thereport ISSUE 419 | 19 DECEMBER 2018 END-OF-YEAR REPORT 1 ISSUE 419 19.12.18 Hope and No.1 glory treaming subscriptions have trend, with three, growth excitement about the potential in brought growth back to the streaming is fuelling the China, India and Africa, there is much music industry – and in 2018 subscriptions the confidence to invest to celebrate from 2018. that has fuelled optimism and driving force. – in artists, technology and That’s not to say the year didn’t Sinvestment. The US, for example, saw copyrights alike. throw up some worries, arguments The global recorded-music industry 10% growth in the first half of 2018 for This is the key music industry trend and even the odd existential debate: lost 56% of its value between 1999 and both retail spending and wholesale of 2018. This is a growth industry once from Spotify’s growing pains, sluggish 2014, falling from annual revenues of revenues from recorded music, with more, and that is driving the decisions markets in Germany and Japan, and the $25.2bn to $14.2bn, according to the 46.4m music subscribers spending of the people within it, as well as failure to deliver (so far) of technologies IFPI. The memory of that 15-year period $2.55bn on their subscriptions – up 33% those outside with the resources to like VR and blockchain to the ever-tense should be enough to stop anyone in year-on-year and now accounting for invest in it. Optimism is back, although ‘value gap’ battles. our industry getting too carried away 55.4% of total spending. for now the memory of those darker This report is music:)ally’s review with the return to growth since. That’s not just important because times is a check on over-confidence or of the year, warts and all. We’ve chosen And yet… return to growth! Global the US is the biggest music market in arrogance. 40 industry trends, and for each revenues grew to $14.7bn in 2015, then the world. It’s also the headquarters From the steady growth of Spotify we’ve tried to say not just what report $16bn in 2016 and $17.3bn in 2017. of the global major music companies, and Apple Music subscriptions, the happened, but what it meant – and Based on the mid-year figures from as well as the home of Wall Street and emergence of smart speakers, to what might happen next. Enjoy… and various countries, 2018 continued that the motherlode of venture capital. In all industry-friendly legislations and the roll on 2019. the END-OF-YEAR REPORT 2 ISSUE 419 19.12.18 Spotify adapts to life as a power player No.2 potify is a big and powerful company The option of direct distribution will whose actions have far-reaching inevitably affect the nature and terms of consequences for the industry within the deals that artists seek from labels (and which it operates. This is an obvious that labels are obliged to offer). Sstatement, but the trend running through Meanwhile, Spotify’s decision to choose Spotify’s 2018 is the company’s exertion of ‘preferred’ distributors to work with will that power, with a mixture of intended and contribute (along with Apple Music) to unintended consequences. determining the winners and losers in that We’ll start with a reminder of the scale sector of the market. we’re dealing with. Spotify began 2018 Spotify’s awareness of its own power with 159m monthly active users (MAUs), was also highlighted in an interview by including 71m paying subscribers. CFO Barry McCarthy at a Goldman Sachs By the end of September, it had 191m conference in September. His jabs at MAUs including 87m subscribers, and its Apple (“It’s not a software culture: it’s a current financial guidance predicts that by hardware culture”) and Amazon (“They the end of 2018, it’ll be on 199-206m MAUs don’t really care how engaged you are in and 93-96m subscribers. the music service as long as you become As its service turned 10 years old in a Prime subscriber”) were unusual in their October, Spotify was paying out around directness. $288m a month to music rightsholders, any future proceeds fairly too. News in June that it was offering some But it was McCarthy’s candid words with another $50m a month spent on R&D It’s not that long in Spotify’s history management firms and independent artists about Spotify’s major label partners – and $58m on sales and marketing. since it was seen as a punchbag as much six-figure advances to license their music “They have oligopoly power, and we can’t After going public, Spotify’s market cap as a partner: remember the days of intense directly was followed in September by tests be successful without them as partners[…] is now $21.8bn. And even the less positive pressure from labels over its freemium of a tool for artists and labels to upload We have driven all of their revenue growth numbers are huge: the company’s net loss model (including famously forcing it to their music directly to Spotify, all without and they can’t be successful without us over the first nine months of 2018 was impose a five-play limit on songs for free having to go through a distributor. as business partners” – that were most around $591m at current exchange rates. users) or the time when Apple played “Licensing content doesn’t make us a striking. Spotify is big. Comfortably the biggest slowcoach with the approval process for label, nor do we have any interest in being “I would say if you’re a drama queen, music streaming subscription service – Spotify’s first iOS app? a label,” stressed CEO Daniel Ek during his knock yourselves out! It’s going to be a Apple Music was on 56m in early December Things have changed. 2018 saw Spotify company’s Q2 earnings call in July. great show,” he added, about the next including trials – even if YouTube outstrips confident enough to discontinue its support “We want to grow the number of labels round of licensing negotiations. Punchbag it for monthly music listeners. for Apple’s in-app purchases for new and creators on the platform, as well as no more, even if labels (as seen by the Pretty much everything Spotify did in subscribers in its app, while also beefing up the number of creators using our tools and reports of a go-slow approach to licensing 2018 had a big knock-on effect for the that once-controversial free tier with more services. In some cases we license from Spotify in India, in response to its direct music industry. Its DPO saw windfalls for on-demand mobile features. labels, and in others from artists if they own licensing of artists) still have levers to pull Sony Music, Warner Music and Merlin, The most prominent (deliberate) exertion the rights to their own music.” in return. report which were passed on to artists, with of Spotify’s power in 2018, however, came Spotify may not want to be a label, (Speculation that Spotify might be Universal Music hanging on to its shares with its moves towards even-more direct but the knock-on effects from all this are tempted to buy a stake in Universal Music but promising (via Taylor Swift) to distribute relationships with artists. still considerable. Group as part of Vivendi’s partial sell-off the END-OF-YEAR REPORT 3 ISSUE 419 19.12.18 Spotify adapts to life as a power player... continued shows there may be more twists yet in That’s a key sentence, actually: with these relationships.) its public listing out of the way, what does Is Spotify entirely comfortable with its Spotify want to be as a company? Apart power? There were hints of growing pains. from ‘profitable’ of course: a goal that Ek Witness Ek’s comments at the company’s and McCarthy both maintain is attainable, investor day in March, saying that “making even if the costs of global expansion are a it onto one of our playlists can literally priority for the time being. change an artist’s life” yet also protesting We know that Spotify wants to be a (too much?) that “we don’t believe in “two-sided marketplace” for artists and gatekeepers”. fans, offering ever-more marketing tools (Contrast his then-colleague Troy for the former, and new ways to discover Carter’s claim at the same event that “our music and artists for the latter. Rolling editorial process is a unique meritocracy in these out while keeping investors happy an industry that was once controlled by just and not alienating music rightsholders a handful of gatekeepers” with a comment (too much) is one of Spotify’s more about the biggest streaming services at delicate challenges. Midem in June by Mom + Pop Music’s We know that Spotify sees itself as a Thaddeus Rudd: “There are 12 people progressive company: it has launched who control the playlists that have laudable initiatives around equality, global impact, and which have the diversity and the rights of refugees. How most impact on new music being as a platform owner. Spotify’s decision to this squares with the company’s desire to streamed on these services.”) remove podcasts by far-right conspiracy launch in some parts of the world where Spotify’s playlists are powerful, theorist Alex Jones was generally these issues are controversial (or, indeed, and not just the human-curated welcomed, but its ill-judged new policy illegal) is a point of tension to watch.