Can Spotify break out of its lane?

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

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

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

Rights holder licensing met market demand

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

DSPs occupy one of streaming’s lanes

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

An increasingly segmented market

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

Time to do a Facebook?

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

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

Hi-Res audio: It’s all about a maturing market

Apple and Amazon made a splash this week by integrating Hi-Res Dolby Atmos audio into the basic tiers of their streaming services. The timing, i.e. just after Spotify started increasing prices, is – how shall we put it, interesting. It also struck a blow against the music industry’s long-held hope that Hi-Res was going to be the key to increasing subscriber ARPU. While that might be true, for now at least, the move is an inevitable consequence of two streaming market dynamics: commodification and saturation.

Music streaming contrasts sharply with video streaming. While the video marketplace is characterised by unique catalogues, a variety of pricing and diverse value propositions (including a host of niche services) music streaming services are all at their core fundamentally the same product. When the market was in its hyper-growth phase and there were enough new users to go around, it did not matter too much that the streaming services only had branding, curation and interface to differentiate themselves from each other. Now that we are approaching a slowdown in the high-revenue developed markets, more is needed. Which is where Hi-Res comes in.

Now that streaming is, as Will Page puts it, in the ‘fracking stage’ in developed markets, success becomes defined by how well you retain subscribers rather than how well you acquire them. As all the key DSPs operate on the same basic model, they need to innovate around the core proposition in order to improve stickiness and reduce churn. Spotify started the ball rolling with its podcasts pivot, but the fact that its podcasts can be consumed by free users means it is not (yet) a tool for reducing subscriber churn.

On top of this, when podcasts are mapped with other positioning pillars, Spotify’s competitive differentiation spread is relatively narrow. Because Apple and Amazon now both have Hi-Res as standard, they not only boost audio quality but value for money (VFM) as well. Bearing in mind, both companies already scored well on VFM because they have Prime Music and Apple One in their respective armouries. 

It is Amazon, though, that looks best positioned of the four leading Western streaming services. In addition to audio quality and VFM, it is building out its podcasts play (as compared to the Wondery acquisition) and it has the potential to bundle in the world’s leading audiobook company, Audible. Given that spoken-word audio consumption grew at nearly twice the rate music did during 2020, being able to play in all lanes of audio will be crucial to competing in what will become saturated streaming markets. 

Immersive audio storytelling 

Finally, Dolby Atmos is more than simply Hi-Res audio; it is an immersive format that enables the creation of spatial audio experiences. If we are truly on the verge of a spoken-word audio revolution, then immersive audio may have a central role to play. Surround sound has been a slow burner for home video, but that may be because the video experience itself has improved so much (bigger screens, HD, more shows than ever) that the audio component has been less important (though the growing soundbar market suggests that may be beginning to change). However, in audio formats there is only the audio to do the storytelling. This could mean that tools like immersive audio become central to audio storytelling, which means, you guessed it, Amazon and Apple would then have a competitive advantage in podcasts and audiobooks that Spotify would not.

YouTube at two billion: Still much more music opportunity to be had

YouTube just announced its milestone of reaching two billion music users on the platform. YouTube has long been the largest music service on the planet, and it has just extended that lead. In 2019, its official total user number was two billion. Lockdown has proven to be a growth driver of epic proportions. 

Nicely timed to (accidentally!) coincide with YouTube’s announcement is third edition of MIDiA’s biannual ‘State of the YouTube Music Economy’ report. This report, which provides a detailed analysis of YouTube’s contribution to the music business, put YouTube’s music user number at 1.2 billion for the end of 2019. Of course, all this comes at a time when European legislators are discussing how Article 17 of the European Copyright Directive will be implemented and therefore impact YouTube’s business (potentially a very convenient time to release a stat of this magnitude?). 2020 has proven to be a big year for YouTube – but equally, make no mistake: YouTube and music rightsholders are still not on the same page. 

