YouTube And The Attention Economy

This is the third in the series of posts exploring how the music industry can better leverage the potential of the YouTube economy.  You can see the first post here and the second here.

Short form video is accelerating at a rapid pace, racking up 4.2 trillion views in the first half 2015.  While challengers Facebook, Snapchat and others now account for just over half of that total, few platforms of scale yet provide content creators and owners comparable ability to build engaged audiences and income.  For music the situation is even more pronounced – no other platform is even on the same lap of the race (and I include Vevo as an extension of YouTube). YouTube is the most popular online music destination by far (46% of consumers use it regularly) and its role for Digital Natives cannot be exaggerated – 65% of US under 25’s use YouTube for music regularly.  But the share that regularly watch YouTube as a whole is even higher: 76%.  The added complexity is that most artists and labels do not feel that YouTube is pulling its weight in revenue terms.  Free music streamers – of which YouTube is the largest single component – comprise 92.5% of all music streaming users and just 32% of all streaming revenue.  Yet a whole generation of non-music creators like PewDiePie, Smosh and the Janoskians have via YouTube built audiences and income that most artists could only dream of.  So what’s the secret?

Talk Don’t Shout

One of the key factors is the way in which YouTubers use the platform, releasing 2, 3 or more videos every week.  Contrast this with an artist releasing a music video maybe once every couple of months.  YouTubers treat the platform as place to build relationships with their audiences and to engage them in regular interaction.  The prevailing approach among artists, their managers and labels is to simply view YouTube as a place to promote.  YouTubers use YouTube as an interactive digital platform for engaging in conversations.  The music industry uses it as a broadcast channel, a soap box from which it can shout about its wares.

While clearly it doesn’t make sense for most artists to be creating 3 videos a week there has to be a compelling middle ground between that and one promo video every quarter.  Nearly half of music’s super fans say that music for them is more than just the song, that they want to know the artist’s story.  Music videos, the highly stylized form that they are, are hardly a vehicle for telling the artist’s story.  In fact there are few mediums less suited for the task.  But there is so much around the video that can be harnessed.  Imagine how much extra content could be created by adding half a day to the video shoot to film extras such as goofy outtakes, the band talking about the song, a making of, behind the scene reportage etc.

Think Of It Like DVD Extras That People Actually Want To Watch

And the costs should be modest.  YouTube is DIY.  Part of the authenticity most YouTubers deliver is by not being over produced.  So only a fraction of the crew used for the music video shoot would be needed.  The resulting video extras could then be planned into a release schedule on the artists’ YouTube channel, building up weekly to the main music video and then maintaining interest thereafter.  This is just one illustration of how it is entirely feasible to create lots of added value content with relatively little additional burden on the artist.  Yes, this might feel like creating the extras for the bonus disc on a DVD, and in some ways it is.  But there is a crucial difference.  DVD bonus discs are a means of charging more for a release and usually go unwatched.  Among young YouTube viewers this sort of content is often of comparable – though different – value to the song itself.

Prospering In The Attention Economy

In the sales era fans invested in their favourite artists by buying an album.  That cash investment usually meant a fan would spend time listening to the album again and again.  And that familiarity became the foundations of a long term relationship that would result in buying concert tickets and future albums.  But now as sales dwindle (down by 29% in the last 5 years) music fans are investing in their favourite artists in time and attention rather than money.  We now operate in an attention economy.  YouTubers totally get this, artists and labels less so.

This is all so important to artists because YouTube is not suddenly going to start delivering dramatically better music stream rates, largely because labels and publishers haven’t had the courage to demand the requisite fair share it should pay.  Rights owners’ fears are understandable: one senior label executive recounted a YouTube negotiator saying ‘Don’t push us.  Right now you don’t like us much and we’re your friend.  Imagine what we’d be like if we weren’t your friend.’  Sooner or later bullying tactics need standing up to.  But that will not be a quick process, regardless of the steps currently being taken behind the scenes.

So in the meantime artists and labels need to figure out how to get more out of YouTube in a way that complements the other ways they make money digitally.  Put simply that means making more non-music video content to generate more viewing hours and thus more ad revenue from YouTube. Heck, they might even generate some YouTube subscription revenue some time.  But do it they must, else they’ll forever be leaving chunks of YouTube money on the table.

The irony of it all though is that the biggest reason of all for doing it isn’t even about the money.  Treating YouTube as a fan engagement platform rather than a marketing tool is currently the most sure fire way artists have of creating engaged fan bases at scale in the digital marketplace.

Making YouTube Pay: YouTubers Versus Bands

This is the second in a series of YouTube generation posts. See the first one here.

