The music business in 2021: Joining the dots

It has been one of those weeks, with impactful music business announcements coming thick and fast. As is often the case, a succession of apparently unrelated events actually have a connecting thread. In this instance there are three:

  1. The (continued) astronomic rise of the independent artist
  2. The growth of creator tools
  3. Streaming’s growing pains

This is how the events of the last week or so are both interconnected and interdependent:

  • CD BabyIndependent artist powerhouse CD Baby just released a bucketful of great data, including the fact it increased artist pay outs by 26% in 2020 with $125 million of streaming revenue and 111% growth in YouTube revenue – yes, 111%. MIDiA will be releasing its 2020 music market figures soon and the artists direct number is little short of mouth-watering. 2020 was the year of the independent artist and creator tools and that momentum has continued into the start of 2021. Independent artists are making dramatically more music than the traditional labels (releasing 8.5 times more than major labels in 2020) and there are more of them than ever, with around five million by the end of 2020, up a third on 2019.
  • Another big year for UMGVivendi’s FY 2020 results revealed UMG grew recorded music revenues by 6.9% on a current currency USD basis. Which means they outperformed the total market, again. But this time Sony grew faster (again, on a current currency USD basis) and more significantly, all the majors grew slower than artists direct, again. More on this to follow shortly.
  • Spotify indie growth: Arguably the most significant statistic in Spotify’s annual report is the share of streams accounted for by the majors and Merlin (a proxy for the traditional music business). The 2020 figure was 78%, down from 85% in 2018. Smaller independents and artists direct grew far faster than the label establishment. This changing of the guard has many first and second order impacts but the key dynamic is that the number of small artists and labels is growing faster than streaming revenue is. They are taking a progressively larger share of the pie but they are splitting it more ways. For streaming platforms this means a) more consumption, and b) further fragmentation of their partners, which helps their negotiating position. For artists it is the paradox of more artists reaching more audiences but taking smaller chunks of income.
  • Soundcloud: In what may be the smartest piece of music industry branding ever, Soundcloud introduced its own take on user-centric licensing: fan powered royalties. I for one will be using this term to refer to UCL henceforth. What is significant is that Soundcloud was able to launch this with its pool of independent artists, because these artists that own their own rights represent a much more straightforward way to drive fast, market-defining innovation than navigating the often-complex mesh of the traditional business.
  • Spotify: 2020 was the first year since 2017 that Spotify’s premium revenue growth was less than the prior year (up €1 billion compared to €1.4 billion in 2019). Subscriber growth boomed, however, which meant a continued deterioration of ARPU, down to €4.31 from €4.72 in 2019 and €6.20 in 2016. Meanwhile, ad-supported ARPU was down too, as was podcast ARPU. Spotify is getting better at growing audience but less good at growing revenue.
  • Square buys Tidal: Coming from the left field, Square just acquired a majority stake in Tidal. This is a very different play from MelodyVR acquiring Napster to rebrand and piggyback a user base, albeit a small one. Instead, Square sees Tidal simply as a new vertical within which to drive creator tools growth. Until now, the creator tools space in music has been driven by, well, music creator tools companies. Square’s move reflects an understanding that the combined growth of creator tools, new small independent labels and artists direct represent a tipping point for the music business.

Streaming was the economic shift that the recorded music business needed to take it into the digital era. However, streaming is now experiencing growing pains, due to slowing growth in mature markets, declining ARPU in emerging markets, and more artists and more tracks sharing the royalties. The UK parliamentary inquiry into the economics of streaming may herald a form of equitable remuneration but could hurt songwriters in the process, illustrating that there are no easy fixes to streaming remuneration.

Big money is flowing into the independent artist and creator tools sectors because the big investors have identified that that is where a new, parallel music business can be built. Let’s just hope that the independent artist goldrush ensures that the creator remains at the centre of remuneration and not just the focus of revenue creation. This is an opportunity to build a new, more balanced ecosystem that can complement the existing one, not simply build a reconfigured version of the old one.

Smaller independents and artists direct grew fastest in 2020

Last year we identified a small but crucial metric from Spotify’s annual report: the share of all streams accounted for by majors and independent licensing body Merlin. It was crucial because it enabled us to segment the streaming market in detail, when combined with market data from majors and independent artist platforms. The key takeaway was that independents grew fastest, but that not all independents grew at the same rate. Now the 2020 figure is out from Spotify and the trends have accelerated.

The share of Spotify streams accounted for by the majors and Merlin fell four percentage points in 2020 to 78%, down from a high of 85% in 2018. The recorded music market is one in which label market shares typically move at a near glacial pace. In comparison, this shift is nothing short of tectonic. What we are witnessing is not just the emergence of a new pattern of growth in the recorded music business but also the emergence of a new breed of record label.

Firstly, the methodological health warning: this percentage reported by Spotify refers to streams, not revenue, so will have some margin of error as there are certain types of labels that do better among ad supported users than paid, which means their contribution to revenue is less than to streams. Emerging markets such as India (which skew heavily to free users) will also over index. Also, non-Merlin independents will include by inference all record labels that are not majors and that are not Merlin licensed, so this will include big record labels in Korea, Japan, India etc. who in their own markets are the equivalents of majors.

All that said, the shares are still directionally invaluable and provide us with some great market insight. By applying the major labels’ market shares for revenue, coupled with artists direct (i.e. DIY) and independents overall, we can work out what the splits between Merlin, the majors and everyone else are.

The headline is that independents as a whole grew market share in 2020 from 29.7% to 31.1%. In 2018 the figure was 28.3%. That is nearly three whole points of market share gained. To drive such big shifts in market share in a fast growing market like streaming, big revenue growth is needed. The Spotify figures would suggest that majors grew by 14%, Merlin was down by 3%, artists direct were up by 28% and non-Merlin independents were up by 49%. As in 2019, artists direct and non-Merlin independents were the big winners. These two segments represent the new vanguard of streaming-era music strategy, entities that have learned how to use their smaller scale to be agile and play to the unique rhythms of streaming in a way that bigger, more established companies have not. 

Merlin’s dip in streams may well not be reflected in revenues, as Merlin labels tend to over index for premium streams. Even if they were around flat or even slightly positive in revenue terms, the contrast with the newer breed of smaller independent labels is clear. Of course, not all Merlin labels are the same, but the category-level trend suggests that many Merlin labels might be stuck in the difficult middle ground between the agility of newer, smaller labels, and not having the scale of tech, data and catalogue to enjoy the same scale benefits that majors do.

Even with all the caveats considered, the direction of travel is clear: streaming is paving the way for a new breed of independent, one that is gaining share at the expense of both majors and traditional independents.

Clubhouse session: Is attention is killing culture?

Join myself, Hanna Kahlert and Karol Severin Thursday 25th at 5pm GMT / noon EST / 9am PT on Clubhouse for discussion of the Attention Economy’s second order effects on culture and creativity.

In this session we will be exploring how the focus on capturing audiences’ time and attention at all costs is resulting in a dumbing down of culture and a predominance of caution over bravery. We will also discuss how some entertainment sectors are much better placed to prosper in the attention economy. Here are a few of the things we’ll talk about:

  • COVID’s attention boom
  • The coming attention recession and what it means for entertainment
  • Who were the winners of the attention boom and how will they fare in the attention recession?
  • The rise of attention culture (playlist fodder, ambient video etc.) and what it means for culture
  • Where entertainment needs to go so it can jump off the attention hamster wheel

We want this to be an interactive discussion, so while these are some of the talking points, we will be looking to you to help us steer things too.

See – well, hear – you tomorrow.