Streaming Hits 67.5 Million Subscribers But Identity Crisis Looms

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For our recently published MIDiA report ‘State of the Streaming Nation’ we conducted an exhaustive programme of research to assess the global streaming music market, from each of the consumer, market and service perspectives. In pulling together subscriber numbers for each of the music services (there’s a full table in the report) we found that there were 67.5 million subscribers globally in 2015. That was 24 million more subscribers compared to 2014 (also nearly double the number of new subscribers in 2014). It is clear that global subscriptions are gathering pace. However, all is not as it may at first appear:

  • Zombies still walk the streaming streets: Back in 2013 I ruffled a few feathers highlighting the issue of zombie subscribers, music subscribers that are recorded in the headline numbers but that are actually inactive, normally because they are on telco bundles. Fast forward to 2016 and the issue is more firmly in the public domain due to Deezer’s IPO filings. Zombies coupled with overstating by music services accounted for around 12 million subscribers in 2015 so the active ‘actual’ subscriber number was nearer 55 million.
  • Emerging markets are gaining share: Emerging markets will play a key role for streaming over the next few years. They are already driving growth for Apple and Spotify and they will collectively bring the most dynamic growth with western markets nearing saturation for the 9.99 price point. Much of the growth though will come from indigenous companies, such QQ Music (China), KKBOX (Taiwan), MelOn (South Korea) and Saavn (India).
  • Free still dominates: For all the scale of of subscriptions, free still leads the way with free streaming services accounted for nearly 600 million unique users (1.3 billion cumulative users if you add together the user counts of all the services). Free thus outweighed paid by a factor of 10-to-1.

Streaming’s Identity Crisis

Streaming must overcome its identity crisis. Depending on where you sit in the music industry, streaming is either the future of retail or the future of radio. It can be both, but there is increasing pressure for it to be retail only. That would see only a fraction of the opportunity realised. Throughout its history, a small share of people have accounted for the majority of spending. Casual buyers and radio accounted for the rest.

17% of music buyers account for 61% of spending. These are the people who are either already subscribers or that will become subscribers over the next couple of years. Which leaves us with the remaining 83% of consumers. The majority of these listen to radio while a growing minority use free streaming (mainly YouTube). The question the music industry must now answer is how seriously does it want to treat the opportunity represented by these consumers? Does it want to only serve its super fans or does it also want to be global culture? Radio enabled music to be global culture in the 20th century, free streaming will enable it to be in the 21st.

The Free Streaming Debate Is As Complex As It Is Nuanced

This is why the free streaming debate is important but also so complex. Yes, too much free music will curtail the opportunity for paid subscriptions, but too little could consign music culture to the margins. With streaming there is an opportunity to monetize a bigger audience at higher rates than radio ever enabled. At the moment free streaming bears the burden of being all about driving sales (either subscriptions or music purchases) but that misses the far bigger opportunity for free in the streaming era: mass monetization.

What we have now is a dysfunctional system. Freemium services have licensing minimas (the minimum that must be paid per stream) that effectively prevent them from building profitable ad supported businesses, while YouTube has licenses unlike any other but is the industry’s bête noire. Only Pandora has a model that is both (largely) acceptable to the industry and (theoretically) profitable. I say, ‘theoretically’ because Pandora could get towards a 20% margin if it wasn’t investing so heavily in ad sales infrastructure and other companies.

Out of those three disparate models an effective middle ground can and should be found so that the streaming debate becomes one of free AND paid rather than free VERSUS paid. Then we will have the foundations for creating a market that enables subscriptions to thrive within their niche and for global audiences to be monetized like never before.

Spotify’s Billion Dollar Challenge

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Spotify just changed the rules of the game, raising an unprecedented $1 billion in convertible debt. I’ll leave the financial analysts to pore over the financial permutations (and there are plenty) but there are a few key strategic implications:

  • This is an IPO war chest: Spotify is effectively priced out of trade sales for two reasons 1) it has received so much funding that its valuation is astronomic (somewhere close to $10 billion) and 2) the competitive market has changed so much that most companies that were potential buyers 3 years ago no longer are. Samsung neither has the growth story nor the music focus any longer, Microsoft is almost out of the game, Sony is out of the game, Apple couldn’t admit defeat so soon, Amazon is focused on the mass market and Google is focused on YouTube. So an IPO is the only realistic option and for that….
  • Spotify needs a growth story: To achieve an IPO valuation as high as Spotify needs, it is not enough to just be the leading player, it needs to be seen to be growing at a healthy clip, especially with Apple constantly making up ground and still odds on to be the long term market leader. Wall Street needs growth stories. Just look at what has happened to Pandora, a company with stronger fundamentals and a more secure licensing base. Yet Pandora has lost billions of market cap because Wall Street hasn’t warmed to the long term mature company story.
  • Growth will come from three key areas: The $9.99 model only has finite opportunity. The top 10% of music buyers only spend $10 a month on music. So to grow beyond that beachhead Spotify has to grow where the market isn’t yet mature (emerging markets), make the offering feel like free (telco deals) and make the offering feel super cheap ($1 for 3 months promos). All, in different ways, cost, which is where much of this money will be spent, along with hefty marketing efforts.
  • Some of it will be spent on strategic acquisitions: Small music services around the globe will be hastily editing their investor decks, pitching for an acquisition or hoping Spotify will come calling uninvited. But there aren’t too many realistic targets. Soundcloud would probably cost most of the raise, and Spotify would have the same problem Soundcloud now has of trying to force a 9.99 model on a user base it doesn’t fit. TIDAL wouldn’t be cheap either and besides a bunch of exclusive rights for some super star artists, would only add 10% to Spotify’s user base, less after all those users who came in for ‘Life of Pablo’ churn out. A more realistic bet would be for Spotify to target a portfolio of niche services that would add little to its user base but would communicate to the street that it is set up for super serving niches to grow its user base.
  • All bets are on Spotify: For the last 2 years the recorded music industry, the majors in particular, has been holding its collective breath. If Spotify has a successful IPO it will likely spur an inflow of much needed investment to the space. If it doesn’t then it is back to the drawing board. In many respective that should happen anyway. The 9.99 subscription model is incredibly difficult (perhaps impossible) to run profitably at scale.

The next 6 months will be ones of hyper activity for streaming, and don’t expect Apple to take this lying down. Await the battle of the gargantuan marketing budgets. Even if no one else does well out of this, the ad agencies will make hay.

 

Quick Take: Soundcloud Goes Premium

 

SoundCloud_logo.svgFollowing weeks of licensing announcements, Soundcloud has finally launched its premium subscription service, a $9.99 tier ($12.99 on iOS), currently only in the US. The move is both encouraging and disappointing. Soundcloud has a truly unique market footprint and has the potential to be a platform for an entirely new approach to monetizing streaming music. But it is also a poor fit for a cookie cutter $9.99 freemium model.

Soundcloud has a whole set of unique challenges and characteristics that make it so different than the rest of the pack:

  • Artist-first experiences: Unlike its now-direct streaming competitors Spotify and co, Soundcloud is an artist-to-fan platform. Most streaming services are effectively a music-store-meets-HBO hybrid. A place you go to get music. Music as a service, or even a utility. Soundcloud is that as well of course, but it is first and foremost it is a place where artists connect directly with their fans. A $9.99 All You Can Eat (AYCE) is not the right model for a place where fans go to engage with artists rather than looking to turn on the water tap.
  • This is a pivot for Soundcloud: Unlike Spotify and Deezer, whose free tiers have long been geared towards driving subscriptions, for Soundcloud this is not a funnel tweak, it is a pivot. It is a complete change in strategy.
  • Competing against free: The problem with giving something away for free for years is that its really difficult to convince people to start paying for it. It is the same challenge YouTube faces with YouTube Red Which is why instead of simply whacking a pay wall around previously free content, YouTube is investing so much in creating new original content only available on Red. In short, Soundcloud needs to explore how it can deliver new, unique value to paid users rather than simply charging them for what they already get (plus a few convenience features).
  • Non-traditional content: Soundcloud’s strength lies in the music that you just don’t find elsewhere, much of which also happens to be dance music. All of the mash ups, bootlegs, un-authorized remixes, 2 hour long mixes are what make Soundcloud such a valuable component of the music landscape. The only problem is that most of them are not covered in standard major label licenses. In fact, many of them aren’t covered at all. Even Dubset, which is trying to build a business around this type of non-traditional content, hasn’t yet been able to get a full suite of licenses in place. For now, it appears that the majors are willing to turn a blind eye to that content. Which raises an interesting question: who gets paid for the revenue generated by unlicensed tracks?
  • Major labels are shaping an indie platform: Major label content is a massive part of Soundcloud but not the majority. In fact, in dance mixes majors typically account for only 30% of the tracks. Yet it is the major labels that are shaping the future of Soundcloud, forcing it down a road that works well for majors on the AYCE services but could skew Soundcloud against its indie community.