A couple of weeks ago I wrote about Generation Edge – the under 16 millennials – and how they are driving an entire new subculture of YouTube stars that throw the traditional fandom rulebook out of the window. One of the intriguing paradoxes (or at least apparent paradoxes) is how a generation of native YouTube stars can create both vast audiences and revenue while for music artists YouTube is simply a place to build awareness and probably lose net revenue due to YouTube streams cannibalizing paid streams. So how can the model both be broken (for music) and yet buoyant for native YouTuber creators?

pewdiepie2 PewDiePie And Taylor Swift

Compare and contrast the biggest earner in music with the biggest earner on YouTube.   Taylor Swift netted $39.7 million in 2014, compared to $7.4 million for PewDiePie. Seems like a slam-dunk for music right? Except when you start digging a little all is not quiet what it seems. Swift’s numbers are gross revenue so include the revenue earned by everyone else (record labels, promoters, ticket agencies, venues etc.). Let’s say she earns a third of that income which would equate to $12 million (and before anyone suggests it should be higher given her relationship with her label Big Machine ¾ of her revenue came from live in 2014). So suddenly the difference doesn’t look quite so big. Then consider that PewDiePie’s $7.4 million refers just to his YouTube ad revenue and doesn’t take into account his live appearances income or his merch revenue. And, perhaps most importantly, the cost of earning that income was negligible. PewDiePie’s audience is right there on YouTube and his videos are home made. The cost of production, distribution and marketing are close to non-existent. The exact opposite is true of breaking a release like Taylor Swift’s ‘1989’. It’s no secret that most big labels lose money on lots of their bigger front line releases, relying upon a few massive successes and the steady income from back catalogue to pay the bills.

10 Billion Views And Counting

PewDiePie just passed 10 billion views three weeks ago and has 39.9 million subscribers – that’s one for every (gross) dollar that Taylor Swift earned in 2014. Anyway you look at it, those numbers are big. Game Of Thrones, which can lay claim to being one of the mainstream media success stories of the moment, has clocked up around 700 million total views globally over the course of 5 series. And while traditional media apologists will argue that you cannot compare a PewDiePie view with a GoT view try telling a PewDiePie subscriber that their viewing is somehow less worthwhile because it is more than weekly and doesn’t come from a traditional TV set.

Taylor Swift of course also has a pretty hefty YouTube / Vevo presence too, with 16.5 million subscribers and 6.3 billion views. But while she has 20 videos available PewDiePie has nearly 2,500. And therein lies one of the key differences. PewDiePie lives on platforms like YouTube and Twitch. His focus is making content regularly for his audience and engaging directly with them. YouTubers typically make multiple videos every week and often multiply that across multiple different channels. Try squeezing that in around touring, recording, writing sessions, media work etc. Swift, unlike many big pop artists, also knows how to do the native YouTube thing too and has had her own, non-Vevo, YouTube channel since 2006, posting 136 videos there to date. But in stark contrast to her Vevo channel Swift has just 1.4 million YouTube channel subscribers. So even one of the most YouTube-centric of pop artists that also happens to be one of the biggest pop acts on the planet right now simply doesn’t have the time, positioning nor content to compete with a shouty gamer from Sweden.

YouTube Is Generation Edge’s Destination Of Choice

So where does all this leave artists and YouTube. Unless bands want to ditch the guitars and start doing Minecraft commentary videos, becoming a full-on native YouTube creator simply isn’t feasible for most artists. But there absolutely is middle ground between the dominant focus on seeing YouTube simply as a marketing channel for music videos, and the native creator route. Part of the solution is seeing YouTube for what it actually is. It is not a video platform, or a marketing platform, it is one of the most important destinations for Millennials of all ages, especially Generation Edge. It is at once a social network, a TV network, a fun place to hang out, a discovery destination, a place where they can simply be themselves and feel connected. YouTube is all of that and more. In fact the breadth and depth of content means that it is everything to all people.

The Value Of An Authentic Voice

Treating YouTube simply as a marketing channel not only underplays its potential but it also completely misses what it means to your target audience. PewDiePie, Zoella, Stampy, Michelle Phan are all so successful because they speak directly with their YouTube audiences in an authentic voice that communicates that it is the here and now that matters. That it is about the moment not simply an attempt to try to get the viewer to go somewhere else to do something else. Authenticity is a priceless commodity and native YouTube creators have it in spades. That is the currency of the YouTube generation.

YouTube’s Biggest Threat To The Music Industry Isn’t What You Probably Think It Is

YouTube’s disruptive commercial impact on the music industry is well documented but the real threat to music is far more fundamental and can’t be ‘fixed,’ not even by the world’s best lawyers. This is because the most important impact YouTube is having on music is not commercial, it is cultural.  While the music industry is grappling with how to deal with the premium revenue that YouTube appears to be sucking away, a whole generation of (largely non-music) creators native to YouTube have quickly learned how to build highly profitable careers and businesses solely on YouTube.  And in doing so they have created an entirely new youth culture.  A culture for the sub-millennials, the early teens and pre-teens that are still lazily referred to broadly as Millennials or Digital Natives, but are in fact an entirely new and distinct from those consumers.  It is a generation that creative types such as Frukt and the Sound are calling Generation Edge.  The emerging behaviours of these consumers are dramatically different from their older Millennial peers and are the catalyst of an entirely new era of youth culture.  Crucially a culture in which music looks set to play much less central role than it has ever done so before for youth.

