The music industry is entering the era of “Streaming 2.0” says Lucian Grainge, propelling the global music business to more than 1 billion paying music streaming subscribers by 2028, asking “how long could it take us to get to 2 billion?”
At yesterday’s Universal Music’s Capital Markets Day, which took place at Abbey Road Studios, CEO Grainge and UMG’s leadership team articulated their vision for how this might happen.
The fundamental message was that streaming needs to shift from a single consumer value proposition of ‘all the music, any time, anywhere’, and simple digital monetisation strategies focused on subscriber growth (‘get people to pay, and then get more people to pay’), to a more complex model that maximises customer value and focuses on both subscriber and ARPU growth.
In simple terms, yesterday’s mammoth session - which lasted nearly five hours - can be condensed into “pretty much everyone understands what streaming is, a lot of people are willing to pay, so let’s find ways to get people who haven’t yet subscribed to sign up, and let’s find ways to get people who are already paying to pay more”.
Underpinning this, said Grainge, are “five big shifts” that Universal has identified - and those five big shifts are, effectively, Universal’s agenda for the next few years.
This first of those shifts is that streaming is moving from a “simple compelling proposition” to a “segmented customer proposition”, and that while the era of “Streaming 1.0” was about “volume over value”, the coming years need to be bedded in “artist-centric principles”. This will allow for “broader and deeper monetisation” opportunities, contrasting with the one-size-fits all “scale digital monetisation” that helped streaming succeed.
With this, focus must shift from established markets to global opportunities, and with it streaming must look at not just growing the total number of subscribers, but also growing ARPU, or ‘average revenue per user’.
Needless to say, a big part of this growth in ARPU will come from the music industry buzzword of the past year or so: superfans.
UMG’s three fundamental facts
Grainge began by laying out three “fundamental facts” of Universal’s business, anchoring the “creative, technological and investment strategies” that the company will be using to “guide and deepen our conviction in the extraordinary opportunities that we see ahead”.
The first of those fundamental facts - and one with which no one can really disagree - is that streaming has changed everything, resulting in a “quantum leap forward in music access and monetisation” that will continue to “propel many years of industry growth”.
Second, “super fandom” is “a core component of music industry economics”, and right now the opportunities presented by superfans are not being fully realised.
Despite streaming having delivered huge value “it has also leveled the playing field”, says Grainge, explaining that people pay the same for access to music whether they are listening “five hours a day or five hours a week”. This means that where, back in 2014, superfans in the “download to own” era were paying around three times as much compared to the average consumer, today the spend of a superfan and an average consumer is the same.
Finally (though actually, not quite finally) “Music is Universal”, and you can bet that whoever came up with that one dislocated their shoulders patting themself on the back. “Music is fundamental to the human experience”, waxed Grainge, “the most enjoyed and influential form of media in the world”.
However, a recurring theme throughout the day - and one which tied the hours or presentations together - was Grainge’s final fundamental fact, snuck in at the end of his big three, which is that the “value proposition of streaming is extraordinary” - both today, but also into the future.
That value proposition is simple. “Access to all the music in the world, in the palm of your hand, frictionless discovery, personalised, shareable and always with you, wherever you go”, said Grainge, a point re-echoed by CFO Boyd Muir, EVP Digital Strategy Michael Nash and others across the afternoon.
Maximising subscriber value
“Over the past decade”, explained Nash in a later session, “it was essential to drive market evolution by focusing on a simple and appealing value proposition for subscription streaming. All the world’s music for one low monthly price on any device, anywhere, anytime.”
However, added Muir, “Music subscription remains significantly under monetised and has great potential for ARPU growth. All the music in the world in the palm of your hand… at a cost of just 20 cents per hour, which is a fraction of the cost of any other form of entertainment.”
“Streaming 2.0 will represent a new age of innovation, consumer segmentation, geographic expansion, and greater value through both subscriber and ARPU growth”, said Grainge, adding that Universal is “creating more engaging and appealing consumer experiences, including specially designed new products and premium tiers for the superfan”.
