YouTube And The Music Business: Sympathy For the Devil (Part 2)

This article first appeared in Music Business Worldwide, which you can view here.

Oh no, not another YouTube article! There has been so much back and forth over the past few weeks. My personal favourites are David BalfourNelly Furtado and Irving Azoff – all of whom have put forth compelling arguments on the music side. Christophe Muller and Robert Kyncl (pictured) have argued YouTube’s corner.

As someone with a foot in both the music and tech what strikes me time and again is the two sides frequently speak at crossed purposes, as appears to be the case with YouTube and the music industry.

This article weighs up where common ground might exist and how both sides might work together once matters are resolved.

To be clear: my personal opinion so far as the value gap, etc is concerned is broadly in line with Azoff et al, but nor do I see YouTube as the “devil”.

So here goes:


1) YOUTUBE: THE NEW BROADCAST PARADIGM (BUT NOT NECESSARILY RADIO!)

The impact of YouTube goes way beyond the music industry. It seems an entire generation is turning away from traditional broadcast media, eschewing satellite and cable subscriptions and even television sets altogether in favour of phones, tablets and laptops with a super-fast broadband connection.

Against this backdrop, native YouTube talent has reached global scale without the help of traditional media.

A number of articles document this trend including this one and this one.

YouTube presents a massive opportunity for artists at all levels, but that opportunity – as things stand – is not the same as fully licensed streaming services.

“A HUGE AMOUNT OF MUSIC IS CONSUMED ON YOUTUBE BUT, OVERALL, IT IS PRIMARILY A PLACE WHERE CREATORS ENGAGE WITH THEIR AUDIENCE.”

A huge amount of music is consumed on YouTube but, overall, it is primarily a place where creators engage with their audience and present their personality, vibe, brand, or whatever it is they want to put out there.

Take a YouTube channel for any given artist. There will be a number of music videos uploaded over a period of time, maybe some audio tracks and hopefully a decent number of subscribers to that artist channel.

Now go into Content ID, block all the music content completely and instead feed the artist channel’s subscribers with a regular stream of vlogs, interviews and docu-footage all filmed and edited on the fly with a GoPro on a shoestring budget.

All of this is monetized through a variety of ad strategies available to YouTube creators.

It would take a brave artist/manager/label to make such a move, but supposing this resulted in more subscribers, more viewing time and more revenue? Even better, it does not require the use of highly prized music rights currently undervalued by the existing YouTube model.

This is not as absurd as it might sound.


2) THE CURRENT GAME AND HOW TO MONETIZE YOUTUBE

MBW notes that YouTube paid out $634m to music rights holders; but if music content makes up a third of all views, surely that figure should have been $1.6bn?

Here’s why: YouTube is not optimized for Total Views, it is optimized for Watch Time, which is about user engagement and encouraging users to stick around and watch more content. Channel subscriptions have a huge impact on Watch Time and as Mark Mulligan notes, music massively underperforms on channel subscriptions relative to other creators and especially native YouTubers.

If the typical artist channel only refreshes with three new videos every eighteen months or so, even if those videos clock up big viewing numbers it is no surprise revenues underperform (under the current model). Not enough advertising inventory is generated if users click on a music video and then click away.

In contrast, native YouTube creators constantly drip feed content, engaging with and growing their audience, encouraging them to keep watching their channel. This in turn creates more advertising inventory and more revenue.

“NATIVE YOUTUBE CREATORS CONSTANTLY DRIP FEED CONTENT.”

One YouTuber told me she quit her day job once her channel reached 60,000 subscribers as by that time she was earning enough from her channel to sustain herself. She did not have an MCN or a manager, only an agent for brand work.

Another YouTube channel I know has grown to 700,000+ subscribers. Its revenue supports a team of seventeen fulltime staff and fresh content is uploaded several times per week. There are plenty of similar success stories.

These channels follow a formula. There are no dark secrets; insights on how to make the most of the platform are there for anyone who cares to look. This approach is not right for every artist, but there are plenty of permutations for creative individuals to engage with their audience in their own style.


3) THE FOOT SOLDIERS “GET IT”

While senior YouTube executives trade blows with music industry figures, those closer to the coalface are doing some great work.

Within YouTube there is a global content partnership team. They run workshops and presentations for artist managers and provide a point of contact for rights owners of all shapes and sizes. Many are ex-music industry people.

On the label side, I speak to industry colleagues with lots of ideas to better monetize their artist’s YouTube channels.

“MANY REMAIN DEEPLY SKEPTICAL OF A PLATFORM THAT DOES NOT YET DELIVER FAIR MARKET VALUE.”

