Quick Take: Apple One – Recession Buster

Apple officially announced its long anticipated all-in-one content bundle: Apple One. $14.99 gets you Apple Music, Arcade, Apple TV+ and 50GB of iCloud storage. A family plan retails at $19.95 and a premier plan includes 1TB storage, News and Apple’s new Fitness+ service. While the announcement was expected (and you may recall that MIDiA called this back in our December 2019 predictions report) it is important nonetheless. 

As we enter a global recession, the subscriptions market is going to be stressed far more than it was during lockdown. With job losses mounting, and many of those among Millennials – the beating heart of streaming subscriptions – increased subscriber churn is going to be a case of ‘how much’ not ‘if’. In MIDiA’s latest recession research report, we revealed that a quarter of music subscribers would cancel if they had to reduce entertainment spend and a quarter of video subscribers would cancel at least one video subscription.

A $15.99 bundle giving you video, music, games and storage will have strong appeal to cost conscious consumers who are loathe to drop their streaming entertainment but need to cut costs. As with Amazon’s Prime bundle, Apple One is well placed to weather the recession. They may not be recession proof – after all, entertainment is a nice-to-have, however good the deal – but they are certainly recession resilient.

Which may explain why music rights holders have been willing to license the bundle which almost certainly included a royalty haircut for them, to accommodate the other components of the bundle. While rights holders will not have been exactly enthusiastic about further royalty deflation (one for artists and songwriters to keep an eye out for when Apple One starts to gain share) they are also keenly aware of the need to ensure they keep as many music consumers on subscriptions as possible. 

One key learning of the impact of lockdown has been that new behaviours learned during a unique moment in time (eg not commuting to an office, doing more video calls) can result in long term behaviour shifts. Lower music rightsholder ARPU may be a price worth paying for shoring up the long term future of the music subscriber base.

We Are At a Turning Point for Social Music

In recent days we have seen three major developments that, collectively, are a potential pivot point for social music:

  1. TikTok close to a US-entity buyout by Microsoft to avoid potential sanctions, following hot on the heels of an India blackout
  2. Facebook launched a (US-only) YouTube competitor for music videos
  3. Snap Inc signed a licensing deal with WMG and others, also for music videos

As cracks begin to appear in the audio streaming market, there is a growing sense in the music industry of the need for a plan B. This has been driven by growing discontent among the creator community, and a slowdown in revenue growth (UMG streaming revenues actually fell in Q2 as did Sony Music’s); the tail wagging the artist-and-revenue (A&R) dog. The search for new growth drivers is on, and social music – for so long a promise unfulfilled in the West – is one of the bets. TikTok was meant to be a major part of that bet. But with the US future of the app so at risk that a Microsoft US-entity buyout may be the only option, and the continued impact of COVID-19 on core revenue streams, the future is beginning to look a little more troublesome. Perhaps now more than ever, the music industry needs social music to start delivering.

There are three key issues at stake here:

  1. How consumers discover music
  2. How (particularly younger) consumers engage with music
  3. Competing with YouTube

How consumers discover music

Among the under-aged 35 demographic, YouTube is the primary music discovery channel, followed by music streaming, then radio, and only then by social. Streaming discovery is heavily skewed towards tracks and playlists, and away from artists and release projects, which is fine for streaming platforms but impedes building sustainable artist careers. Radio is losing share of ear and YouTube… well, YouTube is YouTube (more on that below), so the music business needs a new discovery growth driver. Social has the potential to be just that. But spammy artist pages on Facebook and more-than-perfect Instagram photos are not it. TikTok, for all its amazing momentum, actually has a really uneven impact on discovery. Some tracks blow up out of nowhere while most do little, and rarely is it because of a smart label marketing strategy but instead because certain tracks just work on the platform and the community leaps on them. For now, TikTok is too unpredictable to plan around. Facebook (Instagram especially) and Snap Inc have a fantastic opportunity to do something special here. They have the audience and the social know-how. Whether they can deliver is a different matter entirely.

How (particularly younger) consumers engage with music

What TikTok lacks in consistent marketing contribution it makes up in consumption. Following on from Musical.ly’s start, TikTok has reimagined how music can be part of social experiences for young audiences. It has made music a highly relevant and integral part of self-expression, something that CD collections and music dress codes used to do in the pre-digital world but that soulless, ephemeral playlists wiped out. While labels pin hopes on TikTok successes to drive wider consumption, the discovery journey is also the destination for most TikTok users – they hear the track in a video and swipe onto the next one. That is no bad thing. This is a new form of consumption, and if TikTok were to disappear or fade then someone else needs to pick up the baton. Whether Facebook and Snap Inc can do so is, again, an open question.

