The most consistent comment from No Plan B was that streaming services need to try to cut more margin from rights owners in order to get to profitability. The streaming business is starting to look pretty solid, but if the streaming companies themselves don’t get profitable it will undermine that return to growth. Profitability in the streaming model will be the litmus test of whether the music business is back on a long-term growth path.
And this was the gist of the No Plan B piece, that the business model for streaming is back-to-front. In the old physical business the label paid for almost everything (recording, manufacturing, distribution, marketing & promotion) and kept the lion’s share of the revenue. In the streaming model the service providers like Spotify have invested heavily in technology, marketing, distribution and up-front fees for content, yet are left with thin margins to operate their businesses.
There should be a high value attached to the content that rights owners have invested in. They still have to find, nurture and promote new artists and composers, and that costs serious coin. And I don’t suggest streaming services should expect the lion’s share of the margin - streaming is a volume game and once economies of scale have kicked in everyone in the food chain gets the flow through benefit, including artists, composers, and the services themselves.
But it’s arguable a portion of marketing and distribution costs are now borne by companies like Spotify and Apple, and there are no longer manufacturing costs. So should there be a more equitable balance, particularly in the early days of a service when cash flow is only going one way? Many good, innovative services have died because they were crippled by the high up-front, low-margin content model - Rdio anyone?
And taking it a step further, should there be a more equitable balance between labels and publishers in splitting up the content pie? The rise of rights companies like BMG point to a blurring of the old distinction between what a label and publisher do and what they contribute.
So I was interested to read that Spotify is negotiating to push down the revenue share it pays the labels. And while the music business’ recovery is still fragile, this is really the best way for the sector to get to consistent profitability.
So what do the rights owners get in return for this largesse? Paul commented that streaming services need to leverage their user data to provide a “best in class” digital marketing platforms. It’s a good point. The data collected from 100m+ users is extraordinarily rich and data is an asset the rights owners are increasingly focused on. But what to use it for?
Digital marketing and data should be the cornerstone of the free ad-funded tiers which are still feeding into the paid subscription model. But streaming ad revenue is stubbornly small (about $630m last year) and flat. And it’s not what the rights owners want to license, so it’s only there begrudgingly. Spotify for example provides a variety of options to try and make the free tier attractive to advertisers, such as audio ads, displays, branded playlists, sponsored sessions, and homepage / video takeovers.
But their real focus is using data to make the experience better for its own users, thereby encouraging free subscribers to convert more quickly to paid, as well as keeping their paying users longer. Attract, acquire and retain. This is smart. If you can move more of the freebies into paying and convert them quickly, you reduce the pressure on pricing – at exactly the point in time when there’s pressure to lower prices or at least offer different pricing structures.
A manifestation of this strategy is in playlists – both Apple and Spotify put a lot of effort into their playlists and this is where the real action is. Playlists are the new radio, and they come in all shapes and sizes – those created by users, 3rd party professional curators, the labels and artists themselves, and the algorithmically created playlists. About 90% of us listen to our music through these playlists, so how good a playlist is at hooking and keeping us listening is critical.
And because playlists are now so central to the whole streaming experience, labels in particular are highly focused on making sure their artists are high up in the best and most popular playlists. Tracking playlist popularity, average streaming times, skips, users adding tracks to their own playlists, and all the other things we do while we’re listening is a rich vein of user data.
Which brings us back to the point about using streaming data for best in class marketing – it’s already happening and will only get smarter and more intuitive.
And for everyone over 35, my favourite comment from Colin: “The thing many people miss is the sense of occasion that used to attach to getting a new piece of music. The packaging and context made it rather thrilling. If we can re-discover that sense of wonder and pleasure I see the business taking off even faster.”