One of the biggest issues regarding the YouTube music economy is that music, while performing and growing strongly, still underperforms commercially compared to other content genres on the platform. This is because music videos are not as well suited to YouTube’s monetisation mechanics as genres such as games. For example, the videos are too short to have mid-roll video ads and most music channels (Asian and Latin American ones excepted) are artist-centric, so simply do not have enough content to drive channel engagement. While there are constraints on what can be done with a music video, there is nonetheless a lot of scope for innovation and increasing music’s share of YouTube revenue.

Google is now the second largest global payer of music royalties, with $5.2 billion across free and paid as well as masters and publishing. Spotify is comfortably ahead, but the scale of Google’s royalty contribution is pronounced.

In 2019, YouTube generated $15.2 billion in ad revenue with $4 billion of that music related (this figure includes income for labels, publishers and YouTube etc.). While that was an impressive increase of 18% on 2019 it was much slower than the 36% growth in overall ad revenue. Consequently, music’s share fell from 31% to 26%. Music rightsholders might point to this being evidence of YouTube not paying enough for music, but it pays pretty much the same revenue share to all of its creators. So, there is clearly more that music can be doing to ensure that it can grow at a rate closer to that of other content genres. 

Currently, YouTube is becoming more important to music than music is to YouTube. The one billion views club is becoming the de facto Platinum ‘sales’ award for the streaming era, and there are now 208 music videos that have reached the milestone with 74 videos reaching it in 2019/20 alone. YouTube continues to dominate the global music streaming market, with 47% music weekly active user penetration, ahead of Spotify in second place at 29%. Being the most widely used music streaming app across all ages, with weekly active usage highest among 16-19 year olds at 70% penetration, YouTube is simultaneously a key ad-supported, premium, marketing and discovery asset for artists and labels. Against this setting, the debate around rights holder royalty rates continues to rage. 

Are rights holders missing the point with Twitch?

Twitch has apologised to its users for the growing volume of rights holder takedown notices for music used in Twitch videos. Twitch is in an awkward transitionary phase with music rights holders, not dissimilar to where YouTube was when it was acquired by Google. 14 years on from that acquisition, YouTube’s relationship with rights holders is in a better place but short of where it should be. Article 17, weaving its way between the competing lobbying efforts of rights holders and tech platforms, is just the latest mile marker on a long and winding rocky road. Twitch, like YouTube, does not fit the licensing norms of most streaming services, resulting in repeated stand offs. But just like the music industry still hasn’t grasped the full potential of YouTube, it may be making a similar mistake with Twitch.

Firstly, for sake of clarity, MIDiA firmly believes that copyrighted work should be used correctly and remunerated. We are not, in any way, suggesting that a platform should be able to use music without permission. However, the current licensing structures are:

1. Not flexible and agile enough to truly capitalise on user-generated content (UGC) music (a market which will be worth $4 billion by year end – download our major new FREE report on UGC music here)
2. YouTube and Twitch represent an opportunity to create new growth drivers, especially for artists, that can help fix the ‘broken record’

A lack of sync in sync

Let’s address the first point, well, first. Platform-native creators on YouTube, Twitch and TikTok create content so frequently they make the music industry’s volume and velocity problem look like child’s play. Usually, creators who want music in their videos have a choice: 1) get sync licenses, 2) get library music, 3) use music without permission and get taken down or demonetised. 

The problem with option one is that sync clearance is a lengthy process that can take weeks and cost a lot. Not a great fit for creators who create and upload videos the same day. Companies like Lickd are trying to fix this with catalogues of pre-cleared music, but the industry as a whole is moving too slowly. For the record, MIDiA’s preferred solution is for platforms securing large ‘sandboxes’ of pre-cleared tracks for creators and developers to work with. An early example of this is the NFL making all of its soundtracks available for creators on a Synchtank powered site.Unless music rights holders want to cede the growth in the music UGC space (which will be worth $5.9 billion by end 2022) to library music companies, they need to put alternative approaches at the core of their licensing strategy, not simply pursue them as interesting ‘edge’ experiments.

