The music industry needs a new format

Non-DSP streaming was one of – arguably the – differences between steady growth and stellar growth for the music business in 2021. With three billion dollars of retail revenues in 2021, non-DSP has quickly become a key source of revenue, but not without bringing its own set of challenges. Music rightsholders have been criticised in the past, including by MIDiA, for being too prescriptive in their licensing approaches, often curtailing the potential of new ventures. The homogenised nature of Western DSP streaming being a case in point. But with non-DSP partners, rightsholder recognised that it was still too early to define exactly what the dominant use cases would be and opted for blanket type deals instead, thus monetising new partners while leaving room for innovation. Now though, creators and rightsholders alike are coming to the point of view that the time is right for greater clarity and definition, with calls for ad revenue share as a starting point. But even if these changes were to come into play, there is a much more fundamental issue at hand: the music business does not have a format to license to non-DSP partners.

Value gaps

Much has been made of the comparison between YouTube and TikTok, and their perceived ‘value gaps’ (YouTube’s former value gap, and TikTok’s current one). YouTube’s road to music industry partnership was a rocky one, but now the relationship is positively rosy, as is YouTube’s contribution to music industry revenues. In 2021, YouTube delivered around $3.4 billion in revenues to record labels alone, with ad supported accounting for around two thirds of that. YouTube has gone from pariah to the second largest contributor of label streaming revenue. But, regardless of all the infighting, negotiating and lobbying that happened in the intervening years, it would not have been able to become the success it has were it not for the fact it was already using a well-established music industry format: music videos. This contrasts with non-DSP partners, like TikTok, Meta and Snap, that are, instead, licensing music to soundtrack their formats. In many respects, this is 21^st century sync, soundtracking the parts of digital entertainment where traditional sync does not reach. Indeed, the deals also tend to be classed as sync deals. 

Sync’s strengths and weaknesses 

Sync’s strength is being able to take music to places where music formats do not exist. Its problem, however, is that there has always been a massive value gap between its cultural impact (not least giving music exposure) versus its revenue contribution (less than 10% of 2021 retail revenues). But there is an even bigger challenge with this new ‘digital sync’: whereas traditional sync simply enhances traditional audio-visual formats (TV, games, ads, etc.), in many of digital sync’s use cases it is actually a central component of the experience. Duets, lip-syncs and other lean-through behaviour has music at its core. Without music, the behaviour does not exist. So a licensing structure that leans on monetising a soundtrack falls short of music’s defining role in many of these non-DSP experiences. On top of this, there is much that music creators do on non-DSP platforms (e.g., live chats, non-music posts) that delivers value to the platforms (by generating ad impressions) but do not generate income for those creators nor their rightsholders (if they have them).

A new format for non-DSP

So, how can this circle be squared? The solution is simple in concept but complex in practice: the music industry needs a new format for non-DSP environments, one that will ideally pave the way for metaverse monetisation also. Non-DSP music behaviours rarely revolve around the full-length song, nor full-length music videos. Instead, they revolve around components and snippets of songs, as well as the music creator’s non-music activity. The music industry needs a licensable format that reflects this new usage, not least because everything points to ‘lean through’ and the consumerisation of creation growing, not shrinking. A 15-30 second music format would be one solution, but that would likely be too static, as the more that creator culture grows, the more cultural value will reside in the music being modified by users – as illustrated by TikTok’s new partnership with Stemdrop – which could also form part of a new format structure. And, of course, it would miss the non-music activity. Last year, MIDiA published a report with Utopia (free to download here) that proposed a creator right that would ensure that value accrues to the creator for all their activity, not just musical. It may sound far-fetched, but it is not much different than an actor getting paid for appearing on a TV show.

The solution likely lies in a combination of short-form music formats and new licensable rights – which does not necessarily need to have legislation, there are other widely licensed ‘rights’ that do not legislative underpinnings. As I have already said, the concept is simple, the implementation is difficult. But things worth doing are often difficult to do. Over to you, music industry!

