Quick Take: Apple One – Recession Buster

Apple officially announced its long anticipated all-in-one content bundle: Apple One. $9.99 gets you Apple Music, Arcade, Apple TV+ and 50GB of iCloud storage. A family plan retails at $14.99 and a premier plan includes 1TB storage, News and Apple’s new Fitness+ service. While the announcement was expected (and you may recall that MIDiA called this back in our December 2019 predictions report) it is important nonetheless. 

As we enter a global recession, the subscriptions market is going to be stressed far more than it was during lockdown. With job losses mounting, and many of those among Millennials – the beating heart of streaming subscriptions – increased subscriber churn is going to be a case of ‘how much’ not ‘if’. In MIDiA’s latest recession research report, we revealed that a quarter of music subscribers would cancel if they had to reduce entertainment spend and a quarter of video subscribers would cancel at least one video subscription.

A $15.99 bundle giving you video, music, games and storage will have strong appeal to cost conscious consumers who are loathe to drop their streaming entertainment but need to cut costs. As with Amazon’s Prime bundle, Apple One is well placed to weather the recession. They may not be recession proof – after all, entertainment is a nice-to-have, however good the deal – but they are certainly recession resilient.

Which may explain why music rights holders have been willing to license the bundle which almost certainly included a royalty haircut for them, to accommodate the other components of the bundle. While rights holders will not have been exactly enthusiastic about further royalty deflation (one for artists and songwriters to keep an eye out for when Apple One starts to gain share) they are also keenly aware of the need to ensure they keep as many music consumers on subscriptions as possible. 

One key learning of the impact of lockdown has been that new behaviours learned during a unique moment in time (eg not commuting to an office, doing more video calls) can result in long term behaviour shifts. Lower music rightsholder ARPU may be a price worth paying for shoring up the long term future of the music subscriber base.

Why the struggle of small venues will affect the entire music industry

Prior to the dislocation caused by the pandemic, live music operated with a structure that gave artists a clear sense of where they were in their careers and where they could aim for next. Small clubs represented the starting point, before moving up a ladder of venue sizes to theatres, arenas and stadiums. Then along came lockdown, and the future of that lower tier of venues is now at risk. 

The plight of these smaller venues has had a fair amount of media attention, but the long-term impact of their potential demise will send shockwaves that will reverberate through the entire music business. Without this testing ground for emerging artists, an artist development gap is going to appear. One that could hold back the careers of the next generation of artists, affecting not just their live business but the entire spread of their careers – with clear implications for labels and publishers.

Streaming helped live, until it didn’t

Even prior to COVID-19, a strange dislocation was happening between live music and streaming. Streaming had built a symbiotic relationship with live music, delivering more listeners to artists which resulted in more fans at concerts. It was this very relationship that enabled artists to not worry much about streaming royalties until live revenue stopped with lockdown… and then the #brokenrecord debate kicked in. Alongside the previous, positive impact on live, there was a more insidious, unintended consequence: streaming was making a generation of artists less good at performing live.

Skipping rungs on the ladder

In the pre-streaming era, artist fanbases had growth guardrails that shaped how fast they could grow. If you wanted one million people listening to your music, on-demand, at home or on the go, then they had to buy your album. Selling a million albums is not something that many artists used to achieve, and it used to happen after a long, intense period of label marketing effort and TV and radio appearances. Now though, get picked for the right playlist and an artist could find themselves with a million streams under their belt overnight. Artists could look like superstars from stream counts long before they had comparable build-up.

The reason this matters, is that successful streaming artists often found themselves skipping rungs on the live venue ladder and going straight into theatres etc. Fans arrived expecting a quality of live performance to match the artist’s stream count, but instead got something that fell short. It turns out that putting in those hard miles, touring the country in a beaten-up van to play half-empty small clubs on a cold, wet Wednesday evening are often the making of a live act. It is the equivalent of an athlete putting in all the training sessions before breaking through to the team. 

Not made for live

Matters are compounded by the fact that much of the music that blows up on streaming relies heavily on production techniques and does not translate well to live environments. In fact, with many streaming-era artists focusing more time on the production of their music than the performance of it, live can sometimes feel like something that gets in the way. No surprise then that a number of artists Tweeted during lockdown that they were actually enjoying not being on tour and getting more time to write and produce.

