Category: Music Graphs

What Facebook’s Licensing Deals mean for YouTube

What Facebook’s Licensing Deals mean for YouTube

Earlier in the year, Facebook secured licensing deals with Sacem, Socan, and Wix Publishing. The social media company had previously secured licensing deals with Universal Music Group, Sony Music, and Warner Music (Welch, 2018). These licensing deals illustrate Facebook’s desire to attract more users to its platform through music, but more importantly, it show’s the company’s commitment to work with the music community as we try to turn streaming into a sustainable source of income. In order to show their consideration for music creators and rights holders, Facebook hired Tamara Hrivnak. Hrivnak was the Director of Music Partnerships at YouTube for six years, and prior to that position she was the VP of Digital Strategy & Business Affairs for Warner/Chappel Music Publishing (Levine, 2017). Her experience will be extremely valuable to Facebook’s efforts and could give them a favorable advantage as they prepare to battle against YouTube for music video consumers.

I remember when bootlegging was extremely prevalent in the early 2000’s. There was one artist here in my hometown, Houston, that would literally find bootleggers and fight them during that time. But for every bootlegger he battered, two more appeared. Although he was upset about missing out on sales due to the bootlegged copies of his music, he did notice that his fan base was growing. Eventually he set up a meeting with all of the bootleggers in town with the intent of making them authorized sellers. The meeting did not go well. The bootleggers said they could only afford to pay him .05% of his asking price; an asking price he felt was already extremely low. Needless to say, he was outraged. He continued to battle with them for months, but they just wouldn’t go away. After hundreds of brawls, his stamina and resolve were finally depleted. He gave in and allowed the bootleggers to legally sell his product on their payment terms, and he’s been stuck with this awful deal ever since. The bootleggers in this story represent YouTube, and the artist represents music companies and publishers.

YouTube has been a thorn in the Music Industry’s side for quite some time, particularly due to what is known as the value gap. According to IFPI, the value gap illustrates the “growing mismatch between the value that user upload services, such as YouTube, extract from music and the revenue returned to the music community (2017).” In other words, the value gap explains the variance between the benefits YouTube receives from uploading music on their platforms and the money that labels and artists obtain from those activities. As you can see from the chart below, the difference is blatant.

Does FB’s licensing deals prove that the music industry is regaining authority in a tech-driven world? If Facebook is able to take some video consumption away from YouTube, it could give labels, publishing companies, and artists more power in terms of negotiation. YouTube has grown tremendously over the years. One can argue that this growth is primarily due to how YouTube has been able to integrate music into their platform. According to the 2016 IFPI Music Consumer Insight Report, 93% of YouTube users aged 16-24 utilize the platform to access music, while 82% of total users utilize it for music listening (IFPI, 2017). With over 1 billion users, YouTube is the most popular platform for music streaming. YouTube is able to attract a large number of consumers and advertisers due to their music catalogue, however, they fail to pass on suitable revenues to the copyright owners of that music (primarily because the service is free). One may argue that the copyright owners should prohibit YouTube from showcasing their music until a fair price can be agreed upon, but it’s not that simple. With over 1 billion users (82% being music consumers), YouTube has all of the bargaining power. Michael Weston once said, “To win a negotiation you have to show you’re willing to walk away. And the best way to show you’re willing to walk away is to walk away (Wise Old Sayings, n.d.). It’s difficult to walk away from 1 billion customers though. Even if they are not paying for the digital version of the music, artists and music companies can recoup the losses through revenues from live shows and merchandise. Labels and publishers certainly do not want to leave 1 billion potential customers at the table. But if they have the opportunity to serve those same customers on a different platform (like Facebook) then they may not be hesitant to leave. That’s what makes this development so dynamic and noteworthy.

YouTube and Facebook could soon be in a bitter war to see who can reign supreme over the video streaming market. All the while, music labels and publishers will be standing idly by, waiting to see which platform wants their songs the most. As demand for digital music increases, the price will have to increase as well. I believe recorded music is extremely devalued and that people have acquired a false sense of entitlement when it comes to accessing music. Facebook’s willingness to negotiate with labels and publishers shows that they have an appreciation for music and want to create a partnership with our industry. I commend them for that and applaud them for producing a new revenue stream for creators and right holders.

