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CMU Trends Digital Labels & Publishers
Trends: The real revolution is direct-to-fan
By Chris Cooke | Published on Friday 16 May 2014
In his keynote speech at The Great Escape earlier this month CMU Business Editor Chris Cooke noted the new found optimism that has been a feature of the record industry this last year.
Though he cautioned that the record labels may be getting optimistic for the wrong reasons. Booming streaming revenues are good news – and Spotify stats published since TGE are impressive – though the streaming market remains uncertain. Whereas the potential of direct-to-fan is significant, and labels should make themselves part of that. Here Chris explains why.
There seems to have been a new-found optimism in the music industry – and especially the record industry – in the last year, possibly because of the news just over twelve months ago that, in 2012, the worldwide recorded music market saw slight growth for the first time in well over a decade. And while in 2013 a number of market-specific issues in Japan sent the sector back into decline overall, in Europe things remained on an upward trajectory when it comes to the revenues being generated by the music industry’s recordings.
Of course, recorded music is still bringing in 40% less money overall than back in the 1990s heyday. Which means that, not only is investing in new musical talent as risky as ever, but the rewards – even when it does all work – may not be as abundant as at the peak of the CD era. Assuming, that is, that a label’s investment is exclusively linked to record sales. More on which in a minute.
But still, even within the conventional borders of the record industry, the doom and gloom of the last ten years is starting to lift. Which is a good thing. Doom and gloom is never desirable. Though if that optimism is based on recovering recorded music income alone, then maybe a word of caution.
THE STREAMING BOOM
It’s no secret that record industry growth – especially in Europe – is down to the ongoing digital boom. Download sales in the European market are at an all time high, even if the consensus is that iTunes-style digital music platforms are about to peak revenues wise, as did happen last year in the States. But most attention has focused on the rise of the streaming and subscription services.
Overall these still only account for 27% of the record industry’s digital revenue stream, digital accounting for 39% of record industry income worldwide. Though in some markets, and for some indie labels, the streaming platforms are already much more significant. And have become even more significant in just the last few months. And across the board the growth stats in the streaming space are impressive. And these services – or at least some of them – are paying substantial sums of money into the music industry. Though a word of caution perhaps, without wishing to rain on the parade of optimism.
Be wary of the hype. Streaming stats are indeed impressive. And for sizeable rights owners – and even some smaller ones – the royalty cheques are good. But remember, the streaming market is still at a very early stage, and with a business model that’s taking much longer to bed in than iTunes and its direct competitors, because with ad and subscription revenue streams it’s not as simple as replicating the high street retail model online.
Of course, whatever happens, streaming services have an important place in the future music industry, and we should embrace and support them. But they are not in themselves the future of the music business, and exactly what their future holds is far from certain.
THE START-UP GAME
Remember this. Most of the streaming start-ups are in the first stage of their development, pre-IPO or big sale. However passionate the founders and directors are about music, however much they are in it for the long haul, for many of these companies’ early investors the strategy is simple: rapid growth, maximum hype, inflated asking price at flotation or first sale, and then pay day and bail. That’s the tech start-up game.
Any streaming start-up that really starts to succeed will be quickly sold, or floated on a stock exchange, because for early investors that’s how they plan to get a return on investment. If you’re that kind of investor long-term profitability isn’t really your concern.
And for that kind of investor it really is all about the hype. Get into more markets, open more offices, hire more people, and sign-up more users whatever the cost, so the simpletons of Wall Street pay top whack when that IPO occurs. Or the board of Yahoo! add a few extra zeros to the offer price when they decide they need a new streaming service in their portfolio. It would be fascinating to know how much of the hype Apple is currently buying into during its talks to acquire Beats.
Now, don’t get me wrong, all this hype isn’t just for the benefit of the venture capitalists, it gets the public at large talking about streaming music, exploring streaming music, and hopefully paying for streaming music. But as I say, be wary of it all. Otherwise you might see some certainties where there are actually few.
JUST ONE CERTAINTY
Because little is certain about the future of the streaming sector. And it’s far from assured that the standard streaming business model in Europe in 2014 – all you can eat on-demand streams with mobile functionality for ten pounds/euros a month – is the approach with mass market appeal.
In fact, I think the only certainty in streaming music is this: Once the start-ups float, or are bought by existing media or tech conglomerates, be ready for the meeting where they try to negotiate down the royalties they pay to labels and publishers. Probably the one company everyone should be watching right now is Pandora, even though it only operates in North America and Australia, and via a unique statutory collective licence in the former.