Going beyond the stream

However, the biggest music industry opportunity is not licensing music. It is monetising fandom. The #brokenrecord debate has shone a light on how streaming’s scale benefits do not trickle down at a sufficient rate to creators. Artists compete for tiny bits of highly valuable ‘real estate’ – playlists, artist profiles etc – but most often do not get enough to earn a living. While efforts like user-centric licensing and better songwriter rates will help, they will not change the underlying fundamentals of streaming economics. The counter argument is that scale will change everything, but:

• Average revenue per user (ARPU) is falling. Spotify’s premium ARPU fell 34% between Q1 2016 and Q3 2020, a 34% decline
• Streaming growth is slowing in developed markets
• Consumption is slowing – last quarter Spotify reported an increase in consumption hours to pre-COVID levels but as there were 49 million new monthly active users (MAUs) compared to pre-COVID this implies a reduction in hours per user
• Emerging markets are growing but a) ARPU is lower and b) domestic repertoire will drive most of the long-term consumption – so this means only a small uplift for Western creators

Before live stopped, streaming existed in a mutually beneficial ecosystem, giving artists more fans for concerts and merch. Now that live is out of the equation, streaming isn’t enough. 

This is where platforms like YouTube and Twitch can come in. They enable creators to build loyal fanbases of which they can monetise the loyal core to build sustainable careers. The idea of ‘1,000 True Fans’ was first put forward years ago by Kevin Kelly but now the dynamics of social platforms have made this a realistic possibility for any creator. Nevertheless, music artists are still way off the pace. 

Micro-communities

Twitch and YouTube enable creators to build (often small) loyal fanbases that can generate them income that far exceeds what artists get from streaming. MIDiA terms this dynamic ‘micro-communities’ and we think it will be one of the trends that will shape the music business in 2021 and beyond. As part of our creator tools research we will be exploring how platforms like Splice and Landr will be able to build their own artist-fan communities that can be as valuable to artists as Bandcamp is to many already. 

Streaming created a superstar economy where even within the non-superstars, superstars exist. For example, Tunecore states it has ‘thousands’ of artists that make more than $100,000 a year. A simple bit of arithmetic shows that this means the remainder make less than $100.

Micro-communities represent an opportunity for artists to fill the income gap that streaming leaves without live in the mix. This probably does not reflect a direct revenue opportunity for rights holders – indeed, that would be missing the point. Instead, they can ensure those platforms are supported to empower artist monetisation without speed bumps. Why? Quite simply, rights holders have a model that works for them (streaming), so now they need to support a model that works for their creators so that they can in turn continue to support the streaming model that works for rights holders. 

If the industry does not support this new virtuous circle ecosystem, then it could bring the streaming model crashing down due to creator discontent. 

How YouTube can be a music industry growth driver

In the coming weeks MIDiA will be presenting the third edition of its biannual YouTube music report, State of the YouTube Music Economy 3.0: End of the Beginning. This is a major report that presents the definitive traits of the YouTube music economy, including revenues, royalty payments, streams, subscribers, user behaviour and user demographics. One of the key themes in this report is how the music industry, or at least the Western music industry, is failing to capitalise on the revenue potential of YouTube. Royalty rates play a part, and Europe’s Article 17 will have some role (exactly what is yet to be determined) in changing this. However, music rightsholders can also get more out of YouTube by better utilising the dynamics of the YouTube economy. As subscription growth slows in developed markets, YouTube has the potential to be a major revenue growth driver.

Music does not naturally fit YouTube’s channel template. YouTube’s ‘channels’ are better considered talent and content feeds; they perform the same role as following a creator on TikTok or Instagram, ensuring that the subscriber gets immediate access to all the latest content without having to go looking for it. Most artist channels on YouTube deliver content infrequently and, crucially, only sporadically. YouTube audiences expect more from YouTube channels. This approach implicitly treats YouTube channels as fan clubs rather than the content feeds that they are designed to be. 

