Is YouTube Serious About Music Subscriptions This Time Round?

In 2014 YouTube launched its inaugural music subscription service YouTube Music Keyin beta. The following year YouTube announced it was closing it ahead of the launch of YouTube Red, a multi-format subscription video on demand (SVOD) offering, of which music was going to be sub-component. Soon after Music Key’s launch I announced on stage at a Mixcloud Curates event that it would close within two years: and

I’m gonna put my cards on the table and say it [YouTube Music Key] won’t exist in 18-24 months after

Now YouTube is backfor another round at the table with the launch of YouTube Music.

In 2014 my Nostradamusmoment was less about being a psychic octopusthan it was simply a case of joining the strategic dots. YouTube is all about advertising. Advertisers pay most to reach the best consumers, who are also the ones most likely to pay for a subscription service, which is ad free. YouTube’s ad business is high margin and large scale. Its music subscription business is low margin and low scale. Hence, the more successful YouTube’s music subscription business is, the more harm it does to its core business and operating margins. The same principles apply today as they did four years ago.

So why bother at all? Because it has to keep the labels on side. Although the labels scored a lobbying own goal with their Facebook music deal, they are still applying pressure on YouTube for its safe harbour framework and the ‘value gap’. So if YouTube does not play ball on premium, it puts its core ad business at risk. And music is still the largest single source of YouTube’s ad revenue. Total YouTube ad revenue was $9.6 billion in 2017 – that is a revenue stream that parent company Alphabet cannot put at risk.

youtube spotify.png

When YouTube launched Music Key it used those negotiations to get better features for the free YouTube music offering, including full album playlists, which went live the day after the deal was announced and are still there now, even though Music Key is not. YouTube is no slouch when it comes to doing deals. This time however, YouTube Music will last longer. Here’s why:

  • This isn’t actually year zero:Google already has around five million Play Music subscribers and around the same number of YouTube Red subscribers. Red subscribers will become YouTube Premium subscribers, Play Music subscribers will get access to YouTube Music. So, inasmuch as YouTube is launching a cool new app with lots of new features, this is not Google entering the streaming fray, it is simply upping its game.
  • Spotify is making up ground:YouTube Music is not about to become the global leader in music subscriptions, for all the above stated reasons and more, but it can’t stand on the side lines either. Data from MIDiA’s Quarterly Brand Tracker shows that while YouTube is still the leading streaming music app in weekly active user (WAU) terms, Spotify is making up ground. Crucially, Spotify is now more widely used (for music) among 16–19 year olds. And Spotify is betting big on ad-supported, largely because it has finally persuaded the labels and publishers to amend its deals to allow it to, evidenced by the fact that Q1 2018 ad-supported gross margin increased dramatically from -18% to 13% in Q1 2017. YouTube Music is in part a defensive play to ensure it has an enriched offering for thoseconsumers, both now as free users, and for when they want to pay.
  • YouTube is the best featured music service: One of the great ironies of the recorded music industry’s relationship with YouTube is that because it doesn’t have to negotiate deals in the way other services to, it now has the best featured music service. Streaming and social have risen in tandem, but only YouTube has fully embraced this with comments, likes / dislikes, mash ups, user cover versions, parodies, unofficial remixes etc. And all of these features are front and centre in the new service. Spotify and co can’t get that sort of content because the labels can’t license it. Moreover, labels don’t like users being able to thumb down their songs or comment negatively on them. This launch enables YouTube to shout from the roof top about what it has and, by inference, what Spotify does not.
  • Testing:YouTube Music is being rolled out in the same markets as YouTube Red was (US, Australia, New Zealand, Mexico and South Korea). This slightly eclectic mix of markets represent a test base; a wide range of varied markets that will provide diverse user data to enable YouTube to model what global adoption will look like.
  • Upping the ad load: YouTube’s global head of music Lyor Cohen has nailed his colours firmly to the subscription mast. Although Cohen may not be up high in the Alphabet hierarchy he is a strong voice in YouTube’s music business. It also serves Alphabet well to have this particular voice with that sort of message at the forefront. Cohen has gone on record stating that YouTube will up its ad load to force more users to paid, and it is happening, but it is not just a music thing. Ad loads are up across the board on YouTube. Either way, this element was patently missing back in the days of Music Key.

