Written evidence submitted by MIDiA Research

 

 

Economics of Music Streaming Inquiry

Author: Mark Mulligan

November 2020

 

Introduction

 

Launched in 2015, MIDiA Research is a UK-based entertainment intelligence company that is focused on the intersection of media and technology. Our core specialism is the music industry and our paid subscriber base includes most of the key players in the sector. We take an objective, non-partisan, cross-value-chain approach and are fortunate to be widely recognised as the leading source for music business analysis. We hope that MIDiA’s submission, adhering to this non-partisan approach will provide a valuable and authoritative addition to other submissions received.

 

We understand that many submissions to this inquiry will present similar sets of information and data, including some of MIDiA’s own. To avoid repetition, we will, within the terms of reference, focus, on a few fundamental themes that may not be covered in detail elsewhere:

 

 

Key insights

 

 


What are the dominant business models of the platforms that offer music streaming as a service?

 

The music streaming market lacks differentiation and is consolidated around a few key players. This is a direct consequence of the licensing power of the three major music labels. By the end of 2019, the three majors claimed 67.5% of the global recorded music market. Although this market share is overstated, as it includes the revenue of independent labels that the major music companies distribute, it is the measure that they use for licensing negotiations. The net effect is that each major has the equivalent power of a UN Security Council veto. Few music services have had success launching without all three major labels licensed.

 

This concentration of power has resulted in a conservative approach to innovation. Most streaming services have very similar products, pricing and catalogue. This contrasts sharply with the video streaming market, which is characterised by diversity of offers and pricing, and where rights holder market share is more evenly distributed.

 

While there has been some welcome innovation, such as multi-user price plans, smart speaker support and bundles such as Apple One and Amazon Prime, these are relatively minor tweaks to a model that has remained largely unchanged in over a decade.

 

The approach has affected UK businesses. In the mid-2000s a number of UK start-ups (MusicQubed, Blinkbox, Psonar) identified the opportunity for mid-priced, curated streaming platforms to reach audiences beyond the £9.99 services. The record labels were cautious, providing licences that were too narrow to drive strong consumer demand. There was an opportunity for UK businesses to take a lead in streaming innovation, but instead they failed with under-powered products.


 

 

Music streaming also needs more corporate diversity. The top four streaming services increased their share of UK subscribers from 93% in Q4 2015 to 98% in Q2 2020. Of those four, only Spotify is independent, and the remainder are all owned and operated by one of the US-based, global tech majors (Amazon, Apple, Alphabet). Each uses music as a means to achieve ulterior strategic objectives.

 

 

Although Alphabet is only fourth placed in subscriber terms, its YouTube platform dominates music consumption in the UK as it does globally. 45% of UK consumers aged 16+ use YouTube weekly for music, ten points ahead of the leading music subscription service Spotify. The remainder of the streaming audience is fragmented across a long tail of services. The BBC’s Sounds app has quickly established itself as a strong mid-tier audio app, but still lags far behind the leaders and does not have full, on-demand licences like the other leading services.  

 

YouTube’s dominant role is even more pronounced in demographic terms. Although teens are slightly more likely to use Spotify weekly, all other age groups skew strongly towards YouTube. Although YouTube has made strong progress driving subscriptions in recent years, it is predominantly an ad-supported proposition. It also has a larger catalogue than most audio streaming services and includes many additional features, such as video, comments, and likes/dislikes. YouTube’s free offer is thus a more fully-featured service than most of the paid-for competition.

 

YouTube has a very different licensing position than most other streaming services. In simplistic terms, it seeks licences for music it already hosts while other services negotiate to acquire catalogue to stream. Rights holders do not favour this position and are actively seeking to normalise the situation via the EU’s Digital Copyright Directive. The negative side for rights holders and creators is that YouTube pays less per stream than other streaming services. The positive side is that it has developed a differentiated product with true scale. In the process, it has become a crucial tool in music marketing and discovery. YouTube is second only to radio among UK consumers as the destination for discovering new music. Record labels spend hundreds of millions of pounds, globally, to promote their music on YouTube.

