Is QQ Music Worth $10 Billion?

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

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

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

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

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

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

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

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

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

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

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

How Soundcloud Could Transform Deezer’s Market Narrative

deezer soundcloud

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

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

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

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

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

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

Soundcloud Is Built For The Era Of Mass Customization

As DJ Spooky put it:

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

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

Crowd Sourced Discovery

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

Soundcloud Needs An Ecosystem

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

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

YouTube Is Not For Sale But Soundcloud Is

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

 

Quick Take: A Big Deal Benefits Both Sprint And Tidal

News just emerged that SoftBank owned Sprint has acquired a 30% stake in Tidal, reportedly for $200 million against a valuation of $600 million. The valuation seems on the high side, but a big ticket investment works well for both parties.

According to MIDiA’s latest survey data from December 2016, just 2.7% of consumers in the US, UK, Australia and Canada use Tidal weekly (and that’s probably over reporting). Subscriber wise Tidal had 1 million subscribers at the end of 2016, just 1% of the global subscription market. (Although Tidal has published numbers suggesting it is closer to 4 million, those numbers are not commercially active subscribers but instead ‘users’ and trialists). Tidal is a small player in the global streaming subscription market. So why would Sprint / SoftBank a) want to invest in a small player and b) pay so much?

Making A Small Partnership Bigger

As we discussed in our December MIDiA Research report Next Steps For Telco Music: The Revenue Or User Dilemma telco music bundles are at a turning point. Telco music bundles were highly important in the early stages of streaming subscriptions, helping kick start the market. But their share of total music subscribers has fallen from a high of 32% in 2013 to just 14% in 2016. The original thinking behind telco bundles was differentiation, but when every telco has got a music bundle there’s no differentiation anymore. Additionally, if you are a top tier telco and you haven’t got Apple or Spotify, then partnering with one of the rest risks brand damage by appearing to be stuck with an also-ran. By making a high profile investment in Tidal, Sprint has thus transformed its forthcoming bundle from this scenario into something it can build real differentiation around. Also Tidal has built its proposition around exclusivity and that is being put front and centre of this partnership.

Buy Big To Look Big

Meanwhile, SoftBank has the benefit of a high priced acquisition. Such deals are typically viewed more favourably by investors than smaller ones as it is a statement of intent. Often companies can quickly make their investment back in increased market capitalization because of an uplift to the share price. This is the strategy that kept Yahoo afloat for the last 15 years.

Tidal has struggled to make a dent in the streaming market and has seen more clear water opening up between it and the market leaders. It also has shallower pockets than Spotify, Apple or Amazon. This deal gives Tidal access to Sprint’s customer base, free marketing (well free to Tidal at least) and a war chest to take on the streaming incumbents. Tidal is not about to suddenly become the global streaming leader but it can now, with a fair wind, become a serious player in the US.

 

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.

MIDiA Research Predictions 2017: The Year Of The Platform

MRP1611-coverFollowing an 84% success rate for our 2016 Predictions report, we today launch our 2017 predictions report: ‘MIDiA Research Predictions 2017: The Year Of The Platform’. The report is immediately available to all MIDiA subscription clients and can also be purchased for individual download from our report store here.

Here are some highlights:

2016 was the year that video ate the world. 2017 will be the year of the platform, the year in which the tech majors will fight for pre-eminence in the digital economy, competing for consumer attention through formatting and distribution wars. Companies that are already using mobile Operating Systems to achieve global reach will take the next step, creating Mobile Life Ecosystems that both break out of the app silo walls and straddle them. Facebook, Amazon, Tencent, Microsoft, Apple and Google/Alphabet will be the main players. 2015 was about parking tanks on each other’s front lawns, in 2016 shots were fired, 2017 will be all-out war. Artificial Intelligence (AI) and voice assistance will be key battlegrounds and indeed will form the glue of Mobile Life Ecosystems.