In Search Of A New Subculture

At the Future Music Forum, Frukt’s Jack Horner observed that most music genres, and indeed media as a whole, are becoming age agnostic, which means that it is really hard for Generation Edge to find music that they can own, that their mum and dad aren’t going to sing along to too. This is the price to be paid for media and brands having successfully convinced aging 30 and 40 somethings that they are still young at heart and in the pocket.  So with no music subculture to cling to Generation Edge has instead gravitated to YouTube stars.

For those not familiar with this wave of YouTubers, it is nothing short of an entire new culture in which the platform, medium, format and talent blends into a single entity. Where the term ‘YouTube’ refers to each and every one of those aspects.  The type of content created is as diverse as fashion vloggers, slow motion film makers, online gamers, pranksters and comedy.  The unifying factor is that these creators are young and have built personality brands and audiences that not only owe nothing whatsoever to traditional media, but that often far surpass that of traditional TV, film and music audiences.  YouTubers are becoming the key cultural reference point for Generation Edge.  7 out of 10 of the most recognised personalities among American teens are YouTubers.  A comparison of the number of YouTube subscribers and music artists with the same number gives us an indication of the scale of the popularity of these native YouTube creators for Generation Edge:

  • 9 million –  Zoella, Bethany Mota, Bruno Mars, David Guetta
  • 11 million – Sky Does Minecraft, Skrillex
  • 13 million – The Fine Bros, Justin Bieber
  • 16 million – Jenna Marbles, Katy Perry
  • 17 million – No YouTuber equivalent – Rihanna, Katy Perry, OneDirection
  • 24 million – HolaSoyGerman  – No music equivalent
  • 39 million – PewDiePie – No music equivalent

Equally significant – there isn’t a single music artist in the top 10 most subscribed artist channels.  While it is easy to counter with YouTube being just one consumption platform among many, for Generation Edge it is their main consumption platform.  Under 12s in the UK now spend 15 hours a week watching YouTube.  These YouTubers earn serious cash on YouTube (PewDiePie earns up to $1 million a month) and are also taking their brands ‘offline’ as evidenced by national tours by the likes of Miranda Sings and sell out theatre gigs by the likes of the Janoskians.  When PewDiePie went to Japan he was greeted with hoards of screaming teenage girls.

The Essence of Stardom and Fandom

For those not in the target demographic, it can sometimes be difficult to grasp exactly what the creative value is of many YouTubers.  But that generational inability to grasp the essence of YouTube talent is exactly the same dynamic that music always had when it was the spearhead for youth rebellion.  A kid trying to explain to his mum why Stampy Does Minecraft is worth watching hours on end is simply a 21st century rerun of kids trying to convince their parents of the musical worth of Elvis, the Beatles, the Sex Pistols and so on.  That is the entire point of a youth culture – older generations aren’t meant to get it.

Everyone is familiar with concept of bands and singers having the x factor, the elusive magical something that an act can have that is often entirely unrelated to their musical talent.  How many technically perfect bands have there been that have just fallen flat because they lack that magical something?  The successful YouTubers have that exact same magic dust.  What they are showing us is that the x factor does not need to be wedded to a guitar or a keyboard.

The Voice Of Youth

The age of YouTubers’ audiences is crucial.  The fact they are pre-teen and adolescent means that they are in highly formative stages of their lives, looking for something that they can connect with and that they can ‘own’.  In previous generations this was a role successfully filled by pop and rock stars.  Now it is YouTubers.  The comment of one PewDiePie fan says it all: “When he looks down the camera I know he is talking to me.”  Through the eyes of pre and early teens the world is a confusing place that just doesn’t comprehend how they feel or who they are.  Successive generations of youth viewed song lyrics as an almost magical window into their own soul, an indication that someone out there actually understood them, that they were not alone.  Now as PewDiePie shows us it turns out that haunting melodies and tortured lyrics are in fact only the vehicle for that connection.  That shouty computer game commentaries can do the job pretty well too.

Star – Fan Relationships Are Changed For Good

We are at the early stages of the YouTuber phenomenon – it is really only in the last 2 years that the movement has really begun to gain substantive scale and recognisable form.  So it would be churlish to suggest that the current mix of talent and formats will necessarily be the same 2 or 3 years from now.  We also don’t know whether YouTubers will be able to transition their audiences as they age.  But what is clear is that the connection between star and fan has been reinvented by YouTube and that thus far music stars have not managed to grasp it.  Even Taylor Swift, someone who does actually get YouTube, only has 1.3 million subscribers to her non-Vevo channel.  Music is still always going to be the soundtrack to the bewildering, dazzling and breath-taking journey from childhood to adulthood. That much remains the same.  But the days of music stars automatically being the defining characters of youth are now gone.

