Growth drivers – what comes after streaming

The pandemic-defined 2020 was an outlier year across digital entertainment, with the extra 12% of time consumers spent with entertainment boosting everything, including music. One of the effects was that streaming grew more than it would have otherwise, delaying the inevitable slowdown in streaming revenue growth. This artificial 2020 boost meant that the slowdown impact was felt even more strongly when it arrived in Q1 2021. 

The major labels saw streaming revenue grow by just 0.8% between Q4 2020 and Q1 2021, while Spotify saw revenues fall by 1%. Seasonality plays a major role here (a similar trend was seen last year) and year-on-year revenues were up by around a quarter. Nonetheless it reflects a maturing market. 

Back in 2019 Spotify’s revenues grew 15.7% from Q4 2018 to Q1 2019, while the majors’ streaming revenue was up 3% between Q4 2017–Q1 2018. In short, when the market was growing faster, seasonality did not result in flat / negative growth. Streaming is still in good shape and is going to remain the core of recorded music revenues for the foreseeable future, and Spotify’s price increases will bring a little extra revenue in 2021, but it is clearly time to start thinking about what comes next.

There is an argument that in today’s post-format world, we should not even be thinking about the next thing. So, it is better to think about what new business models and user experiences can grow alongside streaming, to diversify the music industry’s income mix. 

Music businesses, labels in particular, are busy exploring where future growth will come from. The more pessimistic argue that this is largely as good as it gets, that there will not be a ‘next streaming’. That might be right in terms of a single revenue source, but the early signs are that there is enough potential in a range of sources to collectively drive growth. Here are a few of the music industry’s potential growth drivers:

  • Games: Ever since the Marshmello Fortnite event, games has acquired a new degree of importance for the music business. WMG’s stake in Roblox points to just how serious labels are taking the opportunity. With global games revenues hitting $120 billion in 2020 (around $100 billion more than the recorded music market) and more than a third of those revenues being driven by cosmetic (i.e., non-gameplay) spend, there is a wealth of opportunity. But to succeed, music companies will need to think about creative ways to enhance the gaming experience rather than simply seeing it as another licensing play.
  • Social: Revenue from the likes of TikTok and Facebook finally became meaningful in 2020, accounting for around three quarters of the growth registered in ad supported. We are still scratching the surface of what social can do for music, but building tools for users to create their own music and audio will be key. Facebook’s Sound Studio could prove to be a defining first step towards the establishment of the consumer’s version of the social studio.
  • Creator tools: As regular readers will know, MIDiA considers the current revolution in the creator tools space to be one of the most important shifts to the entire music business in recent years. Not only is it transforming the culture of music creation, it represents a new set of opportunities for deepening artist-fan relationships and a set of new facets for the future of music companies.
  • Next-generation sync: Although traditional music sync revenues fell in 2020, music production libraries (including royalty free) grew. We are on the cusp of a major new wave of opportunity in sync, with social content, platform and creators representing a scale of demand that far exceeds that of the traditional sync market. And it is the slow-moving nature of that traditional sector which means that the likely winners in the social sync market will be the new generation of companies that offer solutions that are sufficiently agile and fast to meet the scale of micro-sync demand.
  • Live streaming: The pandemic virtually created the live stream marketplace, resulting in a tidal wave of new start-ups rushing to fill the void left by live. While the results have been a mixed bag, there have been enough high-quality successes to suggest that this is a sector with longevity that will outlive lockdown. The services that will prosper when IRL returns are those that deliver genuinely differentiated experiences that complement rather than try to replace IRL live. 
  • Fitness: Another of the pandemic’s second order effects was a surge in consumer spending on home fitness equipment, including Peleton. Right now there is some meaningful music licensing revenue building around the space, but Beyoncé’s Peleton partnership shows that the opportunity goes way beyond simply piping music into workouts. Crucially, the Beyoncé partnership creates an audience that is focusing their entire attention on the artist, which is rarely the case when people are listening to music on audio streaming services.
  • Fandom: Fandom is the next frontier for music monetisation. Western streaming services monetise consumption, whereas Tencent Music Entertainment monetises fandom, with two thirds of its revenue coming from non-music activity. We are beginning to see a flurry of activity in artist subscriptions and meanwhile, Patreon goes from strength to strength. Check out this free MIDiA report for more on how to tap the fandom opportunity.