Some of MIDiA’s other key predictions for 2017 are:

  • Services are the new black: Maturing ‘phone and tablet markets mean that hardware companies will place a greater focus on digital content and services in 2017. Services are an opportunity to drive strong growth that will compensate for slowing device sales
  • Ad market growing pains: Digital advertising inventory supply will exceed demand in 2017. Audience engagement will grow more quickly than advertisers’ appetite. Consequently, ad rates will decline with the bloating of the market by content farms accentuating the problem. Facebook will not be alone in seeing slowing ad revenues in 2017.
  • A tech major will be hit with the first stage of an anti-trust suit: The incoming US Presidency has made its anti-trust inclinations clear. A likely early target will be the AT&T/Time Warner merger. The global-scale tech companies may be mature companies but their respective sectors are not. Regulation is one of the inevitable growing pains of maturing business sectors. Digital is next.
  • Snapchat’s IPO will be digital’s canary in the mine: App store era unicorns and their attendant Initial Public Offerings (IPOs) will redefine the media and tech landscape. Not only will the success, or failure, of Snapchat’s IPO affect those of Uber and Spotify, poor showings could deflate the VC bubble andput an end to the grow-at-all-costs For the music industry, the stakes are even higher, as an under-achieving Spotify IPO would create a crisis in confidence in the entire streaming market.

Among our music predictions for 2017 are Spotify’s IPO and the subsequent start of a new generation of experiential streaming services, Tidal selling (probably to Apple) while Spotify closes out the year with around 55 million subscribers to Apple Music’s 30 million.

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.

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.

streaming-market-share-q2-16

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.

What Frank Ocean’s Bombastic Blond Moment Tells Us About The Future Of Artists And Labels

When frank-ocean-blond-compressed-0933daea-f052-40e5-85a4-35e07dac73dfFrank Ocean’s latest album ‘Blond’ dropped, it did so like a nuclear bomb, sending shockwaves throughout the music industry. In one of the audacious release strategies of recent years Ocean and his team at 360 fulfilled the final album contractual commitment to Universal Music by ushering his breaking-the-mold visual album ‘Endless’ onto Apple Music.  Featuring collaborations from the likes of Sampha and James Blake and set as a loose soundtrack to art house visuals, ‘Endless’ looked like the sort of digitally native, creative masterstroke that would win plaudits and awards in equal measure. But no sooner had Universal executives started daydreaming about Grammys then along came what turned out to be the ‘actual’ album ‘Blonde’, self released by Ocean (Universal contractual commitments now of course conveniently fulfilled) and, for now at least, exclusively available on Apple Music. You can just imagine seeing the blood drain from (Universal CEO) Lucian Grainge’s face as the full magnitude of what had just happened came into focus. In truth ‘audacious’ doesn’t even come close to explaining what Ocean pulled off, but where it gets really interesting is what this means for the future of artist careers.

Artist-Label Relationships Are Changing

Quickly sensing the potential implications, Grainge swiftly sent out a memo to Universal staff outlawing streaming exclusives…though voices from within Universal suggest that this diktat had been in the works for some time . A cynic might even argue that it was politically useful for Universal to be seen to be taking a strong stand ahead of the impending Vivendi earnings call. As the ever excellent Tim Ingham points out, in practice Universal could put a streaming exclusives moratorium in place and still have a good number of its front line artists put out streaming exclusives. This is because many of the deals these artists have are not traditional label deals where Universal owns all the rights. And that itself is as telling as Ocean’s bombastic blond moment. Not so much that Universal is probably the major with the highest amount of its revenue accounted for by licensed and distributed works, but that any label’s roster is now a complex and diverse mix of deal types. Artists are more empowered than ever before, and thanks to the innovation of label services companies and next generation music companies like Kobalt, labels have been forced to steal the disruptors’ clothing in order to remain competitive.