Competing with YouTube

Now we get to the heart of the Facebook and Snap Inc deals. As important as the previous two points are, they were not the overriding priorities of the commercial teams driving these deals. Instead they were focused on expanding the revenue mix and part of that is creating more competition for the notoriously low-paying YouTube. Well, maybe not that low paying after all.

spotify youtube arpu

The internet is full of statements from trade associations, rightsholders and creators about how much less YouTube pays than Spotify. YouTube does pay less, because it manages to escape paying minimum per-stream rates for ad-supported videos – but it is a more nuanced picture than lobbyists would have you believe. Firstly, in terms of its Premium business, Google is entirely on par with Spotify. But then, that is the part that is licensed in the same way as the rest of the market.

Ad-supported is a mixed story. In North America, where there is a mature digital ad market, YouTube’s ad-supported average revenue per user (ARPU) is entirely on par with Spotify’s. However, on a global basis, ad-supported ARPU is dragged down by its large user base in emerging markets where digital ad markets are nascent. Spotify’s ARPU is 66% higher, in part because it has to pay minimum per-stream rates, i.e. it pays a fixed rate per stream regardless of whether it has sold any ad inventory against the track. This boosts ad-supported ARPU but it risks making the model unstainable, to the extent that Spotify reported -7% gross margin for ad-supported in Q1 2020 (and note, that’s gross margin, not net margin).

Rightsholders will be hoping for Facebook and Snap Inc to bring a similar level of competition to music video as exists in streaming audio, which in turn may give them a path to higher global ad-supported ARPU rates and a healthier marketplace. However, what will determine that objective is not business strategy but product strategy. The key question is what can they both do with music videos that YouTube cannot? YouTube has years of experience and user data around music videos, Snap Inc and Facebook do not. They will be playing catch-up with a weaker portfolio of content assets: Snap Inc is only partially licensed and both it and Facebook have only licensed official music videos. Unofficial videos (mash ups, covers, lyrics, TV show appearances etc.) account for 25% of the views of the top 30 biggest YouTube music videos. Those videos are crucial in that they provide the lean-forward element for viewers; they are crucial to making YouTube music social rather than just a viewing platform.

YouTube has dominated the music video globally for more than a decade. This might just be the time that this position starts to be challenged. But if Facebook and Snap Inc are going to do that, they will have to bring their product strategy A-game to the field. If they can, then the we may indeed witness a social music turnaround in the West.

Making Free Pay

2018 was a big year for subscriptions, across music (Spotify on target to hit 92 million subscribers), video (global subscriptions passed half a billion), games (98 million Xbox Live and PlayStation Plus subscribers) and news (New York Times 2.5 million digital subscribers). The age of digital subscriptions is inarguably upon us, but subscriptions are part of the equation not the whole answer. They have grown strongly to date, will continue to do so for some time and are clearly most appealing to rights holders. However, subscriptions only have a finite amount of opportunity—higher in some industries than others, but finite nonetheless. The majority of consumers consume content for free, especially so in digital environments. Although the free skew of the web is being rebalanced, most consumers still will not pay. This means ad-supported strategies are going to play a growing role in the digital economy. But set against the backdrop of growing consumer privacy concerns, we will see data become a new battle ground.

Industry fault lines are emerging

Three quotes from leading digital executives illustrate well the fault lines which are emerging in the digital content marketplace:

“[Ad supported] It allows us to reach much, much deeper into the market,” Gustav Söderström, Spotify

“To me it’s creepy when I look at something and all of a sudden it’s chasing me all the way across the web. I don’t like that,” Tim Cook, Apple

“It’s up to us to take [subscribers’] money and turn it into great content for their viewing benefit,”Reed Hastings, Netflix

None of those quotes are any more right or wrong than the other. Instead they reflect the different assets each company has, and thus where they need to seek revenue. Spotify has 200 million users but only half of them pay.  Spotify cannot afford to simply write off the half that won’t subscribe as an expensively maintained marketing list. It needs to monetise them through ads too. Apple is a hardware company pivoting further into services because it needs to increase device margins, so it can afford to snub ad supported models and position around being a trusted keeper of its users’ data. Netflix is a business that has focused solely on subscriptions and so can afford to take pot shots at competitors like Hulu which serve ads. However, Netflix can only hike its prices so many timesbefore it has to start looking elsewhere for more revenue; so ads may be on their way, whatever Reed Hastings may say in public.