I believe the music industry is taking initiative by engaging with social media companies. This endeavor creates various opportunities for music industry professionals. Facebook hiring Tamara Hrivnak (a former music business expert) is a perfect example of this. Tech companies understand how important it is to have an industry insider on their side, especially when it comes to negotiating deals.

Technology and music have always had an unsanctioned marriage. In order for the music industry to remain relevant, we have to find ways to stay ahead of the curve. Music streaming has proven to be a profitable source of income for labels and publishers for two years in a row, so it’s only right to ride the wave and widen the stream of revenues. As new social media companies enter the market, they will also be required to do what Facebook is doing if they want to incorporate music into their platform. This deal sets the standard for the future of music in the social media era. I just hope we can stay ahead of the next technological curve so we never have to accept terms from a position of weakness again.

References

IFPI (2017). Music consumer insight report 2016. IFPI. Retrieved from http://www.ifpi.org/downloads/Music-Consumer-Insight-Report-2016.pdf

IFPI (2017). Rewarding creativity – fixing the value gap. IFPI. Retrieved from http://www.ifpi.org/value_gap.php

Levine, R. (2017, January 1). Facebook hires YouTube’s Tamara Hrivnak to lead global music strategy. Billboard. Retrieved March from https://www.billboard.com/articles/business/7669971/facebook-hires-youtubes-tamara-hrivnak-to-lead-global-music-strategy

Nicolaou, A. (2018, March 18). Facebook strikes new music licensing deals. Financial Times. Retrieved from https://www.ft.com/content/7b7e71d6-2964-11e8-b27e-cc62a39d57a0

Welch, C. (2018, March 9). Facebook now has music licensing dealsw tih all three major labels. The Verge. Retrieved from https://www.theverge.com/2018/3/9/17100454/facebook-warner-music-deal-songs-user-videos-instagram

Wise Old Sayings (n.d.). Negotiation Sayings and Quotes. Wise Old Sayings.

2016 Digital Music Revenues

2016 Digital Music Revenues

The upsurge in digital music revenue has created immense opportunities for the music industry to expand and finally grow. However, there are still challenges ahead. As artist begin to realize the power they have in generating profit, it will become imperative for business professionals to reaffirm their importance to the musician’s career. My experience as an independent artist accompanied with my analytical skills allows me to communicate with both sides and enhance business relationships.

Jose Arroyo

UMG’s Management Approach

UMG’s Management Approach

As an active music artist with a long-term goal of managing my own music company, I admire UMG’s success and influence in the music industry. They have a wide array of artists on their roster, such as Drake, The Weekend, Adele, Nicki Minaj, Rihanna, and Taylor Swift. They also own the rights to many popular albums and songs from music legends, such as John Lennon, the Beatles, James Brown, Stevie Wonder, Kiss, and even Eazy-E. Through asset acquisitions (like album copyrights and publishing rights), artist development, market adaptability, innovative leadership, and customer focus, UMG has been able to provide high quality products while putting themselves in a profitable position.
UMG is currently under the leadership of Sir Lucian Grainge. He has been the CEO and Chairman of the Management Board since 2010. Grainge has over 25 years of experience in the music industry and has an extensive background in music publishing. According to an article published by Variety, Universal Music Group’s value has tripled in value since Grainge became the Chairman and CEO of the company.
The music industry has fought hard to break out of the depressive downturn it’s been in for the past 10 years plus. Pirating and digital music sales are some of the factors that contributed to the despair. Music streaming, however, has created an upsurge in revenues for the past two years, and large music corporations love it. UMG is demonstrating effective management because they are showing adaptability to the new music environment. Instead of fighting the changes and complaining about the marginal payouts streaming platforms distribute, UMG has embraced the changing landscape while increasing their revenue. They are also displaying their customer focus by taking initiative and become engaged in the new market.
According to statistics compiled by midiaresearch.com, UMG has the largest music industry market share when compared to all other music companies, accounting for 29%. Sony and Warner Music make up 22% and 17%, respectively. The other 31% belongs to all independent music companies not named UMG, Sony, or Warner Music. UMG’s grasp on the music industry can be attributed to their diverse catalogue of music, adaptable marketing strategies, and innovative leadership.