Treat channel subscribers like you would friends

It does not need to be this way. In fact, an emerging breed of non-Anglo music channels are finding success by doing things differently. Across the top 10 most subscribed music channels on YouTube, one is Brazilian, two Indian and one Korean. Unlike the Anglo artists that make up the remainder of the top 10, these four channels deliver a frequent, regular flow of content. The contrast between the two approaches to content is clearly visible. The top three non-Anglo channels had uploaded more than one video a day for the first 10 days of October. Of the Anglo artists, however, only Marshmello had uploaded a new video recently, while most of the others had not uploaded in months. Ed Sheeran was the worst culprit, with nine months having passed since his last video, his ‘BRB’ logo notwithstanding. Taking nine-plus months off and then simply expecting the audience to still be there, waiting, is little short of arrogant. YouTube subscriber bases need treating like friends. How would you feel if a good friend went dark for nine months and then got back in touch and asked you for something? A similar dynamic is at play here.

Label-led curation and programming

A unifying factor of these top performing non-Anglo music channels is that they are ‘label’ led rather than artist led. Artist-led YouTube strategy is a natural extension of label marketing strategy but it falls short on YouTube because most artists deliver far too little content. Of course, a label-led approach flies against how music fandom has worked for decades (niche afficionado labels excepted) but a genre or label approach alongside artist channels can be a way of driving subscriber engagement and pushing up ad revenues. Yes, Indian music companies are dramatically different entities to Western labels, but the principles can still be translated – and KondZilla (the second-most subscribed music channel) is Brazilian.

Innovating the format 

Then there is the issue of format innovation. MIDiA has been arguing for years that labels should be considering longer formats to complement the core music videos. One way is stitching together curated collections of tracks with chapter markers between each one to create more video ad inventory opportunities. This is something the non-Anglo channels are already doing. For example, in the 10-day sample period, Zee Music Company posted an extended video the ‘Best of Amitabh Bachchan’ that featured ten separate music videos spliced together with chapter breaks.

Despite being so well established, YouTube is growing fast in terms of revenue, audience and views. Yet, music monetization is not growing at the same (watch out for the report for exactly what this divergence looks like). Now is the time to start experimenting with new formats and content strategy. Done right, YouTube monetization can grow strongly for music rightsholders, regardless of what happens with Article 17.

We Are At a Turning Point for Social Music

In recent days we have seen three major developments that, collectively, are a potential pivot point for social music:

1. TikTok close to a US-entity buyout by Microsoft to avoid potential sanctions, following hot on the heels of an India blackout
2. Facebook launched a (US-only) YouTube competitor for music videos
3. Snap Inc signed a licensing deal with WMG and others, also for music videos

As cracks begin to appear in the audio streaming market, there is a growing sense in the music industry of the need for a plan B. This has been driven by growing discontent among the creator community, and a slowdown in revenue growth (UMG streaming revenues actually fell in Q2 as did Sony Music’s); the tail wagging the artist-and-revenue (A&R) dog. The search for new growth drivers is on, and social music – for so long a promise unfulfilled in the West – is one of the bets. TikTok was meant to be a major part of that bet. But with the US future of the app so at risk that a Microsoft US-entity buyout may be the only option, and the continued impact of COVID-19 on core revenue streams, the future is beginning to look a little more troublesome. Perhaps now more than ever, the music industry needs social music to start delivering.

There are three key issues at stake here:

1. How consumers discover music
2. How (particularly younger) consumers engage with music
3. Competing with YouTube

How consumers discover music

Among the under-aged 35 demographic, YouTube is the primary music discovery channel, followed by music streaming, then radio, and only then by social. Streaming discovery is heavily skewed towards tracks and playlists, and away from artists and release projects, which is fine for streaming platforms but impedes building sustainable artist careers. Radio is losing share of ear and YouTube… well, YouTube is YouTube (more on that below), so the music business needs a new discovery growth driver. Social has the potential to be just that. But spammy artist pages on Facebook and more-than-perfect Instagram photos are not it. TikTok, for all its amazing momentum, actually has a really uneven impact on discovery. Some tracks blow up out of nowhere while most do little, and rarely is it because of a smart label marketing strategy but instead because certain tracks just work on the platform and the community leaps on them. For now, TikTok is too unpredictable to plan around. Facebook (Instagram especially) and Snap Inc have a fantastic opportunity to do something special here. They have the audience and the social know-how. Whether they can deliver is a different matter entirely.