The missing steps

Even though streaming distorted the path from studio to stage for many emerging artists, the importance of smaller venue tours is higher than ever. Yet these small venues are most at risk. Bigger live music companies and venues have access to bridge financing that will get them through the tough times, but smaller ones do not. Though some are getting state grants, many will struggle to generate profits with socially-distanced crowds – their capacities are just too small to make the staff-to-audience ratios work. . So we could end up with a gap where the first rungs of the live ladder are meant to be. Short term this will mean more opportunity for bigger, older acts that typically play the larger venues (not that they were exactly struggling before). Mid-term, artists, labels and publishers are going to have a talent development problem on their hands.

Changing cityscapes

The outlook gets even more complex when you factor in the changing nature of cities. With fewer people commuting into city centres daily and more people now moving out of cities, footfall for venues will decline. This means that the business models of many venues will struggle. An opportunity exists to put venues in the new commuter hubs that will emerge over time, but by definition those population centres will be less concentrated and so have less footfall. This may make it harder to build a business case for smaller venues. Larger venues that put on tent-pole events that people will travel to will, if anything, benefit from these population shifts.

So, long story short, unless the industry is careful, the bottom may be about to fall out of the live music business, and in turn the testing ground for tomorrow’s artists.

Where did Disney and Live Nation’s missing $10 billion go?

In both economic and pandemic terms, we are in a relatively quiet period compared to the first half of the year. COVID-19 is at much lower levels in most countries and there are multiple sectors, such as housing and auto, that are reporting booms. These positive indicators will likely be both a pre-recession bounce and the lull before COVID-19’s second peak. However, there is a crucial subtext here, which is that one sector’s loss is often another’s gain. COVID-19 saw winners and losers, as any post-recession recovery is defined by ‘scarring’ where some companies and formats build where others have failed. For entertainment companies that lost revenue during the first half of the year, the question is whether they will regain that revenue or whether their lockdown legacy will be a long-term contraction.

Live Nation and Disney (because of its theme parks) were two of COVID-19’s biggest and highest-profile entertainment company casualties. Live Nation’s revenues fell from $3.2 billion in Q2 2019 to $74 million in Q2 2020, a 98% decline. Disney’s fall was less in relative terms (-38%) due to having a diversified business but more than double Live Nation’s loss in actual terms. Between them, Disney and Live Nation lost nearly $10 billion of revenue which can be bluntly equated with $10 billion of consumer entertainment spend that went unspent in Q2 2020. The big question is whether that spend remains dormant, waiting to be tapped when doors open again, or has it gone elsewhere – and if so, can it be won back.

The lockdown winners were companies that could trade on consumers being cooped at home: games, video, home shopping, video messaging etc. Some of these were stop-gaps that consumers turned to in order to fill the void; others represent long-term behaviour shifts. Here are some of the places consumers shifted their spend, and how it might impact recovery for entertainment businesses:

Home improvements: One of the areas to see strong lockdown growth was home improvements – people stuck at home staring at the DIY jobs they had always meant to get around to doing and now had both the time and the money to do them. Home Depot saw its Q2 2020 revenues increase by $7.2 billion, nearly three quarters of that lost Disney and Live Nation revenue. Obviously, these are not like-for-like shifts as different geographies are involved, but the direction of travel is clear. The beauty of the home improvements business model is that there is always another room to do, another project to start. The risk for entertainment companies is that a portion of these new home improvers may have got the DIY bug and will have less spend to shift back to entertainment.

Home shopping: Amazon was a huge lockdown winner, growing quarterly revenues by 42% compared to 2019, representing an increase of $38.3 billion. Those revenues include, among other things, its cloud business, which rode the wave of many of lockdown’s other success stories. Additionally, the shift to home shopping has been pronounced. Amazon’s growth has extra implications for entertainment companies. Its subscriptions were up 29% which largely refer to Amazon Prime, which of course comes with music and video bundled in and will in turn compete directly with pure-play propositions like Spotify and Netflix. This will take on added significance during the recession: when cost-conscious consumers are forced to cut back on spending, an all-in-one entertainment bundle that includes home shipping looks a lot more cost effective than a handful of standalone subscriptions. Amazon Prime is not recession proof, but it is certainly recession resilient.

