noted before, as Spotify progresses towards an IPO it needs to construct a series of convincing narratives for Wall Street. The investor community generally looks upon the music business with, at best, extreme caution, and at worst, disdain. To put it simply, they don’t like the look of low-to-negative margin businesses that have little control over their own destinies and that are trying to sell a product that most people don’t want to buy. This is why Spotify needs to demonstrate to potential investors that it is working towards a future in which it has more control, and a path to profitability. The major label dominated, 17% gross operating margin (and –9% loss) 9.99 AYCE model does not tick any of those boxes. Spotify is not going to change any of those fundamentals significantly before it IPOs, but it can demonstrate it is working to change things.

The Role Of Labels Is As Important As Ever

At the moment Spotify is a retail channel with bells and whistles. But it is acquiring so much user data and music programming expertise that it be so much more than that. The role of record labels is always going to be needed, even if the current model is struggling to keep up. The things that record labels do best is:

  1. Discover, invest in and nurture talent
  2. Market artists

Someone is always going to play that role, and while the distribution platforms such as Spotify could, in theory at least, play that role in a wider sense, existing labels (big and small) are going to remain at the centre of the equation for the meaningful future. Although some will most likely fall by the wayside or sell up over the next few years. (Sony’s acquisition of Ministry Of Sound is an early move rather than an exception.) But what Spotify can do that incumbent labels cannot, is understand the artist and music fan story right from discovery through to consumption. More than that, it can help shape both of those in a way labels on their own cannot. Until not so recently Spotify found itself under continual criticism from artists and songwriters. Although this has not disappeared entirely it is becoming less prevalent as a) creators see progressively bigger cheques, and b) more new artists start their career in the streaming era and learn how to make careers work within it, often seeing streaming services more as audience acquisition tools rather than revenue generators.

The Balance Of Power Is Shifting Away From Recorded Music

Concert crowd.In 2000 record music represented 60% of the entire music industry, now it is less than 30%. Live is the part that has gained most, and the streaming era artist viewpoint is best encapsulated by Ed Sheeran who cites Spotify as a key driver for his successful live career, saying “[Spotify] helps me do what I want to do.” Spotify’s opportunity is to go the next step, and empower artists with the tools and connections to build all of the parts of their career from Spotify. This is what a next generation “label” will be, a platform that combines data, discovery, promotion (and revenue) with tools to help artists with live, merchandise and other parts of their career.

How Spotify Can Buy Its Way To Platform Success

To jump start its shift towards being a next-generation “label” Spotify could use its current debt raise – and post-IPO, its stock – to buy companies that it can plug into its platform. In some respects, this is the full stack music concept that Access Industries, Liberty Global and Pandora have been pursuing. Here are a few companies that could help Spotify on this path:

  • Soundcloud: arguably the biggest artist-to-fan platform on the planet, Soundcloud could form a talent discovery function for Spotify. Spotify could use its Echo Nest intelligence to identify which acts are most likely to break through and use its curated playlists to break them on Spotify. Also artist platforms like BandPage and BandLab could play a similar role.
  • Indie labels: Many indie labels will struggle with cash flow due to streaming replacing sales, which means many will be looking to sell. My money is on Spotify buying a number of decent sized indies. This will demonstrate its ability to extend its value chain footprint, and therefore margins (which is important for Wall Street). It could also ‘do a Netflix’ and use its algorithms to ensure that its owned-repertoire over performs, which helps margins even further. But more importantly, indie labels would give Spotify a vehicle for building the careers of artists discovered on Soundcloud. Also the A&R assets would be a crucial complement to its algorithms.
  • Tidal: Spotify could buy Tidal, taking advantage of Apple’s position of waiting until Tidal is effectively a distressed asset before it swoops. Though Tidal is most likely to want too much money, its roster of exclusives and its artist-centric ethos would be a valuable part of an artist-first platform strategy for Spotify.
  • Songkick: In reality Songkick is going to form part of Access’ Deezer focused full stack play. But a data-led, live music focused company (especially if ticketing and booking can play a role) would be central to Spotify driving higher margin revenues and being able to offer a 360 degree proposition to artists.
  • Musical.ly: Arguably the most exciting music innovation of the decade, Musical.ly would give Spotify the ability to appeal to the next generation of music fans. The average age of a Musical.ly user is 20, for Spotify it is 27. Spotify has to be really careful not to age with its audience and music messaging apps are a great way to tap the next generation in the same way Facebook did (average age 35) did by buying up and growing messaging apps. (e.g. Instagram’s average age is 26).
  • Pandora: A long shot perhaps, but Pandora would be a shortcut to full stack, having already acquired Ticket Fly, Next Big Sound and Rdio. If Pandora’s stock continues to tank (the last few days of recovery notwithstanding) then who knows.