I believe the company demonstrates effective management because they are adapting their business approach and using their current assets to maximize profitability, while making further acquisitions that will increase revenue and grow their footprint in the music industry. They are also providing products in a way that satisfies consumer needs. As they say in business, you have to ride the wave. That wave right now in the music industry is streaming.

Last month, UMG struck a licensing deal with Spotify, the biggest music streaming company at the moment. By making this move, Universal is demonstrating it’s market adaptability by investing in the new music market landscape. According to a publication released by Statista, streaming subscription services accounted for 38% of total music consumption in 2016. This upsurge translated to increased revenues in a market that has seen downturns year after year.

Although UMG is allowing Spotify access to their catalogue, they still included some contingencies to that will be advantageous to the company’s long-term goal of making music streaming profits a sustainable source of income. In order to come to terms, UMG required Spotify to “window” certain albums, where only paid subscribers to the will be allowed access to the music for two weeks. This move was made as an attempt to incentivize going from a free Spotify plan to a monthly subscription. Spotify has also agreed to give UMG access to their massive database, which will give Universal insight into current and future trends listening trends. In an article published through Full Sail’s library, Robert Levine quotes an industry analyst saying, “Universal is the one that can call the shots,” and I couldn’t agree more. UMG is the first of the Big 3 to strike a licensing deal with Spotify. Their market flexibility and ability to position themselves for sustainable growth (while catering to the average music consumer) shows effective management and great leadership skills.

Resources:

http://variety.com/2017/music/news/universal-music-group-valuation-lucian-grainge-1202400328/

http://www.ifpi.org/news/IFPI-GLOBAL-MUSIC-REPORT-2017

http://www.digitalmusicnews.com/2017/02/24/umg-streaming-revenue/

https://musicindustryblog.wordpress.com/2017/02/26/global-recorded-market-music-market-shares-2016/

https://www.statista.com/statistics/502908/music-consumption-genre-format-usa/

http://web.b.ebscohost.com.oclc.fullsail.edu:81/ehost/detail/detail?sid=47cf5b1b-36f9-4cc3-bcd6-f1560e14166d%40sessionmgr103&vid=6&hid=125&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#AN=122384889&db=bth

BMG’s Perspective on Digital Music Revenues

BMG’s Perspective on Digital Music Revenues

With Nielsen and The Recording Industry Association of America (RIAA) releasing their Music Industry Revenues Report for 2016, it has been revealed that many record labels are raking in the profits. For the past decade (thanks to piracy and a drop off in physical CD sales) the music industry has been constantly diminishing in value. Last year, however, music streaming earnings allowed the industry to see an increase in revenue, and music companies love it. Technological breakthroughs have given fans the ability to easily discover new music. It has also allowed artists to showcase their musical talents to the world. However, it has created over saturation in the market. Online music streaming has manifested itself into a new wave of revenue, and record labels are riding it all the way to the bank. However, artists have long expressed their discontent with the marginal pay outs that streaming platforms distribute. Digital Music News published an article illustrating how discouraging music streaming royalties are to the average artist. In the article, they exhibited the royalties an independent band received from having over 1 million streams. The results: $4,955.90, an average of $0.004891 per stream. I believe it’s only a matter of time before artists demand higher cuts in royalties from music streaming.

The Financial Times published another article this month discussing this topic. They sat with Hartwig Masuch, CEO of BMG (Bertelsmann Music Group), and asked for his opinion on music streaming and how it will affect the future of the industry. According to Masuch, there will soon be “wake-up calls” for many record labels who believe they are living the dream. “A return to growth triggered by the upswing in streaming is potentially under threat, as artists start to demand a much greater cut of royalty revenues generated.” Streaming and the inevitable demand for higher royalty rates among artists is impacting all of the major labels, but BMG is sheltering itself from the upcoming storm by paying their artists 75% of streaming royalties. According to Masuch, “big music companies spent an average of 19% of their revenues on artists royalties.” That’s a wide gap compared to what BMG pays its artists. Masuch also stated that major record labels use the “complicated” structure of the music streaming market to minimize royalties paid to artists, but even that explanation will soon fall on deaf ears.