Changing of the guard: Some of most interesting shifts are actually within entertainment. For example, AMC cinemas saw quarterly revenues fall by a catastrophic 99%, representing a quarterly loss of $1.5 billion while over the same period Netflix gained $1.3 billion. Again, the geographies are not directly comparable but the direction of travel is clear: old video being replaced by new video. A similar changing of the guard is happening in digital advertising. Alphabet, the powerhouse, saw revenues fall by 2% while Amazon saw its ad revenues grow by 40%. Turns out that advertisers will pay a premium to reach customers that are one click away from a purchase. Who’d have thought it…

The list of examples of lockdown shifts goes on and on. In fact, so much so that MIDiA is currently working on a major new piece of research exploring these shifts and what the long-term implications are for entertainment businesses. We’re calling it ‘Post-Pandemic Programming’. There will be a series of in-depth reports for clients and also a webinar and podcast mini-series. So, watch this space!

But returning to the above findings, the key takeaway is that companies that lost entertainment spend during lockdown should not assume that this spending is waiting in consumer’s bank accounts, ready to be spent as soon doors open again. Pent-up demand will ensure much of it will but some of it is probably gone for good, allocated to new habits developed during lockdown but that will persist long after. This is not to say that those companies cannot return to previous heights, but to do so they will need to unlock new spending from new customers. Which may not be the easiest of tasks during a global recession.

Who will own the virtual concert space?

2020 will go down as a rough year for many artists, largely because of the income they lost when live ground to a halt. Unfortunately, the live music sector is still going to be disrupted in 2021 and it may take even longer for the sector to return to ‘normal’. In fact, we could see the bottom of the live sector thinned out as the smaller venues, agencies and promoters do not have the access to bridging finance that the bigger players have. So, smaller artists may find the face of live permanently changed for them in a way that larger artists do not. Whatever the outcome, one thing is clear: live music is not going to be the same again, and the innovations in virtual and streamed events are not simply a band-aid to get us through tough times. Instead, they are the foundations for permanent additions to the live music mix. The big unanswered question is, who is going own the live-streamed and virtual concert sector?

Bringing it all together

One of the most important things digital tech does is to bring things together. The smartphone is a perfect example. 20 years ago people switched between phones, calendars, diaries, computers, maps, phones, music players, DVD players etc. Now these are all in one device. Streaming did the same to music, taking radio, retail, music collections and music players and putting them together into one unified experience. Until now, live music was not subject to streaming’s great assimilation process. But COVID-19 changed all that. Live used to be separate because it required logistical assets like buildings, ticketing operations, relationships etc. The last few months have shown us that the virtual live sector can operate entirely independent of the traditional sector’s frameworks – which is one of the reasons so much innovation and experimentation has happened. Sure, lots of the early stuff was scrappy and of patchy quality, but is through mistakes that we learn the right way forward. Thus, we have new companies like Driift emerging to bring a more structured and professional approach to a fast-growing but nascent sector.

Disruption is coming

The big traditional live companies right now may be most concerned about whether the still-dormant venues are looking at the new ticketing models being deployed with the likes of Dice and wondering whether they can rethink their entire way of doing business when they reopen. While that may trigger what could prove to be the biggest-ever shift in the live business, the virtual part of the business is where the money is flowing right now: Melody VR bought pioneering but struggling streaming service Napster, Scooter Braun invested in virtual concert company Wave and Tidal bought seven million dollars’ worth of access into virtual concert ‘space’ Sensorium. Virtual reality (VR) spent much of the last couple of years in the trough of disillusionment but now COVID-19’s catalysing impact may see it starting to crawl onwards and upwards. Prior to COVID-19 VR was a technology searching for a purpose. COVID-19 has created one. This is not to say that all of VR’s prior failings no longer matter – they do – but it at least has a set of music use cases to build on. VR can now realistically aspire to be a meaningful component of the wider virtual event sector.

Streaming+

It is no coincidence that streaming is playing a key role. Nor is it just the smaller streaming services at play – Spotify has built the tech infrastructure for live events, while Apple is introducing artificial reality (AR) into Apple TV+, so it is not too big a leap to assume Apple Music AR experiences will follow. Live was the last major component of the music business that streaming could not reach, and that is all about to change. The value proposition for music fans is clear: why go to multiple different places for all your favourite music experiences when they can all be in one place? Think of it as Streaming+. Whatever the future of live is going to be, we can be certain about one thing: it will never be the same again.