The three currencies of digital content

Consumers have three basic currencies with which the can pay:

  1. Attention
  2. Data
  3. Money

Money is the cleanest transaction and usually, but not always, comes with a few strings attached. Data is at the other end of the spectrum, a resource that is harvested with our technical permission but rarely granted by us fully willingly, as the choice is often a trade-off between not sharing data and not getting access to content and services. The weaponisation of consumer data by the likes of Cambridge Analytica only intensifies the mistrust. Finally, attention, the currency that we all expend whether behind paywalls or on ad supported destinations. With the Attention Economy now at peak, attention is becoming fought for with ever fiercer intensity. Paywalls and closed ecosystems are among the best tools for locking in users’ attention. As we enter the next phase of the digital content business, data will become ever more important assets for many content companies, while those who can afford to focus on premium revenue alone (e.g. Apple) will differentiate on not exploiting data.

Privacy as a product

So, expect the next few years to be defined as a tale of two markets, with data protectors on one side and data exploiters on the other. Apple has set out its stall as the defender of consumer privacy as a counter weight to Facebook and Google, whose businesses depend upon selling their consumers’ data to advertisers. The Cambridge Analytica scandal was the start rather than the end. Companies that can — i.e. those that do not depend upon ad revenue — will start to position user privacy as a product differentiator. Amazon is the interesting one as it has a burgeoning ad business but not so big that it could opt to start putting user privacy first. The alternative would be to let Apple be the only tech major to differentiate on privacy, an advantage Amazon may not be willing to grant.

The topics covered in MIDiA’s March 27 event ‘Making Free Pay’.The event will be in central London and is free-to-attend (£20 refundable deposit required). We will be presenting our latest data on streaming ad revenue as well as diving deep into the most important challenges of ad supported business models with a panel featuring executives from Vevo, UK TV and Essence Global. Sign up now as places are going fast. For any more information on the event and for sponsorship opportunities, email dara@midiaresearch.com 

Spotify’s Tencent Risk

NOTE: a previous version of this post referred to a non-compete clause with Spotify detailed in this SEC filing. I have been advised that the scope of this clause is narrower than I had originally interpreted. I have therefore updated this post to remove reference to that clause but the essence of the post remains intact due to the potential role of the major labels which, as outlined below, could have the same effect as a non-compete clause.

On Thursday (September 20th) Spotify grabbed the headlines with its announcement that it is launching a free-to-use direct upload service for artists. While it is undoubtedly a big move, and one that will concern Soundcloud among others, it was not a surprising move. In fact, in April we predicted this would happen soon:“Spotify will take a subtler path to ‘doing a Netflix’, first by ‘doing a Soundcloud’, i.e. becoming a direct platform for artists and then switching on monetisation”. Will labels be concerned, sure, because although Spotify might not be parking its tanks on their lawn yet, it is certainly slowly reversing them in that general direction. However, they may just have a way of clipping Spotify’s wings and waiting in, er, the wings…Tencent.

Still waiting for IPO metrics

Tencent is prepping its music division (TME) for a partial US IPO but announced earlier this week that it will be reducing the amount it is seeking to raise from $4 billion to $2 billion, though still against a reported valuation of around $25 billion. Regular readers will know I have a healthy scepticism of Tencent’s music numbers. It has only ever reported one subscriber number officially – 4.7 million for QQ Music in Q1 2016, therefore it has plausible deniability over all the non-official numbers it puts out via the press. So, the fact there still isn’t an F1 filing revealing TME’s metrics is intriguing to say the least.