In conclusion, Spotify’s future is going to be much more than being the future of music retail. With or without any of the above acquisitions, expect Spotify to lay the foundations for a bold platform strategy that has the potential to change the face of the recorded music business as we know it.

For more information on the analysis and statistics in this post check out MIDiA Research and sign up to our free weekly research digest.

Spotify May Be Buying Soundcloud, But Who Wins?

spotify-pac-manThe Financial Times has reported that Spotify is in advanced talks to buy Soundcloud. Soundcloud has been shopping itself around for some time, while Spotify needs to continue outpacing Apple as it heads towards an IPO. Which is why the deal has been rumoured for some time. But who would do best out of the deal (if indeed it goes ahead)?

  • Soundcloud has peaked: Throughout the 2010’s Soundcloud’s growth was impressive, growing from 1 million registered users in May 2010 to 150 million by December 2014. But registered user numbers only ever tell part of the story. The most telling statistic is Soundcloud’s Monthly Active User (MAU) number: 175 million. Impressive enough, and 50 million more than Spotify’s 125 million. But Soundcloud hit that number in August 2014 and it hasn’t reported a bigger number since. In fact, it could well be that Soundcloud hasn’t actually issued a new number since, but instead has simply being restating that number. If it had grown, you can be sure we’d have heard about it. If it had fallen, perhaps not. On top of this, in October 2013 CEO Alexander Ljung stated that Soundcloud had hit 250 million MAUs. A number that has not since been repeated. So best case, Soundcloud usage has peaked, worst case it is in decline. DEAL WINNER: Soundcloud
  • Soundcloud users are male super fans: According to MIDiA’s consumer data 7% of consumers are Weekly Active Users (WAU) of Soundcloud, about half the rate of Spotify (again suggesting that Soundcloud’s headline user numbers aren’t all they appear). But crucially 60% of its WAUs are male while Spotify’s are 50/50 male/female. Spotify has spent the last few years diversifying its user base away from this male super fan skew. All that work would be undone if the Soundcloud user base is absorbed. DEAL WINNER: Evens
  • Soundcloud users are a funnel: Spotify’s model relies upon giving new audiences a taste of its offering via its free tier, super trials and telco bundles, before converting to paid. To keep ahead of Apple, Spotify has to keep filling up its funnel. So Soundcloud’s user base will be a welcome boost to Spotify’s user acquisition as it seeks to maintain momentum as it heads towards IPO. DEAL WINNER: Spotify
  • Many Soundcloud users are already subscribers: 28% of Soundcloud users already have a music subscription, with the majority of those already paying for Spotify rather than Soundcloud Go. So many of the low hanging fruit users have already been converted, weakening the value of the audience. DEAL WINNER: Soundcloud
  • Soundcloud has a unique catalogue: A key reason so many Soundcloud users also use Spotify is that so much Soundcloud catalogue can only be found there. This is a rich asset for Spotify but as much of it is not licensed so it could prove to be a licensing quagmire for Spotify. DEAL WINNER: Spotify, if it can sort out the licensing
  • Soundcloud’s valuation is high: Reported valuations for Soundcloud have ranged from $700 million to $2 billion. Even if it comes in at $500 million, unless the deal is heavily skewed towards stock, Spotify will burn through a massive chunk of its latest $1 billion debt round. DEAL WINNER: Soundcloud

There is an additional wild card, that Spotify could use Soundcloud as vehicle for becoming a serious player in ad supported in its own right (which will delight Apple’s Jimmy Iovine, not). The deal of course may not even happen, but if it does, it is far from a guaranteed winner for Spotify. It will help Spotify build a bullish growth story for Wall Street but Spotify will have to IPO before the shine starts to come off if Soundcloud’s user base turns out to be smaller and less valuable pickings than at first appears.

 

Have Spotify and Apple Music Just Won The Streaming Wars?

