‘Middle class’ artists need niche, not scale

Streaming continues to grow strongly, as evidenced by the 28% growth reported by the RIAA for H1 2021 in the US. Everything looks great for the build-up to the impeding Universal Music Group (UMG) IPO. But all is not well in the creator community, as many artists and songwriters continue to be unhappy with streaming income (seen most pertinently in the UK parliamentary DCMS inquiry). However, the origin of so much of their ills, even if they do not yet realise it, is the mechanics of streaming itself rather than any party (labels, publishers or streaming services) not passing on enough money. Could these entities transfer more to their creators? Yes, of course. But there is no increase that could transform the outlook for most of these creators without potentially breaking the entire streaming economy. The crucial, emerging dynamic is that most mid-tier creators are never going to be big enough to gain adequate streaming scale to use as a reliable income source. In fact, they need the opposite of scale – they need niche.

Streaming income is always going be different from sales income

One of Daniel Ek’s Spotify ambitions is to create and empower a new ‘middle class’ of artists, enabling a new wave of creators to build careers from their creativity. But the irony is that the ‘middle class’ (depending on how you define this amorphous group) is, perhaps, least well served by streaming. Here is why: in the old world, a ‘middle class’ five person band might sell 50,000 copies of an album in a year, for, say, $10 each – thus receiving $35,000 each*. In streaming, this group might generate 10 million streams in a year, which would result in $7,000 each. The old model delivers far fewer fans but far more income. In isolation, the streaming model is less beneficial, however, in a wider context, the streaming-era group is likely to generate more live performance, merch and branding income as a result of streaming’s bigger audience. This is why streaming received much more critical creator attention during the pandemic, as the halo effect across other income avenues was cut off at the knees.

The squeezed middle

This comparison is not intended to suggest the streaming model is broken, but for the middle tier of artists, the scale at which streaming delivers is not enough on its own, and instead it catalyses the wider mix of creator income streams. At the other ends of the creator spectrum, superstars get enough scale to earn a truly meaningful streaming income, and the emerging independent artists are able to reach global audiences in way they could never do pre-streaming. So, the ‘middle class’ of creators actually become the ‘squeezed middle’ of the creators’ streaming economy.

Monetise niches, not scale

Even doubling the creator royalty rates would still leave streaming income 2.5 times smaller than sales income, but it would break the streaming model in the process. Rather than break streaming, an alternative attempt at resolve would be to focus on finding an artist’s core fans – the ones who really care – and selling them products and experiences. With this approach, middle tier artists would be able to replicate the same sort of income flows as the old sales model. Clearly, that theoretical five person group would likely sell fewer than 50,000 copies of a product because much of their audience would already be getting all they need from streaming. But this is not about replacing streaming – this is about complementing it, by bridging the income gap. So, while some artists have opted to remove themselves from streaming and focus solely on platforms like Bandcamp, this approach is unnecessarily reductive and will actually hurt the artist’s earning income in the longer-term, as the funnel for acquiring new fans has been massively narrowed.

Fame and fandom

The concepts in this post are not particularly new and I have, in fact, discussed a few of them before. But they are crucially pertinent, nonetheless. ‘Middle class’ artists need to start thinking about streaming more like radio, i.e., a tool for growing fanbases which they can then monetise elsewhere. Streaming delivers the fame, while niche delivers the fandom. And it is fandom where an artist and a fan get the most value, in all possible permutations of the word ‘value’. As long as, of course, the artist does not get lazy and simply try to fleece their super fans!

*These calculations are simplified, do not include cost deductions (other than retailer margin), assume group members each have an equal share of recording and publishing rights, and assume that rights splits are the same across both.

The oncoming fandom crisis

The Chinese authorities’ crackdown on fandom represents the first major growing pain for the global fandom economy. Tencent Music Entertainment (TME) will likely be the bellwether of this shift, with two thirds of its revenues coming from non-music (i.e., fandom) related activities. But this is more than just about China – it shines a light on the dark underbelly of the global fandom machine. The companies behind K-pop and Idol acts industrialised fandom by leveraging, and even exploiting, fan psychology to massive global businesses that trade upon extracting every possible ounce of spend from fanbases. The China crackdown should act as a wakeup call for the global music market. 

The industrialisation of fandom

Regular readers will know that MIDiA has focused on fandom analysis and research for a number of years now, looking at it across all forms of entertainment. The reasons we believe it is so interesting in music is because Western streaming services monetise consumption rather than fandom, leaving both passion and spent on the table

The Chinese music apps illustrate just how much more can be achieved when experiences are built around the music, rather than simply relying on music to always be the experience. Alongside this, the rise of K-pop, which leans heavily on the Japanese Idol model, shows how much fanbases can be willing to support their favourite artists, particularly in terms of both spend and passion. But, as exciting as these models are, they have also been underpinned by the temptation to push fans’ spending and obsession further and further.