Go west

The likelihood is that the numbers will show a relative flattening in music subscriber growth (though other areas of its business should be robust). If so, they fit a wider narrative of Tencent nearing the limits of its potential in China. Video subs, which have grown superfast, will soon slow, messaging is saturated and the Chinese government is curtailing Tencent’s games operations. The title of our April report says it all: “Tencent Has Outgrown China: Now Comes the Next Phase of Growth”. Until last year’s change in Chinese regulations, Tencent could quite happily have spent its time strolling across the globe buying up companies to spread its global wings. But now, operating under limits of how much it can spend on overseas companies, Tencent is restricted to taking minority stakes in companies like Gaana and Spotify. But those efforts do not deliver Tencent the scale of global growth it needs. You can probably see where this is heading: to grow its music business TME will have to roll out internationally, which is quite possibly part of the story it will use to justify its $25 billion valuation.

Ring fencing Spotify’s global reach 

Should TME decide to use the $2 billion it raises via IPO as a war chest, it could then go on a global roll out to all the markets where Spotify is currently not present. Getting their first, with the backing of Tencent and of the $2bn IPO windfall would put Spotify on the back foot. Especially if, and here’s the crucial part, the major record labels took this as an opportunity to knock Spotify down a peg because of its increasingly competitive behaviour. They’ve been relying on Indian licenses already, that could prove to be a template, with Tencent the grateful beneficiary.  This would have the effect of ring-fencing Spotify’s global roll out plans. For fans of the board game Risk, the board would look something like this:

Spotify tencent risk 1

But Risk’s map doesn’t really do it justice. Using a political global map, the respective footprints would look more like this:

Spotify tencent risk 2

The major labels have proven unwilling to license Spotify for India because they weren’t happy with Spotify offering direct deals for a small number of artists. Imagine how they are going to feel with this latest move. With TME waiting patiently on the side lines, they may just see it as an opportunity to carve up the global streaming landscape into two halves, creating a cold war stalemate. Your move Spotify.

From Ownership to Access

MIDiA PanelLast Wednesday we held the third MIDiA Quarterly forum, exploring the shift from ownership to access across different media industries. In addition to MIDiA analyst presentations we had panellists from Sky, The Economist, Beggars Group, Reed Smith and Readly. The event was held at The Ministry in London and was a great success. Be sure to make it to our next one! Here are some of the key themes we explored.

Change is a coming

We opened with three quotes that summarise the tensions and transformations taking place in the digital content marketplace:

 ‘The fine wines of France are not merely content for the glass making industry’, Andrew Lloyd-Webber

‘We’re competing with sleep…sleep is my greatest enemy’, Reed Hastings, Netflix

‘Content may still be king but distribution is the queen and she wears the trousers’, Jonah Peretti, BuzzFeed

All three quotes represent very different worldviews and illustrate how different things can look from the perspective of the companies being disrupted, those doing the disruption and those building businesses to harness the disruption. All three viewpoints are simultaneously valid, but the media landscape is changing at rapid pace, and fighting a rear-guard action against change only gives the disruptors a freer rein to, well, disrupt.

access slide 1Across most media industries – music, video and news especially, the future of content monetisation will be built around advertising for the mass market and subscriptions for the aficionados, while additional opportunities exist for one-off transactions within both environments (e.g. Tencent live streaming  Chinese boyband TFBoysand Epic Games selling $100 million a month of virtual items in Fortnite). What is going as a mainstream proposition is selling physical media, though niche markets for collectables will thrive—ironically exactly because of the demise of physical media. In an age without shelves full of CDs, DVDs and games, collectors want a physical manifestation of their tastes.

Music and video are plotting the most directly comparable paths towards access-based models, though there are also some very telling differences:

  • Scale:Globally there were 206 million music subscribers at the end of 2017, compared to 452 million video subscribers. But while subscriptions represented 45% of retail music revenues, it was just 12% of pay-TV revenues. Music though is a far smaller industry than pay-TV (11% of the size), so like-for-like comparisons aren’t always that useful.
  • Concentration:What is worth comparing though, is the degree of market concentration. In music, the top four subscription services account for 72% of subscribers, compared to just 54% for video. And while the long tail for music services isn’t very, well, long, in video there is a vast number of smaller services: there are around 60 different services in the US alone.
  • Variety:While music services largely offer the same catalogue, with the same usage terms at the same price, video is defined by diversity and exclusives. Using the US as an example again, more than half of the services are niche – such as Korean drama, 4K nature, horror, reality – and there are 23, yes 23, different price points.

Aside the different heritages of these industries – consumers are used to paying for different slices of TV content, there is another key reason for the differences: rights holder distribution. In music three big companies account for the majority of revenues; in TV there are dozens of key studios and networks. This means that in video, the distribution companies can play rights holders off each other and effectively set the pace of change. In music, the major record labels shape the market.

