State of Music

Manatt Digital

The music business is financially stronger than it has been in several years, thanks to streaming, which now makes up 75% of the industry’s revenues in the United States. Revenues from streaming in the first half of 2018 grew 28% since the same time in 2017, driven by an increase of 15 million paid subscribers since 2017. The industry’s quantitative growth provides a great backdrop for an assessment of other qualitative factors and key players that impact the overall state of the industry.

The Giant

Spotify had its tenth birthday this year, marking a major milestone for the music industry that has been trying to regain the prosperity it enjoyed during the late ’90s. The company’s tenth year was an eventful one that included Spotify going public, creating tremendous liquid value for some of the more known shareholders. The IPO also now exposes the behemoth streamer to the public company way of life: quarterly reports, managing stock price and an ultimate focus on creating value for shareholders. Spotify historically has operated at a loss, leaving some industry insiders to wonder how the company will work toward profitability. There have been some clues, including Spotify signing distribution deals directly with artists. This would be a huge inflection point in the industry’s evolution if Spotify were to double down on this strategy. As our own Jordan Bromley points out, a majority of Spotify’s revenue is paid to rights holders (record labels) and publishers. If Spotify cuts out the middleman and can do deals directly with A-list, highly streamed artists (such as Taylor Swift, whose label deal is up for renegotiation), the company could recognize profitability much sooner. The company is also exploring monetizing other verticals such as podcasts and rebooting its attempt to make a splash into video.

Spotify also reached the 80 million global paid subscribers mark, dealt with executive churn, added a feature that allows artists to upload their music directly to the platform (seemingly eliminating the need for legacy platforms such as Tunecore), and signed a massive deal with Amy Schumer.

The Others

Although Spotify is the leading streaming service as of today, other streamers are making moves to stay in the race. Apple Music continued to grow its U.S. subscriber base at a rate that outpaced Spotify and continued to leverage Beats Radio and celebrity-hosted shows as draws to the platform. It has also made music-centric documentaries that live exclusively on Apple’s platform a staple for the service. As the company prepares its video streaming service, questions about how Apple Music will be integrated into that service still remain.

Soundcloud, which was days away from being insolvent in late 2017, announced its plan to help artists using the platform monetize their content, and also announced a partnership with Pandora to manage ad sales. YouTube, which accounts for 47% of all music streaming, poached Tuma Basa, formerly of Spotify Rap Caviar fame, to help launch its new music streaming service, YouTube Music. And while Amazon does not publish its subscriber numbers, it is believed to have made serious traction, reportedly having “tens of millions of subscribers” and growing at a rate of 100% each year.

Morality, Equity and Regulation

The Music Modernization Act was recently signed into law in Washington, D.C., and is expected to close loopholes that prevented artists, producers and songwriters from receiving their fair share of payouts from music consumption. The true impact of the new law remains to be seen.

As the #MeToo and #TimesUp movements continued to impact and change the landscape of the entertainment industry, the Grammys, touted as music’s biggest night, came under criticism that the 2018 winners and performers lacked ethnic and gender diversity. The Recording Academy has pledged to address this issue going forward.

As hip-hop became the most popular genre in the world (per streaming numbers), the lack of diversity among executives in the industry, specifically blacks, came under scrutiny. Many questioned why qualified veterans in the industry were not being given opportunities to run major labels, especially the ones that benefited most from hip-hop’s success. Whether and how the industry deals with this issue going forward remains to be seen.

On the Horizon

As the music industry continues to grow, led by the proliferation of streaming, the natural question arises: What’s next? The barriers to entry for new artists have disappeared, meaning more music than ever is available to consume. Will playlists continue to be the dominant strategy for discovery and breaking new artists? Will the institutional record label system be able to adapt quickly enough to keep its major labels in their current position of dominance?

Digital-first record labels (which don’t necessarily consider themselves labels) such as Cinq Music and United Masters were created to take advantage of this market opportunity, and could challenge the major labels for market share in the long run as newer artists begin to value retaining ownership of their IP over six- and seven-figure advances.

Will the streamers start to function more intentionally as a label? Spotify’s current agreement with labels prevents such competitive action, but Spotify and the labels will return to the negotiating table soon to hammer out new licensing agreements. The negotiations are expected to be contentious.

If the labels and streamers continue their marriage and maintain their existing dynamic, how will the streamers become profitable? Would Spotify be willing to do flat-rate deals with artists or labels, as is done by Netflix and its creators (i.e., paying for a piece of IP once, regardless of how much it is consumed)? As artists and the executives at the music companies continue to navigate the fledgling streaming industry, and more music than ever is created and made available, the real winners in the industry’s current state seem to be the fans.