Streaming is this the future of the Music Industry?
Part 2 on the music streaming area for labels, artists, bands, and distributors with key points all creatives need to know!
Welcome to Part 2 of the Music streaming. This is such a HOT topic right now with the UK Government looking at this area very closely, with labels, artists, and distributors to provide a fairer landscape for the indies.
The adoption of music streaming is by far the most significant change in the industry in the last ten years.
Streaming services are looking for ways to expand their customer base, develop their product, grow revenues, and find a sustainable long-term business model, easier said than done though!.
The music industry has been caught up in the middle of this activity!
Music Streaming Trends Shaping the Industry
So, according to the analysis of the international streaming market from Music Business Research, by IFPI data, 2011, over 80% of all markets across the world were dominated by physical sales.
This is if we don’t take into consideration the consumption from the pirate services, which were still in their prime (especially outside of Europe and North America).
Then fast forward to 2017, then 85% of the markets were digital-first, and for all of those countries (except for Indonesia and Malaysia) streaming is the primary source of digital revenues.
Streaming is now the primary source of recording revenues from around the World. The recording industry revenues, raising another 9.7% in 2018, seems to be on their way to match or even top the 2001 piracy peak — and with the power behind this growth is the rapid development of streaming.
However, what does the future hold for the likes of Spotify going forward?
Looking at Maturation of the Market
The lion’s share of the streaming growth today is due to the new consumers, making a switch from the previous generations of music distribution — whether its physical sales or with digital downloads.
Once that shift is completed, the growth is bound to slow down — actually in fact, we are already at the point where some of the more developed markets are now reaching the maximum streaming adoption rates, which is interesting and shows you how we now consume music globally today.
Let us take an example of the Scandinavian markets: Finland, Sweden, Norway, Denmark, and Iceland, according to IFPI data, streaming accounts for more than 90% of digital music sales, or about 85% of all recording revenues in those countries.
The Scandinavian streaming markets are the first mature streaming economies that completed the user-transition which I mentioned above — and in that sense, they all provide a peek into the future of the global recording markets.
Let’s, take a look at the home of Spotify, which they are based in Sweden. In 2017, streaming sales grew just 7%, down from 23% in 2015.
By global standards, a 7% annual growth is almost a stagnation point, given the fact that the worldwide revenues were up to 41.1% within the same period.
However, this is inevitable for the future of the streaming industry — the question is just how and when the various local markets will reach that mature state, interesting point!
The streaming industry is very fragmented: while some markets, like the Scandinavian countries and, but to a lesser extent, the United States are reaching adulthood.
The maturation trend, however, seems to take the upper hand. In 2016 and with 2017, streaming revenues grew 60,4% and 41,1%, accordingly.
In 2018, it went down to 34%. MIDiA Research forecasts that this trend will persist in the near future, with the global market possibly reaching a 7% growth rate by 2026.
Streaming and with the Cost of Music
With the current state of the business, most streaming services/companies do struggle to find a sustainable financial model.
Spotify reported a profit only once in over ten years of its history, in Q4 of 2018 — and the company projects to get back in the red in 2019.
So, there’s every reason to believe that not just Spotify, but all major western services are yet to reach profitability — it’s just that Spotify doesn’t have a massive company behind it to absorb the losses like Apple Music or Amazon Music do in fact, but how long can you go without making a profit or is this just all about building the corporate brand or damaging the music business altogether?
But, however, profitability is not imperative for streaming services — much more important is the valuation of the business and as I stated above building a global brand.
This means that the question isn’t how will streaming services turn a profit — it’s how they will keep the momentum, given the slowing down of the market — but as we are seeing more and more people are “streaming” music and film, due to the “pandemic” globally.
So, to first, understand how the streaming services make money, we need to look at the cost structure across this whole segment.
The first line of cost for any streaming service is the pay-outs to the rights holders. In general, this is how the pay-out is divided:
1. First is the Mechanical royalties
They are paid to the songwriters for the right to reproduce the recording every time the user chooses to play a song.
That means that non-interactive plays on DSP, like ad-supported radio-stream like Pandora, for example, does not generate that type of royalties.
2. Looking at Performance royalties
These are paid to the songwriters for the right to publicly perform their music.
Since the streaming distribution model implies that the consumer does not own any of the songs, every stream is rendered as a streaming service publicly performing a song to the user — even if it is enjoyed in the privacy of one’s headphones.
For more information about this area click on the podcast link below to hear more;
3. So, what is the Pay-out to sound recording owners?
The pay-outs to master recording owners make up the primary share of the overall per-stream pay-out.
It is paid to the owners of the recording copyright — whether it is a label, distributor, or artists themselves (this could be if they went with a direct Spotify deal, as an example).
The recording pay-out is usually divvied up between the different parts of the recording chain, and the splits will hugely depend on the contract in place — which means that the recording artist ends up making anywhere from 20% to 100% of the cashflows.
On the artist side, the per-stream payout will depend on the vast number of factors, from the stream type (ad-supported vs. premium) as well as the country where your song was streamed in makes a big difference.
While Spotify charges $9.99 for its premium subscription in the U.S., in India, the price goes down to just $1.67 — and the pay-out differs.
As you can see NOT all streams are born equal. (and why we should forget about the per-stream metrics).
On the streaming side, however, calculating the overall artist pay-out is much simpler — the DSPs would usually pay a set percentage of their revenue to the rights holders.
This percentage is determined through an ongoing stream of negotiations between the streaming services and the rights holders (or their representatives): most notably the big three (which own ⅔ of the streaming catalog) and Merlin, the global digital rights agency representing a majority of the independent catalog.
The exact figures that are a subject of those negotiations are rarely publicly disclosed.
Back in 2018, according to Spotify’s annual report, they had made €5,259 million in revenues, and €3,906 million, or there about 74.2% of that pie was immediately deducted as the cost of the revenue — with a total cost of manufacturing and delivering the product to the market.
Apart from the pay-outs themselves, that figure would also include some expenses linked to maintaining the networks and delivering the content, which is hard to estimate — but the 74.2% figure can give us a good threshold for the total costs of pay-outs by the company.
But there are reasons to believe that the actual pay-out is below 70%. Around 5 years ago, Spotify communicated the pay-out rate of 70% — but since then the streaming service has negotiated the decrease of the pay-out rate across all of the major’s catalog on a condition of meeting specific revenue and subscriber targets.
The negotiations have affected the cost of revenue: the current cost of revenue is, in fact, significantly down from 88,4% back in 2015.
So, for Spotify, an educated guess would be to put the pay-outs at somewhere between 60% or 70% of total revenue — and there’s every reason to believe the pay-out rate would fall in that range for all primary streaming services today.
Apple Music, for example, used to pay out up to 74% of its revenue (58% and 13–15% to the master owners and songwriters, accordingly), but presumably negotiated the rates down since then, which could be on a par with Spotify.
Given all the power tensions between the recording industry and the streaming services, major labels are interested in keeping the playing field leveled and to that point competitive — so it’s reasonable to believe that equal rates are applied across the board.
The rest of the streaming costs are hardly worth mentioning in that context. The market is still in its early stages really, so the key to a company’s success is not in optimizing the internal costs structure.
So, let us come back to the concept of the value of the business as the primary financial goal for streaming services: in its core, the market valuation is a communal estimate of all the combined future profits whether they are 10, 20, or 30 years from now given the fact that the streaming market is a growing industry with such huge potential globally.
So, the streaming services can play a very long game, securing the share of the market that they will turn into profits from say 15 or 30 years from now.
Profitability and customer acquisition costs are hardly relevant at this point — what matters is the share of the global market (with the reasonable assumption that streaming will become the global standard), which is a big possibility with all the facts pointing that way!
If I could simplify things a little bit, every streaming service has two main ways to grow the market share.
The first point is the horizontal expansion of the market — entering new territories to unlock new growth opportunities and broaden the market.
The second point is strengthening the positions on developed streaming markets: either by winning over the users of competing streaming services or expanding the product offering to attract the non-streaming audiences.
4. The Global Expansion of Streaming
As I have mentioned a few times, more developed streaming markets are reaching the max adoption rate today.
That is to say, even though the penetration of streaming in the U.S. was around 47.5% back in 2018, the rest of the population is not interested in the current value of the music streaming services.
The maximum adoption rate of streaming is not 100% of the population — it’s the point when the new user flow will dry out (at around 50% penetration rate, based on the mature streaming market stats).
There’s not much to be gained in terms of “new blood” in the U.S. and Europe, but at the same time, the streaming penetration in India is only 6.1%, which means that the streaming offer is yet to be introduced to the mainstream audience in this country, big differences.
Through MIDiA Research they predict that the long-term growth of the global streaming market will be driven by the emerging markets: Brazil, China, Mexico, and India — as well as other major markets that are a bit late to the party, which include Germany and Japan.
Each local music market is a universe of its own and a topic for a separate discussion, but let us look through these interesting ones:
1. China:
China is the fastest-growing music industry in the world right now. It has gone from 12th to 7th place in the IFPI global recording market rankings, and the vast rise of streaming powers a big chunk of this growth for the country.
Plus, there are now over 600 million people logging into the streaming services each month in China.
However, due to the local legislation and the country’s closed off digital space, those audiences are not able to access the global streaming players.
With Music, KuWo, and NetEase Cloud, despite the wide adoption of streaming, there is still a huge room for growth for the Chinese market, as the average premium conversion rate is just 3% (compared to 46% for Spotify).
But the premium subscriptions are not even the focus of the local players, as TME, the most significant player on the market, takes an alternative path to its customers.
2. Japan:
The second biggest music market in the world, is Japan still a predominantly physical market, with the entire industry built around the CD-format.
As of 2017, more than 80% of all recording revenues were generated by CD sales. However, the physical market is slowly deteriorating — and streaming remains the only real answer to falling CD sales in this country.
All major players are already on the market, from Spotify to Apple Music to Google and YouTube Music — as well as the local solutions, trying to tap into specifics of the market, this is like Sony’s Hi-Res streaming service Mora Qualitas.
But the existing services are yet to find the key to the Japanese market, as streaming a minor power with less than 10% revenue share.
3. India:
But let’s take India who represents a massive opportunity for the global streaming market in terms of new blood.
According to local industry body IMI, only 150 million (or about 10% of its 1.3 billion population) are using music streaming services today.
On top of that, less than 1% of those 150 million ends up paying for standalone streaming subscriptions — which means that the market has a vast untapped potential, both in terms of streaming adoption and conversion to the premium subscription services, very interesting.
With such promise, no wonder that both Spotify and YouTube Music have launched their services in India in 2019 less than a month apart.
Music has actually tripled that number, leveraging the 245 million local YouTube audience. However, global players will face massive competition in the local brands such as Gaana and JioSaavn Music — which means that India is likely to become the main battleground of the global streaming market in the next few years (alongside the MENA markets, where competition is structured similarly).
Is this the future and can the indie sector make a living from streaming, as you need to have millions of streams just to scratch the surface! Well, I certainly hope so.
Sometimes it takes time for things to come around, unfortunately, time is a limited resource!
By Pete Moore