This dynamic is what Clayton Christensen outlined in the Innovator’s Dilemma. There are two key types of innovation:

  1. Sustaining innovations:the smaller, more evolutionary changes that companies make to improve their existing products. Every company does this if they can, it’s how to maintain the status quo and grow revenues predictably
  2. Disruptive innovations:these are dramatic, industry-altering changes that rarely come from the incumbents but instead from disruptive new entrants. P2P file sharing was the big one that shook the TV and music industries. TV responded by fighting free with free, by launching services like iPlayer, ABC.com and Hulu. The music industry responded by licensing to the iTunes Music store. One embraced disruption, one fought it.

Talking of disruption, the big existential threat media companies will have to face over the coming decade, is ceding power, willingly or otherwise, to the tech majors (Alphabet, Amazon, Apple and Facebook). Europe’s Article 13aims to offset some of the growing reach of the tech majors, but ultimately these companies will shape the future of media, across both ad supported and subscription models.

The tech majors generated $40.7 billion in ad revenue in Q1 2018 alone, including around $2 billion for Amazon, the global advertising revenue powerhouse that many still aren’t paying enough attention to. The tech majors have already sucked away much of the news industry’s audience and ad revenues; with assets such as YouTube and IGTVthey are competing for radio and TV too. But it is the content and services revenue that media companies need to pay most attention to. With $16.9 billion in Q1 alone – nearly the same as the recorded music market for the entirety of 2017, this is a sector that all four tech majors are taking seriously, very seriously. And even though Facebook is a late arrival to the party, it is making up for lost time with its new music offeringand evolving video strategy.

The reason all this matters for media companies is that the strategic objectives of the tech major are rarely aligned with those of media companies. The tech majors each use media as a means to an end, a tool for driving their core strategy. Access based models underpin the content strategies of these companies who often control distribution and access to consumers via tools such as app stores, mobile operating systems, search and social platforms. Thus, the shift from ownership to access could also translate into a shift towards a tech major dominated media world.

Sweden Might Just Have Shown Us What the Future of Music Revenues Will Look Like

Earlier this week the IFPI released its Global Music Report – an essential tool for anyone with a serious interest in the global recorded music business. One interesting trend to emerge was the slowdown in Swedish streaming growth and its knock-on effect on overall recorded music revenues. Sweden has long been the leading indicator for where streaming is likely to head, providing a picture of just how vibrant a sophisticated streaming market can be. But now, with the market reaching saturation, it also gives us some clues as to what the long-term revenue outlook for the global music market could be.

sweden growth

According to the IFPI, Swedish streaming revenues reached $141.3 million in 2017, up from $125.7 million in 2016, with subscriptions accounting for 96% of the total. That was an increase of just $9.3 million, or 7% year-on-year growth, down from 10% in 2016 and 23% in 2015. This is a typical trajectory for a market when it has progressed to the top end of the growth curve. With synchronisationand performance revenues collectively growing by just $1.5 million in 2017 and downloads and physical both continuing their long-term decline, streaming is not only the beating heart of Swedish music revenues, it is the only driver of growth. Consequently, overall Swedish recorded music revenues grew by just 4% in 2017, compared to 6% in 2016 and 10% in 2015. As streaming matures, total market growth slows.

So what can we extrapolate from Sweden onto the global market? Firstly, there are a number of unique market characteristics to be considered:

  • Sweden is the home of Spotify, so adoption over indexes
  • Incumbent telco Telia provided a lot of early stage growth for Spotify
  • iTunes never really got going in Sweden, so the legacy download market was a much smaller part of the market than it is globally
  • Physical music sales are further along in their decline (now just 10% of all revenues)

These factors considered imply that Sweden is an indicator of an optimum state streaming market; others may not get there or will not get there so quickly. This could mean that legacy formats decline more quickly in comparison, making total revenue growth slower. However, given that downloads are a bigger chunk of revenues in most markets, these factors should cancel each other out. Therefore, an annual growth of 4% in total music revenues is a decent benchmark for long-term revenue growth.