How (particularly younger) consumers engage with music

What TikTok lacks in consistent marketing contribution it makes up in consumption. Following on from Musical.ly’s start, TikTok has reimagined how music can be part of social experiences for young audiences. It has made music a highly relevant and integral part of self-expression, something that CD collections and music dress codes used to do in the pre-digital world but that soulless, ephemeral playlists wiped out. While labels pin hopes on TikTok successes to drive wider consumption, the discovery journey is also the destination for most TikTok users – they hear the track in a video and swipe onto the next one. That is no bad thing. This is a new form of consumption, and if TikTok were to disappear or fade then someone else needs to pick up the baton. Whether Facebook and Snap Inc can do so is, again, an open question.

Competing with YouTube

Now we get to the heart of the Facebook and Snap Inc deals. As important as the previous two points are, they were not the overriding priorities of the commercial teams driving these deals. Instead they were focused on expanding the revenue mix and part of that is creating more competition for the notoriously low-paying YouTube. Well, maybe not that low paying after all.

The internet is full of statements from trade associations, rightsholders and creators about how much less YouTube pays than Spotify. YouTube does pay less, because it manages to escape paying minimum per-stream rates for ad-supported videos – but it is a more nuanced picture than lobbyists would have you believe. Firstly, in terms of its Premium business, Google is entirely on par with Spotify. But then, that is the part that is licensed in the same way as the rest of the market.

Ad-supported is a mixed story. In North America, where there is a mature digital ad market, YouTube’s ad-supported average revenue per user (ARPU) is entirely on par with Spotify’s. However, on a global basis, ad-supported ARPU is dragged down by its large user base in emerging markets where digital ad markets are nascent. Spotify’s ARPU is 66% higher, in part because it has to pay minimum per-stream rates, i.e. it pays a fixed rate per stream regardless of whether it has sold any ad inventory against the track. This boosts ad-supported ARPU but it risks making the model unstainable, to the extent that Spotify reported -7% gross margin for ad-supported in Q1 2020 (and note, that’s gross margin, not net margin).

Rightsholders will be hoping for Facebook and Snap Inc to bring a similar level of competition to music video as exists in streaming audio, which in turn may give them a path to higher global ad-supported ARPU rates and a healthier marketplace. However, what will determine that objective is not business strategy but product strategy. The key question is what can they both do with music videos that YouTube cannot? YouTube has years of experience and user data around music videos, Snap Inc and Facebook do not. They will be playing catch-up with a weaker portfolio of content assets: Snap Inc is only partially licensed and both it and Facebook have only licensed official music videos. Unofficial videos (mash ups, covers, lyrics, TV show appearances etc.) account for 25% of the views of the top 30 biggest YouTube music videos. Those videos are crucial in that they provide the lean-forward element for viewers; they are crucial to making YouTube music social rather than just a viewing platform.

YouTube has dominated the music video globally for more than a decade. This might just be the time that this position starts to be challenged. But if Facebook and Snap Inc are going to do that, they will have to bring their product strategy A-game to the field. If they can, then the we may indeed witness a social music turnaround in the West.

The Future of Live

The almost total cessation of live music has sent shockwaves throughout the wider music industry. Though live companies are clearly at the epicentre, labels and streaming services are the in the blast radius too as the gaping hole left in most artists’ income is causing them to question their other income sources, streaming especially – with both labels and DSPs in the sights.

Finding both near- and mid-term fixes for live are therefore crucial for the wider music industry and artist community. There is a big opportunity here that goes far beyond lockdown era. This is more than the future of games and music, it is in fact an alternative future for live music. It is the ultimate lockdown legacy.