Streaming Exclusives Represent Another Option For Artists

Just as labels had started to successfully co-opt the label services marketplace by launching their own – e.g. Universal’s Caroline – or by buying up the competition – e.g. Sony’s acquisition of Essential Music & Marketing – along come streaming services giving artists another non-label route to market. In truth, the threat has remained largely unrealised. Exclusives on Tidal have most often proved to be laced with caveats and get out clauses (e.g. Beyonce’s ‘Lemonade’ arriving on iTunes 24 hours after landing ‘exclusively’ on Tidal). Chance The Rapper’s (in name only) mixtape ‘Colouring Book’ and Ocean’s ‘Blond’ are exceptions rather than the rule. So all that’s about to change now right? Not necessarily…

Album Releases Require More Time Than Apple Probably Has

As anyone who works in a label will tell you, releasing an album is typically a long, carefully planned process with many moving parts. It’s not something you do in a couple of weeks (Ocean started building the hype and expectation for his latest opus a year ago). If, for example, Apple was going to start doing exclusives routinely, even if it just did 20, that’s still a new exclusive to push every 2 weeks. That might work, at a stretch, for music service retailing promotional pushes but is far short of a fully fledged album release cycle. Which means that even for just 20 exclusives Apple would have an intricate mesh of overlapping release campaigns. This is something that labels do with their eyes closed but would it require new organizational disciplines for Apple. Not impossible, but not wholly likely either.

In practice, exclusives are likely to be limited to being the crown jewels of streaming services, their most valuable players, creative playmakers if you like. Even for Netflix, that pioneering exemplar of the streaming originals strategy, only spends 15% of its $3 billion content budget on originals and probably won’t break 20% even by 2020. What Apple and Netflix have in common is that they are using exclusives as a customer acquisition strategy, achieving their aims by making a big noise about each one. But if you’re releasing exclusives every week or two the shine soon wears off. And suddenly the return on investment diminishes.

Streaming Exclusives Are Unlikely To Turn Into A Flood

None of this means that we won’t see more artists striking streaming exclusives. We will, regardless of what labels may actually want to happen. And most of those will probably be on Apple – the service with bottomless pits masquerading as pockets. But the trickle will not turn into a flood, a fast flowing stream perhaps (see what I did there) but not a torrent.

Although they might not realise it yet, Kobalt might find themselves hurting more than the majors from this latest twist in the Exclusives Wars. Kobalt has probably done more than any single other music company to drive change in the traditional music industry in the last 5 years, showing artists and songwriters that there is another way of doing things. But Frank Ocean has just shown that there is now new another option for established artists looking for options at the end of a label deal.

Most importantly of all though, is that streaming exclusives (and indeed label services deals) work best when an artist has already established a brand and an audience. Most often that means after an artist has had a record label recording career. Apple cannot be relied upon to build anything more than a handful of artist brands. One of the founding myths of the web was that it was going to do away with labels and other traditional ‘gatekeepers’. Now, decades later, labels still account for the vast, vast, vast majority of music listening. Make no mistake, a momentous value chain shift is taking place, with more power and autonomy shifting to the creators, but that is a long journey and ‘Blond’ is but one part of this much bigger shift.

Understanding ’15’: How Record Labels And Artists Can Fix Their YouTube Woes

The artist-and-labels-versus-YouTube crisis is going to run and run, even if some form of settlement is actually reached…the divisions and ill feeling run too deep to be fixed solely by a commercial deal. What’s more, a deal with better rates won’t even fix the underlying commercial problems. Music videos under perform on YouTube because they don’t fit YouTube in 2016 in the way they did YouTube in 2010. The 4 minute pop video was a product of the MTV broadcast era and still worked well enough when online video was all about short clips. But the world has moved on, as has short form video (in its new homes Snapchat, Musical.ly and Vine). Short videos are no longer the beating heart of YouTube viewing and quite simply they don’t make the money anymore. This is why music videos represent 30% of YouTube plays but just 12% of YouTube time. If record labels, publishers, performers and songwriters want to make YouTube pay, they need to learn how to play by the new rules. And to do that they need work out what to do with ‘15’.

youtube monetization

There Is A Lot More To YouTube Revenue Than Some Would Have You Think

The recorded music industry gets radio, and it is beginning to get streaming. Both are all about plays. Each play has, or should have, an intrinsic value. They are models with some degree of predictability. But YouTube does not work that way, which is why the whole per stream comparison thing just does not add up. In MIDiA’s latest report ‘The State Of The YouTube Music Economy’ we revealed that YouTube’s effective per stream rates (that is rights holder revenue divided by streams) halved from $0.0020 in 2014 to $0.0010 in 2015.