This requires buy-in not only from their label bosses but also managers and artists, yet many remain deeply skeptical of a platform that does not yet deliver fair market value for music assets. Once that skepticism is overcome, however, great things can happen.

One recent independent label client of mine doubled its YouTube revenue in less than a year purely through optimizing content and applying best practice across its artist channels. There are similar stories elsewhere for both artist managed and label managed channels.

The caveat is this: these revenues are substantial in the context of UGC generated content, but fall well short of the rest of the fully licensed streaming market.


4) EVOLVING THE BUSINESS MODEL

What is most striking about the current situation is that while YouTube’s business model very clearly does not work for the music industry as far as its traditional assets are concerned, it could be argued it does not work for YouTube either.

If music content is only generating $634m on YouTube when it should be making at least $1.6bn (current model), surely that should also be an issue for YouTube?

What is holding YouTube back from coming to the table? They appear fearful not only of paying a market rate but also limiting functionality for music assets in line with other, fully licensed ad-funded services.

Many observer’s comment that YouTube’s parent company, Google, is more concerned with data mining based around search rather than building a content business for YouTube. Search is the business Google knows best after all.

But what if YouTube could be persuaded to step out of its comfort zone and properly incentivize rights owners? Two things could happen:

  • Artists and labels may be more disposed to invest more in their own UGC content and deploy content strategies similar to native YouTube creators.
  • Up-selling to subscription services and possibly even a la carte services.

The latter point should be a no-brainer. Spotify has shown freemium is an effective funnel to higher value services and YouTube offers one hell of a funnel. Moreover YouTube already does this for TV and movies giving users options to rent or buy, as they can on fully licensed platforms. No wonder the music industry feels left out.

The former point is a significant opportunity not apparent to many music industry executives largely skeptical towards ad-funded business models generally and the current YouTube model specifically. But if YouTube came to the table and engage more positively they can win over the skeptics and build a substantial business within the music vertical on artist UGC content alone. On top of that is an even bigger business around premium content in one form or another.


5) MAKING THE NUMBERS WORK

In bringing all of this together, the broader opportunity needs to be understood. YouTube’s Robert Kyncl is underselling the potential of his platform when he says only 20% of consumers have ever been willing to pay for music. This is wrong.

Figures I have for the pre-digital era indicate that 20% consumers bought at least one album per month or more, a further 30% 1-2 albums per year and only 50% of consumers never bought music, not the 80% Kyncl suggests.

“IN THE DIGITAL AGE, SURELY THE GOAL MUST BE TO ENCOURAGE MORE PAID CONSUMPTION – NOT LESS?”

These are Gallup/ BPI figures for the UK market in the early 90s (which I relied on for my undergraduate dissertation on digital music written in 1993).

This was before mass-market retailers entered the market and CDs still sold at a premium. As the decade unfolded per capita consumption, if anything, increased. In the digital age, surely the ultimate goal must be to encourage more paid consumption not less?

Ad-funded services have a part to play, but the opportunities to up-sell are much broader, but also more granular. YouTube is an ideal platform to exploit that granularity and hopefully YouTube Red might unlock some of those opportunities.


WHAT NEXT?

YouTube is far too random a proposition for one business model. It is a pick’n’mix of traditional content creators, native YouTube creators and pure amateurs.

Artists and rights owners, meanwhile, have not tapped into what YouTube does best: monetizing artist and label channels with their own UGC.

Both sides need to step out of their comfort zones. That requires YouTube evolving its business model with strands and layers appropriate to vertical markets such as music.

It also requires further diversification from artists and rights owners to create and monetize their own UGC programming.

That is where the common ground lies.

Sympathy For The Devil: why do so few music tech start-ups succeed?

This article first appeared in Music Business Worldwide, which you can read here.

 

The digital music market continues to grow, but life remains tough for music tech start-ups. Rdio bit the dust before Christmas and Cür Music, had a fight on its hands to meet payment deadlines to labels, which it has now done. Even some of the bigger players are not without their problems as MBW has alluded to.

Many within the music industry have little sympathy for the tech sector, yet the fact remains hardly any fully licensed music start-ups have achieved either profitability or a successful exit after almost twenty years of trying. It is worth asking, why?

The table below compares the biggest music tech start-ups of recent times against three of the biggest tech start-ups overall during the same period. It compares their launch dates, early fundraising and current valuation.

Screen Shot 2016-05-11 at 07.26.19

The Series A is the key line to focus on.

