Why the Major Labels Should Buy Multi-Channel Networks

The most logical expansion for UMG, WMG and Sony is to embrace online video stars from YouTube, Vine and Snapchat

Streaming music, up 54.4% YOY in the US in 2014, is finally putting some cash into the pockets of record labels (and growing pressure to improve freemium conversion rates may boost income from it further), but next to the continued plummeting of physical sales and digital downloads it doesn’t seem like much to get overly excited about. The fact is that record labels need substantive new revenue streams, and more M&A within the label landscape (or music industry in general) is of incremental value: buying other sinking (or at least unstable) ships isn’t a solution.

The three majors — Universal Music Group (UMG), Warner Music Group (WMG), and Sony Music Entertainment (Sony) — require ambitious repositioning of their role within the modern media (not just music) landscape. They need to apply their skill in identifying, promoting, and monetizing creative talent toward a more diversified scope of operations. The most logical jump for their expansion is to acquire or incubate their own Multi-Channel Networks (MCNs), which represent online video stars from YouTube, Vine, Snapchat, and elsewhere.

While the labels would be entering a new market, it wouldn’t actually be that radical of a move. Here’s why:

1. Online video is on fire, and it’s still getting started

Q2 2014 saw a 43% increase in online video viewing hours YOY, along with a 25% increase in advertiser spending on videos. CPMs for online video have surpassed that of primetime cable TV and continue to rise. Social media platforms like Snapchat, Vine, Instagram, Twitter, and Facebook are prioritizing social video in their user experience. Among teens, YouTube stars are bigger celebrities than Hollywood A-Listers. And don’t forget that that nearly two-thirds of the world isn’t even on the internet yet.

Justine Ezarik and Troye Sivan

For MCNs rising with the tide, things are looking strong too, despite early skepticism about their ability to turn a profit. Content creators’ cut of ad revenue from their videos — the source of income for MCNs, who often take 30% — is likely to improve across the board, with heated competition between tech platforms driving friendlier revenue sharing terms. YouTube up to this point has had complete dominance of the market and hasn’t needed to back down from its 45% share of ad revenue from creators’ videos (leaving the creator with ~38% and their MCN ~17% of the total). But top YouTubers amass their fans across numerous platforms (Twitter, Instagram, Tumblr, Snapchat) giving them growing walking power right as Facebook, Vimeo, Vessel and other platforms have begun poaching them with upfront bonuses, increased production resources, and better ad revenue splits. (Expect Twitter and Snapchat to get more involved in the competition for social video talent over 2015 as well.)

Image credit: Mark Suster, Upfront Ventures

Social media stars (far more so than musicians) also tend to quickly expand their revenue streams through the launch of their own product lines, books and more, which presents the opportunity for 360-degree deals with firms that provide relevant support across all their operations.

2. Major labels already have much of the core MCN infrastructure in place

That’s because, when you look at it, an MCN is basically a record label for online video stars. While the networks arose as a form of collective bargaining for this new sector of talent, getting the hundreds (or thousands) of YouTube content creators on their roster better CPMs, the lack of any pre-existing industry for the new sector of talent led them to provide a full package of services. Like a record label with their musicians, many MCNs guide a creator’s marketing, PR, artistic collaborations, brand partnerships, content rights, production resources, and accounting. And of course they’ve grown beyond just YouTube to become multi-platform in the distribution of content as well.

Labels’ biggest gap is in the need to build an ad sales operation for video, but the core functions beyond that integrate directly into the infrastructure and relationships that are their bread-and-butter… it’s just applied to another type of artist. Not to mention, in-house expertise exists already (to ease the integration of an MCN) since top musicians are inherently social media stars themselves, with marketing support from their label to engage with fans through online video and social apps.

3. Competing in the MCN space is equally a defensive play for labels to protect their long-term role in representing musicians

The current generation of rising musicians (and future generations only more so) are building their careers on YouTube, Vine, and elsewhere, which makes it increasingly likely that they’ll be signed with an MCN before they get an offer from a record label.

That situation then prompts debate over what a label can provide that their MCN can’t— with the addition of a smaller “label services” arrangement for radio promo and/or physical distribution. Last year, for example, we saw young musicians like Shawn Mendes (of Vine) and Troye Sivan (of YouTube) leverage their online success for record deals with Island and EMI Australia; but we also saw equally high profile stars Jack & Jack (Vine) and Lindsey Stirling (YouTube) release albums while eschewing labels and remaining signed with just Fullscreen and Maker Studios, respectively. In the short-term, record deals are still the path to music stardom, but in the medium- and long-term many signs point to that not being the case amidst the growing strength of alternatives.

4. The close cross-pollination between an in-house MCN and record label teams would provide a distinct competitive advantage in both sectors

The data that MCNs are constantly amassing and analyzing from their partner channels (including views, viewer drop-off points, sharing metrics, demographics, engagement levels) empowers them to help their creators determine best practices. Those data-backed insights from the channels of top YouTubers would be equally valuable to the marketing teams guiding a recording artist’s social media strategy and involvement in short-form videos (including their own music videos and “behind the scenes” clips from on tour). Thus far, labels have mostly treated online video platforms as distribution for the same TV-format content they’ve long created, rather can producing native content that’s shown to perform best. Consider WMG using their Snapchat Discover channel only to squeeze in traditional music videos. Integration with an MCN could help labels make that sharp shift.

Meghan Trainor’s “Lips are Movin” video, featured YouTubers like Les Twins.

Having both musicians and social media stars in-house also opens the door to more efficient and extensive cross-promotion (or “collabs” in YouTube speak) between artists with overlapping target audiences. For example, Meghan Trainor’s “Lips are Movin” music video produced by and co-starring several famous YouTubers, hit 2.5M views in 48hrs when it launched in early November and (according to Billboard) spiked Trainor’s following across Twitter (11%), Facebook (15%), Instagram (41%), and Vine (100%) within a couple weeks. Such crossover helps musicians tap into the highly-targeted, loyal fan bases that social stars build while also providing the online star with exposure to the musician’s fans and the more mainstream press attention musicians garner.

Leading TV/film conglomerates have been the ones buying up MCNs — like Disney with Maker Studios, Dreamworks with AwesomenessTV / Big Frame, and the Chernin Group (plus AT&T) with Fullscreen — but it seems the more natural integration is for major labels to be the ones scooping them up (or building them internally).

Of the three majors, UMG appears best poised to make the first big jump into MCNs, given its dominant market position with brand deals (that are also the fuel of MCNs) and the focus of its parent company, Vivendi, on deploying a fresh $5B war chest (from telco sell-offs) toward digital media M&A and a stronger focus on the music/video overlap. Perhaps VEVO (co-owned by UMG, Sony, and Google/YouTube) will, alternatively, undergo fundamental changes to compete in representing social media stars in place of UMG and Sony acting independently, but the complexity/politics of its ownership make that unlikely.

Either way, it’s a bold but natural strategic step for the majors to expand into this new crop of artistic talent. Rather than just fighting to maintain what a record company used to be, they should be fighting for a re-shaped vision of what they can become as media, and media consumption, evolves.

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Top Image: Lindsey Stirling performs onstage at Shepherd’s Bush Empire on May 28th 2013 in London

Follow Eric Peckham on Twitter @epeckham
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