The rise of the fan-centric music streaming service

Amidst the near-total elimination of live events — the most important source of income for scores of musicians around the world — 2020 accelerated calls for better remuneration from streaming services. Coming from a wide variety of sources from independent/DIY artists to the UK government, these debates have focused on the redistribution of money in the current ecosystem toward the long tail, given that the top 1% of artists reportedly account for 90% of all music streams.

What is relatively lacking in this discussion, though, is a vision for actually growing the streaming pie.

Some experts have pointed out that while a redistribution of current streaming revenues may satisfy feelings of justice, it might not actually bring about the desired change to many artists’ economic standing. For instance, Roskilde University’s Rasmus Rex Pedersen found that record-label market share under a user-centric model would largely be the same as with the current pro rata model, while also pointing out that earlier studies contradict each other with regards to whether indies or majors would stand to gain a larger portion of the streaming pie.

A mere redistribution of dollars also doesn’t address superfans’ willingness to spend more than the typical monthly streaming subscription fee to support their favorite artists. For the past decade, music fans around the world have been paying the local equivalent of $9.99/month to access millions of tracks. Improvements to streaming UX have focused mainly on algorithmic recommendation, user onboarding and overall content availability (both music & podcasts), while keeping price constant.

All of these elements make sense for a catalog-centric service — i.e. one that helps fine-tune the relationship between each individual listener and the service’s sprawling catalog, for the sake of improving retention. This is an important goal as streaming giants continue to fight for the biggest share of a crowded subscription market.

But to meaningfully grow the global streaming pie, we can’t just think about raising the floor of how many people are paying for music. We also have to raise the ceiling of how much people can pay. This is an inherently fan-centric approach; rather than creating value by offering a catalog of (nearly) all music, it monetizes the connection fans have with their favorite artists.

This would require a fundamental rewrite of how today’s top streaming services work. Industry analysts Mark Mulligan and Keith Jopling recently described this shift as going from a “song economy” to a “fan economy” that caters to micro-communities of fans and delivers revenue directly to the artist. Hence, while many larger digital music corporations are starting to give us a glimpse of what a more fan-centric streaming landscape could look like, some of the most interesting models for fan-centric music experiences are emerging from outside incumbent platforms.

Incumbent platforms: The difference between charity and business

In April 2020, Spotify and SoundCloud both launched their own features that allowed artists to highlight a direct donation link on their profiles, to raise funds either for themselves or for a third-party charitable cause. While perhaps well-intentioned, the features were not without controversy, and to date have not led to any grand success stories with respect to fundraising volume.

This is in stark contrast to the Chinese digital music market, where top players like Tencent Music make as much as 70% of their revenues from in-app tipping and other micropayments on their services. In fact, Tencent Music’s average revenue per user from their “social entertainment” business alone (i.e. micropayments on its music apps QQ Music, Kugou, Kuwo and WeSing) was nearly 18 times higher than that of its online music business (i.e. subscriptions and downloads).

Aside from tipping, other examples of micropayments and virtual commerce on Tencent Music’s services range from cosmetic “upgrades,” like the ability to purchase skins from artists to change the look of the QQ Music desktop app (pictured above), to direct-support mechanisms like the ability to buy virtual gifts for broadcasters on karaoke-app WeSing. In addition, Tencent Music’s services have allowed artists to host ticketed livestreams for years.

If we compare the donation offerings that SoundCloud and Spotify launched this year with those on East Asian streaming services and on gaming-centric services like Twitch, there’s a crucial difference: The former group treats donations like charity, whereas the latter group has figured out how to make the experience feel like much more than charity for the fan.

To put that in terms of neoclassical economics: The latter allows fans to make selfish purchase decisions without relying on altruism, by tying tips to in-app rewards and framing them as a tangible value exchange. Donations and tips become not just a tack-on feature to build goodwill with artists, but rather part of what investor Connie Chan has called a “multimodal business model” at its core, whereby “diversified revenue streams for businesses … allow users to make better, more flexible purchasing decisions.”

Beyond China, a more multimodal approach to digital music — characterized by a more diverse set of revenue streams that represents the totality of the artist-fan relationship aside from merely an all-you-can-eat flat fee for catalog access — is slowly starting to emerge in other markets around the globe.

This is in part due to the pandemic, which has compelled the US and EU music industries to invest more in livestreaming, both through UGC platforms like Twitch and through more formal, proper ticketed events on the likes of LIVENow and Moment House. US-based tech conglomerates like Apple and Amazon are incorporating videos more deeply into their respective music services, such as Apple Music TV and Amazon Music’s integrations of music videos and Twitch streams. But not all of these multimedia experiences necessarily tie to new revenue opportunities for artists.

YouTube, which attracts over a billion monthly active music listeners and 30 million paid music subscribers, is one of the furthest ahead in terms of allowing musicians to tap into multiple revenue sources apart from just ad and subscription revenue. Since 2017, the Google subsidiary has launched monetization features like channel memberships, Super Chat and Super Stickers that allow fans to support creators directly.

Super Stickers and Super Chat are specific to livestreams: The former are special emoji that viewers can use in the live chat, whereas the latter allows viewers to pin chat messages at the top of the channel for a certain duration during a stream (pictured above). Between March and June 2020, over 2 million YouTube users spent money on these two features for the first time. (Twitch has many of these same features, but, unlike YouTube, has yet to become a top destination for music consumption.)