I believe BMG is handling the situation very well and is blazing a trail towards future success. Bertelsmann was a media giant in the music industry before, but Sony acquired the company in 2008 for $1.2 Billion. Masuch then reassembled the company with a new vision, “to help artists and songwriters make the very most of their songs and recordings in the digital age.” Masuch created a new company tailored specifically for a digital market, distancing themselves from traditional label business models and adopting a digital infrastructure that allows for songwriters and artists to gain larger royalty revenues. They’re new business model will certainly attract emerging acts. Most artists choose to stay independent, not because they want to do it all by themselves, but because they want freedom to create and higher profitability. By establishing their stance on music streaming and publically advertising their 75% streaming royalty pay outs to artists, they are positioning themselves favorably among musicians seeking the influential power of a music company.

I believe BMG’s response to the growing frustration artists are experiencing due to low royalty rates will bring long term success to the company. In a Financial Times article that was published this month, Masuch stated that “BMG’s ebitda (earnings before interest, tax, depreciation, and amortization) margin of 22.8 percent in 2016 [is] proof that the larger music businesses have cost bases still mired in the physical world.” According to an article published by Music Business Worldwide, “Universal Music Group posted an annual ebitda figure of $712M… representing a 13% [profit] margin.” Sony had a profit margin of 11.5%, and Warner Music Group had a profit margin of 15.9%. BMG, on the other hand, had a profit margin of 22.8%, larger when compared to the Big 3. Although their total revenue was lower than the other companies, when the data is normalized one can see a big difference in the four company’s profit margin.

The article went on to state how BMG has made over 100 acquisitions over the last 8 years and are now focusing on “organic growth.” I believe the company will do just that within the next few years. But there still remains a question to be answered: How are music streaming platforms going to contribute to higher royalty rates for music artists and labels?

Resources:

http://www.digitalmusicnews.com/2016/05/26/band-1-million-spotify-streams-royalties/

https://www.musicbusinessworldwide.com/bmg-revenue-tops-450m-2016-23-profit-margin

https://www.bmg.com/us/about.html

http://www.completemusicupdate.com/article/bmg-boss-says-streaming-boom-will-force-labels-to-offer-artists-better-royalties/

https://www.ft.com/content/e33399ca-1b76-11e7-bcac-6d03d067f81f

Soundcloud’s Future

Soundcloud’s Future

SoundCloud is one of the biggest online music platforms around right now. Boasting approximately 175 million users, it is difficult to see how the giant music streaming company could possible disappear in the next few years. However, they are currently in a problematic situation that will either make or break the company. I believe SoundCloud’s future will consist of rainy days.

After reading the article by KLS.com and understanding some of the warning signs that tell whether a company will ultimately fail, I came to the conclusion that SoundCloud is in jeopardy. Although the music streaming website is popular among musicians and DJ’s because it is a free service, their recent transition into becoming a paid music subscription platform has been anything but seamless. SoundCloud now offers music subscription packages that range from $4.99-$9.99/month (Go and Go+), along with their free package as well. Their free package offers users access to 120M tracks. SoundCloud Go offers access to 120M tracks, offline listening, and removes ads. Their Go+ package offers 150M tracks, offline listening, and no ads. However, there are some flaws in their business model that could ultimately lead to an unsuccessful endeavor.

Ben Stager from MakeUseOf.com published an article in April 2016 titled, “We tried SoundCloud Go so you don’t have to.” In the article, he gives an in-depth look into his musical experience with SoundCloud Go.  One of the major flaws he highlights is SoundCloud’s catalogue. Soundcloud’s musical library is devoid of many well-known artists such as Kanye West, Jay-Z, Rihanna, and Beyonce. This is understandable, seeing as how Jay-Z’s has pulled all of his music from streaming platforms and made them available exclusively on Tidal. Though it is an ongoing battle in regards to whether these big name artists should display their music on Spotify and AppleMusic (seeing as how pay outs are marginal), one thing is for certain: they are not running to SoundCloud for music streaming. While on the website, I did some research of my own as well. I looked up a few of my favorite independent underground artist (such as Papoose and K-Rino) and they had a minimal amount of their enormous catalogue on the website.  I was not surprised.