Nevertheless, Pandora is a former streaming music start-up post-IPO. And with shareholders now focused on profit rather than sale price, they are trying to pay the music industry less. Needless to say the labels and publishers – who aren’t shareholders in Pandora, like they are in many of the pre-IPO start-ups – are resisting. While they can. Though once all the streaming players are at that stage, and none of them can afford to take a hit to fuel rapid growth, royalties which many artists and rights owners reckon are already too low may have to come down even more.
Well, that’s my prediction. Which might have put some doom and gloom back into the mix. For which I apologise. Except I don’t, because if your newly optimistic in this business because of Spotify and Deezer and Rdio and WIMP – all great services and lovely people by the way – then you’re not paying attention.
THE D2F REVOLUTION
iTunes was the record shops reinvented for the internet age. Pandora and Spotify are in a way radio reinvented for the internet age – albeit with very different licensing challenges and the subscription model to contend with. These are all great services that have become key to the record industry, and the wider music business, though none are actually truly revolutionary.
The revolution in music caused by the world wide web is direct-to-fan. And I don’t mean selling t-shirts on your website. Direct-to-fan is something much, much bigger than mail-order. It’s changing the way artists – and their business partners – do business.
Before the web artists didn’t have any direct connection with their fans, beyond the fan letter and the mosh pit. And in fact, not even the artist’s primary business partners – labels and promoters – had a direct-to-fan relationship. It was retailers and especially ticketing firms that actually dealt directly with the music consumer. But the world wide web has changed everything. It means artists and their business partners can now properly do business with core fanbase, a traditionally underserviced and undertapped part of the market.
Because at the core of this industry are the artists, and the stuff they do that excites and engages their target audience, hopefully in such a way that they ultimately reach for their wallets. The ‘stuff’ might be single songs, cohesive albums, video, live performance, cover art, whatever. It will depend on the fanbase. But beyond the licensing quagmire and the tour routing challenges and the brand dilemmas, the music industry is really simple. You find an artist. You build an audience. And then you sell them shit. Well, quality content and experiences if you prefer.
Though – and here is the crucial thing – in the past what that stuff was didn’t depend on the fanbase, it depended on the business partner, and crucially the retail, media and ticketing companies that actually controlled route to market. Which is why direct-to-fan is such a big deal. Artists can now build a business designed to appeal to, and profit from, their particular fanbase. Rather than releasing records and booking tours in the hope they have a CD-buying, gig-going audience because that’s what the music industry’s infrastructure demands.
So, build a fanbase and sell them stuff – simple.
Some challenges remain, of course. Technical challenges – how to connect to fans, what to do with all that data, when and how to deliver digital products direct, and how to transact and fulfil physical product orders over the net worldwide. Though, the technologies and service providers are now out there to help with this, and there’s a new community of music marketeers emerging who understand fan engagement, and who are starting to get to grips with the analytics. In fact, the really big challenge is this: where does the label fit in?
LABELS AND DIRECT-TO-FAN
When direct-to-fan first became a thing, many a commentator predicted the demise of the record company. Now artists can connect and sell direct to fans, why would they want to sully themselves by doing a deal with a sinister record label? Except doing direct-to-fan right needs technical, marketing and strategic know-how, it needs expertise and resource, it needs investment. And these are all things labels – good labels – can do.
But how? And on what terms? It’s time to mention the 360 degree record deal, isn’t it?
We all know that most labels – not all labels, but most labels – are now insisting they are cut into an artist’s other revenue streams beyond recordings when they make a new talent investment, so that rather than only getting control of the sound recording copyright, they take control or get a cut of publishing or live or merchandise or brand partnerships or all or any of the above.
These deals were set up to benefit the labels of course, to help reduce the risk of their investments, given that a record, even if it was a hit, might bring in only two thirds of what a hit record of the 1990s would have made. But this more integrated approach to the record deal can benefit artists too. Providing the label truly understands direct-to-fan.
Because to capitalise on the fan relationship, artists need business partners who work with them on a constant basis, not just for the four months of an album campaign. But that means – if that business partner is a label – that the record company is going to need to be incentivised beyond just selling records.
And in that way, 360 degree deals – or rather ‘multi-revenue stream deals’ – start to make sense for artists as well as labels. Providing these deals really are about building fan businesses, rather than being traditional record deals with some other revenue streams tacked on. Quite how these new partnerships are structured – well, that’s not so simple – but direct-to-fan provides so many opportunities for artist label partnerships that it’s worth rising to the challenge of making this work.
The fan-centric music business was a key theme throughout this year’s Great Escape, because that’s how big an opportunity this is. Direct-to-fan isn’t just about email and e-commerce, it’s about a new more flexible approach to building artist businesses, and the way labels can invest in and work for those ventures.