In December, YouTube also launched Live Redirect, which allows artists to host a “pre-show” livestream in advance of a YouTube Premiere of a music video or film. Live Redirect has already been tested with stars like Cardi B, Justin Bieber and BTS, and helps further strengthen the harmony between YouTube’s live and on-demand music offerings — making the service look more and more like popular streaming services in East Asia.

Newcomers: Alternative monetization sources, from curation to protocols

One could argue that multimodal business models for digital music favor established platforms due to their strong social graphs, payment infrastructures and product integrations. Yet the current moment also presents an opportunity for new platforms to root themselves firmly in the market, without the pressure of licensing large catalogs.

In an environment where hundreds of millions of music fans pay a monthly fee to access nearly all the music in the world, how can these kinds of platforms charge people additional fees for what they already have access to?

One approach to growing the pie, as discussed above, is to integrate mechanisms for “virtual gifting” and direct artist support more deeply into the music streaming experience. Bandcamp is perhaps one of the most successful music marketplaces that not only acts as a point of music consumption and discovery, but also allows fans to showcase their collections on their own profiles, watch ticketed livestreams and, in many cases, pay whatever they want for artists’ records and merch. That last feature bakes a “tipping” mindset directly into the point of sale, and accounts for a wider range of willingness to pay.

A small but growing group of new apps are trying to integrate this mindset into a streaming-focused interface. On LÜM, users can earn or buy on-platform currency called “notes” that they can then redeem for rewards around specific tracks and artists (pictured below). Gifting will display fans as supporters on the tracks’ and artists’ profiles, which also have leaderboards for top supporters. Matter, another streaming upstart that was founded in 2019 and has recently attracted several major figures from the “hyperpop” scene, lets artists monetize on top of streaming consumption through a digital Marketplace for music assets and a paid membership feature called Artist Clubs, which are similar to channel memberships on YouTube and Twitch.

Another approach to growing the pie is to position community features, such as fan- or artist-driven social curation, as a separate value add in itself. Major streaming services tend to use playlist access merely as a perk to sell subscriptions to the entire service as a whole, and are still highly individualistic rather than social user experiences. In contrast, Currents.fm, which was founded in 2019, allows artists and curators to build playlists of tracks from multiple sources like SoundCloud and Bandcamp, and fans to access those playlists via four different support tiers ranging from free to $10/month. Benefits of subscribing include listening to full playlists and dropping reactions on said playlists.

Rather than positioning each creator on the platform as a solitary individual, Currents.fm also allows artists and curators to group themselves into collectives, which closely aligns with how the scenes using the platform function in the real world (e.g. DJ collectives and organizers). The service’s tip-chain features underscores this community emphasis by rewarding tip receivers with half the total sum, after which they’re expected to pay the other half forward to an artist or collective of their choice.

Last but not least, an emerging model around music streaming involves shifting its economics from the platform level to the protocol level. This means that rather than a service existing as a standalone, siloed corporate entity, it instead exists as interoperable standards, or protocols, that are governed by its users. This allows people that use these protocols, such as artists and fans, to create the rules that govern a given music service.

This philosophy is clearest with music consumption platforms and marketplaces based on blockchain technology, such as Audius and the upcoming Catalog (from the team behind Zora), given that blockchain protocols are platform-independent. Audius in particular is intent on letting artists set their own per-stream rate for their songs, which could lend itself to a more diverse landscape of how people perceive the “value” of streaming as a whole. Through this protocol, Audius hopes to be able to reward participants of its economy whether they’re artists, developers or fans — the latter by earning network fees and platform tokens that allow them to participate in the governance of Audius. (Such ambitions have also received ample scrutiny with regards to their implications for copyright infringement and enforcement.)

Conclusion: Why Spotify has to care

All of the above “newcomer” services emphasize fan-centric business models from the outset, with the long-term goal of continuing to create additional value for artists and fans.

Another common thread is that these fan-centric services allow artists to have more control over the pricing of their work, and/or for fans to have more flexibility over how much value they contribute to their favorite artists. In contrast, for incumbents like Spotify, Amazon Music and YouTube, any feature innovation ultimately still points to convincing people to pay for access to millions of digital music tracks on a flat, monthly basis — a catalog-centric rather than fan-centric model.

It remains to be seen whether any of these initiatives can scale to wider audiences. That said, they might not require traditional scale in order to achieve their platform goals in the first place. Instead, they need to ensure artists can scale their fan bases on the platform, since the artist-fan relationship is the business model’s engine. (Some direct-to-fan monetization platforms like Patreon have taken this stance in the past with respect to prioritizing fan connections over discovery.)

One major trend to watch in 2021 is how, if at all, Spotify will respond to this emerging fan-centric movement coming from outside its company borders. While its foray into tipping hasn’t been the success the company perhaps hoped for, it’s unlikely to be the last. In fact, given that the streaming giant is prioritizing podcasts over music at the moment, it should be focused on direct creator support more, not less; after all, many podcasts build viable businesses around niche interests with loyal fan communities around them, who might be more willing to lean into these kinds of direct-support features.

There’s also the higher angle of global corporate development to consider: Spotify and Tencent Music have been minority shareholders in each other for over two years. The deal saw the companies attain additional leverage in negotiations with partners, which Spotify now may be able to use in order to avoid a reconfiguration of its payment model and instead license and build out functionality to open up new revenue streams for artists, akin to the models of QQ Music, WeSing and others that Tencent Music and Spotify co-own. As organizational ownership continues to transcend geographic boundaries, so will the underlying business models of streaming as we know it.