Why Niche Is The Next Streaming Frontier

If 2014 was the year of fear, uncertainty and doubt for streaming then 2015 is shaping up to be the year in which streaming starts to deliver.  In fact so far streaming has helped drive revenue growth in the first half of 2015 for markets as diverse as Italy, Spain and Japan as well as of course in the streaming Nordic heartlands of Sweden, Denmark and Norway.  All this despite an accompanying average decline in download revenue of 7%.  But as I have long said, there is only so far that 9.99 AYCE (All You Can Eat) subscriptions can go.  This value proposition and price point combination constrains appeal to the aficionados and the upper end of the mainstream.  Pricing will be key to unlocking new users (as Spotify’s focus on the $1 a month for 3 months promo shows). However some highly influential elements within major labels are more resistant to pricing innovation now than they were this time last year.  So don’t hold your breath for the long overdue pricing overhaul.  The other side of the 9.99 AYCE equation though is just as important, namely choice, or rather, less choice. In fact, done right, cut down, niche music offerings should be able to fix the pricing conundrum too.

Too Much Content Is No Value At All
catalogue anatomy

Most people are not interested in all the music in the world and most people are not interested in spending $9.99 (or the local market equivalent) a month for music.   All the music in the world is a compelling proposition for super fans, but it is both a daunting prospect and more than is required for casual fans.  In fact the supposed benefit becomes a problem, the excess of choice begets the Tyranny Of Choice.  Indeed, just 5% of streaming catalogues is regularly frequented.  Most of the rest is irrelevant for most consumers.

Cord Nevers Are A Music Industry Problem Too

Most music fans like one or more kinds of music most.  While super fans are happy to pay for the ability to get everything, mainstreamers are not.  This is exactly the dynamic we are seeing in the video space, with consumers increasingly turning to smaller, cheaper services such as Netflix and Amazon rather than paying through the nose for an excess of cable channels.   The TV industry calls these consumers cord cutters (i.e. those that cancelled their TV subscriptions) and cord nevers (i.e. those that never paid for cable).  Now the music industry is facing its own cord never challenge: consumers who have never taken up a music subscription and have no intention of doing so.  In the past they would have spent some money on downloads, now they’re just watching more music videos YouTube.  The music industry quite simply does not have a Netflix for its cord nevers to go to instead of the full priced subscription option.

The Case For Niche Playlist Services

But give those more casual music fans a music app just built around their tastes and for a fraction of the price and the equation changes from zero sum.  Imagine genre specific playlist apps for $3 or $4 month.  A dozen curated playlists, a handful of featured albums and a couple of radio stations, all just of your favourite style of music and all streamed into a dedicated app.  Not only does this proposition deliver clear value, it also gives the industry an opportunity to open up new users that have thus far not been swayed by the broader utility play of AYCE services.

Imagine a Country app, a Classic Rock app, a Hip-Hop app, a Metal app, an EDM app, a Jazz app…. Each of these would create clear appeal within the mainstream elements of genre fan bases.  And while there is some risk of cannibalizing $9.99 services, this should be small if they are 100% curated (i.e. no on demand element) because they would be unlikely to appeal to aficionados and the super-mainstream.  These niche music apps could be delivered by standalone curated playlist service providers like MusicQubed, white label providers like Medianet and Omnifone, or even by AYCE services like Spotify ‘doing-a-Facebook’ by spinning out standalone apps.

The Marketplace Needs Niche Services Right Now

Niche services are not however a nice-to-have, an optional extra for the industry.  They will be crucial to unlocking the scale end of the subscription market and they will be needed sooner rather than later. Organic subscription growth (i.e. not including the temporary adrenaline shot of Spotify’s limited time price promotions) is not growing fast enough.  Apple Music looks set to add a significant amount of new users before year-end but many of those will come at the direct expense of the incumbents.  All the while YouTube is leaving everyone else for dust: the amount of net new video streams (i.e. free YouTube views) in H1 2015 was more than double that of net new audio streams.

The 9.99 AYCE model still has a lot of life in it yet, but just as the mobile phone market has far more choice than high end devices, so the subscription market desperately needs the diversity that niche services would bring.

Soundcloud Edges Towards Making YouTube The Odd One Out

Soundcloud took another step away from being an ‘under licensed’ service to a ‘fully licensed’ one with its deal today with indie licensing body Merlin. This follows on the footsteps of deals with Warner and the National Music Publishers Association. Soundcloud is a long way yet from being out of the licensing woods but momentum is clearly building. Most importantly though, Soundcloud is inadvertently playing the role of ice breaker in the new wave of deals for sites that traded as promotional sites in the download era and are having to, willingly or not, accept a new role that looks and feels a lot more like a straight forward streaming service.

Merlin’s CEO Charles Caldas nailed it in this quote from an interview with Music Ally:

As the value of the streaming market grows, people are starting to realise that consumption is the new sales. Anywhere that people are listening to music is actually the end-game now. This notion that everything is promotional: that way that people used to talk about YouTube as a ‘promotional channel’. When that becomes the destination for music fans, it needs to compete in the marketplace with all the platforms that are monetised,” said Caldas.