YouTube Music may not be the start of Alphabet’s streaming game, but it is certainly its biggest play yet. And while it will remain focused on protecting its core business, it will likely explore ways to drive ad revenue within its ‘ad free’ premium offerings. Sponsorship and product placement will be one tactic; using MirriAd’s dynamic product placement ad tech could be another. YouTube is unlikely to become the leading music subscription service soon, but there is no denying that it has clearly upped its game.

The data in this chart and some of the analysis will form part of MIDiA’s forthcoming second edition of its landmark ‘State of the YouTube Music Nation’ report. If you are not already a MIDiA client and would like to know how to get access to this report and data, email stephen@midiaresearch.com

Facebook Might Just Have Done YouTube a Massive Favour

The word on the street is that the deals labels have struck with Facebook for its forthcoming music service have been done on a blanket license basis (i.e. a flat fee) with no reporting. This was reported by Music Business Worldwideand has been confirmed to me by various well-placed third parties:

“One controversial element of these agreements is, we hear, that these are ‘blind’ checks: effectively, advances that are not tied to any kind of usage reports from Facebook.”

Now to be clear, this has not been confirmed by either the labels concerned nor by Facebook but, if true, it has potentially dramatic implications, and not where you would necessarily think.

Facebook will bring something highly differentiated to streaming

Facebook is obviously in legislative cross hairs right now because it has proven unable to keep sufficient tabs on user data. The reason reportedly given for the lack of reporting is that Facebook does not yet have the reporting technology in place to track and report on music consumption. Now, there is no doubt that music rights reporting is no small undertaking; it requires expensively constructed systems to manage complex frameworks of rights. Given that Facebook is likely to launch something that more closely resembles Musical.ly and Flipagram (e.g. sound tracking, messaging, social interaction and photo albums) than it does Spotify, the odds are that this proposition will be particularly complex from a reporting perspective. But, and it is a crucial ‘but’, this challenge of tracking, enforcing and reporting on music-integrated user-generated content (UGC) is exactly the same challenge YouTube has been grappling with for years.

Facebook will become the new big player in UGC music

As we all know, YouTube’s relationship with music rights holders (labels in particular) has been fraught with conflict, tension and disagreement. The recorded music industry remains committed to rolling back much of the ‘fair use’ rules under which YouTube operates, to ensure that it can be licensed more like the standard music services. And it appears that genuine legislative progress has been made with big announcements mooted for later this year.

However, if I was part of YouTube’s lobbying team right now I’d be thinking I’ve just been given a free pass. The crux of the industry’s argument is that YouTube does not sufficiently protect copyright, enforce policing nor pay enough. Not paying enough is not directly a legislative issue, but instead a commercial factor. But the labels argue that the unique ‘fair use’ basis on which YouTube operates enables is to pay too little.

If the assumed basic premise of this deal is indeed correct, it transforms in an instant, YouTube from wild west desperado into the closest thing global scale UGC music has to a sheriff. YouTube’s Content ID system is more than 99% accurate at tracking and reporting on consumption. There is so much music on YouTube because in large part the labels need YouTube as a marketing platform. In fact, labels spend more on YouTube marketing than any other digital channel except social.

Fair use lobby efforts may be impacted

Meanwhile Facebook’s position on reporting, according to Music Business Worldwide, is:

“the social media service has committed to building a system which will be able to provide such usage reports – and therefore royalty reports – in the future.”

The deal as a whole could result in three potential legislative outcomes:

  1. Proposed regulations are rethought
  2. Proposed regulations are put on ice
  3. Proposed regulations are implemented but applied equally to Facebook too

The latter is a possibility, but the complication is that the labels – and again this is if the suggested deal structure is correct – have chosen to enable Facebook to behave in many of the exact ways which they do not want YouTube to operate.

Of course, there are good reasons this deal has happened, not least that Facebook will make a massive contribution to the digital music space in a truly different way. But perhaps more importantly in this context, Facebook will have paid enough to make the labels do a 180 degree turn on their approach to UGC. Therein lies the heart of the YouTube problem. Rights holders want to get paid more, and lobbying for legislative change is seen as the only way to make that happen. But some of the fundamentals that underpin that change are potentially put into question by the Facebook deals. So, there is a chance that in their efforts to get more revenue from Facebook, the labels might just have compromised their ability to get even more revenue in the long term from YouTube.