This is the funding round that enables a start-up to launch its product or to scale to a meaningful level once in the market through hiring a team, product development, marketing, etc.

RdioDeezer and Spotify required a Series A funding round that was more or less double the Series A for three of the most successful start-ups of recent times.

Spotify is by far the most successful music tech start-up in terms of scale and impact. It was founded in 2006, launched in late 2009 with a Series A of $21.6m. On this funding round Spotify concluded deals with all three majors and Merlin. Reports suggest the company burned through $8m prior to the Series A, so Spotify was $30m in the hole pre-launch.

Compare this with Uber, AirBnB and WhatsApp and some interesting points emerge:

  • All three raised much smaller Series A rounds, less than half what Spotify did.
  • AirBnB and WhatsApp launched two years before raising their Series A, valuable product development time in the market prior to scaling properly.
  • These companies are superstars, yet their initial steps were broadly in line with most start-ups. The typical Series A round falls within the $2-10m range,
  • AirBnB launched in 2008 with an initial Seed round of $620k, waiting over two years to secure a Series A of $7.2m.
  • Uber and AirBnB have valuations far in excess of Spotify’s while WhatsAppachieved an exit more than double Spotify’s recent valuation.

Even leaving aside the headline grabbing unicorns (the billion dollar start-ups), a more typical goal for a founder or investor is a $100m+ exit.

Over the past five years, there have been around 100 or so tech start-ups achieve such an exit per year either by IPO or acquisition.

These include SaaS, FinTech, AdTech Social Media start-ups but no music tech start-ups and certainly not ones that are fully licensed.

Asking around amongst well-placed friends, who have held senior global digital music roles, between us we can only think of two successful exits for music services in the past fifteen years or so:

  • MusicMatch selling to Yahoo for $160m in 2004
  • Last.fm selling to CBS for $280m in 2007

Last.fm was not fully licensed but a number of rights owners managed to close deals around the time of the acquisition.

So that means only one fully licensed music start-up has achieved a successful exit and that was in 2004!

What would you do if you were a founder or early stage investor? Go for music and swallow greater dilution of equity with greater financial risk? Or target other sectors that require less dilution with less risk and, potentially, offer a much greater return?

Bootstrapping and lean start-up methodologies have been widely adopted within the tech sector. Yet, applying these methods to music tech start-ups is problematic.

The benefits of the lean start-up model are very simple: eliminate waste and focus on product development. Build, measure, learn and repeat in short iterations until the product is sufficiently developed to scale. Balance the risk and pick more winners.

The business development model that rights owners apply to licensing digital services is well established (equity, advances, minimum rates, etc). Yet this approach places a huge burden on music tech start-ups before they even launch.

In fairness to the music industry the tech mantra of scale first, establish a business model second should be given short shrift. No AirBnB host would want to give free accommodation to strangers just to help out some tech entrepreneurs. Why should rights owners give anyone a free lunch? They should not.

Streaming is fuelling a growth in recorded music revenues but there is still a long way to go to get the market back to where it once was let alone to where it could be.

Moreover, the market is dominated by a handful of major tech players. Yet corporate tech companies cannot always be relied upon to innovate. In the music tech space for every Apple there is a Mircosoft or Nokia that does not quite hit the mark.

Time and again, start-ups innovate and create new markets across a range of industry sectors. The music sector, however, remains problematic.

Leaving aside the actual deal structures for music licensing, the costs associated with negotiating the deals, managing content and reporting usage are substantial whichever side of the table you sit on.

Of course, some would point to Blockchain and GRD as solutions, certainly the tech industry has proved adept at collaborating at an infrastructure level to enable more innovation in the market.

Facebook helped established the Open Compute Project that has signed up just about every major tech giant except Amazon. The reasoning is very simple. Tech giants are not competing on their server capacity, they are competing on the next wave of innovation around VR, AI and so on that sits on top. So collaborate on the back end to enable a higher level of competition where it matters. Brilliant thinking.

In fairness to the music industry, it has picked up the mantle to fight online piracy and address issues such as the value gap and safe harbour. Such work creates a fairer environment for innovative music tech start-ups seeking to launch fully licensed legitimate digital music services. This is something the tech community, as a whole, should recognise.

Coming back to the music tech start-up looking to strike deals with rights owners, how might the business development teams approach these opportunities and back more winners?

For the sake of brevity, let’s consider three key components: cash, equity and debt.

Ask for too much cash upfront and the start-up struggles before it even gets going. To the extent at advances are applied, many observers say advances should be proportionate to the likely earn through especially in the early stages.