Soundcloud always had a lot of goodwill within the indie community and indeed even within the marketing and A&R departments of majors because of its roots as a platform for helping labels, artists (and more recently) fans interact more effectively. The labels’ commercial affairs teams however have been far less enamoured, instead asking why Soundcloud should be able let people listen for free, on demand, without licenses when others can’t.

The role of standalone promotional streaming services made sense when everyone was still buying music, but with download sales and CD sales both on the slide globally the model is less obvious. The discovery journey has also become the consumption journey but the change is happening so fast that it is easy to confuse the two. This is why we have the paradoxical situation where 10 million streams on Spotify is considered to be x amount of lost sales while 10 million YouTube views is considered a marketing success. Right now a large chunk of digital marketing activity that is driving streams on YouTube and Soundcloud is tactic without purpose. It is marketing for marketing’s sake without a clear enough sense of what the end goal is.

This is why Soundcloud needs to get these deals in place. It will completely transform the commercial dynamics of Soundcloud, and there will undoubtedly be disgruntled artists and fans, but the music world has changed and it needed to also. All of which leaves YouTube the odd one out without a chair to sit on when the music stops.


An honourable mention goes to Songkick who today announced a merger with Crowdsurge and a combined raise of $16m. Congrats to Songkick and Crowdsurge co-CEO Ian Hogarth who is one of the smartest minds in the music industry.

Spotify Just Parked Its Tanks On YouTube’s Lawn

Today’s Spotify announcement was always going to be about Daniel Ek attempting to regain control of the streaming narrative in advance of Apple’s grand entry in a couple of weeks.  But if you were expecting this to be the launch of a bunch of new music features then you were in for a little bit of a shock.  Though there were some new music features outlined (such as swipe to listen, behaviour-learning programming and fitness features) the core of this event was positioning Spotify’s transition from a pure play music service into an entertainment destination with video taking centre stage.  YouTube has been competing (on uneven terms) with Spotify for years as a music service.  Now Spotify is fighting back by going after YouTube’s heartland.

Moving Beyond The Soundtrack

Spotify’s hook line for the event was ‘Soundtracking Your Day’ but in actual fact Spotify want to do much more than that (after all that’s what they already do), now they want to also be a visual part of your day too.  Spotify announced a host of new video partners including native online video producers, next gen video creators like Vice News and traditional brands like Comedy Central.  Spotify is creating a catalogue of video shorts that are designed to fit into your day.  This is unashamedly YouTube, Vessel and Buzz Feed territory.

Lessening The Music Dependence

While music consumption is booming (25 billion hours of music has been streamed on Spotify so far) Ek and co are spreading their bets.  The last 6 months have been tough for Spotify with the major labels casting doubt on its freemium model due to thinly veiled pressure from Apple.  Spotify will quite rightly feel aggrieved with this shift in attitude considering the fact it now accounts for half of global streaming revenue and is doing a better job of driving subscription uptake than anyone has ever come close to doing.  Running a music service can be a high effort, low reward and frustrating experience at times.  So Spotify can be forgiven for wanting to weaken its utter dependence on the whims of a few big labels.

Reversing Into YouTube Territory

Reversing into YouTube and Buzz Feed’s front lawns though will be easier said than done though.  The nature of the mobile consumption landscape is a diverse mix of content capsules, whether they be apps, mobile bookmarks or notification feeds.  Users have learned to consume mobile content in bite-sized chunks.  Facebook has done what it can to re-aggregate content via timeline but has found that asset more useful for sorting users personal content and shared content snippets.  Messaging platforms are now looking like the place where content audiences are best aggregated.  In fact the history of content audience aggregation can be summarised as:

1 – websites

2 – portals (e.g. Yahoo, AOL)

3 – social networks

4 – messaging platforms

Which is why Facebook is disrupting itself with WhatsApp and Facebook Messenger, it knows where things are heading.  This is the environment in which Spotify will be competing, with Snapchat and Line as much as it is with YouTube and Vice.  In Spotify’s favour is the fact that many of the digital first content destinations, Buzz Feed especially, are entirely willing to envisage a future in which their content could exist entirely on third party platforms.

Return Of The Portal?

In a lot of ways Spotify’s video mini-pivot feels like a back-to-the-future spin on the 20th century portal model but there is clearly an opportunity to re-aggregate our fragmented digital entertainment lives.  Whether Spotify can do that or not is another question and even if it can, it will be a long-term play rather than some short term hit.  Ek might have said he wants to ‘soundtrack our day’ but his product strategy actions show us that he feels Spotify has outgrown being the soundtrack alone.