Despacito Is About To Hit 4 Billion YouTube Views

­­In January Despacito became the second fastest music video in YouTube history to hit one billion views, taking just 97 days to do so. Now it is on track to hit four billion. In January Despacito was part of a succession of new music video consumption records that YouTube and Vevo are setting. YouTube music video views are on the rise, dramatically so, driven both by more users (YouTube announced 1.5 billion signed in active users) and deeper engagement. This is YouTube’s music renaissance and the record labels (their marketing divisions at least) are loving the increased exposure their artists are receiving. At first glance this might not appear to make much sense, given that: a) video streaming growth is outpaced by audio streaming in key markets such as the US and UK, and b) that the whole value gap-grab debate is as far from a resolution as it has ever been. Then, along comes Despacito to drive yet another bulldozer through everything, breaking all the rules again.

despacito 2.png

The days of one billion streams being considered exceptional are fast disappearing. Despacito added one billion streams in July alone. Just as Spotify spent 2015 and 2016 continually rewriting the rules each quarter, now YouTube is doing the same in 2017. Spotify, of course, is also having a spectacular year but it has established a steadier pace of change, especially in developed markets. Spotify is the new normal (until it’s not again). YouTube had its ‘normal’ but now the acceleration of usage, particularly from Latin America, is making the previously accepted reference points irrelevant.

Moreover, Latin American driven streams might actually intensify the value gap-grab debate. In 2016 YouTube delivered a monthly average revenue per user (ARPU) of $0.07 to the labels. In contrast, Spotify delivered a monthly ad supported user ARPU of $0.34. On paper YouTube has a lot of ground to make up, but things are a little more complex than that. YouTube pays out a share of ad revenue to rights holders. So, if revenues go down the amount it pays goes down by the same rate. Spotify (at risk of simplifying excessively) pays out on a per stream basis. So, if revenues go down, Spotify still pays a certain amount.

This is where Latin America comes in. The local video advertising markets throughout Latin America are much less developed than in the US and, additionally, there is much less advertiser demand. Compared to the US, there are fewer advertisers with less money to spend on consumers, who also spend less money. This means that advertiser demand massively outstrips supply, which suggests that ad prices are lower. So, as Latin American YouTube music consumption grows, effective per stream rates will decline. In our MIDiA’s 2017 Predictions Report, 2016, we predicted that this would happen.

“In 2017, audience behaviour will continue to grow faster than advertiser budgets, meaning that CPMs (and in the case of YouTube, effective per stream rates for music) will fall.”

YouTube and the music industry are unlikely to truly see eye to eye, but value gap or no value gap, we are now at a decision point. The accelerating role of Latin America and other emerging markets in YouTube consumption will see more and more records broken, with bigger and bigger hits made, but the gap between consumption and revenue will widen. So the music industry needs to decide what it really wants YouTube to be for the next few years: promotion or revenue. Trying to make it do both well will most likely result in YouTube doing neither of them properly.

Spotify, Netflix And Instagram Make Gains In Q2 2017

Since Q4 2016 MIDiA Research has been fielding a quarterly tracker survey across the US, UK, Canada and Australia to build a proprietary dataset that provides a unique insight into how digital consumer trends are evolving quarter-upon-quarter. Through the tracker we monitor weekly active usage of apps for streaming music, streaming video, games, social and messaging. We also measure the shifts in key consumer behaviours, such as curated playlist listening, binge watching and subscriptions, in each of these sectors each quarter. We have structured the data so that clients can explore each app and behaviour by demographics, and, crucially, users can examine how much each app overlaps with others and with all the 40 different behaviours we track. We recently published a report for MIDiA’s paid subscribers analysing key trends across the first three quarters of our tracker. Here are some of key insights from the report. To find out more about how to get access to MIDiA’s Quarterly Trends report, email stephen@midiaresearch.com.

The leading apps in each of the categories tracked are largely consistent across all of the countries surveyed and they are also the big names that are familiar to all (see figure above). However, where things get interesting is in a) the variations in penetration across countries and b) how usage has evolved over successive quarters. For example:

quarterly trends midia figure 1

  • Messaging apps on the rise: Weekly Facebook usage was up slightly in the US between Q4 2016 and Q2 2017, but down in the UK. Over the same period WhatsApp was flat in the US but up slightly, along with Instagram, in the UK. WhatsApp penetration stood at just 11% in the US in Q2 2017 but 33% in the UK, while penetration in Australia and Canada laid in the middle of those two points.
  • Netflix growing but not in the UK: YouTube is still the standout video destination in terms of weekly usage across all the markets tracked. However, growth has slowed in these markets, with penetration going down slightly over the three quarters. YouTube’s loss is Netflix’s gain, with the streaming TV platform’s usage increasing each quarter. Though, again, there is an intriguing country level exception: Netflix is growing everywhere except the UK where weekly usage was flat over the period.

top streaming music apps in q2 2017, spotify, youtube, apple music, soundcloud, amazon, musical.ly

YouTube is the world’s leading streaming music app and this is true of the larger, mature markets. The continual breaking of YouTube music streaming records by the likes of Shakira and Luis Fonsi point to a renaissance in YouTube as a music streaming platform. However, the origin of those artists point to the location of YouTube’s music momentum: Latin America. Meanwhile, across the US, UK, Canada and Australia, weekly usage of YouTube as a music app was flat, and down actually in Australia. Most of the music apps we tracked had a dip in Q1 2017 but in the main held ranking and overall usage. Deezer saw a small rise while Soundcloud fell slightly. Spotify was the big winner, gaining penetration to close the gap on YouTube, and becoming the leading standalone music app. In the UK, Spotify surpassed YouTube for music among 16-19 year olds, hinting at a strong future for Spotify among Gen Z. Talking of Gen Z, lip synching apps Musical.ly and Dubsmash maintained momentum across the period, something other music messaging apps have previously failed to do this late on in their lives. These sort of apps, though niche in scale, point to what Gen Z want from their social music experiences.

These are just some of the very high-level trends, and there is much more in the report itself. If you are a MIDiA subscription client you can access the report and data right away here. If you are not yet a client and would like to learn more about how to get the report and the other benefits of being a MIDiA client email Stephen@midiaresearch.com.

YouTube And Latin America Are Taking Over The World

Unless you have been on Mars for the last couple of days you will have seen the news that Luis Fonsi’s ‘Despacito’ has become the most streamed track in history with 4.6 billion streams. The figure includes a couple of versions of the track (ie the one include a certain Justin Bieber) but is an impressive tally nonetheless. The landmark raises 2 key trends:

  1. The role of the Latin American market
  2. The role of streaming

Latin Takeover

On the first point, Latin America is becoming a streaming powerhouse. This is a trend we have long anticipated at MIDiA and it is why we have a Latin American analyst (Leo Morel in Brazil) and have been fielding consumer surveys in the region since we launched the company. ‘Despacito’ is not an isolated event. For example, Shakira’s ‘Chantaje’ became the first Latin American Spanish language track to reach 1 billion views earlier this year. But Latin America’s contribution to streaming is uneven. It accounts for 17% of all subscribers globally but 27% of all streaming video users. Indeed, Brazil and Mexico are Vevo’s 2nd and 3rd largest markets globally, after only the US. The socio-economic realities of Latin America mean that it will always over index towards free streaming compared to European and North American markets. But the streaming appetite is clear. With such large streaming appetite, expect Latin American audiences to increasingly shape future hits. Once enough Latin American fans get behind a track the snowball effect kicks in: once in Spotify’s global streaming chart it then finds its way into curated playlists and then volumes grow even faster. A similar effect is felt as the momentum kicks YouTube’s and Vevo’s algorithms into gear. But because the region skews towards YouTube and Vevo the regional revenue impact under indexes. Thus we have an emerging dynamic where Latin American audiences create the hits and European and North American audiences pay for them. This is the new normal.

despacito midia 1

Just as important as the rise of Latin America, is the continued rise of YouTube. Value Gap or no Value Gap, YouTube’s role in breaking and making hits is clear. More so, it is becoming more pronounced. YouTube streaming growth might be slowing in the US but the same does not necessarily apply globally. Indeed, taking the time it takes for YouTube / Vevo music videos to reach 1 billion views we can see that the 2017 hits ‘Despacito’ and ‘Shape Of You’ got there 40% faster than the average for tracks from 2016, 2015 and 2012. Only Adele’s 2015 hit ‘Hello’ got there faster, and that was a highly anticipated event that is a unique case.

despacito midia 2

 

YouTube added 500 million users between 2012 and 2017. That is no mean feat but nor is it stellar growth. Over the same period Facebook added more than 1 billion users and WhatsApp came from next to zero to 1.2 billion. YouTube is a mature platform and so growth is not just measured in terms of users but also in terms of engagement, especially streams per user. And this is where YouTube really seems to be delivering. A way of relating the growth of 1 billion view music videos to the total user base is dividing the average number of monthly views each video had en route to 1 billion and dividing that by the total number of YouTube users. In 2012 this figure was 0.19, by 2017 it had fallen to 0.17. Thus, for the 1 billion club, more YouTube users are streaming these songs more times. Growth is coming both from audience and activity.

 

There are other mitigating factors. For example it is conceivable that YouTube and Vevo are simply becoming better at creating mega hits, concentrating the audience around big hits. Thus making YouTube/Vevo more of a superstar economy. Vevo’s recommendation algorithms and YouTube’s autoplay feature play a role too, contributing to more streams. The autoplay was negotiated, along with full albums, from the labels as part of YouTube’s Music Key service. A service that never even made it out of beta, but YouTube of course held onto the good parts of that deal. Spotify, that is how you do digital deals!

 

The fact that streaming records are now being broken with such regularity shows that we have arrived at a tipping point. Streaming is transitioning from fast growing digital revenue stream, to the centre of an entirely new business. As impressive as ‘Despacito’s numbers are, get used to these sorts of records being made and broken on a regular basis. And get used to Latin America and YouTube playing an ever bigger role.

 

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.

 

Guess Who Gen Z Prefers For Music: Spotify Or YouTube?

It is still common to hear people talk about Millennials as if it is one amorphous group. In actual fact, Millennials are now 2 entirely distinct generations, not 1. In addition to the core Millennials we now have a new generation of younger consumers born on or around 2000. This is Generation Z, the ‘true Millennials’ if you like. MIDiA recently deep dived into the behaviours and characteristics of this group in a piece of research for the BPI and ERA. In it we explored technology and media trends for 0-11 year olds, 12-15 year olds and 16-19 year olds. You can download the full report here. I’m going to deep dive into 1 key idea here: YouTube vs Spotify.

YouTube emerges as the dominant theme throughout all of the age groups of Gen Z, as both a social and an entertainment platform. And of course, as a music platform. Indeed, a staggering 94% of UK 16-19 year olds use YouTube monthly, even among 12-15 year olds the rate is 87%. But it is not just music that people are using YouTube for, indeed it is only by the time Gen Z gets to late teens that music becomes the most widely penetrated content watched on YouTube (to be clear, that is not the same as saying the most frequently watched or most time spent). YouTube is the world’s most widely used music app and its reach among younger audiences is clear to all.

spotify uk

All of which makes the next finding all the more remarkable: Spotify has overtaken YouTube as the primary music app for 16-19 year olds in the UK. In December 2016, 53% of UK 16-19 year olds used Spotify weekly compared to 47% for YouTube. As the chart shows, no other streaming service, paid or free, comes anywhere close to Spotify and YouTube. Of the countries we surveyed in this piece of research (US, Canada, Australia and UK) it is only in the UK that Spotify is ahead of YouTube and, crucially, only in this age group.

An Aspirational Youth Brand

So, what’s going on here? Spotify has become an aspirational brand for Gen Z. It has, for teens, become a byword for streaming in the same way the iPod became synonymous with the MP3s and Netflix has with streaming video. Spotify is not exactly an old brand but neither has it been a youth brand, instead prospering within its core demographic of 25-34 year olds. Now a new generation of youth, many of which were only just starting school when Spotify first launched, have seized the brand as their own.

I recall a meeting with the strategy team of one of the world’s biggest consumer electronic companies in the mid 2000s when the iPod was reaching its apogee. The team explained that they knew there was nothing they could do to compete with the iPod because it had become an aspirational brand, with an appeal so strong that it didn’t matter whether other products were better or cheaper, the iPod was the brand people wanted to be associated with. This company had done its homework and knew exactly how the trend was playing out because it had benefited from the exact same effect for the previous 2 decades.

Teens Have Made Spotify Their Own

It is hard to exaggerate the potential of this development. Teenagers have taken the Spotify brand and made it their own. Unless Spotify totally screws up somehow, which is unlikely, it has a platform for future growth that could make its current success simply look like the warm up act. Although the UK is the only one of the 4 markets in this study where Spotify has taken the lead, it is on track to do the same in the 3 other English speaking markets surveyed. And it has also taken the lead in other markets we track: Sweden (where national sentiment plays a major role) and Germany (where YouTube offers a much more restricted music range due to rights issues).

And Spotify’s Lead Is Growing Further Still

But there’s more… In a more recent survey in the UK that we fielded in March, the lead extended even further. Now 71% (yes, 71%!) of 16-19 year olds are using Spotify weekly, though YouTube is also up slightly to 52%. Our June survey is in the field now, so watch this space for an update on Spotify’s progress. It could potentially break the 80% mark.

Now to be clear, 71% of 16-19 year olds using Spotify weekly does not mean that anything like that share is actually paying for it. Most are streaming for free while some are on family plans and others are on the half-priced student plan. But even with that caveat, the scale of adoption is inarguable. While the music industry has been locked in an existential angst over the perceived YouTube ‘value gap’, Spotify has created the best possible riposte for rights holders and creators.

As Spotify edges towards its overdue public listing, it now has the evidence of foundations for truly sizeable future growth. The future is bright, bright green.

 

 

Who’s Leading The Streaming Pack?

At MIDiA Research we are currently in the final stages of producing the update to our annual landmark report: The State Of The Streaming Nation, a report which compiles every streaming market data point you could possibly need.

In advance of its release in June we want to give you a sneak peak into a couple of the key areas of focus: streaming app usage and major label streaming revenue.

music apps slide

Subscriber numbers only tell part of the streaming story. They are solid indicators of commercial success, but can often obscure how well a service is doing in terms of engaging its user base. That’s why we track the main music services’ active user bases every quarter. But rather than tracking Monthly Active Users (MAUs), we track Weekly Active Users (WAUs). The MAU metric is past its sell by date. In today’s always on, increasingly mobile digital landscape, doing something just once a month more resembles inactivity rather than activity. The bar needs raising higher. Companies like Snapchat, Facebook and Supercell measure their active user bases in terms of Weekly Active Users (WAUs) and Daily Active Users (DAUs). It is time for streaming services to step up to the plate and employ WAU as the benchmark.

Using this approach, YouTube and Spotify emerge as the leading services with 25.1% and 16.3% WAU penetration respectively. However, at the other end of the spectrum, Deezer swaps its top half of the table subscriber count ranking for the bottom ranking for WAUs with just 2.3%. Google Play Music All Access does not fare much better on 5.5% and even this likely reflects survey respondent over-reporting for what has proven to be a lacklustre effort from the search giant.

Streaming music finally returned recorded music revenue to sizeable growth in 2016, driving the year-on-year growth of 6%, increasing revenues by $0.9 billion. Label streaming revenue was up $1.6 billion, finally offsetting the impact of declining revenue from the legacy formats of the CD and downloads.

label streaming revenues midia

The growth continued in Q1 2017, albeit at a slightly slower rate. Among the major labels, streaming revenue grew by 35% to reach $1.1 billion in Q1 2017, up from $0.8 billion in Q1 2016. The major labels respective share of cumulative revenue in streaming largely reflects that of total revenue. Streaming was the lynchpin of 2016’s growth and will be even more important in 2017.

Streaming represented 33% of major label revenue in 2016. That share rose to 42in Q1 2017. Streaming is now the stand out revenue source, far outstripping physical’s $0.6 billion. Though a degree of seasonality needs to be considered, the streaming trajectory is clear. Record labels are now becoming streaming businesses. The independent label sector experienced strong streaming growth also, powered in part by licensing body Merlin. Merlin paid out $300m to its independent label members over the last 12 months, leading up to April 2017, to an increase of 800% on the $36m it paid out in 2012. The streaming business is no longer simply about the likes of Spotify and Apple Music, it is the future of the labels too.

These findings and data are just a tiny portion of the State Of The Streaming Nation II report that will additionally include data such as: streaming behaviour, YouTube, role of trials and family plans, playlist trends, average tracks streamed, subscriber numbers for all leading music services, service availability, pricing and product availability, revenue forecasts and user forecasts. The report includes data for more than 20 countries across the Americas, Europe and Asia and forecasts to 2025.

To reserve your copy email Stephen@midiaresearch.com

The Internet’s Adolescence: The Real World Catches Up Eventually

I started my career as an internet analyst back in the period of the dot-com bubble. They were heady days in which anything seemed possible. The world was changing in unprecedented ways and the possibilities were endless. The rules that governed the old world didn’t apply. Except they did. Investors soon twigged that dot-com startups were simply not able to deliver on their revenue promises and so pulled their funding. In an instant, the whole edifice came tumbling down. It turned out that those old fashioned and outdated concepts such as turning a profit actually applied to internet companies too. We have come a long way since the dot-com bubble, but it would be wrong to think of the internet as being a mature medium yet. Instead, it is entering its market adolescence and consequently still has a lot of growing up to do.

Regulation Comes Eventually

Although the internet and its associated technologies (apps, social, streaming, e-commerce, etc) are deeply embedded in our daily lives in the developed world (and increasingly so in emerging markets), it is still fundamentally just getting going. On a global level, each key sector of the internet economy is dominated by 1 company (Amazon/e-commerce, Google/search, Facebook/social, etc). A single dominant company is typically an indication of an early stage market and/or one that is about to be opened up with regulation. In the case of internet industries, it is likely to be a combination of both. Thus far, regulation has not yet properly caught up with internet companies. The global, borderless nature of their propositions and their relative lack of precedents makes regulation a highly challenging task. But it will happen.

Regulatory Repercussions

To be clear, regulation is not some shining panacea for business. But it is the price of being part of society and global commerce. The more deeply integrated into civic society that internet companies become, the stronger the likelihood for them to become regulated. And when regulation happens, the effects can be devastating for companies that have previously operated with free reign. When the European Commission, under lobbying pressure from Real Networks, compelled Microsoft to unbundle the Windows Media Player (then by far the most popular music player) from Windows in 2004, it was the trigger for a long period of decline for Microsoft, from which it is only just beginning to recover. Clearly, there were other market factors that contributed to its decline, but regulation was the tipping point. And the model of a competitor (Real Networks) shamelessly using regulation to give it a competitive edge over an established rival could reoccur. For example, any number of big Chinese companies looking to extend their reach to the west may view EU regulators as an opportunity to prize open the market for them.

The Pendulum Swing Of Disruption

When a new technology disrupts a traditional incumbent, it normally does so by being 3 things to the end user:

  1. Cheaper/free
  2. Quicker
  3. More convenient

Napster, YouTube, Amazon, Uber, Netflix, all of these companies have done exactly this. Because they most often build market share and presence using external funding, such companies turn existing economics upside down with loss leading tactics. The result is that audiences switch in their millions and incumbents are left in tatters. Any old business that relies on scarcity economics will be swept away.

Take Uber’s impact on taxi drivers across the world. In the UK, a black cab driver will spend 5 years riding around every street in London on a scooter, memorising every street before taking a $60,000 loan on a black cab. 8 or 9 years into the venture, a black cabbie might be in the money. In the days of Google Maps and Uber, those principles go out of the window. Uber has had such an impact in London, that the cab rank queues at train stations can be miles long because black cabs have so little street side business left. In New York, yellow taxi medallions (the city’s government certification for official taxis), once traded as high as $1.3 million each in secondary markets, but have dropped to $240,000 now that Uber and Lyft have ensured that you no longer need a medallion to operate as a taxi in New York.

This is the pendulum swing of disruption. But pendulums eventually swing back. That is when regulations, real world economics and new business model innovation come into play. The original market disruptors often either disappear or get bought. The recorded music industry is now finally building a new set of effective businesses around the disruption brought by Napster, which died as an entity before the millennium really got going. YouTube transformed video and was bought by Google, Skype cannibalized mobile carriers and was ultimately bought by Microsoft, Linkedin disrupted recruitment advertising and was also bought by Microsoft, PayPal disrupted credit card companies and was bought by eBay.