The question is, what happens to the remnants of declining legacy format revenue? Do those CD and download buyers disappear out of the market, or does some of their revenue switch over to ensure that growth continues further? The likelihood is that Apple will see much of its longer-term growth come from converting higher value iTunes customers into subscribers, but there is a clear case for expanding the market beyond 9.99. The current 10% price hike experiment Spotify is running in Norway is one route. But, a suite of higher tier products is a better solution, as are super-cheap low-end products (e.g. $0.25 a week for Today’s Top Hits) and, of course, boosting ad-supported revenue to steal audience from radio. That latter point is probably the best long-term option for pushing real continual recorded music industry growth.

The Spotify Numbers You Won’t Have Seen

One of the core values that we deliver to our clients at MIDiA Research is finding the ‘third number’— the data point that wasn’t reported by a company but that can be arrived at through a process of modelling and triangulation. Next week, we will publish a report that does just this for the numbers presented in Spotify’s F1 filing. The metrics we arrive at help create a more complete picture of Spotify’s performance for investors and rights holders, as well as the impact of core metrics upon other parts of Spotify’s business. In advance of its publication, here are just a few highlights.

spotify metrics

Spotify’s F1 filing paints a picture of a growing business that is improving metrics across the board, with the foundations for a solid couple of years ahead now well built. But there are also a number of challenges:

  • User growth: Spotify experienced strong growth between Q4 2015 and Q4 2017, increasing its subscriber base from 28 million to 71 million, its ad supported users from 64 million to 92 million and its total monthly active users (MAUs) from 91 million to 159 million. Set in the longer-term context, Spotify’s subscriber growth trajectory indicates it is well up the growth curve, with 2014 representing the earlier growth phase and Q1 2015 the point at which the inflection point occurred. Since Apple Music entered the market in mid 2015, Spotify has seen growth actually increase, and over the period added more net new subscribers by the end of 2017 (49 million) than Apple Music did (34 million).
  • Streams up, but inactive subscribers also: Engagement is growing, with subscribers playing an average of 630 streams a month in 2017 compared to 438 in 2015. Over the same period ad supported users increased average monthly streams from 119 to 222. The net result was 195.4 billion streams in 2017 compared to 59.6 billion in 2015. However, inactive subscribers (i.e. subscribers plus ad supported users minus MAU) grew from one million in Q1 2016 to four million in Q4 2017. Though this is a long way off the ‘zombie users’ problem that Deezer has historically suffered from due to inactive telco bundles, it is a metric Spotify will need to keep on top of.
  • Churn down…: Throughout 2016 and 2017 Spotify progressively reduced its churn rate from 6.9% for Q1 2016 to 5.7% in Q4 2017. This is despite churn being pushed up by the super trials and thus reflects a solid improvement of organic retention across Spotify’s paid user base. In a March investor presentation, CFO Barry McCarthy argued that as Spotify’s subscriber base matures, life time value (LTV) and gross profit will increase, with more subscribers sticking around for longer.
  • …but not out: Despite quarterly falls, churn remains a core issue while Spotify is in growth phase and is acquiring portions of subscribers who try out the service but realise it is not for them. On an annual basis churn 18% in 2017, down from 18.5% in 2016. These lost subscribers totalled 12.8 million in 2017, up from 8.9 million one year earlier. Spotify added 23 million subscribers to its year-end total in 2017 but, including churned out subscriber the total subscribers gained was 35.8 million. Thus, churned subscribers accounted for 36% of all subscribers gained. This process of getting more subscribers in than out is common to all premium subscription businesses and is particularly pronounced when a service is in growth phase, as is the case with Spotify. It is even more pronounced in contract-free subscriptions. Pay-TV and mobile companies have the benefit of long-term contracts to minimise churn. The fact that Spotify reports churn at all is creditable. McCarthy’s old company Netflix got so fed up with investors’ reactions to churn that it stopped reporting it all together.
  • Super trials: Spotify’s subscriber growth has not however been linear. Heavily discounted trials offering three-month subscriptions for $1 have been pivotal in driving strong user growth spikes each quarter in which they run. On average, Spotify’s global subscriber base grew by a net total of 2.8 million each quarter between Q4 2015 and Q4 2017 in the quarters that these ‘super trials’ were not running, but by 7.5 million in the quarters that they did.
  • Non-linear growth affects all regions: In 2016 and 2017, Spotify’s European and North American subscriber bases each grew at an average of one million subscribers in quarters without trials and three million and two million respectively in quarters with them. Thus, Spotify’s organic net monthly subscriber growth in each of these regions was around 330,000. A similar trend appeared in Latin America – where net subscriber growth doubled in each trial quarter from one to two million. The impact is more dramatic in rest of world, where rounded net subscriber growth was flat in all quarters without trials and more than one million in quarters with.