MIDiA’s latest subscriber report ‘Recovery Economics: Music, Games, Live Streams and the Future of Concerts’ has just been published and subscribers can read it here. In this blog post I am going to highlight some of the key themes.

Live streaming’s teething pains

From a value chain perspective, Lockdown came too early for live streaming; it is under-developed, under-monetised, under-licensed, under-professionalised. Unfortunately, the live-streaming surge is showing all the signs of a goldrush with a lack of clear structure and the first signs of artist backlash, with some artists feeling that some platforms are relying on them to build their audiences while performing for free.

Furthermore, quality is patchy and artists are becoming concerned with the impact on their brand image. Saturation is another Achilles heel: with traditional performances saturation is negated by artists moving from one city to another. Live streaming has no geographical constraints so the effect of multiple performances is analogous to playing repeated concerts in the same small town.

Virtual concerts, not live-streamed concerts

Arguably the biggest single mistake the music industry made with music streaming was to think of it as a format rather than a paradigm. As a consequence, the (western) streaming services lack differentiation and true feature innovation. We must think of the live opportunity as something that goes beyond live streams. Live streams are just one part of the mix. The true opportunity is virtual experiences, that can range from 100 attendee super-premium intimate sessions, through mass scale ad-supported YouTube streams, to avatars performing in games.

If we start this journey thinking narrowly, the scale of opportunity will be constrained. And right now, the industry needs to get as many virtual event innovations going as it can, because it will have to continue to carry the baton for live for some time yet.

In a best case scenario COVID-19 recedes later this year and we have a small number of limited capacity concerts happening before year end. Alternatively, we may see recurring waves of COVID-19 denting consumer confidence with fewer people wanting to go to concerts even if they could. Either way, artists are not going to get most of their live revenue this year.

It is this post-lockdown opportunity that virtual events need to meet. But there is a lot of work yet to be done. The biggest problem to fix is monetisation.

Fans pay around 80 times more per minute for a real-world live performance than they do for listening to music on paid streaming services. The value exists in the shared moment. The problem with live streaming in its current manifestation is that it is abundant and is delivered in a ubiquitous format that is implicitly low value. If this sector is to become a serious income stream for artists then we have to stop giving it all away for free. What is needed is a sophisticated freemium monetisation model that can cater both to large free audiences and better monetise fans.

A set of principles for virtual events

There is also a lot more that can be fixed. Here are some meta principles that virtual events should adhere to:

• Scarcity (fewer gigs, geo-restricted – Laura Marlin has just announced geo-restricted live streams – let’s make that the trailblazer not an isolated initiative)
• Better production qualities
• More sophisticated monetisation (freemium, pay-to-stay, super premium / VIP etc)
• More sophisticated segmentation of types of shows (not all live streams are the same, but we currently only have a one-size-fits all product
• Better platform segmentation (e.g. big tech platforms can play the role of stadiums and arenas while off-portal destinations like artist apps can host smaller, scarcer, super-premium events)
• Better discovery (the equivalent of the TV EPG needs creating for virtual concerts, Bandsintown has made a decent start but much more needs to be done)
• Better alignment between what artists want and what the platforms want

The birth of a new industry

COVID-19 will likely be a mid- to long-term part of life, so the traditional live sector will face a ‘cost of confidence’ as portions of artists and fans alike will initially stay away. Virtual concerts (live streaming and generative virtual performances) can become an important component of the live music sector as it builds out of lockdown. But it will not get there without concerted efforts to fix the problems that currently define this nascent sector.

A new virtual concert value chain is starting to emerge that traditional live companies are not – yet – well embedded in. The future market will be one defined by both incumbents and insurgents. The big live companies will bet big on virtual but we’ll also see new types of companies like virtual booking agents and avatar agencies. The whole concepts of what a concert is and what a venue is, can be turned on their heads. Fortnite’s Party Royale island is now hosting regular live streamed concerts. With 350 million users, Fortnite can lay claim to being arguably the biggest capacity venue on the planet. This may be the birth of an entire new ecosystem.

