Proclamations of the death of music are not exactly new.
Let’s remember the announced death of CDs when many record stores were closing. Today, these stores are reappearing, and CDs are all but dead. Many also announced the end of professional artists, who were not paid sufficiently. But even after one year since the onset of the pandemic, the music industry is doing better than ever. What can explain that this industry, which many believed had already disappeared, seems to be rising from the ashes? We are witnessing a transformation process...
From 2007 to 2019, before the health crisis, one could already observe a decrease of the leaders’ production turnovers by one half. In fact, this decade has been characterized by the transformation of the music industry. New actors have appeared, from production to distribution. An example is Believe, a French company specialized in supporting and accompanying artists and labels. Believe owns various distribution brands and labels such as TuneCore, Groove Attack, Believe Distribution, AllPoints, Naïve, and Nuclear Blast. On the distribution side, new players such as Spinnup, a music distribution platform owned by Universal Music Group, are appearing. While these new players are challenging the leaders, the best of them are sometimes being acquired by the incumbents. The buzz word is streaming. Just like in the film industry, streaming platforms constitute a real competitive threat to traditional distribution. Besides Spotify, Deezer and Apple Music, other independent platforms are emerging everywhere. The digital sale of singles mastered by iTunes has been replaced by illimited streaming subscriptions. Since 2016, the world’s third music industry leader Warner Music Industry has not made its biggest profits from physical sales (vinyl and CD), but from streaming. It can be noted that contrary to the smaller streaming platforms, which are at risk of being acquired by the bigger fish, Amazon Music Limited has enough resources to scare off the incumbents.
And what if leaders like Universal Music (France), Sony (Japan), Warner (Russia and USA) were to be acquired by some of the new platforms? Could the almighty streaming dominate traditional players? Probably not, or not yet. Sony for instance is the new streaming giant and just acquired a platform for 1.2 billion Dollars. Warner Music has acquired EMI France and the French Deezer. The leaders still dominate the platforms in terms of acquisitions and display an offensive strategy. Three companies (Warner Music Group with a 18% market share in 2017, Universal Music Group with 30% and Sony Music Entertainment with 27%) control 80% of the worldwide catalogue of artists present on the platforms. Thanks to the success of Spotify, the leader of the music industry Universal has even entered the stock market. According to the French newspaper Les Échos, Universal is valued at 40 billion Dollars. Sony Music is valued at 20 billion Dollars and Warner at 15 billion. Could it be that the financial giants are profiting from the success of their streaming services? In the face of the unexpected (now 10-year-old) crisis of the music industry provoked by the end of CDs and the arrival of the Internet, the giants could have lost their disproportionate monopoly position and even disappeared. In fact, a loss of only 5% of turnover in a specific industry is often considered a catastrophe. As a consequence of illegal streaming, the music industry might have lost up to 60% of its turnover. Warner Music had to go as far as to lay off 30% of its workforce. But in the end, the leaders have been able to adapt. One irreplaceable asset was key to their survival: the profession and the quality of artists! The latter represent a stable and secure value and have allowed them to turn their initially defensive strategy into an offensive one. Of course, the early 2000s have been characterized by a half-baked attempt to limit illegal online copies with the help of certain technologies. And then, the sun started to rise again with the arrival of a brilliant idea. When Deezer, the first free and legal music streaming site, was created in 2007, the leaders, which had also anticipated the illimited streaming services with subscriptions (such as Universal with Neuf Cegetel), agreed to provide Deezer with their catalogue of artists including the greatest stars. They were open to collaboration, but under certain conditions! The streaming companies had to commit to ultimately make their users pay through subscriptions. Driven by the arrival of smartphones and the development of Internet networks, this consumption mode has since established itself. The leaders have hit the jackpot. In order to obtain licences of the three giants, which own the hits of the top stars, streaming platforms agree to cede shares of their companies. Deezer has ceded options that can be converted into shares worth 200 million Euros in 2015. When Spotify entered the Swedish stock market, its shares were worth several billion Dollars.
In the end:
Today, artists can record their songs in their bedrooms and directly upload them to streaming platforms.