Sounds terrible right? And make no mistake, there is no way to spin it into a good news story. However, it didn’t fall because of some nefarious Google ploy. It fell because of many complex reasons (all of which we explore in the report) but the 2 biggest macro causes were:

  • YouTube pays out as a share of ad revenue (55%) not on a per stream basis. So when the value of its ad inventory goes down (due to factors such as more views coming from emerging markets with weaker ad markets) the revenue per stream goes down too. This is something the labels can do little about, though an increased revenue share will soften the blow as YouTube globalizes.
  • YouTube serves its in-stream video ads (the most value ad format) on a time-spent basis, not on a per-video basis. Our research found that the average number of video ads per hour of viewing comes out at about 4. That means if you have 15 minute videos (like many YouTubers do) you will get a video ad every play. But if you have 3 or 4 minute pop videos you may only get 1 video ad for every 4 or 5 plays. Which means 4 or 5 times less video ad revenue. In fact, our research revealed that just 26% of music video views have video ads. This is the underlying issue the industry needs to address, and unlike global ad market dynamics, this is something it can indeed fix.

The 15 Scale

This is where the magic number 15 comes in. Right now music video sits in the same 3-4 minute slot it has done so ever since MTV said it wanted videos that length. Yet video consumption is now polarized between the 15 second clip on lip synch apps like Musical.ly and Dubsmash and 15 minute YouTuber clips. Falling in between these two ends is revenue no-mans land. As I have written about before, labels and publishers need to figure out how to harness the 15 second clip as an entirely new creative construct and shake off any old world concepts that this is actually anything about marketing and discovery. It is consumption, plain and simple…it just happens to look unlike anything we’ve seen before.

At the opposite end of the 15 scale labels and artists need to start thinking about what 15 minute formats they can make. Think of this as a blank canvas – the possibilities are limitless. For example:

  • 3 track ‘EP’ videos interspersed with artist narrative and reportage coverage
  • Live sessions (recorded by, and uploaded by labels so they get revenue as well as publishers)
  • Mini-documentaries such as ‘the making of’s
  • On-the-road features

15 Minutes Does Not Have To Break The Bank

And before you cry out ‘but this stuff will cost so much more to make’, it doesn’t have to if more is made out of current assets and processes. For example, ensure that one of the support crew has a handheld camera to film some shoulder footage for reportage. The whole thing about YouTube is that it doesn’t have to be super high production quality, in fact the stuff that does best patently isn’t. YouTube videos that work best are those that are an antidote to the old world of inaccessible glamour. If you really want to do things on the cheap, simply splice three music videos together into a single long form video (e.g. tag 2 older tracks onto the new single). Doing so will nearly treble the video ad income.

And before you think this isn’t what audiences want, ask Apple about ‘The 1989 World Tour LIVE’ and Tidal about ‘Lemonade’.

And (yes another ‘and’) if you can’t get your head around the inescapable need for a completely new music video construct, just think about it this way: 15 minute videos will make you 5 times more video ad revenue. This really is a ‘no brainer’.

Back To The Future

As a final piece of evidence (not that it is needed), cast your mind all the way back to 1982, to Michael Jackson’s landmark video ‘Thriller’. A 13:42 video that is widely recognized as one of the all time music video greats that has also racked up 330 million views on Vevo. So you could say the case for 15 minute video was already made a quarter of a century ago (thanks to MIDiA’s Paid Content Analyst Zach Fuller for pointing that one out).

The 4 minute music video is dead, long live the 15 minute music video.

For more detail on our ‘State Of The YouTube Music Economy’ report check out our blog.

You can also buy the 25 page report with 8 page data set here.