 

Business models

 

All subscription services operate on the same basic model: monetise through subscriptions and pay rights holders approximately 70% of premium revenues, allocated on a consumption basis. Spotify has the most incentive to reduce royalty rates, being one of the few companies reliant upon music as its core driver of revenue and profits. Spotify has spent most of its existence operating at a loss. The tech majors (Amazon, Apple, Alphabet and Facebook) can afford to loss lead with streaming and even have an incentive to over-pay for rights, a strategy that could damage Spotify’s commercial sustainability. The question is whether they would maintain such a strategy if a strong independent player was no longer in the market.

 

The two biggest business model differences are:

 

 

In conclusion, the dominant business models of streaming services are subscriptions and advertising, both routinely delivering low or negative net margins. Innovation will either operate within current licensing models (e.g. high-definition audio, increased prices) or go entirely outside of music (e.g. podcasts). Notably, Amazon is pursuing both approaches.

 

Have new features associated with streaming platforms, such as algorithmic curation of music or company playlists, influenced consumer habits, tastes, etc.?

 

Streaming is changing how people listen to music, and in turn is shaping how music is made. This cultural circle of influence may prove to be one of the most significant long-term legacies of streaming.

 

Pre-streaming music consumption was divided into two main categories:

 

  1.                                                                                                                                                                                                                    Radio: passive, lean-back listening – low-spending mainstream
  2.                                                                                                                                                                                                                    Retail: lean-forward, selective acquisition – higher-spending fans

 

Streaming fused these two categories. As streaming services have innovated around personalisation, curation and programming, lean-back listening has grown.

 

 

There is a causal relationship between streaming curation, and record label A&R and marketing. Both sets of creatives are exposed to similar cultural stimuli and often mix in similar social circles. Moreover, record labels sign and promote music which they think streaming curators will select and promote. This second circle of cultural influence has made streaming a genre microclimate. Among UK consumers rock is the second most liked music genre, yet it only accounted for 2% of the top 50 Spotify tracks in the UK in early November 2020. Hip hop was the second biggest genre in the Spotify top 50, yet ranks sixth for all UK consumers and third for Spotify weekly users. The Spotify top 50 resembles radio programming, further illustrating the move to lean-back listening.

 

The song economy

 

Streaming accelerated the pre-existing consumption shift from albums to songs, transforming the modern music business into a song economy.

 

Streaming’s modus operandi is to deliver large quantities of targeted new music to listeners.

Labels feed the cycle by releasing larger volumes of new music to maintain market share. Audiences thus consume growing volumes of music, often passively, rather than spending time with individual artists, making it hard for artists to build fanbases. Music is becoming sonic wallpaper, favouring the streaming services rather than artists or labels.

 

As subscription royalties are paid as a share of a fixed pot, and ad revenue was just 13% of UK streaming revenues in 2019, streaming services are incentivised to drive consumption, which has had the effect of making music a passive, background app behaviour. This dilutes engagement and fan passion. Artists need a creator economy; streaming favours a song economy.

The creator economy

 

The rise of the independent sector is one of the most positive streaming-driven trends. This segment is defined as:

 

  1.                                                                                                                                                                                                                    Independent labels
  2.                                                                                                                                                                                                                    Independent artists that own their masters, using labels as service partners
  3.                                                                                                                                                                                                                    Independent artists that release directly without a label

 

The third group is the most dynamic of all, growing faster than any other sector in the global recorded music business, up 32% in 2019 to reach 4.1% of all revenues. The total market grew by 11.4%. Growth accelerated further in the first three quarters of 2020 and should total £825 million globally for the full year.

 

Globally, there were 4.7 million self-releasing artists by Q3 2020, of which around 340,000 were from the UK.

 

We are entering a new era for the music business, with independent artists and new small labels capitalising upon the democratised access to means of production and distribution. Companies like Apple and Ableton provide aspiring creators with affordable, studio-quality music production software. Apple’s £200 software programme Logic Pro is used by globally successful artists like Billie Eilish and Kylie Minogue. Meanwhile, distribution tools like Soundcloud, YouTube, TuneCore and Amuse enable independent creators to reach global audiences.