Spotify has just delivered 2 landmark data points: 40 million subscribers and $5 billion paid to rights holders to date. Although the 3 million added in Q3 was down on the 7 million added in Q2 (boosted by a summer pricing promo) there is no escaping the fact that Spotify’s momentum has accelerated rather than declined since the emergence of Apple Music. 2016 is proving to be Spotify’s year. The question is how well the rest of the market is performing beyond the 2 market leaders?

The streaming music market as a whole is experiencing unprecedented growth, with the major labels collectively reporting a 52% increase in streaming revenue in Q2 2016 compared to the same period 12 months ago. Given that total streaming revenues (including YouTube etc. but not Pandora) grew by 44% in 2015 (according to the IFPI) the picture that is emerging is one of, at worst, sustained growth, at best, accelerating growth.

Although the major label numbers have to be interpreted with caution due to factors such as Minimum Revenue Guarantees (MRGs) – see my previous post for much more detail on this – the headline trend is growth. However, headline growth is not necessarily a reflection of how most of the market is actually performing. In fact, a forensic examination of these numbers cross referenced against reported Apple Music and Spotify numbers reveals that the outlook for the rest of the pack is very different indeed.

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At the end of 2015 there were 67.5 million subscribers, by the end of June 2016 that had increased to 83.2 million – a 23% increase from the end of 2015 and a 63% increase on Q2 2015. Spotify’s subscriber count for Q2 2016 was 37 million (including super trialists) while Apple Music was just under 16 million. This gives them a combined market share of 56%, which in itself is not particularly surprising. However, when we look at what has happened to the rest of the pack that things start to get really interesting…

The Rest Of The Pack Is Getting Left Behind

By end Q2 2015 Spotify had 20 million subscribers and Apple Music none. This meant that the rest had 31 million between them. By Q2 2016 this ‘remainder’ had shrunk to 30.5 million. Among this chasing pack there is a diverse mix of stories, with some services showing solid growth, some losing lots of paid subscribers and some disappearing all together. Meanwhile Spotify and Apple Music added 32.7 million to the global subscriber base. Thus over the same 12 month period these two players combined, became bigger then the entire rest of the market in subscriber terms with a 63% combined market share. An interesting side note: Tidal’s reported revenues of $47 million in 2015 mean that it can’t have had more than around 800,000 commercially active subscribers by year end, which means that the reported and ‘implied’ 4.2 million current subscriber count is probably closer to half that.

Streaming revenue followed a similar trend with Apple and Spotify dominating and the rest falling slightly (by 1 percentage point year on year). Spotify paid around $1.6 billion in royalties in 2015 and a cumulative $6 billion by September 2016, implying about $1.1 billion in 2016 already. The amount that Spotify paid to record labels in Q2 was somewhere between $479 million and $622 million, depending on when and how Spotify paid for those 7 million new super trialists it acquired that quarter. Towards the lower end of that range is probably the safer bet. Apple by comparison paid around $220 million. And as with subscriber numbers, the rest of the pack lost revenue.

It’s A 2 Horse Race

When Apple launched Apple Music some less informed observers suggested that it was too late to the party and that there was only room for one big player. The numbers from Q2 2016 show that Apple was far from too late (fashionably late perhaps) and that the rather than being a winner takes all scenario, the streaming market is a 2 horse race. Unfortunately for the rest of the pack it does look like there is only space for 2 leading global players, with Apple clearly having played a key role in knocking Deezer out of 2nd place and racing on ahead.

Still A Place For Regional Leaders

This does not mean that there is not space for other players, there is. Especially regional leaders like QQ Music, KKBox, Anghami and MelOn. But the consumer marketplace only has so much appetite for global scale $9.99 AYCE services. Which is why pricing and product innovation are so crucial if the recorded music business wants a vibrant streaming sector. Compare and contrast with the streaming video market where there is immense innovation with niche services and a diverse range of price points. Music streaming needs the same approach. Tidal may have (very successfully) differentiated on brand and content but it remains fundamentally an also-ran, $9.99 AYCE service. As things stand, the only really serious attempt to play by different rules is Amazon’s steadily emerging streaming strategy. Expect that dark horse to make up ground by playing by different rules. Perhaps even Pandora may be able to break the mould too.

But it is only through differentiated strategies that serious inroads can be made and unless pricing and product innovation occurs (and the labels and publishers need to enable it) expect the streaming race to continue to be a tale of 2 horses.

Kanye West, Leonard Cohen And Death Of The Creative Full Stop

When Kanye West started tinkering with ‘The Life Of Pablo’ he triggered a minor maelstrom of chatter among the music business and his fans alike. From a month after the album had been made available exclusively on Tidal, Kanye started changing track names here, adding lines there, re-mastering here, giving guest vocalists more space there. Cynics might argue that the changes started to happen just after the Tidal free trial period ended for fans who’d signed up to access the album. But the changes carried on months after and doubtlessly will continue to do so. As intriguing as Kanye’s tampering may be though, the really surprising thing is its exceptionality – why in these digital days, where shelves of physical products are a dying breed, do 99.99% of artists and labels still allow themselves to be constrained by the straight jacket of the album, turning everything into a creative full stop?

The Long And Windy Road Of Hallelujah

imgres-5In his excellent podcast series ‘Revisionist History’, Malcolm Gladwell – he of ‘The Tipping Point’ – focuses one episode on Leonard Cohen’s ‘Hallelujah’. Nowadays ‘Hallelujah’ is widely recognized as a masterpiece but it went on an epic journey to acquire that status. ‘Hallelujah’ starts out as a mediocre track on a 1984 album ‘Various Positions’ that Cohen’s label CBS refused to release and is instead put out by indie Passport Records. The release, as Gladwell puts it, “barely makes a ripple”. The magic in the song was all but invisible at this stage. But Cohen doesn’t see that 1984 recording as the end of the story, in fact it is just the start. Over the following years playing live he tinkers, tampers and reworks ‘Hallelujah’, slowing it down, making it twice as long, changing verses and making it even darker.

Finally, John Cale sees Cohen playing a reworked version at a gig and there is enough magic in it to compel him to ask Cohen to send him the lyrics so he can record his own version. Cohen then faxed Cale fifteen pages of lyrics (reflecting just how much tinkering he had done) and Cale “went through and just picked out the cheeky verses.” His recording of ‘Hallelujah’ is the first of the song as the world knows it – in part because it ended up on Shrek. The magic is finally released, or as Gladwell puts it Cale “cracks the code of ‘Hallelujah’”.

imgres-6Cale’s version appears on an obscure Leonard Cohen tribute album put together by a French Music magazine ‘I’m Your Fan’ which by pure serendipity ends up in the CD collection of a woman who a certain Jeff Buckley is house sitting for. He hears Cale’s version, is blown away, and performs his take on Cale’s take. A Colombia A&R exec hears Buckley performing it, is equally blown away, signs him up and records it in what would prove to be Buckley’s only – but highly influential – 1994 studio album ‘Grace’. Buckley’s version becomes the defining version of ‘Hallelujah’ and connects it with the world.

The Pseudo-Permanence Of Mass Media Was A Historical Anomaly

‘Hallelujah’s tale may be an exceptional one yet it also applies to all songs. Singers and bands reworking old songs into their live performances is no new thing, they like to update the songs to make them match where they are now as people, performers and songwriters. But only rarely does that then translate into a new recorded version. And this is the problem with record media. It creates an entirely arbitrary creative full stop. This though, isn’t the natural state of things.

The pseudo-permanence of mass media is an artefact of the distribution era, of the time when people were conditioned to believe that everyone could own their favourite music, movies and TV shows for ever. But of course nothing last for ever, especially not recorded media. Vinyl scratches and warps, cassette tapes degrade, DVDs and CDs lose their reflective quality and crack. And then to compound matters, these physical formats die out as products. So the ‘permanence’ was only ever transient. Nonetheless it ossified the creative output.

imgres-7Until Edison invented the Phonograph in 1887, music, with the exception of the highly regimented genre classical music which was ossified in musical score – though reinterpreted by conductors, was an ever evolving thing. Folk songs morphed out of all recognition as they passed down the generations, jazz musicians would tear apart songs with their own interpretations, blues numbers would ebb and flow like the Mississippi delta with each subsequent interpretation. No one ‘owned’ the music in the moment and no one ‘knew’ the correct performance of it because there was no ‘correct’ official performance. Radio and the phonograph changed all that. But now, with streaming there is no need for this arbitrary ossification of music. Music can return to its living breathing roots rather than imitating a museum piece in a glass case.

