The biggest news in the music industry last week was a bit of a damp squib. Universal Music Group and Spotify jointly announced Wednesday (July 22nd) that they’d re-upped their global licensing deal — but aside from a vague commitment from Universal to utilize Spotify’s “two-sided marketplace” tools (something we’ll come back to), there didn’t appear to be any major changes to the prior agreement between the world’s biggest recorded music rightsholder and the world’s biggest audio subscription service.
When Universal inked its last updated deal with Spotify in 2017, insiders say UMG agreed to hand Spotify a bigger share of net revenue from consumption of its recorded music, meaning that UMG’s proportion of this money reduced from 55% to 52%. But this time ’round, that balance has stayed in place, with no other material alterations to the licensing of UMG’s music, aside from some ring-fenced guarantees regarding how podcasts impact on subscription revenue payouts.
Notably, there’s been no obvious movement over Universal’s licensing of Spotify’s ad-supported free tier, which pays far less in royalties than its subscription tier, and has been a source of uneasiness for Universal and its major rivals, Sony and Warner, for years — despite Spotify’s protestations that it’s an essential funnel into paid subscription for millions of users. At the center of this label uneasiness today is a stalwart of the music ecosystem: advertising revenue.
It’s believed that all three majors are continually mulling the pros and cons of asking Spotify to limit the amount of music on its free ad-supported tier, specifically within “mature” subscription streaming markets like Scandinavia, where recent stats suggest that 49% of residents now pay for a music streaming platform.
Making “free” a less enjoyable experience in these markets carries some economic logic — because what you might lose in advertising revenue will likely be more than offset by the cash gleaned from nudging stubborn non-subscribers into recurrent billing. But this theory is less convincing in more fragile or emerging markets, as the majors discovered back in 2011 when they tried to hinder Spotify’s free tier in Spain and promptly saw their ad revenue sink.
Yet, in 2020, the argument for major rightsholders perpetuating free streaming tiers in certain markets with their full catalogs is getting harder to make. In fact, as paid subscription revenues start slowing on Spotify, we can logically expect major music rightsholders to more stringently scrutinize the ad money they are generating on digital platforms. (Mark it in your diaries for UMG’s next round of negotiations, due in 2022.)
To illustrate how advertising revenues are becoming an increasing problem for the record industry, let’s first look at global IFPI numbers showing the advertising money paid out by on-demand streaming platforms to record labels over the past three years.
To anyone following the music industry’s perennial “Value Gap” argument over YouTube — in short, that consumption of music on streaming video platforms isn’t commensurately rewarded by revenues to artists and labels — these video stats won’t be a huge shock. Labels will be hoping that the promise of music video launching on Facebook, combined with in-the-works licensing deals with TikTok, may improve this situation.
The less-discussed concern for record labels, though — especially in terms of Spotify’s ad-funded tier — is the weak growth seen in advertising from audio platforms last year. Record labels were paid $1.73 billion in ad dollars by audio streaming services in 2019, according to IFPI, up by $310 million YoY. Yet in the prior year (2018), this number almost tripled, from $530 million to $1.42 billion. As a result, advertising from Spotify and other on-demand audio streaming platforms comprised just 8.5% of the total turnover ($20.2 billion) of the global record business in 2019.
The key factor testing the labels’ patience here is audio streaming advertising’s pitiful contribution, percentage-wise, in those mature streaming markets. Again, let’s look at Sweden: last year, according to local IFPI retail data, ads on audio streaming platforms contributed $3.9 million (34.6 million SEK) to the local recorded music market. Subscription streaming revenues, meanwhile, contributed over 37 times this amount, at $147.8 million (1.3 billion SEK). Driving the point home: audio streaming advertising contributed just 2.3% of Sweden’s total recorded music market revenue in 2019.
Over in Norway, another mature streaming market, there’s even stronger evidence of a problem. In 2019, according to IFPI Norge, advertising revenue from Spotify and other audio streaming services made up just 1.1% of industry turnover, with a contribution nearly 74 times smaller than that of paid subscriptions. More worryingly, Norway’s audio streaming ad revenue actually fell year-on-year, down to $1.0 million (NOK 9.5 million) versus $1.3 million (NOK 12 million) in 2018.
Will the major labels soon decide that such a weeny slice of their income is worth risking – trimming down their catalogs on Spotify ‘free’ in these markets in the hope it will irritate more ad-funded consumers into paying for Premium? Evidence certainly suggests there’s room for further paid music subscription growth in the Nordics, because although around half of Scandinavia’s residents already pay for music streaming, some 69% pay for movie and TV streaming platforms.
The eventual destiny of the labels might even see them press the red button — nuking Spotify et al’s free offering entirely in some parts of the world by refusing to license a single track to ad-funded audio platforms. Recall that five years ago, speaking at the Code/Media conference in Los Angeles, Universal Music Group boss Sir Lucian Grainge said: “The ad-funded part of the music ecosystem — that’s on-demand, ad-funded — as I’ve said before, is not something that is particularly sustainable in the long-term.” The latest stats from Scandinavia suggest he was on to something.
Another reason the majors may be losing their patience with audio advertising: According to IFPI data, record labels themselves spent $1.7 billion worldwide on marketing in 2017, a statistic that’s remained roughly static over the past decade. We can definitely expect this figure to fall in 2020: Not only has the pandemic pushed back a string of planned blockbuster releases, but the hits we are seeing — whether Taylor Swift’s folklore or Drake’s Toosie Slide — have been driven by largely free social and online media momentum.
Spotify now wants the labels to move a chunk of their annual ad spend away from the likes of Google, Facebook and Instagram, and over to its own “two-sided marketplace” (most notably via Marquee, which enables labels to buy pop-ups advertising their releases for $5,000-plus a time). $SPOT’s argument for the labels doing so is that, on average, over 20% of people who see a Marquee promo go on to stream that release in the following two weeks.
It’s a compelling pitch, yet one has to ask: How comfortable will the major record companies be shelling out X amount of millions on advertising via Marquee and other Spotify promo tools if Spotify itself is paying them back an increasingly disappointing haul of advertising revenue?
The pandemic has messed with a whole host of record industry projections these past few months. But if it materially damages the advertising revenues delivered to record labels by streaming platforms, you have to wonder if 2020 will finally be the year that the record industry seriously reevaluates its treatment of those consumers who pay to listen to music… and those who do not.
Tim Ingham is the founder and publisher of Music Business Worldwide, which has serviced the global industry with news, analysis, and jobs since 2015. He writes a weekly column for Rolling Stone.