Despite the joint effects of subscriber bill shock and reduced margins, super trials are clearly net positive for Spotify’s business. When it later decides to fade them out in more mature markets – namely when it switches from user acquisition to user retention mode – Spotify will be able to quickly improve both margin and retention.

Barring calamity, Spotify looks set to have a strong 2018 in terms of growth across subscriptions, MAUs and revenue. If it continues its current operating strategy Spotify should reach 93 million subscribers by the end of 2018. By comparison, Apple Music is likely to have hit around 56 million subscribers by Q4 2018, with its rate of net new monthly subscribers having increased to 2 million in 2018.

If you are not yet a MIDiA subscription client and would like to find out how to get a copy of the forthcoming seven-slide report and accompanying dataset, email stephen@midiaresearch.com

The Narrative Of Spotify’s Filing Is That The Best Is Yet To Come

Spotify just filed its F1 for its DPO. The most anticipated business event in the recorded music industry since, well…as long as most can remember, is one big step closer. The filing is a treasure trove of data and metrics, and while there won’t be too many surprises to anyone who follows the company closely, there are none the less a lot of very interesting findings and themes. The full filing can be found here. Here are some of the key points of interest:

  • Most of the numbers are heading in the right direction: MAUs, subscribers, hours spent etc are all going up while churn and cost ratios are heading down. Premium ARPU was an exception, declining: 2015 – €7.06 / 2016 – €6.00 / 2017 €5.24, which reflects pricing promotions. But Spotify was never going to have fixed every aspect of its business in time for its listing, that was never the point. What Spotify needs to convince potential shareholders is that it is heading in the right direction. The narrative that emerges here is of a company that has helped create an entire marketplace, that has made great ground so far and that is poised for even bigger and better things. That narrative and the clear momentum should be enough to see Spotify through. As I’ve previously noted, investor demand currently exceeds supply. If you are a big institutional investor wanting to get into music, there are few options. Pandora aside, this is pretty much the only big music tech stock in town. As long as Spotify can keep these metrics heading in the right direction, it should have a much smoother first few quarters than Snap Inc did, even though a profit is unlikely to materialise in that time.
  • Spotify is baring its metrics soul: Spotify has put a lot of metrics on the line, setting the bar for future SEC filings. While competitor streaming services will be busy plugging the numbers into Excel so they can compare with their own, the rest of the marketplace now has a much clearer sense of what running a streaming service entails. One really encouraging development is Spotify’s introduction of Daily Active User (DAU) metrics. As we have long argued at MIDiA, monthly numbers are an anachronism in the digital era, a measure of reach not engagement. So, Spotify is to be applauded for being the first major streaming service to start showing true engagement metrics.
  • Users and engagement are lifting: Spotify had 159 million MAUs in 2017, with 71 million paid and 92 million ad supported. Europe was the biggest region (58 million total MAUs) followed by North America (52 million), Latin America (33 million) and Rest of Word (17 million). The latter two are the fastest growing regions. Meanwhile, 44% of MAUs are DAUs, up from 37% in Q1 2015, which shows that users are becoming more engaged, though the shape of the curve (see chart below) shows that when swathes of new users are on-boarded, engagement can be dented. Consumption is also growing (a sign of both user growth and increased engagement): quarterly content hours went from 17.4 billion in 2015 to 40.3 billion in 2017. There are some oddities too. For example, ad supported MAUs actually declined in Q2 2017 by 1 million on Q1 2017 and in Q4 2017 only increased by 1 million on the previous quarter to reach 92 million.
  • The future of radio: Spotify puts a big focus on spoken word content and podcasts in the filing, as it does on advertiser products. It also lists radio companies first and subscription companies second as its key competitors. Meanwhile ad supported flicked into generating a gross profit in 2017 (ad supported went from -12% gross margin in 2016 to 10% in 2017. Premium gross margin up from 16% to 22% over same period.) As MIDiA predicted last year, free is going to be a big focus of Spotify in 2018 and beyond. The first chapter of Spotify’s story was about becoming the future of retail. The next will be about becoming the future of radio. And the increased focus on spoken word is not only about stealing radio’s clothes, it is about creating higher margin content than music. None of this is to say that Spotify will necessarily execute well, but this is the strategy nonetheless.
  • Spotify is still losing money but is trending in the right direction: Spotify’s cost of revenue in 2017 was €3,241 million against revenue of €4,090 with an operating loss of €378 million. However, losses are not growing much (€336 in 2016) and financing its debt added a whopping €974 million in 2017, from €336 million in 2016. Part of the purpose of the DPO is to ensure debt holders, investors and of course founders and employees get to see a return of their respective investments in money and blood, sweat and tears. Once that is done, financing costs will normalize. Also, Spotify’s new label licensing deals are kicking in, with costs of revenue as a share of premium revenue falling from 84% in 2016 to 78% in 2017. Spotify is not yet profitable but it is getting its house in order.