Even Western artists are getting in on the act. When Taylor Swift encouraged her fanbase to go and buy the re-recorded version of Fearless, she was looking for their support in her old master recordings ordeal. But who really needed the $50 for a vinyl copy most, Swift or her fans? 

This industrialisation of fandom has actually weaponised it, and, in doing so, puts its very essence at risk.

The oncoming fandom crisis

A fandom crisis is coming. Fandom is far more meaningful and profound for fans than mere consumption. It is also far harder to measure – in fact, it is only the effects of fandom that can be measured (i.e., merch sales, comments, likes, etc.). Fandom is rooted in human psychology. It is about identity, belonging and self-expression. Things that often matter more to younger people than anything else, especially teens in their formative years. It is no coincidence that the industrial fandom machines are primarily built around younger consumers. The Chinese government’s decision to limit fandom, in part because of its negative social impacts, is an extreme move, but it could also act as an ice breaker for regulatory scrutiny in Western markets. 

The fandom crisis goes beyond music

The oncoming fandom crisis is neither confined just to Asia, nor just to music. In fact, huge swathes of the global social economy are built on exactly the same dynamics. TikTok, Instagram, YouTube, Twitch – all of these platforms exploit the creator / fan relationship and have constructed sophisticated monetisation frameworks around them. The sophistication does not so much lie in payment methods or technology, but instead in deploying products that drive competitive fandom. Fans compete to be the biggest fan, often by spending more. This can be a kid spending their parents’ money to have his comment pinned to the top of a YouTube gamer’s comment stream, or a Twitch user paying to unlock exclusive emotes and sub badges of their favourite Twitch streamer. 

The platforms need to consider a crucial principle: just because you can do it does not always mean that you should do it.

A crucial moment for the business of fandom

Fandom is the ozone layer of the entertainment world, and it is a critical resource that is too often taken for granted and can be irrevocably damaged. 

This is a crucial juncture for fandom. We are beginning to see the emergence of cool new apps, like Fave, and Western labels looking East for inspiration, such as UMG tapping Hybe’s Weverse app for some of its artists. It is crucial that well intentioned efforts do not falter because of a wider fandom backlash. Fandom should be nurtured, not harvested.

Not only is there so much that can be done, the music industry needs more to be done. A key reason there are armies of BTS and Black Pink fans in the West is because a generation of kids were growing up with a sense that something was missing from music for them, that streaming simply did not let them express themselves and feel part of something. Streaming in the West does not do fandom. Streaming in China, perhaps, does it too well. Clearly, there must be a solution somewhere in the middle that enables fans to be fans, while also doing the right thing for them. 

Fandom and ethics should not occupy opposite sides of the debate. They should be intertwined and interdependent. Fandom is about who you are and what you are. Without ethics, what are any of us?

Kanye just obliterated the creative full stop

Kanye just obliterated the creative full stop 

Kanye West knows how to stir things up, not least in making us rethink what music is and nudging us away from considering it as linear and static. First there was his announcement that Life of Pablo was a “living, breathing, changing creative expression”, and now there is his Donda Stem Player – which we wrote about here last week. Transformational change does not normally happen in one big wave, but instead is triggered by disruptive outliers, things that, at the time, might look like inconsequential edge cases, but act as the ice breakers for the paradigm shift that follows. Digital entertainment in its wider sense is entering its lean inphase, where audiences participate with content, whether that be simply commenting on a YouTube video or creating your own TikTok video. Given simple but powerful tools, it turns out that the consumers like to be creators too. First it was pictures and video, but now it is audio’s turn, and Kanye’s Donda Stem Player could prove to be a pivotal step in that journey.

Formats do not need to be how they have always been

The future always looks much more like the past. The Model T Ford looked more like a horseless cart than it did a 1950’s car. Change takes time. Digital entertainment business models have undergone dramatic change, but the content itself much less so. We think of TV shows, movies and music as being clearly defined things that have always been thus, but, in truth, they were defined by analogue technology in the 19th century. Now that linear TV schedules, radio and CD players are entering their final phases, there is no need for the traditional formats to continue to dominate. Creatives who argue that a 45-minute drama and 3.5-minute song are simply the best formats, do so because that is all that they have ever known. Yes, they work, but that does not mean that other formats cannot also work. Just look at the album. Many artists still like the creative construct, but just 21% of music streamers regularly listen to albums on streaming services. Music fans have already decided that this format is not part of their future.

Fluid audio erases the creative full stop

The Donda Stem Player, made for Kanye by Kano, takes this concept and runs with it. This, as my colleague, Kriss Thakrar, identifies, is fluid audio, and it fits into the Agile Music that we first identified back in 2011. Analog entertainment formats were inherently creative full stops. When an album was recorded, it was done – final. It did not matter if the artist’s creative vision had moved on, as the songs remained the same. This seems entirely natural, but until the recording era, this would have appeared as a creative anathema in popular music. Before recordings, a song was never the same twice. It only existed as a live performance that was played in the moment and survived in the listener’s memory. Songs evolved and changed. Whether that be centuries of evolution in European folk music or decades in American blues and jazz. Then recording came along and songs became petrified – the stuffed animals of creativity. 