Entrepreneurs often complain this does not happen and advances can be too aggressive. But what is the alternative? Cash is less risky and if rights owners are assuming more risk, then the overall compensation should reflect the level of risk.

Equity is well established in licensing deals, usually on the first round of negotiations and that equity dilutes over further funding rounds until a final exit is achieved. But only one such exit has ever been achieved.

How might the equity piece be approached differently? Perhaps there is an argument to take more equity earlier, divest a proportion of that equity on later rounds and retain the remainder until final exit?

Such arrangements are not that common but do happen. There are all sorts of permutations.

Debt finance is often overlooked, but it has been brought into prominence on account of Spotify’s latest funding round. The debt piece can be structured in all sorts of ways, interest can be applied and it can be converted to equity on pre-agreed terms. For a start-up low on cash, it is an alternative, but it is still risky for the rights owner.

These thoughts just skim the surface of a complex problem, but a problem exists and it affects all of us in the digital music value chain. There are no easy answers.

Provided the start-up is on the hook one way or another for the music rights they use from day one, are there more creative way to strike these deals to enable more innovation and growth in the digital music market?

If Spotify does achieve a successful exit, then it will only be the second fully licensed music start-up to do so. We need more.

Analyse This … The Rise of the Music Industry Analyst

This article first appeared in Record of the Day magazine, which you can subscribe to here.

The music industry has a tendency to pigeonhole people. This is especially so when it comes to jobs and job titles.

Different roles attract different characters. Within labels, roles traditionally fall into a few key strands: A&R, product manager, plugger, press officer and around them: sales, international, digital and business affairs amongst others.

One role that cuts through all of the above is the analyst. It is a role I have a lot of love and affection for because that is how I first started my career.

The life of an analyst in the music business:

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What is an Analyst?

Analysts cover a very broad remit in the modern music industry. Artist Insight details where an artist sits in the market, identifying their audience and how that audience behaves. At market level, broader trends can be established: where does streaming adoption sit? Who is still buying CDs? Etc.

We should all be familiar with social media stats, streaming stats, YouTube stats, all of which can be analysed on a per territory or global basis. Cause and effect can be easily monitored, layered with digital marketing and advertising spends. Taking it to another level marries usage and impacts with revenue generation to assess engagement and monetization.

In a world of big data, those who complain of too much data don’t know what they are doing. Or they need to hire an analyst. Someone who can make sense of complexity and cut to the essence of what is required to aid better decisions that drive an increasingly sophisticated business. The role of the analyst has come of age.

A good analyst is a match for any management consultant or MBA graduate.

 

What makes a good Analyst?

Analysts need to be smart and probably degree educated, they certainly need to be trained how to think. Some have quantitative degrees, but that is not a prerequisite.

Some come to the industry having worked in insight roles elsewhere. Some, like me, had a burning desire to work in the music business and fell into it.

A good analyst can zone in on mirco level issues such as a specific artist campaign, while understanding macro level trends of where the business is going. Most of all they have to be able to filter and interpret in a manner that connects with decision makers who have notoriously short attention spans.

Analysts need to understand the broader creative and social context of music (it helps to be on ticket allocations). They also need to understand the fundamental drivers of the business they are in. The latter comes down to reading the trades, Don Passman, Dissecting The Digital Dollar, etc. It also means getting to know their stakeholders and what they do.

Having being in the role of a decision maker for far longer than I was even an analyst, I can always tell industry newcomers because although they deliver great analysis maybe their context is not quite right. This is easily fixed through constructive feedback. Decision makers need filters too.

 

How it used to be

Twenty years ago, there were one or two analysts in each major and a couple of people at the BPI. Very few people knew what we did.

I was referred to as “the numbers guy”, a “statistician”, “the guy who walks around with the midweeks”, or more bluntly “what is it you do again, Andy?

It wasn’t supposed to be this way. I spent my university years promoting gigs for bands such as Nirvana. Solely in the interests of getting my 2:1, I searched for a music related topic for my technology-focused degree.

Peter Scaping, then Research Director of the BPI and Chris Green’s old boss, suggested: “Some people seem to think that one day music will be beamed into people’s homes. Why don’t you go away and think about that?

30,000 words later and I had written one of the first major pieces of analysis on digital music. It got me my start, but from then on I was labeled the geek.

Charles Wood, Media And Planning Director at Sony Music, called me up about a job, but initially I wasn’t that interested. The Eureka moment came at the second interview when Charles had me do a range of tasks. I thought two things: 1) This guy is seriously smart and 2) What a great way to learn about music marketing.