All in all, there is enough in this filing to both convince potential investors to make the bet while also providing enough fodder for critics to throw doubt on the commercial sustainability of streaming. Spotify’s structural challenge is that none of the other big streaming services have to worry about turning a profit. In fact, it is in their collective interest to keep market costs high to make it harder for their number one competitor to prosper.

But in the realms of what Spotify can impact itself, the overriding trend in this filing is that Spotify is well and truly on the right track. For now, and the next 9 months or so, Spotify will likely remain the darling of the sector. But after that, investors will start wanting a lot more if they are going to keep holding the stock. Spotify is promising that the best days are yet to come. Now it needs to deliver.

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Announcing MIDiA’s Streaming Services Market Shares Report

coverAs the streaming music market matures, the bar is continually raised for the quality of data required, both in terms of granularity and accuracy. At MIDiA we have worked hard to earn a reputation for high-quality, reliable datasets that go far beyond what is available elsewhere. This gives our clients a competitive edge. We are now taking this approach a major step forward with the launch of MIDiA’s Streaming Services Market Shares report. This is our most comprehensive streaming dataset yet, and there is, quite simply, nothing else like it out there. Knowing the size of streaming revenues, or the global subscriber counts of music services is useful, but it isn’t enough. Nor even, is knowing country level streaming revenue figures. So, we built a global market shares model that breaks out subscription revenues (trade and retail), subscribers, and subscription market shares for more than 30 music services at country level, across 30 countries and regions. You want to know how much subscription revenue Spotify is generating in Canada? How many subscribers Apple Music has in Germany? How much subscription revenue QQ Music is generating China? This is the report for you. Here are some highlights:

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  • At the end of 2016 there were 132.6 million music subscribers, up from 76.8 million in 2015
  • In Q4 2016 Spotify’s subscriber market share was 35% and it had $2,766 million in retail revenue
  • Apple Music was second with 21 million subscribers at the end of 2016, a 15.6% market share and it had $912 million in retail revenue
  • In 2016 Apple was the largest driver of digital music revenue across Apple Music and iTunes
  • The US is the largest music subscription market, which Spotify leads with 38% subscriber market share
  • The UK is Europe’s largest streaming market, which Spotify also leads
  • China’s subscriber base is the second largest globally, but it ranks just 13th in revenue terms
  • Japan is the world’s third largest subscription market, in which Amazon has the largest subscriber market share
  • Brazil is Latin America’s largest music subscription market

The report contains 23 pages and 13 charts with full country detail as well as audience engagement metrics. The dataset includes four worksheets and a comprehensive methodology statement.

Streaming Services Market Shares is available right now to MIDiA premium subscribers. If you would like to learn more about how to access MIDiA’s analysis and data, email Stephen@midiaresearch.com.

The report and data is also available as a standalone purchase on MIDiA’s report store as part of our ‘Streaming Music Metrics Bundle’. This bundle additionally includes MIDiA’s ‘State of The Streaming Nation 2.1’. This is our mid-year 2017 update to the exhaustive assessment of the streaming music market first published in May. It includes data on revenue, forecasts, consumer attitudes and behaviour, YouTube, app usage and audience trends.

Examples of country graphics (data labels removed in this preview)

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What Spotify Can Learn From The Roman Slave Trade

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

Roman Slaves

Roman Slaves

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

The Importance Of Economic Surplus

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

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

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

Product Innovation Where Are You?

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

Post-Listing Scrutiny

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

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Spotify The Music Company

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

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

Streaming Is The Engine Not The Vehicle

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