No doubt, Soundcloud had to get licenses in place. It had traded on label good will for long enough. But the current model will not maximise Soundcloud’s vast potential. Instead of Spotify-like 15-20% conversion rates instead expect King and Supercell-like 1.5-5% rates. Let’s hope this is simply a hygiene release, preparing the way for a set of products that fit Soundcloud like a glove rather than odd boots. What could a next iteration look like? Well for a start it could be artist focused and secondly it could be cheaper. Imagine a $4 a month, 5 artist subscription that gives you everything by your favourite artists, including premium-only exclusives. Every month you can swap any number of those artists for different ones for the next month. That is the sort of thinking that needs to be applied to Soundcloud’s subscription business if it is going to live up to its capabilities. The alternative is being condemned to being a freemium also-ran.

The Labels Still Don’t Get YouTube And It’s Costing Them

This is the fifth post in my YouTube economy series. You can read the other posts here, here,here and here

2015 was the year that streaming came of age across global markets (it had already got there in the Nordics and South Korea of course). In the UK and the US stream volumes grew by 85% and 93% respectively in 2015. These markets matter because they are the 1st and 4th largest recorded music markets and between them account for 40% of global revenue. But as strong as a validation of the music streaming model as those numbers might be, the real success story here isn’t Spotify, Deezer or Apple Music…it’s YouTube. In both the US and UK YouTube outgrew audio streaming services. With YouTube delivering so much less back per stream to rights holders than freemium audio services and the whole issue of safe harbour and un-monetized tracks (however good Content ID has gotten) it is little wonder that the record labels are having an identity crisis over YouTube. Indeed, as I wrote last year, the YouTube discovery journey has become the consumption destination. The advert has become the product. But there’s even more to it than this. Not only is YouTube outperforming the audio pure plays, music is being outperformed on YouTube by its growing body of native creators, the new generation of YouTubers.

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YouTube started out as a place simply to watch (and upload) videos but has evolved into a sophisticated entertainment platform that supports a multitude of diverse use cases, both in terms of content and audience. Nowhere is this more pronounced than in channel subscriptions. In many respects ‘channel’ isn’t the most appropriate term as they are in effect talent feeds rather than channels in a traditional video / TV sense. Nonetheless, or perhaps because of this, they have become the lifeblood of native YouTube creators as diverse as Michelle Phan, PewDiePie, Zoella, SMOSH, stampylongnose and IISuperwomanII.

These are creators who often do everything from writing, filming, production through to front-of-camera. DIY superstars if you like. And they are fast becoming the lifeblood of YouTube. Of the 330 million subscriptions in the top 50 YouTube channels, YouTubers account for 34%. Compare and contrast with the measly 15% music artist and label channels have. And despite all the excitement around the increased subscribers Adele and Justin Bieber have racked up these last few months – they gained 8 million subscribers between them, making them the two fastest gainers across all of YouTube – music artists as a whole lost ground, accounting for just 31% of the top 50 gains during the last 90 days compared to 53% for YouTubers.

Music Is Losing Ground To Native YouTubers

Music does fare better in terms of views with 36% of the 41 billion top 50 views in the last 90 days. However it still plays second fiddle to YouTubers who account for 45%. But it is the direction of travel that reveals the most telling trend. Over the last 90 days 42% of the 50 top 50 growing channel views compared to 39% for music. In itself that may sound like a modest difference, but this is just the latest 90 day chapter in a much longer story. Music used to be the clear focal point of YouTube but that is changing. In terms of all time views music actually outpaces YouTubers with 42% compared to 41%. But at current rates that lead will be wiped out in the next 90 days. And here’s the paradox: music’s hold on YouTube is slipping even though YouTube is outperforming music services.

Part of driving force is out of the hands of the labels: video is eating the world, with more than 5 trillion short form views in 2015 alone. Music is always the first mover in digital content consumption, the trailblazer for other media. Once distribution, bandwidth and consumer sophistication all improve, video moves in.

Time To Stop Using YouTube Like School Kids Use Instragram

But record labels and artists can seize some control of their destiny, by taking a more sophisticated view of YouTube and exploring how to build strategies that work for YouTube in 2016 not for YouTube in 2010.  Right now record labels are using YouTube like school kids use Instagram, obsessing with vanity metrics such as views rather than thinking more deeply about how to build lasting relationships with YouTube audiences. A new generation of music artists is emerging that have created and nurtured audiences on YouTube, often with little or no help from labels. Artist like Dave Days, Tyler Ward, Boyce Avenue and Hannah Trigwell have built their fanbases on YouTube, often starting with covers but also crucially often non-music content such as parodies and vlogs. Raised in YouTube these artists are entirely native to the platform. They understand what audiences want because that’s where they come from.

If the big traditional artists and labels want to start making up some ground on the YouTuber revolution they could do worse than take a few hints from this new breed of YouTube artist.

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.

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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.