Music marketing in the 90s was more sophisticated than many people realize and with a real focus on numbers. The groundwork had been laid in the 1980s by Clive Farrell (RIP), Charles’ former boss who developed a method of analyzing TV advertising spend against chart sales data by TV region.

By the 90s data was more sophisticated and way ahead of the rest of the world. There was also airplay tracking and a bunch of other sources. The whole business revolved around charts (and still does).

As many analysts will tell you, there are relatively few opportunities to be the hero. Once such moment for me was this:

On a Tuesday morning I had Paul Burger (Chairman), Rob Stringer (Epic MD) and John Aston (Sales VP and Sony COO Nicola Tuer’s old boss) all standing in my office, with Burger yelling at me “you got your fucking numbers wrong, Andy!

Paul could yell louder than Rob (which is very loud) and he was pissed off because I had predicted Manic Street Preachers would not be number 1 by the weekend. Their new single If You Tolerate This (Then Your Children Will Be Next) would be narrowly beaten to the top spot by Steps as things stood.

No Paul, I got my numbers right.” Paul bought my argument and the Sony machine rolled into action. The Manics made number 1 with 146,529 sales to Steps’ 140,020. Without an analyst, Sony and the Manics would not have made it. That was a step-up moment for the band: their first number 1 single that kicked off global campaign taking them to the next level.

Moving forward to present day, the role of the analyst is better understood, better paid and better resourced although there is still some way to go. There are more career options if you intend to remain in that sort of position, but an analytical grounding has wide application across the whole music business.

  

Ex-Analysts

Charles has remained at Sony Music and is still doing what he does best. His predecessor, Peter Duckworth moved to Virgin Records and then become part of the senior management team at EMI and now jointly runs Now Music.
Lohan Presencer, my opposite number at Warners, moved into a marketing role, then to Ministry where he is now CEO. One of the smartest deal makers I know.

Emma Drew (nee Sharma), my opposite number at Universal, moved into digital marketing and now runs her own hugely successful YouTube channel creating nursery songs and animations for kids.

Pete Downton was an analyst at Warner Music before his elevation to VP of Digital. He is now Deputy CEO of 7Digital, another shrewd deal maker.

In making my move, the aim was twofold: 1) work more closely with artists and 2) move into digital. Since then I have alternated between start-ups and artist management. Initially marketing focused, later focused on deal making.

 

More career choices for Analysts

There are now far more options for those wishing to remain in analytical roles.

Fred Bolza and his team does great things at Sony and Mark Utley is building a solid team at Spotify. Tech + Music = More Opportunities For Analysts.

Another beneficiary of that crossover is Will Page, also at Spotify. An economist by trade, he presents in a hugely compelling way. On stage his PowerPoint skills possess the virtuosity of a Jimmy Page guitar solo.

Outside the corporate loop, Mark Mulligan and Chris Carey are building entrepreneurial businesses and credible media profiles as analysts.

 

Striking Out

For those who wish to strike out and diversify their career either into frontline marketing or commercial roles, you have to look within yourself and assess your own strengths and weaknesses. Think about how you can enrich your life and experiences through other avenues aside from your day job.

There is no reason why someone who started out as an analyst cannot make it all the way in this industry. Lohan has proven you can reach CEO level if you are smart and the right opportunities come your way.

Very often analyst types let themselves down through lack of confidence or lack of self-promotion. Super smart people can be their own worst critics when they need to be more brazen. They don’t see the big deal in the amazing things they do, while others make the mundane appear remarkable.

Sometimes you have to learn to say “fuck you” and/ or have a FUCK YOU attitude. Not to be obnoxious, but knowing when to stand your ground and to know your own worth. At other times you have to be charm personified.

Analysts can over think things, but when they do make decisions they tend to be good ones. Backing up a decision in advance of achieving an outcome requires conviction. Those are the moments that test your mettle.

Some people in the music business get paid a lot of money not because their job is inherently difficult on an intellectual level, but because they are under enormous pressure to deliver results. Moreover, they have to do so in what can be a highly political environment.   That could be managing a band constantly on the verge of breaking up or running a corporation with numerous stakeholders, either way it requires nerves of steel.

 

Knowing your worth

The difficulty with analyst roles is while they are incredibly demanding they are often undervalued. Analysts lack the professional status of lawyers and accountants or the frontline kudos of product managers. I would argue they are equally valuable and that value is now more apparent than ever.

To HR people and senior executives I would say: value proven analysts and do your best to retain, motivate and promote them. To the analysts reading this: don’t quote me (ha!) Only you can weight up your own situation, but consider your options and know your worth. This is your time.