 

The wider streaming economy is levelling the playing field for aspiring artists. In 2019, independent artists increased global Spotify streams 40%, compared to 27% for major label artists. However, this is not just about major labels; it is about old versus new. Independent labels distributed by Merlin (which tend to be older, more established labels) only grew by 11% while other independents (which tend to be newer) grew by 58%. Small labels and artists born into streaming have learned how to make the system work for them.

 

The unintended consequence of the rise of independents is the dilution of streaming royalties. Streams are divided among more artists so while total royalties grow, the average income per artist falls. This is the price of democratisation. Creators need other ways to benefit from the streaming economy and the growth of their audiences. Monetising superfans on platforms such as Twitch represents an alternative approach.

 


What have been the economic impacts and long-term implications of streaming on the music industry, including for artists, record labels, record shops, etc.?

 

Streaming returned the global and UK recorded music industries to growth. UK recorded music revenues were £1.8 billion in 2019 in retail terms, up 10% from 2018 with streaming 64% of the total. UK revenues grew for four successive years up to 2019. Previously, traditional formats declined more quickly than streaming grew. MIDiA forecasts UK retail recorded revenues will reach £2.5 billion in 2027, with streaming accounting for 84%.

 

 

Although total revenues have grown, many creators and rights holders feel that they are not earning enough from streaming. The song economy and the fragmentation of streams are key factors, but matters are compounded by declining stream rates. Between Q1 2016 and Q3 2020, Spotify reported subscriber ARPU falling from €6.38 to €4.19, a 34% decline. Lower ARPU means lower stream rates. This dynamic is a trend driven by:

 

 

As Western markets reach maturity, ARPU will recover but emerging markets’ growth will increase pressure on stream rates for UK artists earning overseas.

 

In addition, headline subscription prices have remained at £9.99. On a global basis, accounting for inflation, this reflects a 34% decline in real terms between 2009 and 2019.

 

There is clearly a case for increasing consumer prices, and MIDiA’s work in this space indicates there is consumer tolerance. It is important to note, though, that even a £2 increase would not meaningfully offset the wider effects of streaming economics for creators.

 

Creator income

 

Perhaps the most important aspect that artists and songwriters must grasp is that streaming represents a shift from the sales model shaped by large single payments, to an annuity model that spreads income over time and in which less popular songs deliver less income.

 

Prior to COVID-19 disrupting live music, artists benefited from a network effect, with streaming allowing more people to listen to their music, driving bigger live audiences and more merchandise sales – segments where many artists earn most of their income. Once live stopped, artists became more sensitive to streaming royalties, leading to the rise of the #brokenrecord debate. Professional songwriters have long endured this, unable to sell t-shirts or perform live, and will still feel the same once live recovers.

 

Income flows

 

Artists and songwriters all earn different shares of streaming revenue because of their rights holder relationships. These are some key variables:

 

Artists

 

Songwriters

 

 

 

The above table presents a series of illustrations of different income flows for artists and songwriters. Masters royalties refer to the recording of the performance (artists and labels) while publishing royalties refer to the underlying composition (songwriters and music publishers).

 

The range is pronounced across all examples, but the biggest difference is between performing artists and songwriters. Masters royalties typically account for between 52% and 55% of subscription revenue, while publishing royalties typically account for between 12% and 15%. Matters are compounded for songwriters by the fact that it is increasingly common for songs to have multiple contributing writers, thus reducing the amount any single songwriter earns.

 


How can the UK government protect the industry from knock-on effects, such as increased piracy of music? Does the UK need an equivalent of the EU Digital Copyright Directive?

 

Piracy is becoming yesterday’s problem. Digital piracy rose to prominence when the music business had no viable digital strategy. Since the rise of streaming, piracy has become niche - just 2.9% of UK consumers use music P2P (peer-to-peer) regularly. Not only are consumers now able to easily access free music legally, consumption has shifted from albums to songs, so when piracy does occur it usually entails a smaller number of files per user. None of this means piracy does not still need to be addressed, but rather that the scale of the threat is now small in terms of both audience size and volume of files.

 

Do alternative business models exist? How can policy favour more equitable business models?

 

With streaming growth slowing, now is the time to explore new models. These are a few of MIDiA’s proposed models. For all of them we recommend that rights holders allocate larger revenue shares to their creators than they do with streaming: