After 15 straight years of declining revenue, the global recorded music market has now enjoyed three straight years of revenue growth. While this presents optimism for many that the record industry is finally rebounding in the wake of Napster and the internet’s ultimate unraveling of physical record sales, a closer look at the dynamics of the reported growth and the overall effect of on-demand streaming reveals a more uncertain future, one that artists and managers (as well as their representatives) must monitor, since these trends can have a big impact on who they choose to work with and the deals they negotiate.
According to the International Federation of the Phonographic Industry’s 2018 Global Music Report, digital revenues from last year accounted for 54% of total recorded music sales worldwide, the first time in which digital revenues represented over half of total global recorded music sales. This increase was tied largely to streaming revenue, which led the way at 38.4% of total sales. At the same time, revenue from digital downloads and physical formats (e.g., CDs and vinyl) continued to fall, accounting for 10.8% and 30%, respectively, of total recorded music revenue worldwide.
Leading the way in the music streaming revolution is Spotify, which negotiated a lower per-stream royalty in 2017 with the three major labels — Sony Music, Universal Music Group and Warner Music Group. This arguably helped them increase their gross margin to 21% by the end of 2017, up 7% from 2016. With the added growth, Spotify did as many expected and filed for an initial public offering (IPO) in February 2018. However, by becoming publicly traded, they may have inadvertently created unnecessary pressure from shareholders, and Spotify now finds itself searching for ways to become profitable while fending off advances from competitors, which appears ready to drive a wedge between the healthy relationships they’ve enjoyed with the majors.
Despite comments to the contrary, Spotify has, in many ways, begun to function as a traditional label. Recently, they launched Spotify for Artists, which provides artists with the tools necessary to improve their reach, such as listener data, and the ability to submit music to Spotify’s editorial team for inclusion on the company’s vaunted playlists. Reports also indicate that Spotify has recently signed deals with independent artists and managers, establishing a direct relationship to talent and removing the label intermediary. As part of these deals, artists are getting the benefit of distribution and promotion, the draw of major labels, while still maintaining their ownership rights, something that almost always ends up in the hands of labels. While the dollar value of these deals is relatively insignificant, it can still be seen by the major labels as direct competition.
At the same time, new services such as YouTube Music, Google Play Music and Apple Music have emerged as serious competitors, the last of which just recently surpassed Spotify for the most U.S. paid subscribers. Unlike Spotify, these companies have ample funds available to invest and are under no pressure to maximize their revenue from streaming music, whereas Spotify remains under pressure from shareholders to become profitable and has been left searching for partners to help it grow. It's no coincidence that Spotify launched Hulu and Showtime streaming packages as part of its Premium for Students plan and ventured into the podcast realm, diversifying their product offerings and increasing paid subscriptions (while also decreasing their reliance on the labels’ catalogs).
At a time when it is often said that content is king, artist and managers alike need to pay close attention as this situation continues to develop, especially with Spotify’s renegotiation with labels looming large. With deeper pockets, content distributors such as YouTube, Google and Apple are well-positioned to provide artists with the advances and marketing budgets labels are famous for, while also having the technical capabilities to provide digital distribution that labels lack. For these companies, they can leverage their success in the digital content distribution market to branch into the music business, relying on their own platforms as marketing tools (especially as terrestrial radio play has become less important in marketing an artist). It also helps that music can easily be integrated into video, allowing for content distributors to serve as music publishers for the artists by helping them place their songs in content they distribute. For example, they can offer direct-to-consumer licensing for content creators who need to license music for their videos prior to uploading. It can also be argued that these platforms are able to offer more creative flexibility to an artist, especially when going viral has become a successful marketing strategy.
With Spotify’s licenses set to expire within the next couple of years, we may soon find ourselves in an all-out streaming arms race by content distributors for the right to sign new artists, especially if Spotify’s access to the major labels' catalogs is limited in any way. Only time will tell if the growth the industry has recently experienced is short-lived or the beginning of something truly different.