The Streaming Maturation Effect

What do Netflix and music subscriptions have in common?  They both experienced slowing growth in 2014 in the US.  Subscriptions are the monetization focal point of streaming but there have long been signs that the market opportunity is far short of the mainstream. Reports suggest that Spotify may (finally) be about to launch video, as a means of differentiating in an increasingly competitive marketplace that is about to get a whole lot more competitive on the 9th of June (i.e. when Apple announces its long mooted arrival into the space).  Spotify needs a differentiation point.  It may be the runaway market leader but it doesn’t have the feature badge of identity that many of its competitors do (e.g. Rdio is the social discovery service. TIDAL is the high def service. Beats is the curation service etc.).  However, even with a feature differentiation point, Spotify and all of its subscription peers face a more substantial challenge than competing with each other: they are collectively in danger of banging their heads on the ceiling of demand for music subscriptions.

Behaviours Will Change, But Slowly

The world is unequivocally moving from ownership to access and streaming will be a central component of this new consumption and distribution paradigm.  9.99 subscriptions however have no such mainstream inevitability.  They are too expensive for most consumers but most crucially they require consumers to pay for music every month when most people instead spend when one of their favourite artists is in cycle with a new album, single or tour.  Over time (a half generation or so) some consumers will have their behaviours modified, but the majority will not.  In some sophisticated markets (such as South Korea, the Nordics and, to some degree, the Netherlands) subscriptions are showing some sign of edging towards a wider audience (though still far short of mainstream).  In most major music markets though, they remain firmly locked in single digital percentage adoption ranges. They are niche services for the high spending aficionados.

maturation effect

But this isn’t solely a music subscription problem.  It is a dynamic of digital subscriptions more broadly.  Take a look at the US. In 2014 net new subscribers (i.e. the amount of subscribers by which the market grew) fell to 1.5 million, down from 2.8 million in 2013 – which translated to a 46% decline in net adds.  And that was in one of the highest profile years yet for subscriptions.  Over the same time period, Netflix’s net new US subscriber growth fell from 6.4 million to 5.7 million, which was a more modest 11% decline in net adds.

This is not to say either business model has run its course – far from it, and of course both sectors still gee in 2014 – but instead that premium subscriptions are not mass market value propositions. And once you have mopped up your early adopters and early followers growth inherently slows.  The music industry may be locked in an identity crisis over how it deals with freemium services, but it needs to have a realistic understanding of just how far subscription services can go without lower price tiers and more ability for users to easily dip in and out and, ideally, pay as they go rather than being tied to monthly commitments.

The incessant success of YouTube and Soundcloud show us that mainstream consumers want on-demand music experiences but the slow down of subscriber growth in the US shows us that the incumbent model only has a certain amount of potential. Sure, Apple will doubtlessly unlock a further tier of early followers to meaningfully grow the market, but it will only be a matter of time before it hits the same speed bumps.

Access based models are the mainstream future, subscriptions can be too, premium subscriptions though are not.

The Problem With Streaming Exclusives

Jay-Z’s ambitions for TIDAL has triggered a lot of discussion about how streaming models can evolve.  One focus has been exclusives with a number of references to TIDAL ‘doing a Netflix’ by commissioning exclusives.  Netflix can attribute much of its growth over the last couple of years to its flagship ‘Netflix Originals’ such as ‘House Of Cards’ and ‘Orange Is the New Black’.  It is an appealing model but the Netflix Originals approach cannot so easily be transferred to music.

There are three main types of exclusives:

1.    Service Window: album is released exclusively to a single music service for a fixed period of time e.g. only on TIDAL for 1 month

2.    Tier Window: album is released across one type of music service tier before others e.g. only on paid subscription tiers for 3 months

3.    Service Exclusive: music service acquires exclusive rights to an album so that it will never appear anywhere else unless the service decides to let it

The first two will become increasingly common components of the streaming landscape over the next couple of years.  Daniel Ek and Spotify fought a brave rear guard action against Taylor Swift and Big Machine to ensure the Tier Window model did not carve out a beachhead with ‘1989’ but it is an inevitability.  If free tiers are to have a long term role alongside paid tiers they have to be more clearly differentiated.

TIDAL and Apple look set to become the heavyweight players in the Service Window, duking it out for the biggest releases.  TIDAL will argue it pays out more to rights holders (75% compared to 70%) while Apple will argue that it can directly drive download sales (which is where everyone still makes their real sales revenue).  Apple will have to play that card carefully though as it stands just as much chance of accelerating download cannibalization as it does driving new sales.

When Is A Label A Label?

The really interesting, and potentially most disruptive, exclusive is the Service Exclusive.  This model would start blurring the distinction between what constitutes a music service and what defines a record label.  If, for example, TIDAL was to buy out the rights of the next Beyonce album or sign a deal for the next two Calvin Harris albums TIDAL would effectively become the record label for those releases.

