The New Bohemian Rhapsody
Part 2 of The Chronicles of Streaming — Spotify and the Artist Oligopoly
Streaming songs is a thing. In many ways it has saved the music industry. 2016 was the first year since the late 90s where revenues for recorded music actually grew. Most forecasts, like the one below, see streaming accounting for all of the growth and almost all of the market within a decade.
The easy ‘Netflix-for’ comparison to make in this market is Spotify, of course. In fact, the trajectory of paid subs for both companies is spookily similar (see below). Spotify is somewhat less of a vampire squid though, largely due to the market structure of recorded music. Spotify account for over half of the paid music-subscriptions worldwide (without having made any significant push into Asia) and they’ve ‘set the price’ for streaming music as a result. Though they’re certainly not the tastemaker in the mould of Netflix. Not yet, anyway.
Music is a curious beast. 3 record labels — Sony, Warner, Universal — take in 2/3rds of global streaming revenues. Here in the UK, they account for a massive 77% of revenues. These businesses are the true trend setters. That’s a much bigger deal in music than in video and a good part of that is due to the useful life of content. TV shows, documentaries and movies stick around and are enjoyed for longer and by more people, these days.
I know what you’re thinking. You’re probably thinking about everyone from The Beatles to Bowie, Parton to Piaf. There’s certainly plenty of classics around but they’re certainly not getting streamed a great deal. About half of Spotify users are under 30, and those are the folks who are doing all the streaming. Netflix can go ‘full stack’ (own the value chain entirely) with a degree of confidence that Spotify is unlikely to have because the ROI from content needs to be realised in a much shorter time period. It’s harder to take big risks when returns are uncertain and the time period to realise those uncertain returns is very short.
That’s not to say that they’re not going to try though. One of the stations on that line is to somehow break the market power that the big 3 labels possess. Paradoxically, the way to do that is to make the useful life of music content even shorter. This isn’t to say: decrease the quality of content. This also isn’t to say: that Spotify should be flooding the platform with music (which it is of course, but this is a function of the greater goal which the company is working toward).
Think about this useful life of content in a different way. For those big three labels, they probably have a pareto rule where ~80% of their revenues are generated through ~20% of their artists. The blue riband crowd. In fact, the very existence of Tidal serves to support the idea that the power-law of return generators for the big labels is much more aggressive than 80:20. We’re talking about Beyonce, Rihanna and Kanye West here. They’ve got it and we want it. These artists, products of the big labels, have millions upon millions of loyal fans. Insofar as that’s the case, the useful life of their content is far greater than that of the up-and-coming indie band.
This scenario isn’t in Spotify’s interest, of course. To be beholden to the labels for their premium content / top artists — because that’s what customers want — is to decrease the ability for Spotify to wrest some power from the incumbents. So, what have Spotify been doing in response?
I’m a proper Spotify fan-boy. I have been from the beginning. If there is such a thing as a power-user, I probably am one. I’ve witnessed over the years that the platform has gradually been weaning me off artist-allegiance and onto playlists. I now no longer reliably get notifications when artists that I follow release new music / new music is uploaded to the platform. I do however listen to my Spotify Weekly, religiously. As dependably as I listen to it, I dependably have no clue as to the artist that I’m listening to…but I like it, so no matter. I listen to other playlists too. I follow a whole load of them. Ultimately, what choice do I have? In a world where 20,000 songs are being added every day to the existing library of 30m+, I need those playlists to help me separate the music from the noise.
Where once I took pride in curating my own lists — and to an extent I still do — Spotify does an increasing amount of the hard work for me. That work is done increasingly better as the weeks and months roll on. I keep listening and putting songs that I like the sounds of into my playlists, and they keep learning. They’re learning from me, about me. They’re also learning about people similar to me. Importantly, they’re learning from plenty of people who are nothing like me so as to help me avoid things I’m not going to like. Spotify may well serve me up some of my favourite Edwin Starr from time to time, but be sure that’s part of a balanced diet to ensure engagement rather than encouraging a relapse into slavish artist-worship.
A reasonable question to ask is whether streaming represents the end of artist (and label) oligopoly? Will streaming kill the music star, just like it’s killing the video star? That’s probably a little overblown, not least as being a fan hits right at the heart of the human need for belonging and inspiration. Still, it’s the direction in which we’re travelling. Streaming on the up, diversity of artists being listened to…also on the up:
In this brave new world, Spotify is the leader in ‘discovery’. The explosion in musical content has mean that this is a valuable product in itself. It’s also coincided with what’s likely to be a formulated plan to breaking down artist-allegiance (record label power) which has helped to add ‘use’ to the ‘case’.
So, what does the future look like? Assuming music-by-playlist is here to stay, along with the context and realities that go with it, one version of the future is for Spotify to take payment in order to promote certain artists within those playlists. I’ve got to say, that sounds a bit spivvy. That being said, the ‘outrage’ among premium users relating to Drake’s recent release of Scorpion and its promotion across the platform points toward an increasing proclivity to making this revenue line a reality.
It’s not a massive leap to think that Spotify might attempt the full stack, or at the very least expand their direct-artist deals. They’re sitting on a tech platform, learning about their users in ways not dissimilar to Netflix. Why not take the risk on content at the point at which you’ve got a degree of certainty that you’ll get some ROI? Whether it’s directly commissioning content, looking more like a record label or just getting closer to artists, there’s a path. The main problem with this route is, of course, the labels. They still own the rights to the music, so how could they tolerate such competition? Well they’ve found themselves in a bit of a catch-22. Yes, they own the rights but Spotify ‘owns’ the LTV. At one time, the labels sensibly took equity stakes in Spotify as an antidote. A sensible move. However, since Spotify publicly listed those labels have dumped large proportions of their stakes thereby reducing their influence. Spotify’s new Rise initiative looks an awful lot like this, and no doubt has been operated much to the displeasure of the big labels.
Where does all this musing on the two stars of streaming leave us? The battlefield that these tech companies now find themselves on is best summarised by a16z’s Alex Rampell: “The battle between every startup and incumbent comes down to whether the startup gets distribution before the incumbent gets innovation”.
Curiously I’ve come to a somewhat counterintuitive conclusion. While Netflix is arguably a much more successful company — certainly valued far more highly in the public markets than Spotify — I feel as though they have some more formidable challenges ahead. Content production is so central to their success, less so for Spotify. While I’ve been whaling on HBO’s, the BBC’s et al.’s ability to compete, the fact remains that they’re still pretty good at producing content. There’s more competition. The incumbents are ‘getting’ innovation in the form of HBO Go and Hulu. That’s not even to mention the Prime elephant in the room.
Curiously, in music, the picture is a little different. Content and its distribution pre-internet involved infrastructure, hardware, software, millions of humans and satellite industries. Napster ripped the plaster off a little too quickly though smoothed the way for Spotify, Apple Music, Tidal and others. Incumbents had a warning shot early-doors though they’ve been slow to the innovation punch while the tech companies, particularly Spotify, are well ahead with distribution.
Game on.