All Of This Has Happened Before And Will Happen Again

Today’s internet giants may have the appearance of being permanent features of the digital landscape, but they’re not. AOL, Yahoo, Netscape or MySpace looked immortal in their days, as the GAAF (Google, Apple, Amazon, Facebook) do now. That doesn’t mean these companies cannot become long serving global superpowers. But history has a habit of repeating itself. Or as the fictional mythical Sacred Scrolls of Battlestar Galactica said: “All of this has happened before and will happen again.”

Never mistake normality for permanence.

 

Change Is Afoot In Music Video

Music video’s two power players are both in the news for strategic resets. On the one hand YouTube has announced that it is merging its YouTube Music and Google Play Music teams while on the other hand Vevo has announced it is postponing the launch of its subscription service in favour of prioritising global expansion. These are both important developments in their own rights but together form part of a changing narrative for music video.

Music video is streaming music’s killer app. According to MIDiA’s latest consumer survey, 45% of consumers watch music videos on YouTube or Vevo every month, while 25% of consumers use YouTube for music every week (more than any of the streaming audio services). So what YouTube and Vevo do has real impact.

YouTube Is Where Google Is Placing Its Music Bets

YouTube’s merging of teams is not a huge surprise. It always appeared overkill having 2 separate teams, especially considering that Play was performing so poorly in the market (its weekly active users are measured in single digit percentages) and that Google’s music priority has always been, and will always be, YouTube. Although nothing will change immediately in terms of user proposition, the strategic direction of travel is clear: YouTube is where Google will place its music bets. Which places even greater importance on rights holders and Google coming to an understanding around royalty payments. YouTube moving to minimum guaranteed per stream rates is untenable (for Google) as is the Value Gap/Grab (for rights holders). Something has to give.

My long-term bet is still on Google creating a parallel music industry around YouTube, one that is entirely opted out of the traditional music industry’s rights frameworks. But a more immediate concern for Google is contingency planning in the event of Vevo upping sticks and becoming the centre piece of a revamped Facebook video play. A combination of no Vevo and disgruntled rights holders would be a recipe for disaster for YouTube’s music strategy.

Facebook And Vevo May Be Courting 

Vevo jumping ship to Facebook is not as far-fetched as it might have seemed when it was first mooted a few years ago. Facebook is now the world’s 2nd biggest online video property and has finally admitted that it is a media company. Slowing ad revenues in 2017 will see Facebook double down on ancillary revenue streams and content will be a key plank of that strategy. Games is the biggest addressable market and it has already made moves in that direction. Growing video is another. While streaming music is a relatively small market opportunity for Facebook, it has wide appeal. Launching an AYCE streaming service would be an ill-advised (and highly unlikely) option for Facebook, but partnering with Vevo would be a higher margin, lower risk way of getting into music. It would also be the perfect vehicle with which to showcase Facebook’s next generation of video UI, which will include features such as curation, channels, recommendations etc. In short, a lot less like Facebook video and lot more like YouTube.

The Rise Of Music Inspired Video

Interestingly, Vevo’s CEO Erik Huggers has announced that Vevo will be increasing its focus on short form, non-music video, such as artist interviews, mini-documentaries, and animated shorts. This snackable, highly shareable content bears closer resemblance to the sort of video that works well in Facebook’s more social-centric video platform than YouTube’s more viewer-centric environment. Vevo’s non-music video approach is smart. As we explained in our report ‘From Music Video To Music Inspired Video’, if rights holders want their share of overall video time to grow, or at least hold their own, then they need to start exploring creating music related video rather than just music videos.

The core consumption format will still be the music video, but the additional content expands reach and time spent. In a Facebook environment (especially if Instagram was incorporated) this sort of content would spread like wildfire. Add into the mix that Huggers also referenced Vevo’s prioritization of building its direct audience via its own apps (ie not via YouTube) and we might just be starting to see the emerging shape of a planning-for-life-after-YouTube strategy. Even if Vevo decided to stick with YouTube (which remains the most likely outcome), it could use all of these moves as leverage for getting a better deal.

Change is afoot in the music video space and we may just be beginning to see the two key players beginning to put competitive space between each other. But perhaps most tellingly, as both companies up their game, they are also both, in different ways distancing themselves from their subscription plays. Music video is the killer streaming app for many reasons. The fact that it is free is reason number one, and Vevo and YouTube both know it.