The MIDiA Research Podcast: Episode 1 – What Next for Tencent?

midia research podcastWe are excited to announce the first episode of the MIDiA Research podcast: What Next for Tencent?

President Trump’s executive orders concerning Bytedance and Tencent set the cat among the pigeons. In this podcast we explore what the potential ramifications are for Tencent’s bold and disruptive entertainment business strategy in the West.

MIDiA Research · MIDiA Research Podcast Episode 1: What Next for Tencent

Newsflash: UMG, WMG and Spotify may have a problem with Tencent

UPDATE: AWhite House official confirmed to the LA Times that the announcement, at this stage, will not affect Tencent shareholdings of companiesand clarified that the order only refers to transactions ‘related to’ WeChat. How tight or narrow that definition will prove to be is another matter. This is a case of watch this space but whatever path the order eventually takes when put in action 45 days from now, Tencent’s global entertainment investment strategy has at the absolute least been put on a warning. The potential repercussions remain vast.

Donald Trump just signed a presidential order prohibiting any company subject to US jurisdiction from “any transactions” with Tencent Holdings Limited or “any subsidiary of” Tencent. This will have just put Universal Music, Warner Music and Spotify into emergency planning mode, not to mention Snap Inc, Epic Games, Blizzard Entertainment, AMC cinema and countless other entertainment companies that have taken Tencent investment. What had looked like a mischievously smart global strategy, giving Tencent back-door reach and influence over the Western entertainment business has just been dealt a potentially fatal blow by the stroke of the US president’s pen.

Donald Trump’s campaign against Bytedance and TikTok has had centre-stage media coverage (which of course has benefits during an election year) but by now pulling Tencent into the bitter dispute he may have (though probably inadvertently) started a domino effect that could cause major disruption to the US entertainment world. The wording of the presidential executive order (full text here) while aimed primarily at WeChat is incredibly vague and broad in reach, far beyond the WeChat app. While a White House official has since suggested the order is narrower in scope than the order suggests, the order says Commerce Secretary Wilbur Ross will not identify what transactions are covered until the order comes into effect in 45 days time.

There is a possibility that the scope of the order will be more tightly defined when it comes into effect, which will be in late September, just in time for peak presidential election campaigning. If it is broad in scope then it will likely be subject to legal challenges but they are lengthy affairs and going to legal war against a president that takes things very personally, especially during an election, is going to get messy. The kind of messy that already jittery stick markets do not like.

So, the near term scenario for UMG, WMG and Spotify is that they may all have to sever ties with Tencent (including Tencent Music Entertainment as it is a Tencent subsidiary) and then maybe even have to ensure Tencent divests its shareholdings (though that of course would require “transactions” – see how messy this is going to be). After that, the big repercussions for music could kick in. Tencent has been willing to pay a premium for the investments it has made in US based music companies. In doing so it has helped push up the overall value of music assets. Tencent’s sudden (potentially permanent) withdrawal from the market at a time when the global economy is entering a recession, could have long term impact. And in principle, any US label, publisher or CMO licensing music to Chinese streaming services via Tencent could easily be considered ‘transactions’.

Trump’s campaign against TikTok, while controversial, is relatively narrow in scope for the West, but Tencent represents an entirely different scale. Years of building its Western investments mean that Tencent’s tentacles of commercial interest stretch throughout the Western entertainment world. To date, Tencent has played a relatively passive role in its invested companies, if Tencent decides to go down fighting, that may be about to change. Whether it does so or simply deflates the music investment market by vacating it, the potential ramifications of Trump’s order for US based entertainment companies are huge.

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.

Music Streaming Needs a New Future

While doing some research on the Chinese streaming market I came across this fantastic UX tear down of Xiami Music. I recommend you read it in full. The day before I found this – also must-read –article on Beyoncé’s streaming strategy, which explains how she uses different platforms to segment her fanbase (Tidal – super fans, Spotify engaged fans, Netlix, passive fans). These two articles may seem entirely unrelated, but they are in fact two sides of the same coin: fandom.

Regular readers of MIDiA’s output will know that we have made fandom one of our central research themes, most recently identifying it as one of the next five growth drivers for the music business. We have also discussed at length how Chinese streaming services have built businesses around monetising fandom while Western streaming services instead simply monetise consumption.

Now I am going to take this thinking one step further by proposing a new way to consider how to segment the music consumption journey and how Western companies can become part of this new vision.

the three srtags of the music journey

Consider music consumption as three key steps:

  1. The song
  2. The (artist) story
  3. The fan

Streaming services now own the song. Social is doing an okay, but far from perfect job of owning the artist story. But no one – digitally – is owning the fandom. Music fans have to hop from one place to another to join the dots. This of course contrasts sharply with Chinese streaming services which own all three steps in the music journey. Let’s take a look at Xiami Music to illustrate the point.

XiamiI have written a lot in the past about Tencent Music’s portfolio of apps. Alibaba’s Xiami Music is one of the smaller players and its end-to-end value proposition is all the more impressive for that: this sort of functionality is table stakes for competing for audience attention in the Chinese market.

Delivering the music is almost just the starting point for Xiami Music, wrapping the music with endless additional context and features including (but by no means limited to): music videos, lyrics, commentaries, reviews, news, comment streams, virtual tipping, badges, trophies, lyrics poster, you can even grow your own Tamagotchi. As Siew writes in his UX tear down:

“Every piece of music has its own entourage — live versions, videos (the official one and the live ones), behind-the-scene footage, outtakes, remakes or covers, reviews etc.

Xiami has taken a leaf out of WeChat’s playbook. Everything you need about a song, an album, or an artiste/band, you can get it on Xiami. No need for you to google for lyrics, head to YouTube for a video, or launch Twitter/Weibo for news.”

Time to stop leaning back

Another insightful observation that Siew makes is that Xiami Music – as with other Chinese streaming apps – has a white background to make it easier to read and interact with lots of content. Whereas Western streaming apps have dark backgrounds as they behave as largely passive vehicles for delivering music: find your playlist, press play, close screen.

There is a fundamentally different UX ethos:

  • Western apps: lean back, listen with minimal friction
  • Chinese apps: lean forward, dive in, interact

Years ago (11 to be precise) I laid out a vision for lean forward music experiences, where interactive context and social features were built around the music. Now is the time for Western streaming services to push themselves out of their UX comfort zones and start to own stages two and three of the music journey.

Lead, don’t follow

It is important that they do not all follow the same path. Differentiation – or the abject lack of it – is the Achilles heel of Western streaming services. The hope here is that they each pursue their own path and use this blank canvass to develop their own unique identities. Which will make it easier for record labels and artists to follow Beyoncé’s approach of segmenting their audiences across different platforms.

Of course this will take time. It may even take another 11 years (though hopefully not). In the meantime radio companies should be seeing this as a great opportunity to carve out a role for themselves in step two (artist story telling). Most have realised by now that they cannot compete with streaming but instead should compete around it. Get it right and radio could become the home of artist storytelling, a genuine complement to streaming consumption. Meanwhile, TikTok may well be best placed to act fast to own step three (fandom) before the Western streaming services can get their respective acts in gear.

There is nothing quite like some fierce competition to focus the mind.

The Music Industry’s Next Five Growth Drivers

The risk with trying to imagine what the future might look like is to simply think it is going to be a brighter, shinier version of today. At this precise moment in time, this has perhaps never been truer.

The COVID-19 lockdowns were a seismic shock to the economy, one which will take months, possibly years to recover from. Entertainment consumption patterns have been transformed, with some need states becoming void states in an instant, while new ones have filled their place.

Whether COVID-19 goes for good in the coming months or whether it is with us for years to come, some behaviour patterns have changed for good, creating new opportunities, many of which (e.g. virtual events) have yet to be properly monetised. So at a time when it seems that the whole world is creating music forecasts, it is now the time to think about what comes next rather than just predicting how big the long established revenue streams will get.

With streaming growth slowing and creators feeling short changed, it is time to think about what plan B is, for the sakes of both the industry and the creator community.

At MIDiA we are currently compiling our music industry forecasts with a lot of detailed work being put into estimating how COVID-19 and the coming recession will impact a revenue growth. We’re modelling everything from ARPU, churn, net adds, and disposable income patterns through to store closures. We’re confident that this new methodology will make our already reliable forecasts even better (for the record our 2019 subscription forecasts with within 4.5% of the actual figures).

We’re also going to push ourselves out of our comfort zone and over the course of the year forecast some new revenue streams for which a comprehensive set of historical data does not exist. This means our chances of making incorrect calls is higher, but we’re doing it because we think it is crucial to start trying to frame what the future landscape will look like.

Here are the five emerging revenue sectors that we think could collectively be the music industry’s next growth driver

  1. Contextual experiences: Two big lockdown winners have been mindfulness / meditation apps and online fitness training. With it looking likely that consumers will be spending more time at home and away from public places for some time to come, the opportunity for these categories is twofold: 1) build audience now, 2) establish behaviour patterns that will outlive lockdown.

    Music is often a core part of these but it is not always licensed. The example of artists and rightsholders making music available to fitness trainer Joe Wicks illustrates the point. To date, streaming services have provided the soundtrack to such activities with contextual playlists (chill, study, workout). But it is of course far better for the context itself to deliver the music. We expect the next few years to see categories like online wellness and fitness to eat into the time that people were previously using streaming for the soundtrack. Instead of bring your own music, the trend will be the context will bring it. UMG’s Lego partnership is a case in point.

  2. Creator tools: There is an increasingly diverse mix of tools for music creators, including production, collaboration, sounds, reporting, mastering and marketing. The vast majority of the millions of independent artists will spend much more on creator tools than they will ever earn from their music. The revenue opportunity is clear, but there is more to it than that.

    Artist distribution platforms built a role as top of funnel tools, helping labels find the next big hit. But the music creation itself, enabled through online SAAS tools is in the fact the real top of funnel. Anyone who can establish relationships there does so before they release music. Right now, Spotify looks better placed to capitalise on this opportunity than labels. But labels should be paying close heed. Just in the way that distribution platforms came out of nowhere to become an established part of the label toolkit, so will artist tools. Simply put, creator tools will become part of what it is to be a music company.

  3. Virtual events: As we wrote about earlier this week, there is a huge opportunity to make virtual events (live streaming, listening sessions, avatar performances) a major income stream. The sector is in desperate need of commercial structure and product tiering, but it can happen. A freemium model with free, pay to stay, premium and super-premium tiers will enable this fast-growing sector to be more than a lockdown stop gap.
  4. Fandom: Regular readers will know that MIDiA has long argued that phase one of streaming was monetising consumption and that phase two will be about monetising fandom. Tencent Music Entertainment already does a fantastic job of this with live streams, virtual gifts and virtual currencies. So do K-Pop artists and Japanese Idol artists. Now is the time for western social and streaming platforms to wake up to the opportunity. Virtual merch, artist badges, premium chat, artist avatars—there are so many opportunities here waiting to be tapped.
  5. Social music: As an extension of fandom, the fact that the vast amount of music-centred social activity on Instagram, Facebook, Snapchat and TikTok has not yet been properly monetised is a gaping hole of opportunity. TikTok will be crucial. As my colleague Tim Mulligan wrote, TikTok is having its ‘Snapchat moment’, trying to identify what commercial route it will take. I’d go even further and frame it as a YouTube or Facebook moment. Both those platforms went on to massively expand their remit and build diversified business models.

    TikTok clearly has momentum that far exceeds that of previous similar apps. It can either choose to just carry on being good at one thing or instead become the next big social platform, growing as its audience ages. Just like Facebook did. TikTok now is where YouTube was back in the late 2000s. If rights holders can establish an entirely new monetisation framework then TikTok could become the biggest single driver of future revenue.

As with any future gazing, the odds are that not all of these opportunities will transpire, but what is clear is that the current dominant format is not enough on its own. Rights holders and creators alike need new future revenue streams to offset the impact of slowing revenue growth and royalty crises.

The last time the music industry had one dominant format and no successor was the CD and we all know what happened then. The music industry is not about to enter a decade of freefall this time, but it is at risk of stagnating, especially as its leading music service is now so eager to diversify away from music that it offers a podcaster more money in one deal than most artists will ever earn in their lifetime from it. Let’s make this next chapter of the industry’s growth about innovation, growth, new opportunities and fresh thinking.

Take Five (the big five stories and data you need to know) December 2nd 2019

Take5 2 12 19Bytedance / TikTok split: Bytedance appears to be getting nervy about the impact of Chinese censorship regulation on TikTok, to the extent that it is reportedly mulling spinning off the app as a separate company. This follows negative reactions to the closure of an account of a TikTok user that posted about Uyghurs. TikTok’s value to Bytedance is external to China, so it appears to want to ring-fence it from China. Whether Chinese authorities will permit that is another issue entirely.

Netflix at the movies: Netflix is reopening an iconic, boutique movie theatre in New York. This is all about cultural relevance and credibility. Netflix already does small screenings of some of its movies to be eligible for awards. This enables it to have red-carpet, star-studded premiers which will help its actors, directors and producers feel like they are still in the movie business. Old-world hangover.

Joyn (not a typo): ProSiebenSat.1 and Discovery have added a premium tier to their free OTT service Joyn (which is apparently a combination of ‘joy’ and ‘join’…). Naming quibbles aside, we are going to see more and more video services launching. Consumers will have to spend ever more in order to get all the shows they want to watch. The original streaming promise of replacing expensive pay-TV with a couple of cheap streaming subscriptions is dying on its feet.

Create Music, one to watch: Streaming and independent artists are rewriting the music business. A new(ish) breed of companies is emerging, playing by the new rule book. One to watch in 2020 is Create Music Group, which just signed a global distribution deal with Latin and hip hop label First Order Music.

Piracy is back: Well, maybe. But the principle that piracy could be the big winner of the streaming wars is valid. The more expensive it becomes to stream all the shows you want due to service fragmentation, the more likely people are to start pirating again, and streaming piracy is way harder to deal with than peer-to-peer downloads.

Why the Music Industry Needs Bytedance to Disrupt It

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

Change, but remain the same

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

Do first, ask forgiveness later

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

The music market needs Bytedance to do something transformational

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

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

Emerging markets testbed

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

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

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

Take Five (the big five stories and data you need to know) November 18th 2019

Take5 18 11 19Bytedance subscription: Bytedance, parent of TikTok, is reportedly close to launching a music subscription service, initially focused on emerging markets. The big question is whether Bytedance will get the deals to launch something genuinely new, built on TikTok’s foundation, or just end up launching a cookie-cutter “all you can eat” 9.99 service.

Netflix and Nickelodeon team up: Netflix and Viacom’s Nickelodeon have announced a multi-year partnership to create kids shows. This shows two things: 1) Netflix is ensuring its kids offering is up to competing with Disney+, and 2) not all traditional TV companies see Netflix as being the enemy. This is becoming a heavily nuanced market.

Tencent looking for backingTencent is reportedly looking for external partners to come in as part of its $3.3 billion acquisition of 10% of UMG. Given Tencent was bullish about going it alone and paying a premium, something feels odd here. Maybe Tencent got spooked by slowing streaming growth in Q3 – something MIDiA said at the start of the year would happen.

Disney streaming woes: Good news for Disney+ with 10 miillion sign ups in 24 hours – that’s more than Apple Music got in weeks after launch. Bad news: it couldn’t cope with the demand, with widespread user complaints.Turns out it is just as hard for a media company to become a tech company as vice versa. There will be broad grins in Netflix towers.

BT keeps Champions League rights: UK telco BT has secured television rights for the European Champions League for another three seasons from 2021. The deal is reported to be worth £1.2 billion ($1.6 billion), with streaming service DAZN missing out in the bidding process. Sports rights remain a highly valued asset, but the bubble will burst at some stage in the next five years or so.

Why Music Streaming Could Really Do with a Disney+

The music and video streaming markets have long been best understood by their differences rather than similarities, but the flurry of video subscription announcements in recent months have upped the ante even further. New services from the likes of Disney, Warner Bros, Apple and AMC Cinemas point to an explosion in consumer choice. These are bold moves considering how mature the video subscription business is, as well as Netflix’s leadership role in the space. Nevertheless, Netflix is going to have to seriously up its game to avoid being squeezed. The contrast with the music streaming market is depressingly stark.

Diverging paths

The diverging paths of the music and video subscription markets tell us much about the impact of rights fragmentation on innovation. In music, three major rights holder groups control the majority of rights and thus can control the rate at which innovation happens. As a consequence, we have a streaming market in which each leading service has the same catalogue, the same pricing and the same device support. If this was the automotive market, it would be equivalent of saying everyone has to buy a Lexus, but you get to choose the colour paint. Compare this to video, where global rights are fragmented across dozens of networks. This means that TV rights holders have not been able to dictate (i.e. slow) the rate of innovation, resulting in dozens of different niche services, a plethora of price points and an unprecedented apogee in TV content.

Now, Apple and major rights holders Disney and Warner Bros have deemed the streaming video market to be ready for prime time and are diving in with their own big streaming plays. Video audiences are going to have a volume of high budget, exclusive content delivered at a scale and trajectory not seen before. There has never been a better time to be a TV fan nor indeed a TV show maker.

The music streaming market could really do with a similar rocket up its proverbial behind right now. The ‘innovation’ that is taking place is narrow in scope and limited in ambition. Adding podcast content to playlists, integrating with smart speakers and introducing HD audio all are important – but they are tweaking the model, not reimagining it. Streaming music needs an external change agent to shake it from its lethargy.

Do first, ask forgiveness later

The nearest we have to that change agent right now is TikTok. TikTok has achieved what it has by not playing by the rules. It has followed that long-standing tech company approach of doing first and asking forgiveness later. Sure, it is now locked in some difficult conversations with rightsholders – but it is negotiating from a position of strength, with many millions of active users. TikTok brought a set of features to market that rightsholders simply would not have licensed in the same way if it had gone the traditional route of bringing a business plan, pleading for some rights, signing away minimum guarantees (MGs) and then taking the neutered proposition to market.

I recall advising a music messaging app client who was just getting going to do the right thing. I hooked him up with some of the best music lawyers, made connections at labels, and basically helped him play by the rules. Two years later he still hadn’t managed to get a deal in place with any rightsholders – though he had racked up serious legal fees in the process. Meanwhile, Flipagram had pushed on ahead without licensing deals, secured millions of users and tens of millions of dollars of investment and only then started negotiating deals – and the labels welcomed it with open arms. To this day, this is my single biggest professional regret: advising this person who was betting his life savings to play by the rules. He lost. The ‘cheats’ won.

We need insurgents with disruptive innovation

The moral of this story is that in the consumer music services space, innovation happens best and fastest when rights holders do not dictate terms. This is not necessarily a criticism. Rights holders need to protect their assets and their commercial value in the marketplace. They inherently skew towards sustaining innovations, i.e. incremental changes that sustain existing products. New tech companies looking to build market share, however, favour disruptive innovations that create new markets. Asking an incumbent to aggressively back disruptive innovation is a bit like asking someone to set fire to their own house. But most often it is the disruptive change that really drives markets forward.

Streaming subscription growth will slow before too long, and as a channel for building artist-fan relationships they are pretty much a dead end. There is no Plan B. Back in 1999 there was only one format; it was growing well, but there was no successor. Looks a lot like now.

The Future of Music: A Vision of Post-Format

Formats have shaped and dictated the evolution of recorded music. The constraints that formats set have, in turn, become the creative frameworks within which music has operated. Now, in the internet era, formats are becoming a thing of the past – and yet the way in which music is made and distributed still conforms to the old physical world. It is time for a change in how we think about music, right from the creation process through to what a song actually sounds like. Here is a vision for what the future of music could be.