The irony is that this ‘ownership of the masters model’ by streaming services is emerging just as the next generation labels are distancing themselves from it.  A new breed of ‘labels’ such as Kobalt’s AWAL and Cooking Vinyl’s Essential Music are focussing on providing label services without taking ownership of the masters and in turn putting the label and artist relationship on a more equitable agency / client basis.  But there are far more impactful challenges to the Service Exclusive model for music than simply being out of step with where the label model is heading:

  • Scarcity: ‘House Of Cards’ is only available on Netflix (and some download to own stores such as iTunes). It is a scarce asset, which is not something that can be said about any piece of recorded music.  As TIDAL found with the near instantaneous Beyonce YouTube leak, music scarcity is ephemeral in the YouTube age.  As long as YouTube is allowed to hide behind its perverse interpretation of ‘Fair Use’ and ‘Safe Harbour’ there will be no music scarcity.  (Of course true scarcity is gone for good, but if that can be made to only mean P2P then the problem is manageable, as it is for TV content).
  • Consumer expectations: Consumers have learned to expect their video experiences to be fragmented across different platforms and services, to not find everything in one place.  For music consumers however the understanding is that catalogues are either near-complete or useless.  So if all music services suddenly started having high profile gaps then subscribers would be more likely to unsubscribe entirely than they would be to take up multiple subscriptions.  Ironically the net result could be a return to download sales at the expense of subscriptions.  Talk about going full circle….
  • Industry relationships: Netflix started out as a pure licensee, paying TV companies for their shows.  Now it competes with them directly when commissioning new shows.  It has become a frenemy for TV companies and is finding many of its relationships less favourable than before.  And this is in an industry that is built up the frenemy hybrid licensee-licensor model.  The music industry does not behave this way, so any service that took up the Service Exclusive model could reasonably expect itself to find itself developing tense relations with labels.  Which could manifest in those labels giving competitor services preferential treatment for their own exclusives.  Labels have long feared the disintermediation threat posed by the web.  It is unlikely to materialize any time soon but they are not exactly going to encourage retail partners to kick-start the process.
  • Appetite for risk: Buying up the rights to the latest release of an established superstar is the easy part, and we already have some precedents though neither were exactly run away successes (Jay-Z’s ‘Magna Carta Holy Grail’ with Samsung and U2’s ‘Songs Of Innocence’ with Apple).  But being a label, at least a good one, isn’t simply about signing proven quantities, it is about taking risks on new emerging talent.  And that doesn’t simply mean having a DIY platform on a streaming service – though that can act as a great talent identification tool.  If streaming services want to start playing at the label game they need to also start nurturing and marketing talent.
  • Limited horizons: Stream is still only a small fraction of recorded music revenue.  There are few non-Nordic artists that rely on streaming for the majority of their sales income.  That will change but not for a few years yet.  So a release that only exists on streaming, let along a single streaming service, is only going to deliver on a fraction of its potential.  TIDAL and Apple especially could easily choose to loss-lead and pay over the odds for Service Exclusives to ensure artists aren’t left out of pocket.  But that only fixes part of the problem.  An artist locked into one single streaming service will see his or her brand diminish.  ‘House Of Cards’ may be one of Kevin Spacey’s most assured performances yet only a few tens of millions of people globally have ever seen it.  If it had been on network TV the audience would have been hundreds of millions.  With touring becoming the main way many artists make money the album is the marketing vehicle and if that album is locked behind the pay wall of one single music service the marketing potential is neutered.

Streaming music services will find themselves locked in total war over the coming years and while Apple’s cash reserves will likely make that warfare appear asymmetrical at times, exclusives of some kind or another will be utilised by most of the services.  Just don’t expect them to deliver them Netflix-like success because that’s not going to happen.

The Music Industry’s 6:1 Ratio

One of the many things that the digital revolution has done to the music industry is to create and accentuate a number of imbalances. Imbalances that will either change, become the foundations of the next era of the music business, or both. In fact there are three key areas where, coincidentally, the lesser party is 6 times smaller than the other: 6 to 1

  • Digital music revenue share: A common refrain from songwriters and the bodies that represent them (music publishers, collection societies etc.) is that everything starts with the song. And of course it does. However it is the recorded version of the song that most people interact with most of the time, whether that be on the radio, on a CD, a download, a stream or a music video. This has helped ensure that record labels – usually the owners of the recorded work – hold the whip hand in licensing negotiations with digital music services. Labels have consequently ended up with an average of 68% of total on-demand streaming revenue and publishers / collection societies just 12%. The labels’ share is 6 times bigger. Publishers are now actively trying to rebalance the equation, often referred to as ‘seeking out a fair share’. For semi-interactive radio services like Pandora the ratio is roughly 10:1.
  • Artist income: While music sales declined over the last 10 yeas, live boomed. And although there are signs the live boom may be slowing, a successful artist can now typically expect to earn as little as 9% of their total income from recorded music, compared to 57% from live. Again, a factor of 6:1. There are many complexities to the revenue split, such as the respective deals an artist is on, fixed costs etc. but these splits tend to recur. Ironically just as everything starts with the song for digital music, everything starts with the recorded work (and the song) for the live artist. The majority of an artist’s fan base will spend most of their time interacting with the recorded work of the artist rather than live. The recorded work has become the advert for live. In fact the average concert ticket of a successful frontline artist costs on average 8 times more than buying their entire back catalogue. Thus for fans the ratio is even more pronounced at 8:1.
  • Free music users: The freemium wars are dominating the contemporary music industry debate. Spotify and other services that have on demand free tiers are under intense scrutiny over how these tiers may be cannibalising music sales. However YouTube’s regular free music user base is about 350 million compared to approximately 60 million free freemium service users across all freemium services. Again a ratio of 6:1. Whatever the impact freemium users may be having, it is 6 times less than YouTube.