Recovery economics

The lockdown lag will create a whole new set of economics across all industries. Driving a recovery during this transition period will require innovation and a willingness to downplay old ways of doing things. For music it will be about exploring new income streams to recast a new music business. The first step is for live streaming to have a product refit that delivers a genuine value exchange for fans if it is to ever get out of its free / charity / tip cul-de-sac and become a genuine income stream of scale.

If you are not yet a MIDiA client and would like to learn how to get access to this report then email stephen@midiaresearch.com

If you are a client and would like to talk to us about the themes covered in the report then schedule an enquiry via enquiries@midiaresearch.com

Ellie Goulding and Billie Eilish Are Streaming’s New Normal

Less than a week into the new decade and we already have the first indications that the streaming rulebook continues to be rewritten faster than the ink can dry on its last entry. Three separate articles, on the surface unrelated, when stitched together create the outline of a new streaming narrative that while firmly rooted in recent developments represents an entirely new chapter for the music industry:

1. Ellie Goulding’s ‘River’ was the UK Christmas number one despite being an Amazon exclusive
2. Jimmy Iovine claims Drake and Billie Eilish each have more streams than the entirety of the 1980s
3. UK streaming revenue growth slowed, adding £191 million in 2019 compared to £210 million in 2019

Fusing consumption and retail

Streaming’s impact is both commercial and cultural, in large part because it fuses what used to be retail and radio. Like some kind of musical nuclear fusion, it smashes discovery and consumption together to create a chain reaction with explosive implications. In the old world, repeated radio spins drove awareness and then sales. In streaming environments, lean-back streams are simultaneously radio-like listens and sales. The distinction does not matter for streaming services – they are focused on user acquisition, engagement and retention, but for labels it challenges the very premise of what marketing campaigns are meant to achieve. It is in this environment that today’s streaming stars are made.

‘More of more’

With streaming services lacking any meaningful way to differentiate, they are forced to compete on who can deliver their users’ the most new music to drive the most listening. This strategic imperative of ‘more of more’ is at direct odds with the objective of any label campaign, which is inherently about ‘more of less’, i.e. listen to this song more instead of more songs. The net result is vast amounts of streams spread widely, but also an environment in which hits become megahits. The songs that get traction experience a domino effect of successive algorithmic decisions, rapidly pushing songs with buzz to a progressively wider number of playlists and users. In the old world this would have been radio airplay success; now it is just volume of streams.

Catalogue Darwinism

Because of the focus on new, streaming-era artists end up with far bigger streaming volumes than older artists that were ‘bigger’ in their respective eras, but an afterthought in the streaming era. Hence, Drake and Billie Eilish being bigger than the entirety of the 1980s. Back in mid-2018 MIDiA published a report predicting that music catalogue was going to decline. We faced a lot of opposition then but now we are beginning to see that catalogue is indeed undergoing a fundamental change. For deep, legacy catalogue, streaming dynamics are stripping out the long tail and boiling down entire decades to a handful of tracks. Think of it this way: if 10% of the artists released in the 1980s were ‘successful’ at the time, and 10% of those were successful enough for their music to still be listened to now, and that the songs that are still listened to are 10% of these artists’ entire 1980s output, then you end up with 0.1% of the music from the 1980s being streamed at any meaningful scale now. Added to that, new music gets pushed to more lean-back playlists so is listened to more times. The multiplier effect for new music acts as a divider for older music. As an illustration, 40 music videos on YouTube have more than one billion views but in October 2019 Guns ‘n Roses ‘Sweet Child o’ Mine’ was the only one from the 1980s that had a billion views.

If you own the rights to those catalogue gems then the value of that asset is arguably higher now than ever before, because it has won the Darwinian game of catalogue evolution. But the rest fall by the wayside.

