I.B. BAD: WILL SPOTIFY AND APPLE MUSIC RETURN THE BIZ TO PRE-NAPSTER PROSPERITY?

SPOTIFY CARRIES THE TORCH: Daniel Ek-led Spotify recently added another 6m users to paid subscribers, and the service now boasts 37m paid subs, with the newly added 6m composed largely of those who jumped on its 99-cent three-month trial. Insiders on the rights-holders side believe 70% of the trial users will convert to premium. Of its 37m paying customers, including the trial, 11m are in the U.S. and 3.3m in the U.K. By comparison, Apple Music has 16m after its first year of existence, with 6.7m in the U.S. and 1.2m in the U.K. If, like Beyoncé, you’re not on Spotify or Apple Music, you’re not reaching the Nordic countries, and you’re not doing a great job of reaching young females in the U.S. either. What’s more, Spotify will not be chasing exclusives, having determined that they don’t matter in the big picture.

Interestingly, Spotify has done a poor job up to now of letting the music business power players know how well it’s doing. No U.S.-based major label exec has yet been to the company’s HQ in Sweden. But Spotify’s bandwidth speaks for itself, its playlists have huge impact—especially Today’s Top Hits and Rap Caviar—and it is fast becoming the majors’ biggest account, along with Apple/iTunes. As Spotify grows, company brass is said to be flexing its muscles by pushing back against those labels and acts who give Apple and Tidal exclusives.

At the current pace, with Spotify and Apple Music collectively at 53m, total worldwide subscribers will hit 60m+ sometime in Q3 and will reach 100m during the first half of 2017. As a result of this mounting momentum, most now believe the interminable post-Napster gloom-and-doom era will finally be coming to an end in the not too distant future, and if that fervently hoped-for return to prosperity does occur, Spotify will have played a major role in boosting the biz out of the deep, dark hole in which it’s been trapped for the last 15 years.

YOU SAY YOU WANT A REVOLUTION: The explosion of streaming will radically change the economics of the music business for the rights holders. Pre-Napster gross revenues worldwide—which topped out at nearly $37b worldwide in 2000, compared to $15b last year—should experience a dramatic turnaround as a result of the exponential growth of the premium-subscription sector, with those assumed 100m subscribers paying $10 a month in what will then be a $12b-a-year business. If this scenario becomes reality, given the concurrent decline in sales revenues, what will total revenues be at the end of 2017? Whatever that dollar figure turns out to be, profits to the rights holders should increase considerably due to cost-cutting over the last 10 years, while values for the rights holders should skyrocket during the course of the next decade. Not only that, but profit margins, presently in the 9-12% range for the Big Three, should increase as well.

Broken out above is a chart showing the state of the sales market year-over-year, in which every key index is in negative territory—making it abundantly clear that the shift from sales to premium streaming is the key to the future of what will be a transformed music business. As the revenue chart of hit singles for the week ending 7/21 (below) indicates, the streaming business is now throwing off real money, and we’re still in the early stages of the transition.

As streaming becomes the new center of the recorded-music-business economy, the traditional album—the basis of the old business—will become ever less relevant. But the album configuration isn’t going away without a fight, with the physical album in particular showing resilience, oddly enough, slipping only 10.5% YTD compared to a 20% decline in digital albums, thanks to that stubborn minority of fans who want to own rather than rent the music of their favorite artists.

Any major music attorney in L.A., New York or Atlanta will tell you that the growing domination of the new format will require a rethink of the contractual relationship between artist, label and publisher. Deals need to be changed as that long-familiar term album becomes associated with an era that has passed into history. These deals must be adjusted to reflect the times; e.g., the elimination of breakage fees, returns, packaging deductions and controlled-composition clauses to reduce mythical mechanicals. Concurrently, publishers need to modernize as well in terms of MDRC (minimum delivery and release commitment) requirements and what will count under delivery requirements. In each case, the song or track becomes the new model, and gross revenue becomes the new yardstick to measure success as well as determining how artists get paid their fair share of the booty.

Thanks to the revolution in progress, it appears that the bets UMG, Sony and Len Blavatnik made during the last 10 years will all pay off, as the values of acquisitions and catalogs escalate dramatically. Collectively, these assets will be valued in the tens of billions of dollars. The indie sector should also see its catalogs grow in value as the long tail of streaming continues to throw off new revenues to them while distribution costs continue to decline.