The music industry has never been a meritocracy nor will it ever be one. So it would be fatuous to suggest equality is suddenly going to break out. However there will be something of a righting process in some areas, especially in the digital music revenue share equation. Most significantly though, these ratios are becoming the foundational dynamics of the new music industry. These are the reference points that artists, rights holders, and all other music industry stakeholders need in order to understand what their future will look like and how they can help shape it.

NOTE: This post was updated to reflect that the songwriter ratio is actually 10:1 for semi-interactive radio.  The 2:1 ratio applies to label revenue versus collection society revenue, which includes revenue for performers who are often but not always also the songwriter.

A Manifesto For The Future Of Free Music

In the thankfully long gone days of DRM downloads it could be fairly said that ‘music was born free yet everywhere it is in chains’. Now it is free of DRM and, for most consumers, of price also. Of course the majority of consumers have always spent most of their time listening to music for free via TV or radio. But the internet transformed free into something that was every bit as good as the paid for product. So yes, most people have always listened to music for free most of the time, but they listened to what broadcasters decided they would listen to. In the old model free music was something that would sate the appetite of the passive fan but was not be enough for the dedicated fan. Free music thus very clearly played a ‘discovery’ role for the core music fans. On demand free though has changed the equation entirely. For many consumers the free stream is the destination not the discovery journey. So 50 million YouTube views is no longer a marketing success but instead x million lost sales or paid streams.

For younger consumers the picture is particularly stark. 56% stream for free, 65% listen to music radio and 76% watch YouTube music videos. Compare and contrast to over 25s where the rates are 35%, 47% and 76%.   In short, free is more likely to be something that drives spending among over 25s because it is predominately programmed while among under 25’s it is less likely to do so because it is on demand.

Free needs recalibrating. Here are a set of objectives to help fix free, a Manifesto for the Future of Free Music:

  • Set the objectives: One of the problems with free is there is too little clarity around what purpose it is meant to serve. And this is because it is simultaneously serving multiple purposes: to monetize the masses (ad supported), to drive sales (discovery), to drive subscriptions (freemium). All three are worthy goals but unchecked each one also competes with the other. A consistent industry vision is needed.
  • Programme more: Free has a massive role to play in digital music, but it needs to better targeted. A super engaged music fan should not be able to sate their on demand appetite on free. In short, free music needs to be less on demand and more programmed. That is not to say YouTube or Soundcloud need to become Pandora, but they do need to explore meeting somewhere midway.
  • Use data to segment: It is not enough to simply say users can choose between different services, they services need to better use their data to determine who gets what experience within them. Someone who watches 20 YouTube music videos a day is clearly a target for a Music Key subscription. That person should not just be marketed Music Key, s/he should also have their free experience progressively dialled down to push them towards it.
  • Fix the models: Pandora is a highly viable ad business that happens to have a radio service built on it. There is a world of difference between Pandora’s ad business and Spotify’s. Spotify’s deals with the rights holders essentially preclude it from making free a viable business, which is fair enough. But it does create the unfortunate vicious circle of there never being a case for Spotify investing enough in ad sales infrastructure to drive up CPMs enough to boost ad supported revenue. Labels and publishers need to think hard about what tweaks may need to be made to business models if they want freemium services to be strong enough financially to drive a vibrant subscription market. Not fixing the models will only skew the market to the companies with ulterior business models who can afford to perpetually lose money on free.
  • Don’t give up on free fans: A generation weaned on free music will grow up craving more free music. Just because free dominates younger consumers’ digital lexicon now does not mean that it will inherently always do so. Don’t give up on the lost generation of music consumers with the default position of free.
  • Strike the right balance: This is simultaneously the most important and most difficult part to get right. YouTube, Soundcloud and Spotify’s free tier are legal alternatives to piracy. Turn back the dial too much on the legal sources and illegal ones will flourish again. However the fact that more than a third of free streamers use stream ripper apps to turn streams into downloads means that the distinction between licensed and pirated has long since blurred. Nonetheless the balance needs to be better struck, probably somewhere equidistant between YouTube and Pandora. Ultimately it will require lots of real time honing and perfecting to get the right mix.

Free music will always be part of the equation and it has become a key part of the music industry’s armoury. But there is a difference between a controlled burn and an out of control forest fire. The freemium wars have already accounted for some high profile scalps and more controversy will follow. Free will remain a crucial part of the landscape but it is time for a reassessment of its role and that must encompass all elements of on demand free, not just Spotify.