Kanye took his first swipe at the creative full stop with his continual updates of Life of Pablo. Not everyone got it. Many fans simply wanted it to sound the way it did when they first heard it. It takes time for people to get their heads around change – quite literal change in the case of Life of Pablo. Now, with the Donda Stem Player, Kanye has obliterated the creative full stop. Donda will never sound the same twice, and that is now literally in the hands of his fans.

In some respects, making a piece of physical kit looks to be quite a retro move in this digital era, but the subtle, yet crucial idea here is to make the Donda Stem Player an actual instrument. It is the ultimate form of creator culture, by turning songs made with instruments into an instrument itself. How very meta!

Back in 2015, I published my book ‘Awakening’, which was part history of the digital music business and part vision for the future. Some of my predictions did not age as well as I would have liked, but some of them are still looking good. One of them was the DISC concept. I proposed that future music formats needed to be:

Dynamic

Interactive

Social

Creative

I mainly aimed this at the digital realm, and we are already seeing it happen, whether that be TikTok lip sync videos, Facebook Audio Studio, Clean Bandit’s Splice sounds pack, or apps like Voisey and Trackd. But I also suggested that it could apply to physical formats in order to free music of its smartphone chains. One theoretical proposal was for pieces of art that would enable to the user to change the songs by walking between them, triggering a vocal part here, a drum beat there, etc. It is not a million miles away from the Donda Stem Player.

A lean in future

The entire music world is not suddenly going to go from static streams to interactive widgets, but change is a coming. In a year from now, we may look back on the Donda Stem Player as being a fun gimmick, but if we do, it will be because we have not yet found the Model T Ford, rather than the underlying principles being wrong. Of course, the majority of music listening will most likely remain lean back and static, but not all of it will. As audiences lean in ever further, more of them will want to create as much as they consume, just like they do with social video today. There is one thing we can be certain of – the future of music creativity and consumption is changing, and Kanye just played his part, again.

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.

The record labels are weaning themselves off their Spotify dependency

The major labels had a spectacular streaming quarter, registering 33% growth on Q2 2020 to reach $3.1 billion. Spotify had a less impressive quarter, growing revenues by just 23%. After being the industry’s byword for streaming for so long, Spotify’s dominant role is beginning to lessen. This is less a reflection of Spotify’s performance (though that wasn’t great in Q2) but more to do with the growing diversification of the global streaming market. 

Spotify remains the dominant player in the music subscription sector, with 32% global subscriber market share, but streaming is becoming about much more than just subscriptions. WMG’s Steve Cooper recently reported that such ‘emerging platforms’ “were running at roughly $235 million on an annualized basis” (incidentally, this aligns with MIDiA’s estimate that the global figure for 2020 was $1.5 billion). 

The music subscription market’s Achille’s heel (outside of China) has long been the lack of differentiation. The record labels showed scant interest in changing this, but instead focused on licensing entirely new music experiences outside of the subscription market. As a consequence, the likes of Peloton, TikTok and Facebook have all become key streaming partners for record labels – a very pronounced shift from how the label licensing world looked a few years ago.

The impact on streaming revenues is clear. In Q4 2016, Spotify accounted for 38% of all record label streaming revenue. By Q2 2021 this had fallen to 31%.

Looking at headline revenue alone, though, underplays the accelerating impact of streaming’s new players. Because Spotify already has such a large, established revenue base, quarterly dilution is typically steady rather than dramatic. Things look very different though when looking specifically at the revenue growth, i.e., the amount of new revenue generated in a quarter compared to the prior year. On this basis, streaming’s new players are rapidly expanding share. Spotify’s share of streaming revenue growth fell from 34% in Q4 2017 to just 26% in Q2 2021. Unlike total streaming revenue, the revenue growth figure is relatively volatile, with Spotify’s share ranging from a low of 11% to a high of 60% over the period – but the underlying direction of travel is clear.

Spotify remains the record labels’ single most important partner both in terms of hard power (revenues, subscribers) and soft power (ability to break artists etc.). But the streaming world is changing, fuelled by the record labels’ focus on supporting new growth drivers. The implications for Spotify could be pronounced. With so many of Spotify’s investors backing it in a bet on distribution against rights, the less dependent labels are on it, the more leverage they will enjoy. From a financial market perspective, the last 18 months have been dominated by good news stories for music rights – from ever-accelerating music catalogue M&A transactions to record label IPOs and investments. 

Right now, the investor momentum is with rights. Should the current dilution of Spotify’s revenue share continue, Spotify will struggle to negotiate further rates reductions and will find it harder to pursue strategies that risk antagonising rights holders. Meanwhile, rights holders would be surveying an increasingly fragmented market, where no single partner has enough market share to wield undue power and influence. That is a place where rights holders have longed dreamed of getting to, but now – divide and conquer – may finally be coming to fruition.