We should nevertheless take a closer look at the artists’ wages. According to a study commissioned by the French Ministry of Culture in 2017, artists receive an average of 17.2% of the producers’ net turnover. To make matters worse, some French start-ups like Believe Digital have worsened the artists’ situation by offering them à la carte services. Believe Digital has also acquired its competitor TuneCore, a company that sells tracks online for a subscription fee ranging from 10 to 30 Euros per month. With TuneCore, all royalties were gained by the artists themselves. In the wake of the pandemic, leaders have been able to adapt another time. In March 2018, Warner Music acquired Sodatone, a start-up founded in 2016 that aimed to predict an artists’ potential to go “viral” thanks to data analysis. Universal acquired TuneCore’s Swedish competitor Spinnup. Insiders even speculate (without much conviction) about the takeover of Believe by one of the three leaders. The giants are watching any significant market developments closely. Spotify, on its side, is bypassing the leaders and signs deals directly with artists, including also upfront payments. Universal, Sony and Warner have not responded publicly to these developments. But internally, retaliatory measures might have been introduced. In the end, these developments are definitely benefiting artists, who for some years have only been able to earn money thanks to concerts. When a song is played 1000 times on Deezer, the record company, the composer and the performers together earn about 6 Euros. But the earnings for artists remain largely unequal: for megastars, whose songs are played on replay, cents end up turning into millions. For those artists that are less known, but not necessarily less talented, cents remain cents. In short, the music industry is doing better, but it doesn’t allow all artists to live from it.
Let’s focus on France. In France, since 2018, streaming and digital music in general have constituted the largest source of revenues in distribution (57% vs. 43% for traditional physical sales). In 2006, the share of physical sales was still 94%! The number of subscribers has already reached 5.5 million, with an explosion of live concerts. This does not mean, however, that streaming has taken over the whole market. FNAC stores and other physical networks still successfully sell CDs, and some evoke the return of vinyl. Just before the pandemic, in 2019, the music industry achieved a turnover of 735 million Euros, an increase by 5.4% compared to the previous year. Nevertheless, these numbers only represent 44% of the industry turnover in 2002 (1432 million Euros). Digital and physical sales amount to 652 million Euros. The share of digital music (streaming and single online sales) has increased by 18.6% to reach 395 million Euros, while physical sales have decreased by 10%, but still remain at the significant level of 230 million Euros. Since 2017, numerical sales are the first source of revenue of recorded music, representing 63% of the turnover of the music market. Streaming constitutes 93% of this segment and has been growing continuously for 10 years. In 2019, revenues generated from streaming have even increased by 23%. The latter are generally generated from ads and streaming videos, which have grown by 43%. The number of subscriptions has also undergone a substantial increase, with more than 15 million subscribers in France, representing a growth of 18,5%. Premium subscriptions generate almost 80% of streaming revenues and almost half of total revenues. An important fact in France is that streaming services are not only used by young people (even if they remain the largest customer base). 25% of those older than 55 years use streaming platforms and 11% even have subscriptions. Even if the physical sales are falling by 10%, they still generate 37% of the revenues in 4000 sale points, in part thanks to the renewed popularity of vinyl.
Finally, in the wake of the pandemic, new countries are leading the music industry. There is the Brazilian market, or the Indian one - it is not only about the US, Europe or Japan anymore. While Spotify wants to establish itself in India, the “big three” say they “have already established multiple and strong partnerships in this market”, as reported by the specialized site Business Music Worldwide.
The transformation of the industry is being accelerated by the Coronavirus crisis. A certain number of innovations are also new opportunities to address the newly arising challenges, such as the remuneration of artists and more generally, the emergence of new music forms whose revenues would be equally distributed. Therefore, the leaders are hiring new occupations, notably data analytics of online listening behaviour, artificial intelligence or eve. The objective is to compensate for the losses made in a whole range of services, including marketing, for which artists necessarily need the leaders. In the same fashion, the leaders strengthen their positions in the publishing sector, ie. The exploitation of intellectual property rights for composers. Sony has announced it would acquire the company EMI Music Publishing and its wide catalogue of more than two million titles for 2.3 billion Dollars. This way, in the dark pandemic year 2020, the transformation of the music world is accelerated. Music 4.0 is progressively being born. The role of artists is being redefined: we have artists 4.0, producers 4.0, diffusion 4.0 and even concert halls 4.0 with new festivals, at an ever-higher speed.