TikTok Music could change the game

There has been talk for some time now of TikTok parent ByteDance launching a music streaming service in Western markets. It already has Resso in Indonesia, India, and Brazil, but has spiked interest recently with trademark registrations, new Twitter accounts, and reports that ‘more than a dozen’ new markets are being prepped. TikTok has become one of the central forces in the digital music market ecosystem, eroding the cultural capital of traditional streaming services. It is a logical leap to assume that if TikTok becomes a key force in music discovery, it could do the same for consumption. While this is certainly the case, ByteDance’s streaming opportunity is a whole lot bigger and more disruptive than Resso:

TikTok Music: Resso is a perfectly decent streaming service, but similarly to YouTube Music, it only scratches the surface of what it could be. Both TikTok and YouTube have unique content, behaviour, features, and culture that stand in stark contrast to standard streaming. It is difficult to translate much of this because of licensing constraints but doing so should be the priority for both TikTok and YouTube. This will drive differentiation and help the industry carve out genuine new growth pockets rather than just unearthing the remnants of the addressable base for standard streaming. Of even more relevance to the music business, unless rightsholders can empower ByteDance’s streaming offering with something truly different, is the risk that its growth will largely comprise of switching Spotify subscribers. The music business needs the maturing streaming market to be about growth, not substitution. Perhaps TikTok Music Twitter profiles point to something bigger and bolder than Resso.

Discovery is consumption: People used to discover music on the radio and then go and buy it. That model has been turned upside down. Now, people (younger audiences in particular) discover most of their new music on TikTok or YouTube before going to radio-like streaming services to consume it. What is more, much of the ‘discovery’ that happens on TikTok is consumption. It is not just consumption either, it is consumption that streaming cannot replicate. This is before even considering the importance of ‘lean through’ creative behaviour, such as doing a duet or a dance challenge to your favourite artist’s new track. Music is the soundtrack and often the catalyst to this ‘consumption’, but when that music is listened to on streaming, it is stripped of all that creative and cultural context – It is like only listening to the soundtrack of a movie. Movie soundtracks do well as formats, but they only exist because of the movies as that is where the real value lies. All of this is why a TikTok Music service could be so exciting as it could provide both the creative and cultural context, not just the stripped-down audio file.

Ecosystem: The single most important factor of all though is TikTok’s ecosystem play. In the traditional streaming value chain, you have creators, rights, distribution, promotion, and consumption. TikTok achieves these with its superpower: its audience. Creation comes from the audience, who then distribute and market the content (via the user-centric algorithm framework, user shares, recreation, and other means), and then, of course, the audience consumes. It is a self-contained, virtuous cycle – An ecosystem. Right now, artists are pumped into the system by label marketing teams, and independent artists can push out of the system into traditional streaming with SoundOn. Yet, over time, TikTok’s creation, distribution, and consumption will become ever more self-contained, making TikTok part of what MIDiA identified as the music industry counter-culture. TikTok Music could be a major step on that journey.

Major label revenue surged in 2021, but what does that mean?

2021 was an anomalous year for the recorded music market. Two of the majors did an IPO, the pandemic continued to disrupt the marketplace, and major label revenues grew at unprecedented rates. If the fourth quarter majors’ earnings follow similar seasonality patterns to previous years, collective major label recorded music revenue will be up by 29% in 2021, reaching $19.6 billion (a more bearish estimate is $19.3 billion). By way of comparison, 2020 growth was 6%, and 2019 was 10%. To put it another way, major label revenue increased by $787 million in 2020, and in 2021 it was up by $4.4 billion. 2021 was a red-letter year for the major labels, but was it a one-off or an industry pivot point?

To get to the answer, we first need to contextualise major label revenue growth within the wider market. 

Streaming 

Predictably, streaming was the core driver of major label revenue growth in 2021, accounting for 67% of the revenue, and up by 31% to reach $12.8 billion. That level of annual streaming growth has not been seen since 2016. 2020 streaming growth was 18%. But streaming’s leading player, Spotify, did see that kind of growth. Spotify’s full year 2021 revenues look set to hit €9.6 billion (which would be up by 22% from 2020), and if we only consider premium growth (i.e., the part that is not boosted by podcast revenue), then growth was just 19%. And it is not as if Spotify is losing much ground in the global streaming market – its subscriber growth was largely in line with the global market average (excluding China). So, the majors grew streaming faster, somewhere beyond Spotify.

The total market

The major labels’ total revenue growth also follows a different trajectory to other parts of the market, The year-to-date performance of just one of the top four recorded music markets matches the majors’ trend (bear in mind that these four markets were 62% of global label revenues in 2020, so they shape global growth trends):

• US: 27.1% growth (H1) – RIAA
• Japan: -1.0% (Jan-Nov) – RIAJ 
• UK: 8.7% (FY) – ERA
• Germany: 12.4% (H1) – BVMI

(It will be interesting to see how the IFPI allocates the revenue. There may well be quite a gap between their global total and the sum total of all the individual countries if this is indeed largely attributable to one off payments rather than reflecting organic, country level revenue.)