To reiterate, streaming is, and will remain for many years, the beating heart of recorded music revenue. In fact, more than that, most of these new opportunities exist at such scale because of streaming. Until now, streaming enabled revenue growth in its own right, now it will enable growth in new adjacent markets.

Spotify pushes prices up, but do not expect dramatic effects

Spotify finally announced a significant price increase, raising prices in the UK and some of Europe, with the US set to follow suit. The increases affect Family, Duo and Student plans. The fact that streaming pricing has remained locked at $9.99 since the early 2000s is an open wound for streaming, so this news is important – but less so for actual impact than statement of intent.

Back in 2019 MIDiA showed that since its launch, Spotify’s $9.99 price point had lost 26% in real terms due to inflation while over the same period Netflix (which increased prices) saw a 63% increase. Price increases are a must, not an option. Not increasing prices while inflation raises other goods and services means that streaming pricing is deflating in real terms. In this context, Spotify’s move is encouraging, but it is not yet enough. The increases of course do not affect the main $9.99 price point, currently apply to a selection of markets and do not address the causes of ARPU deflation (promotional trials, uptake of multi-user plans, emerging markets). But let’s put all that aside for the moment and look at just what impact these changes will have:

  • Pricing: The increase is 13% for a Family plan and 20% for Student, both meaningful but below the 26% real terms deflation that was hit back in 2019. Averaged across all price points, the price increase represents a 10% uplift (in the markets where this is being done). By comparison, Netflix’s last major price hike averaged out at 11% across all price points, so it is line with that, though obviously Netflix had numerous other previous increases.
  • ARPU: ARPU (i.e. how much people are actually spending) matters more than nominal retail price points, which are subject to promotions and discounts. Spotify ARPU fell from €4.72 in 2019 to €4.31 in 2020. Let us conservatively estimate that would fall to €4.00 in 2021 without any price increases. Let us also assume that the announced price increases roll out to every single Spotify market (which of course they won’t) and let’s assume it all happened on January 1st 2021 (which of course it didn’t). On that basis, and factoring in what share of Spotify subscribers are on family and student plans, total revenue and premium ARPU would increase by 6.2%. ARPU would hit €4.25 (still below 2020) and premium revenue would hit €9.5 billion.
  • Income: Spotify would earn an extra €166 million gross margin, music rights holders would earn an extra €388 million, record labels €310 million and the majors €212 million, representing 2% of their total income. UMG would earn €95 million. Meanwhile, a recouped major label artist could expect to see a million streams generate €1,487 rather than €1,400 (assuming all the streams were premium).

All of these assumptions are based on this rollout being global and FY 2021, neither of which are the case. So the actual effect will be markedly less. The key takeaway is that this is an important first step on what needs to be a continual journey, and one followed by the other streaming services. Spotify was previous locked in a prisoner’s dilemma where no one was willing to make the first move. Spotify had the courage to jump first. What needs to happen next are (though not necessarily in this order):

  • Pricing increase to all remaining tiers, especially $9.99
  • Other streaming services follow suit
  • Tightening up of discounts and promotional trials in well-established markets

Good first step by Spotify; now let the journey begin.

The music industry’s centre of gravity is shifting

Regular readers will know that MIDiA has been analysing the creator tool space for some time now and building the case for why the changes that are taking place will be transformational not just for the creator tools space itself but for the music business as a whole. In fact, we believe that the coming creator tools revolution could be at least as impactful on the wider music business as streaming was. Firstly, it establishes a new top-of-funnel that sits above distribution companies, meaning that creator tools companies are now able to fish upstream of labels for the best new talent. Secondly, audio will become the next tool with which consumers identify themselves, following the lead of images (Instagram) and video (TikTok). But there is another factor too: the fast-growing volume of institutional investment is changing where the centrifugal forces of the music industry reside.

Outside of the currently crippled live business, the record labels used to be the undisputed central force of the music business. Then streaming services grew in scale and attracted the first wave of inward investment into the industry. Alongside labels, streaming services became the joint central force of the music business, around which all else orbited. Big investors started to make bets on either side of a binary equation: rights or distribution.