The underlying message of the day is that streaming is not only ready to evolve but must evolve - and Universal intends to position itself at the forefront of that evolution.
“We’re now ten years into the music industry’s return to growth”, Muir explained. “A decade ago, we knew that for the industry to recover, we would have to help streaming scale with a simple, easy to understand consumer proposition at a remarkably good value… And look at where we are now. More than 600 million subscribers across the globe.”
It’s probably worth noting here that when Muir talks about subscribers, he’s talking about paying subscribers, and it’s on that front that UMG sees continuing and significant opportunity. “Subscription still has a significant subscriber penetration opportunity”, continued Muir, but warned that “per capita monetisation” - the amount that people are spending on music per head - “is only 50% of what it once was” at “peak physical era spend” in 1999.
This means that “music subscription remains significantly under monetised” and that there is “an opportunity to increase ARPU across all platforms and all markets”. That increase in ARPU will be achieved by “increasing revenue per subscriber” as well as by “closing the value gap between paid and free ad-supported streamers”, but also by “engaging with super fans with new products and experiences that unlock their spending potential”.
Escalating market growth
Alongside opportunities for increased monetisation of subscribers, and that uplift in ARPU, Muir outlined “demographic tailwinds” that Universal sees as a strong contributor to overall market growth, as a “second wave of penetration amongst older listeners” occurs, something further confirmed by Gaby Lopes, UMG’s SVP Of Global Insight who said “older listeners are still shifting from the traditional listening behaviors”.
“Both established and high potential markets have significant headroom for continued subscriber growth”, Muir explained, noting that “subscription penetration is still below 50%, even in our most established markets, with most still below 30% penetration”.
High potential markets - those territories where streaming is growing rapidly, supported by an economic and technological ecosystem that makes shifting to music streaming fairly inevitable - offer another big opportunity for growth. Those markets “will be propelled by the same drivers along with technology adoption and the subsequent embrace of streaming in the same way that we've seen time and time again with the established markets”.
Lopes further explained that opportunity, saying that, globally, Universal believes that there are “around 220 million subscribers already in the consideration set” across the 23 different markets that Universal monitors, which, combined, make up 91% of the streaming market.
According to UMG’s research parameters, those future subscribers or “consideration set” consumers are people who “understand what a paid subscription [streaming] service is” and “are interested” in that proposition, but also, critically, are people “who say that they are willing to pay at least the current price, that is the $10.99 or local currency equivalent” for a streaming subscription.
Most of those future “consideration set” subscribers are in “high potential markets such as China, Brazil and Mexico”, but Universal also expects a third of them - so as many as 75 million new subscribers - to be won in existing “higher ARPU markets such as the US, Germany or Japan”.
“Even when we look at the US, an established market”, continued Lopes, “we can see significant headroom for growth. The US paid subscriber penetration is only 42%. When we look at the remainder 58% of non-subscribers, about half of them have already shifted from legacy formats”.
As a result, UMG sees “many routes to attract new subscribers”. One of those routes - perhaps somewhat controversially, given the current dispute between Spotify and US collecting society the MLC - is audiobook listeners, with Universal’s research showing that “as many as 61% of US weekly audiobook listeners don’t currently hold a music subscription”.
This, Lopes noted, means that “these are consumers already in the audio streaming environment and for them to complete their experience with music is not a huge leap”.
Interestingly, one key opportunity for growth identified by Lopes is “consumers who are paying for programmed music via satellite radio, who can be migrated to services with both programmed and on-demand streaming”, noting that those consumers “tend to be in higher incomes households” and “already display a willingness to pay” - albeit for satellite radio rather that streaming, with particularly strong opportunities in the 45-54 and 55+ age demographics.
With hours of content to dissect and digest from yesterday’s session, there’s a lot more to explore. Look out for more insights and analysis from the CMU team in the next few days.