Ellie Goulding: niche mainstream

So, the current dynamics of streaming programming favour new versus old. It may not always be so, but this is where we are right now. These same dynamics can then be used to create hits – demand creation, if you like. This is where Ellie Goulding comes in. Goulding’s Joni Mitchell cover ‘River’ was an Amazon exclusive yet became the overall UK number one in large part because Amazon ensured it was on just about every holiday-themed playlist. Every time someone asked Alexa to play Christmas music, ‘River’ soon found its way there. Because Echo listening skews so heavily lean-back, ‘River’ simply became part of the sonic festive wallpaper, much in the same way ‘All I Want for Christmas’ did on radio. Just like with radio, lean-back listeners are unlikely to stop whatever else they are doing in order to change the track. Because streaming economics do not differentiate with lean-back and lean-forward listening, passive listening is just as valuable as active listening. Radio has become as valuable as retail but is much easier to manipulate.

The other crucial aspect of this is that Amazon has shown that you only need to find and activate a small slice of the mainstream to have a mainstream hit. As MIDiA first said last year, niche is the new mainstream.

At the start of this post I stated that streaming’s effects are both cultural and commercial. The commercial backdrop to all of these consumption and programming shifts is that the rate of revenue growth is beginning to slow (not just in percentage terms – that is a natural effect of markets getting bigger) but also in absolute terms. Early last year we predicted that streaming growth would start to slow towards the end of 2019 in developed markets and the ERA figures for the UK are the first evidence of this shift. Globally, growth will be sustained by emerging and mid-tier markets, but in markets like the UK and US, growth is peaking. The significance is that the conflation of radio and retail does not matter so much when everything is growing. When growth slows, however, quirks of the market can become business challenges. The ROI of throwing money at campaigns to cut through the audio clutter becomes problematic when the promise of the pie getting ever bigger begins to wane.

All of these things are of course simply part of a maturing and changing market. Nevertheless, the marketing strategies currently employed have been developed in an environment of growth abundance. The challenge for streaming’s next chapter is finding the new rules that are more ROI focused but can still play to streaming’s consumption strengths. Delineating different rates for lean-forward and lean-back streams feels like a logical place to start, but more evolution will need to follow – each iteration of which will trigger its own waves of unintended consequences. Exciting times.

Take Five (the big five stories and data you need to know) November 25th 2019

Disney tidies its streaming stats: Disney is tidying up its streaming subscriber numbers in preparation for reporting the performance so far of Disney+. In the shake-up, ESPN falls from 3.4 million to three million while Hulu goes from a 28.5 million to 29 million. All figures Q3 2019. Headline: Disney is already a streaming powerhouse and is about to become even bigger.

Spotify awards: Spotify is moving into the music awards space. The only surprise is that Spotify didn’t do this sooner; this is the equivalent of MTV moving into the awards space in the 2010s. Spotify will be hoping, probably with good reason, that it will be able to make its awards a bigger deal than YouTube has its YouTube Music Awards.

Tecent’s global gaming empire: Tencent has invested in 40% of Fortnite owner Epic Games and 11.5% in competitor PUBG. By using access to the Chinese market as leverage for getting equity stakes in western games publishers, Tencent is building a global games business. It may even be en route to becoming a global tech major. It has a long way to go, through.

YouTube creators can take a break, perhaps: YouTube CEO Susan Wojcicki claims her company’s analytics can take a break from making content and come back with bigger metrics. The data is likely skewed by a) under-performing channels taking a break, and b) the novelty factor of a returning creator. The underlying truth, however, is that YouTube’s monetisation system skews strongly towards high-volume output. The system needs changing if creators are to genuinely be able to take breaks.

Throw ladders down: Meghan Rapinoe’s acceptance speech for her Woman of the Year award presents a new vision for how those with influence should use their platform for others’ voices, by ‘throwing down ladders’ for others to climb up. She tackles inequality in many forms in her speech and sounds more like an accomplished activist politician than a sports personality. If only all sports people (and politicians) could make contributions like this. Go watch the video.

Why the Music Industry Needs Bytedance to Disrupt It

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

Change, but remain the same

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

Do first, ask forgiveness later

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

The music market needs Bytedance to do something transformational

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

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

Emerging markets testbed

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

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

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