The publishing renaissance

Then music publishers and publishing catalogues started to attract investment. At the time, the only real place big institutional investors could place their bets on the rights side of the equation was Vivendi – and even then, it was an indirect bet as UMG was just one part of Vivendi. SME is just too small a part of Sony Corporation for the parent company to be a viable music industry bet. Since then, UMG divested 20% of its equity and is on path towards an IPOWMG went public and Believe is on track to an IPO also

When growth isn’t growth

Investors may be given pause for thought by the way in which leading music industry trade associations such as ARIA in Australia and Promusicae in Spain have restated their 2019 figures, having the effect of making what would otherwise be declines in 2020 instead look like growth. Take a look at Australia (2019 total revenues AUD 555 million here versus 2019 total revenues AUD 505 million here) and Spain (2019 subscriptions €159 million here versus 2019 subscriptions €138 million here).

Publishing catalogues by contrast look more predictable, with performance still largely shaped by non-recorded music market trends, including radio and public performance – though COVID-19 threw a lot of that stability down the toilet. Music publishers used the inward investment to diversify their businesses. Kobalt pushed into artist distribution (recently sold to Sony), neighbouring rights and a PRO; Downtown pushed hard into the independent creator sector (CD Baby, Songtrust); while Reservoir is going public with a Spac merger; and then of course there is Hipgnosis.

The creator tools gold rush

With music publishing catalogue valuations over-heating, big investors started looking for places where they could still play in the music market but get better value for money. Enter stage left creator tools. Key moves include Francisco Partners’ moves for Native Instruments and Izotope; Summit Partners’ investment in Output; and Goldman Sachs’ investment in Splice

What this means is that the music industry now has an additional gravitational force at its core. Just as music publishers and streaming services used their newfound investment to push into other parts of the music and audio businesses, expect creator tools companies to do the same. With hundreds of millions of dollars pouring into creator tools (and lots more set to follow), investors are making big bets on audio in a broader sense, with bold ambitions that will not be sated by staying in the creator tools lane as it is currently defined. Avid’s recent move into distribution follows on from LANDR’s similar move, and of course Bandlab has 30 million ‘users’. Adding label-like services (e.g. marketing, debt financing) and streaming functionality are logical next steps for creator tools companies.

Streaming may be the change agent that has enabled all of these shifts – but streaming is the start of the story, not the end point. The process of music business diversification is only just beginning and the next chapter may be the most exciting yet.

Assessing the streaming opportunity: You’re doing it wrong

Buoyed by lockdown, streaming enjoyed another strong year in 2020, up 17.1% on 2019 according to MIDiA’s recorded music market shares report. But the revenue slowdown will come in 2021, driven by the maturation of the big music markets (e.g. US, UK, Australia) and the growth of emerging markets. Identifying emerging markets growth as a slowdown factor might sound oxymoronic but the lower ARPU in these markets means that subscriber growth and revenue growth are becoming uncoupled. Look no further than Spotify’s earnings: subscribers were up 25% in 2020 but premium revenue was up just 17%, driven by a premium ARPU decline of -9%. Despite the dampening effect of emerging markets, they will be crucial to future growth – yet much of their potential may go untapped. The reason is all to do with how the music industry measures the opportunity, and that approach needs to change.

Anyone who has seen, or prepared, an investor presentation will be familiar with the total addressable market (TAM) concept. It is the big number that is used to impress investors with just how big the market opportunity is. The framework is also widely used in the music business to illustrate how much growth remains for streaming. But it only tells part of the story, and crucially it can be highly misleading – especially so for the streaming music market.

When MIDiA works on market opportunity projects for clients we always take the next two steps in the TAM approach: serviceable addressable market (SAM) and serviceable obtainable market (SOM). Here’s how it works:

  • TAM is how big the pond you are fishing in is
  • SAM is how many fish there are in the pond
  • SOM is how many fish you are likely to catch

TAM: you’re doing it wrong

The obsession with the TAM can be problematic because, while it results in impressive-sounding numbers, it is not a useful measure for understanding what a company or sector can actually do. If you are one person fishing in a lake, it does not matter how big the lake is nor how many fish there are; you and your fishing rod can only catch so many fish. When Spotify announced its extra 85 markets in February it said it was bringing its service to ‘more than a billion people’. That might give the impression of representing massive future growth, but it is simply the TAM. In fact, the figure is more than the TAM because only a sub-component of that one billion have mobile data plans – the industry’s principal TAM measure. In order to understand where the streaming market can really go, we need to go deeper and lay out the SAM and SOM.