On the distribution side, since 2020, it appears that the music industry is at its best, which can appear surprising against the background of the pandemic. The world market of recorded music has increased at a rate of 7.4% for a turnover of 21.6 billion Dollars. While the pandemic has been a fatal blow to concerts and festivals, it has in no way impeded the growth of recorded music. For the 6th year in a row, the world market has been growing (at a rate of 7.4%). The turnover of 18.5 billion Dollars admittedly represents a slight slowdown in comparison to 2019 (21.6 billion Dollars). But the growth that had started in the previous decade persists during the crisis. This can be explained by the increased use of streaming and paid subscriptions during the pandemic. At the end of 2020, the IFPI (International Federation of the Phonographic Industry) counted 443 million users of paid subscriptions worldwide. The revenues generated by paid subscriptions and advertising have also increased by 20% in the previous year, representing 2/3 of the turnover of recorded music. Physical sales have, of course, diminished by 4.7% to 4.2 billion. The 80s style crystallin-synthetic “Blinding Lights” from the Canadian The Weeknd has been streamed or downloaded 2.72 billion times in 2020. The pandemic has been the streaming year par excellence. The Swedish number 1 streaming company has announced an important increase of active streaming users and users with paid subscriptions. Its active users have increased by 27% to reach 345 million by the end of 2020, while users with paid subscriptions have increased by 24% to reach 155 million worldwide. Even Apple Music and Amazon Music are lagging behind these developments. And what about Spotify? Of course, one could underline the losses made in 2020 (581 million Euros compared to 186 million Euros in 2019) due to the increase of exploitation charges and social charges. But this is only a detail. The group has achieved a turnover of 7.9 billion Euros, an increase of 16.5% compared to 2019. For 2021, the group is expecting operational losses from 200 to 300 million Euros, after a loss of 293 million Euros. After having more than doubled in a year, Spotify’s stock has decreased by 6.7% in NY (due to the turnover forecasts for 2021). But thanks to its turnover, the company still plans to expand internationally with the recent reopening of Swedish services in around 12 countries including South Korea. Today, it is present in 93 countries. Another source of rising growth rates are podcasts: their number has doubled since 2019 and attracts substantial investments, as illustrated by the takeover of Mégaphone in early November 2020. Spotify was proposing 2.2 million podcasts for free by the end of December 2020, against 1.9 million at the end of the third trimester of the same year. Moreover, the turnover generated by advertisement reached 281 million Euros thanks to this diversification (source: IFPI).
In the end, considering the importance of digitalisation in the music world, it is important to ask oneself how to imagine new technologies from which everyone could benefit. In fact, the other side of the coin of innovation needs to be fair wages for artists, but also fair revenues for the leaders and platforms. Blockchain and AI could be a solution.
Let’s start with Blockchain: the Blockchain would allow the restoration of a balance between artists on the one hand, and composers and final consumers on the other hand. Revenues are shared between distributors and labels. This repartition depends on several variables: the number of radios, the number of clicks on apps like Spotify or Pandora, replays, data collection, etc. Revenue computations are carried out by collective management organisations, such as Ascap in France or BMI in the US. For the artists, it is often impossible to verify certain data they are being provided by intermediaries. This is partially due to the absence of a reliable source that would regroup all data available for all released songs. One could also take into account the number of persons participating in the composition of a song: 6 people have contributed to “Dark Horse” by Katy Perry, and even 22 to “Formation” by Beyoncé. The negative effect of this is that those who wish to exploit a song commercially now have to negotiate with a number of negotiation partners (collective management organizations, publishers of the composition, managers…). Blockchain could allow for the quasi-immediate exchange of virtual values, the predefinition of the conditions of a transaction, or the management of voting rights. Lejo music or Mycelia already offer their artists the opportunity to control the use of their data and their songs by fans or other musicians. Start-ups like Pledge Music develop code lines that would impede the use of a music file outside of the blockchain. This could be considered a threat to the uncontested reign of the leaders.
AI, on the other hand, could allow the identification of current expectations and future predictions on musical tastes for leaders. It could also allow artists to compose new, original “out-of-the-box-sounding” songs. But there are many other possible uses, such as predictions on the virality of an artist or a song thanks to data analytics. But let’s also be careful – music culture should not fall into the clutches of robots or be overdetermined by ethical informational biases of algorithms.
Pascal de Lima (PhD economics - Sciences Po) is currently Chief Economist at Harwell Management and Teacher at Aivancity. He is a French economist and knowledge manager (KM). He applies his knowledge of economics to the field of KM to solve management consulting challenges. He lectured economics at Sciences Po in Paris and has also taught economics in several of France's top universities (HEC, ESSEC, Sup de Co, Engineering Schools and PREPA...) for a total of 18 years. As an essayist, he wrote more than 200 Op-Eds for major media outlets in France, 10 books and 5 referenced academic articles. He regularly gives lectures at international economics conferences. He specializes in economic foresight. His work is centered around monitoring and prospective thinking with primary focus on the assessment of the economic, social and environmental impact of innovations. After 14 years in the field of management consulting for the financial and banking sector (Ernst & Young, Cap Gemini, Chief Economist & KM at Arthur D.Little and Altran), he founded Economic Cell in 2013, an idea laboratory and consultancy whose purpose is to study market evolutions in light of economic transformations brought about by innovation. In 2017, he joined Harwell Management as Chief Economist, and in 2020, has become a teacher at Aivancity. He holds a PhD degree in Economics from the Paris Institute of Political Studies (Sciences Po), a Masters in Industrial Economics from Panthéon-Sorbonne Paris 1 and a Masters in Financial engineering from a top French business school.