All of this means that the additional major label growth is likely reflective of factors such as:

• Large, one-off payments from the likes of ByteDance, Twitch and Facebook
• Licensing income from the same parties
• Increased contribution from other markets
• Market share increase from catalogue acquisitions 
• Revenue growth from major-distributed independents
• Organic market share growth

While all of these factors will be at play, it is the first two factors that are likely the most consequential. MIDiA estimates that these new non-DSP streaming income sources accounted for between $0.8 and $1.2 billion in 2021. Even at the lower end of the estimates, that revenue alone would have driven the same amount of growth in 2021 as all major label revenue growth combined in 2020. 

There is a clear narrative that post-digital service provider (DSP) revenue is now becoming a central growth driver for the recorded music business. Clearly a very beneficial narrative to have had during an IPO year, especially if the trend was accentuated by one-off payments and settlements – which would help explain the divergence between major label growth and local market growth. 

There are two key potential scenarios:

1. Upfront payments for post-DSP streaming partners exceed organic mid-term revenue, resulting in slower growth rates in 2022 and 2023
2. Post-DSP streaming partners meet / exceed expectations, making 2021 and 2022 look much like the late 2000s and early 2010s did for DSP streaming, with minimum guarantees being more often than not 

So, by 2023 we should be able to tell whether 2021 was a spike or a pivot point. If I was a betting man, I would probably put money on the outlook being closer to 2 than to 1.

Can Spotify break out of its lane?

After years of relative stability, music consumption is shifting, with the DSP streaming model beginning to lose some ground as illustrated by the major labels growing streaming revenue by 33% in Q2 2021 while Spotify was up by just 23%. It is never wise to read long-term market trends into one quarter’s worth of results, but there was already enough preceding evidence to suggest we are entering a genuine market shift. The question is whether Spotify and the other Western DSPs are going to find themselves left behind by a fast-changing market, or can they innovate to keep up the pace?

Social music is streaming’s new growth driver, generating around $1.5 billion in 2020 and growing fast in 2021. It represents a natural evolution of social media rather than an evolution of streaming. Audio is just another tool for social expression, along with video, pictures and words. MIDiA has long argued that Western streaming focuses too heavily on monetizing consumption, at the expense of fandom. While social video does not fix the fandom problem, it does cater to some of the key elements of fandom: self-expression, identity and community. Which means that, in some respects, Spotify and the other DSPs only have themselves to blame for having kept fandom out of their propositions. In doing so, they created a vacuum that TikTok and Instagram eagerly filled.

The data in the above chart comes from MIDiA’s latest music consumer survey report which is available now to MIDiA clients and is also available for purchase here.

Rights holder licensing met market demand

Spotify and the other DSPs are the dominant, core component of recorded music and they will remain so for the foreseeable future. But whereas a couple of years ago it looked like they might be the entire story, now music consumption is moving beyond, well, consumption. Finally, we are seeing music becoming an enabler of other experiences. Historically this was restricted to non-scalable, ad hoc sync deals. Now rights holders have established licensing frameworks that are flexible, dynamic and scalable enough to enable a whole new generation of experiences with music either in a central or supporting role.

DSPs occupy one of streaming’s lanes

The implication of this is that Spotify and the other DSPs now risk looking like they are stuck in just one lane of the streaming market. What looked like a highway is now just a single lane – and Spotify, Apple and Amazon do not have the assets to build propositions that can get them out of it. Being part of this social music revolution requires both massively social communities and video. They could all build that, of course, but with little guarantee of success. YouTube is a different case, having launched Shorts in a belated bid to ward off TikTok’s audience theft – but at least it is now running that race, and Alphabet reported 15 billion daily global views for Q2.

An increasingly segmented market

Spotify and other DSPs now find themselves not being part of streaming’s new growth story and, YouTube excepted, with no clear path to becoming part of it. To be clear, Spotify will continue to be the world’s largest subscription revenue generator and the DSP subscription model will continue to be the biggest source of revenue, at least for the foreseeable future. But revenue growth will increasingly come from elsewhere. In many respects this simply reflects the maturation of the music streaming market. Consider video streaming. Netflix added just 1.5 million subscribers in Q2 2021 while YouTube grew by 84% and TikTok went from strength to strength. Netflix occupies just one lane in a multifaceted streaming market. The same is now becoming true of the DSPs.