Bringing dead sounds back to life

When Edison invented the phonograph, a denigrator called it a machine ‘that brings dead sounds back to life’. Conditioned by the recorded era, it is hard for us to conceptualise a time when music only existed in the moment and was never heard exactly the same way twice. Nevertheless, this is a historical anomaly – a legacy of physical media. Songs became fixed, static and permanent because that was the only way we could squeeze music into little discs – mummified echoes of live performances.

Over time, as recording techniques and technology improved, the recorded song developed into its own art form, with multitrack recording, effects, synthesis and programming enabling the creation of sounds that could never be truly replicated live. Now, with physical media accounting for an ever-smaller share of music consumption, there is no need to adhere to its constraints. We have 14 track albums because CDs were designed to fit Beethoven’s 9thSymphony; we have static recordings to serve legacy distribution models; we have three minute songs to fit radio schedules. All three straightjackets can be discarded. Here is how:=

  • Write and produce for the medium: We are already locked into a process of music being designed for Spotify success, through so-called Spotify Core and with the industrialisation of song writing seeing songs stitching together the best hooks from multiple songwriters. Much of this can be reductive, dumbing down to the lowest common denominator.However, it is the execution and intent that requires attention, not the strategy. In fact, it needs pushing further – much further. TikTok, YouTube, Instagram, Snapchat and Spotify are all dramatically different propositions with equally diverse use cases. So why would we expect a song to perform equally across each one? What video producer would create a meme for Netflix, or a two-hour movie for Snapchat? It is time to follow video’s lead and write for where the song is going to be listed to most. Lil Nas X when writing Hometown Road was focused on making something viral, something that would blow up on TikTok. The idea that songs should have fixed lengths, choruses, verses – all of this can now be played with in the mainstream in the way that it has been on the experimental fringe of music for many years. This time, it is to give listeners what they want rather than for avant-garde expression.
  • Ditch / evolve the album: Just 16% of consumers listen to traditional albums and an even smaller 10% listen to full albums on streaming. 59% of consumers say they are listening to albums less because of streaming playlists. The album is not dead, but its addressable audience is far smaller. Now a new generation of artists is coming through who grew up with playlists, not albums, so do not even think in album terms. Of course, many artists, especially older ones, still want to write albums and they absolutely should do so. They should not, however, expect the majority of their audiences to listen to them in full. There will always be exceptions (Ed Sheeran, Adele etc.) but the direction of travel is clear. Artists and labels need to rethink what the album should be. We’re beginning to see artist contracts that stipulate numbers of tracks rather than albums. This is hugely positive and will enable far more creative freedom. Artists need to start pushing the boundaries, pulling every lever available (e.g. more tracks, fewer tracks, all tracks at once, over time, mixing in spoken word, images and video, EPs etc.). The only rule should be that there are no rules.
  • Fill the space between recorded and live: Despite its ‘dead sounds’ origins, the recorded song is an established entity with established consumption patterns that is not going to disappear in any meaningful timeframe. But that does not mean that it has to be the only entity. Technologies such as live streaming, real time tipping, comment streams, virtual gifts and collaboration tools can be used to create music experiences that are neither live nor recorded, but something in between. Imagine an artist doing a pay-to-view live stream in the studio, with a set of beats in a shared folder that the audience can drop in and out but that only changes what they each individually hear. Then the guitarist starts cycling through a few riffs, and the viewers upvote their favourite one in the comment stream. Then as the keyboard player starts, listeners change the synth patch, but again just for their own stream. Think of this not as a blueprint for what the format could be, but an illustration of how to think about it. To create something that is unique, that exists in the moment and creates an indelible bond between artist and fan. 

This was not a definitive list of what post-format innovation needs to do but instead three principle areas of focus and illustrations of how to structure thought. Now it is time for creative artists, writers, labels and tech companies to pick up the baton and run with it. Standing still is of course an option, but in the increasingly competitive attention economy, if music does not up its game there can be no complaints if it loses share to video, games and social.