The SAM and SOM layers are even more important for emerging markets than developed markets. There is a tendency to assume that because most people listen to music in some way or another, they are all addressable by music. But this is not the case. Most people, at least in developed markets, read – but that does not mean they all buy books, magazines or newspapers. The same applies for music.

Going beyond the TAM hype

In order to get beyond the TAM hype, MIDiA is building a new TAM, SAM, SOM model for music and we are for the first time going to use it to drive our forecasts (we have previously used a weighted scorecard methodology). One of the key reasons for the shift is to better understand just how much, or little, opportunity can be tapped in emerging markets with currency pricing strategies. Although subscriptions are much cheaper in emerging markets in dollar terms, when they are looked at in affordability terms, a very different picture emerges. Take India: the average headline cost of a subscription is just 15% of what it costs in the US. But when looked at on a purchasing power parity (PPP) basis (i.e. a measure of relative affordability) it is five times more expensive. Therefore in India, one of the world’s lower per-capita GDP markets, music streaming has been priced for the well-off, urban elites. And that is fine, as there are plenty of them. But it means that streaming subscriptions are out of reach for the majority of the population, which means that it is irrelevant to refer to India’s 1.4 billion people when talking about the opportunity, unless prices are reduced by a fifth – something music rights holders, at least Western ones, are currently loathe to do.

To better determine the market opportunity, MIDiA is using the following approach:

  • TAM: A hybrid measure of people with smartphones and data plans (including assessing the ratios between them)
  • SAM: The share of the TAM that is interested to some degree in paying for music
  • SOM: The SAM with additional discounts for factors such as a PPP measure of streaming pricing and urbanisation rates

Although this approach results in much smaller end figures, it is a much more useful way of understanding where music subscriptions are likely to get to in the next five to ten years. It also helps us better segment the emerging market opportunity, with some regions, such as the Middle East and North Africa, coming out much stronger – in large part because of better affordability in relation to per-capita GDP.

I appreciate we are giving away some of MIDiA’s ‘secret sauce’ here, but we think that this is such an important issue that we want to highlight it to as many people as possible. If your research provider (internal or external) is providing you with TAM figures to assess the market opportunity, then they are simultaneously under-selling you and over-selling the market opportunity.

Creator tools platforms could become social networks

With all the growing interest and investment in creator tools companies, music production platform Bandlab hitting 30 million users points to a longer-term future for the space – one in which the boundaries spread far beyond the base of music makers. Unlike most creator tools companies, Bandlab has simultaneously built itself as a platform for creators and fans. While the 30 million ‘users’ does not specify ‘active users’, it nonetheless points to the potential of creator-centric fan communities. While this blog’s title says ‘social networks’, in truth the term is becoming redundant. Everything is becoming social; the distinction now is howsocial a platform is. Right now, most creator tools solutions are not very social at all, but that will change and those that harness the change early will have an advantage.

Artists have a branding problem 

The song economy of streaming has created a branding problem for artists, relegating the profile of the artist to the side lines. If streaming was a computer, the artist would be the processor chip, the Intel inside. There are no signs that is going to change in a meaningful enough way anytime soon, so artists need to look to other places where they can build their profiles and relationships with fans. One solution is to bring fans closer to the creative process. A growing number of artists that have done writing and production videos on Twitch have learned that there is strong fan interest in what might otherwise look like quite a niche topic. 

Music production software and hardware have traditionally been relatively complex, and so it is only natural that fan spaces did not get built around them. However, the music creation process is undergoing a user experience revolution, with elegant, intuitive design prioritised. This user-centric mindset means that the newer generation of creator tools products already have a more consumer-friendly feel, and many also already have strong creator community tools. These are the foundations for building fan communities.

Ecosystem plays

Bandlab is building an end-to-end creator tools platform, incorporating a DAW (the music making software), sounds, distribution and audience. This ecosystem play will become more widespread as investors put together multiple creator tools companies to build single combined entities, such as Francisco Partners’ investments in Native Instruments and iZotope. The depth and breadth of fan involvement will become a key battle ground for creator tools companies. The rise of these fan-micro-communities built around exclusive and early access to their favourite creators will become a defining characteristic of the future of the music business. Perhaps even more important is the way in which these micro-communities will open up new income sources for artists. Products like creator subscriptions and virtual merch could ensure that most creators would earn many multiples more from their micro-communities than they could from streaming.

Just one more way in which creator tools companies are set to transform the music business.