Although SoundCloud has had a few milestones, for example partnering with Chance the Rapper to make his album, “Coloring Book,” available for free (even though Apple Music struck a deal to stream the album exclusively two weeks prior to SoundCloud), the company has not had many highlighting moments. It was once said that SoundCloud would be the Facebook and YouTube of music streaming, but the fact is that many established artists have not rallied around the platform. In my opinion, it’s becoming the MySpace of music streaming. It is big amongst independent and upcoming artists, but once they establish themselves they tend to move on from the platform. Just look at how Drake abandoned the website a few years ago.

Besides not having the support of many well established artists, examining SoundCloud’s financial forecast will reveal that the money won’t be raining down any time soon. Although the company has been experiencing losses for the past couple of years, they have continued to add employees. According to Digital Music News, SoundCloud expended $28M on wages and salaries for 295 employees in 2015. That means the company spent an average $95,000/employee that year. Their employee wages were less than their total revenues. This does not include any other operational costs, such as rent, utilities, and marketing. The year prior, they spent an average of $80,000 each salary for 236 employees. The costs of acquiring talent and operating in the shark-infested waters of the music subscription sea keeps rising. SoundCloud is basing its future success on the idea that they will be successful. Alexander Ljung (Co-founder of SoundCloud) commented on his company’s business model, “The assumption of a successful launch of the new subscription service is the key element of… financial projections for the next three years… [It] bears financial risks regarding the operating results and cash flows of the group.” According to Ljung, the company might have trouble generating sufficient cash for upcoming expenditures, and may require additional funding from investors, or they could “run out of cash earlier than December 31, 2017.” There is a lot of uncertainty clouding the company’s financial future, and that is an unattractive trait for a business looking to acquire more investors.

Besides reporting losses since 2010, SoundCloud has also explored the possibility of selling the company. According to Hypebot, SoundCloud has been attempting to raise $100M since the summer of 2016 (around the same time they launched their Go+ subscription service). Bloomberg.com also reported that SoundCloud was considering a sale for $1 billion. Business insider made some good points as to why the platform would consider selling. One of the reasons they presented was that SoundCloud might not be able to compete in the rough waters of music streaming, which is dominated by Spotify and Apple Music. Pandora and YouTube also have shares in the market, and consumers are not likely to pay for music subscriptions from multiple platforms. 26% of SoundCloud’s free users are already paid subscribers to other companies.

Spotify initially showed interest in acquiring SoundCloud, however, last year in December those talks came to a mute. Techcrunch.com published an article detailing the unrealized acquisition. With Spotify’s plans of going public on the trading market, they decided not to purchase SoundCloud, as it could negatively affect their preparation. Dealing with the labels is one thing, but SoundCloud caters to independent artists and DJ’s. Acquiring the company would require Spotify to negotiate deals with labels, independent artists, and DJ’s, something they were not up for. It was once approximated that SoundCloud was worth about $1 billion, but an article published by Digitalchew.com reported SoundCloud could sell for as little as $250M, a 75% decrease in former valuation. Complete Music Update also published an article detailing how SoundCloud’s CFO and Finance Director exited the company, causing more concern for a sinking ship. Whether SoundCloud can turn in a profit under different management remains to be revealed, but seeing as how prominent Spotify and Apple music are becoming,  I do not see the music streaming platform being around in the next few years.

Resources:

http://www.makeuseof.com/tag/tried-soundcloud-go/

http://www.news.com.au/technology/home-entertainment/audio/chance-the-rapper-takes-to-twitter-to-defend-649000-streaming-deal-with-apple-music/news-story/47553b67cda08a5f1c01cd4821669bb1

https://soundcloud.com

http://www.digitalmusicnews.com/2017/01/05/google-soundcloud-possible-bankrupt/

http://www.hypebot.com/hypebot/2017/03/as-soundclouds-cash-woes-continue-fire-sale-at-40-of-valuation-seen-as-likely.html

https://www.bloomberg.com/news/articles/2016-07-27/soundcloud-owners-said-to-mull-1-billion-sale-of-music-service

http://www.businessinsider.com/soundcloud-could-sell-for-1-billion-2016-7

https://techcrunch.com/2016/12/08/spotify-soundcloud-deal-dead/

http://digitalchew.com/2017/03/13/soundclod-sale-investment/

http://www.completemusicupdate.com/article/soundcloud-seeks-new-funding-as-key-execs-leave/

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