Time to do a Facebook?

So, what can Spotify and the other DSPs do about it? If Spotify really wants to ‘own’ audio, then it will have to do what Facebook did to ‘own’ social: create a portfolio of standalone sister apps. Facebook would have become the Yahoo of social media if it hadn’t bought / launched Instagram, WhatsApp and Messenger. The signs are already there for Spotify. Even ignoring the slowdown in monthly active user (MAU) growth in Q2 2021, podcast users stopped meaningfully growing as a share of overall MAUs in Q4 2020. It turns out that trying to compete with yourself in your own app is hard to do. The time may have come for a standalone podcast / audiobook app (by the way, I’m just taking it as read that Spotify is going to take audiobooks a whole lot more seriously). If Spotify does launch a podcast app, then the case suddenly becomes a lot clearer for other audio-related apps, all of which could include subscription tiers, such as social short video, karaoke, and artist channels.

The more probable outlook however is for specialisation, with segments going deep and vertical rather than wide and horizontal. While Spotify, and other DSPs, might have success in one or more side bets, it will be the specialists who lead in streaming’s other lanes. Whatever the final market mix looks like as a result of this change, the streaming market is going to be more diverse and innovative for it.

The record labels are weaning themselves off their Spotify dependency

The major labels had a spectacular streaming quarter, registering 33% growth on Q2 2020 to reach $3.1 billion. Spotify had a less impressive quarter, growing revenues by just 23%. After being the industry’s byword for streaming for so long, Spotify’s dominant role is beginning to lessen. This is less a reflection of Spotify’s performance (though that wasn’t great in Q2) but more to do with the growing diversification of the global streaming market. 

Spotify remains the dominant player in the music subscription sector, with 32% global subscriber market share, but streaming is becoming about much more than just subscriptions. WMG’s Steve Cooper recently reported that such ‘emerging platforms’ “were running at roughly $235 million on an annualized basis” (incidentally, this aligns with MIDiA’s estimate that the global figure for 2020 was $1.5 billion). 

The music subscription market’s Achille’s heel (outside of China) has long been the lack of differentiation. The record labels showed scant interest in changing this, but instead focused on licensing entirely new music experiences outside of the subscription market. As a consequence, the likes of Peloton, TikTok and Facebook have all become key streaming partners for record labels – a very pronounced shift from how the label licensing world looked a few years ago.

The impact on streaming revenues is clear. In Q4 2016, Spotify accounted for 38% of all record label streaming revenue. By Q2 2021 this had fallen to 31%.

Looking at headline revenue alone, though, underplays the accelerating impact of streaming’s new players. Because Spotify already has such a large, established revenue base, quarterly dilution is typically steady rather than dramatic. Things look very different though when looking specifically at the revenue growth, i.e., the amount of new revenue generated in a quarter compared to the prior year. On this basis, streaming’s new players are rapidly expanding share. Spotify’s share of streaming revenue growth fell from 34% in Q4 2017 to just 26% in Q2 2021. Unlike total streaming revenue, the revenue growth figure is relatively volatile, with Spotify’s share ranging from a low of 11% to a high of 60% over the period – but the underlying direction of travel is clear.

Spotify remains the record labels’ single most important partner both in terms of hard power (revenues, subscribers) and soft power (ability to break artists etc.). But the streaming world is changing, fuelled by the record labels’ focus on supporting new growth drivers. The implications for Spotify could be pronounced. With so many of Spotify’s investors backing it in a bet on distribution against rights, the less dependent labels are on it, the more leverage they will enjoy. From a financial market perspective, the last 18 months have been dominated by good news stories for music rights – from ever-accelerating music catalogue M&A transactions to record label IPOs and investments. 

Right now, the investor momentum is with rights. Should the current dilution of Spotify’s revenue share continue, Spotify will struggle to negotiate further rates reductions and will find it harder to pursue strategies that risk antagonising rights holders. Meanwhile, rights holders would be surveying an increasingly fragmented market, where no single partner has enough market share to wield undue power and influence. That is a place where rights holders have longed dreamed of getting to, but now – divide and conquer – may finally be coming to fruition.

Spotify and music listening 10 years from now

July marks ten years since Spotify’s US launch. Although the tendency among some is to consider this ‘year zero’ for streaming (thus ignoring everything that had happened in prior years both within and outside of the US) it does present a useful opportunity to reflect on what the next decade might hold for Spotify. 

Rather than focus on the business outlook, I am going to explore how Spotify and other streaming services, could change the way in which music is consumed ten years from now. But first, three quick future business scenarios for Spotify:

1. It continues to be the global leader but with reduced market share due to the rise of regional competitors in emerging markets
2. It loses market momentum, stock price tumbles and is acquired by another entity 
3. It morphs into a true multi-sided entertainment and creation platform, doing for entertainment what Amazon now does for retail but with more tools and services

So, on to the future of music consumption.

To map the future, you need to know the past. These are (some of) the key ways streaming has transformed how we engage with music:

• We listen to a larger number of artists but spend less time with individual artists
• We listen to tracks and playlists more, and albums less
• Music is programmed (by ourselves and by streaming services) to act as a soundtrack for our daily lives and routines
• Genre divisions are becoming less meaningful
• Artist brands are becoming less visible
• Music fandom is becoming less pronounced

Music is more like the soundtrack to daytime TV than blockbuster movies

In 2015 Spotify’s Daniel Ek said that he wanted Spotify to ‘be the soundtrack of your life’. Undoubtedly, Spotify and other streaming services are achieving that but the utopian vision is more prosaic in practice. Less ‘that was the best day of the summer’ and more ‘put on some tunes while I cook’. It is a soundtrack, but less the soundtrack to a blockbuster movie and instead more like the soundtrack to daytime TV. Music has become sonic wallpaper that is a constant backdrop to our daily mundanity. (Though the pandemic, the climate crisis and stagnant labour markets can make even the mundane look aspirational for many).

Like it or loathe it, this sound tracking dynamic is likely to play a key role in what the future of music consumption looks like. But it is not all sonic dystopias; personalisation, algorithms, user data and programming also have the potential to reinvigorate music passion. Here are two key ways in which Spotify and other streaming services could transform music listening ten years from now:

• Dynamic and biometric personalisation: The current recommendation arms race works from a comparatively small dataset, focused on users’ music preferences and behaviour. The next battle front will be the listener’s entire life. Any individual user can appear to be a dramatically different music listener depending on the context of their listening. Even the same time of day can have very different permutations; for example, looking for chilled sounds at 7pm after a manic Monday but banging beats at the same time on a Friday. If streaming services could harvest data from personal devices and the social graph, elements such as heart rate, location, activity, facial expression and sentiment could all be used to create a music feed that dynamically responds to the individual. Instead of having to actively seek out a workout or study playlist, the music feed would automatically tweak the music to the listener’s behaviour and habits. The faster the run, the more up-tempo the music; the later in the evening, the more chilled (unless it’s 9pm and you’re getting ready for a big night out). Selecting mood and activity-based playlists will look incredibly mechanical in this world. Think of it like the change from manual gear change to automatic in cars.
  
  
• Music catalogue reimagined: Just as activity and mood-based listening will become more push and less pull, so can music catalogue. Traditionally catalogue consumption is driven by a combination of user behaviour (‘I haven’t listened to that band in a while’) and marketing pushes by labels, publishers and now music funds’ ‘song management’. But it needn’t be that way anymore. Over the years, streaming services have collected a wealth of user data. Just as Facebook introduced memories for users’ posts, so streaming services could deliver music memories, showing users what they were listening to on this day ten years ago, or what the soundtrack to your summer was way back in 2021. Clearly Spotify is already making steps in this direction with Wrapped but this would be much bigger step, routinely delivering nostalgia nuggets throughout a day, week, month, year. In many respects the result would be a democratisation of catalogue consumption. It wouldn’t simply be the rights holders with the biggest marketing budgets and smartest campaigns on TikTok (or whatever has replaced TikTok ten years from now) that get the biggest catalogue bumps. Instead, catalogue consumption across the board would boom. This could make the current 66% of all listening look like small fry in comparison. What that means for frontline releases finding space is another question entirely.

These are of course just two well-educated guesses, and their weaknesses are that they are based on what has happened so far rather than what currently unforeseen consumption shifts may happen in the future. Indeed, streaming itself may have been surpassed ten years from now. But tomorrow’s technology often looks more like today than it does tomorrow. Henry Ford’s model T Ford looked more like a horse and trap than it did the swept wing aerodynamics of 1950s cars. Change takes time. But ten years is a long time in the world of technology, so even if neither of the above come to pass, you can be sure that music listening is going to look a whole lot different than it does now.

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

We 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.

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.

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.

I 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.