Conceptual Innovation Versus Experimental Innovation

There is a very important cultural reason why the creative full stop needs consigning to the waste bin of history: it curtails creativity. In his podcast Gladwell outlines two key types of innovators:

  • Conceptual innovators: they’re the ones who create in an instant, and often burn bright and short. They’re the ones we most often think of as geniuses.
  • Experimental innovators: these are the ones who continually iterate, changing, tinkering, for ever looking to perfect their work.

Both groups have creative geniuses within them. Pablo Picasso was a conceptual innovator, bursting onto the scene and transforming the art world in an instant. Paul Cézanne though, an equally important artist from the same era, was entirely different, he would create endless different versions of paintings, often not finishing or even destroying them. He was on a continual journey of creative discovery, he was an experimental innovator.

Recorded media forces experimental innovators into the confines of conceptual innovators. Which means that so much great music was never allowed to find its true greatness, instead being bound to a recording long before it was ready to be. During his updates to ‘Life Of Pablo’ Kanye wrote “Fixing Wolves 2day… Worked on it for 3 weeks.”  He’s an experimental innovator, a perfectionist. The irony is that the album he continually hones is called ‘The Life Of Pablo’, which quite probably refers to that archetype of the conceptual innovator Picasso (Kanye even said once “My goal, if I was going to do art, fine art, would have been to become Picasso or greater.”). So a more appropriate name for the album would have been called ‘The Life Of Paul [Cézanne]’

Agile Music

images-1Back in 2011 I wrote a report entitled ‘Agile Music: Music Formats and Artist Creativity In The Age of Media Mass Customization’ – you can still download it for free here and you can watch my Midem keynote here. In it I made a case for bringing audiences into the creative process and for the death of the creative full stop; for music to become a living, breathing entity that artists can continually edit and evolve. Almost exactly 5 years on and virtually no one, Kanye obviously excepted, is doing this. Why? Because artists and labels still have static audio files as their reference points. Yet there is simply no need for this to be the case anymore. Sure, there has to be caution – if every single track changes all the time audiences would oscillate between apoplexy and utter confusion. But with moderation and clear context, Agile Music can reclaim music from the orthodoxy of the physical format that somehow still dictates the streaming environment. As more artists and labels embrace the approach, brace yourself for ‘Hallelujah’s becoming the norm not the exception.

Quick Take: Sony Music UK Buys Ministry Of Sound Recordings

Leading UK indie Ministry of Sound Recordings today announced its sale to Sony Music UK. While this is undoubtedly another case of a big major swallowing up a smaller indie, there is a much more important angle to this – surviving in the streaming era. Ministry of Sound is unusual in that it is a label with a relatively small catalogue, instead its business is built around compilations. In doing so it has built an incredibly robust and profitable business. No mean feat in the current climate. But Ministry’s core strength has also become an Achilles Heel with the onset of streaming.

Ministry licenses music from other labels to build its compilations. This approach works well in a sales model where proceeds are split between the respective parties. But in the context of streaming, any money generated by plays of tracks on a compilation go to the label that owns the track not to the label that curated the compilation. This is why Ministry compilations have been conspicuously absent from streaming services and it is also why Ministry ended up in conflict with Spotify when the streaming service initially refused to take down user playlists that replicated Ministry compilations and that used Ministry artwork.

At the time, the Spotify case raised the still-to-be-answered question of just how much curation is actually worth. Spotify and Ministry settled their differences but the underlying economics remain, and meanwhile Spotify also upped its curation game. Ministry thus faced the double whammy of increased curatorial competition and an inability to make streaming pay. Enter stage left, Sony Music.

With its co-owned Now brand, Sony is as good a fit as Ministry could find in a major. Sony for their part are getting one the most valuable compilation brands and immediate dance music culture credibility. Sony also has big digital plans for Now, which Ministry will no doubt slot into nicely. On top of this, because Sony own so much catalogue themselves, they can make the economics of compilations work in the streaming environment.

The fact that 25% of music subscribers still buy compilation albums show that however a good job streaming playlists might be doing, there remains a big demand for compilations, even within the core of streaming music aficionados. Curated playlists will continue to gain importance but compilations are going to live alongside them for a good long time to come. And all the while the distinction between what constitutes a playlist and a compilation will continue to blur.