Three patterns in big-tech companies' music strategies

Twelve days ago, Trapital founder Dan Runcie and I hosted a free webinar about music strategies at big-tech companies. For an audience of nearly 250 attendees, we broke down the strategic thinking behind major music headlines around Facebook, Amazon, Apple, Netflix, Google and Tencent, and discussed what they meant for the future of other platforms like Spotify and for the music industry at large.

If you weren’t able to tune in live, you can watch the webinar video on YouTube and listen to the podcast on all major listening platforms, including Apple Podcasts and Spotify; I highly recommend following along with the slides we referenced as well.

Today’s newsletter is meant to accompany the webinar. I want to zoom out beyond company-specific discussions, and instead highlight three major themes not just in how big-tech music strategies are constructed, but also when and why their execution falls short.

As more and more tech corporations — including but not limited to Snapchat, Epic Games and TikTok owner ByteDance — expand their presence in the music industry, it would be good to keep each of the below themes in mind, for the sake of making predictions as well as managing expectations.

1. Music is (mostly) a commoditized drop in the bottom-line bucket

The commoditization of music streaming is nothing new, but must be acknowledged in any conversation about big tech’s role in the music industry.

For the most part, big-tech music strategies are powered by blanket licensing deals for music content with major labels, publishers and performing rights organizations (PROs). By nature of these deals, one platform is paying for essentially the exact same millions of tracks as the next platform. This means that by default, their music content is not differentiated, and instead is relegated to a commoditized marketing add-on to drive sales of the platform’s core revenue streams. (Two major exceptions to this rule are SVOD platforms like Netflix and Disney+, which sign one-off licensing deals for each of its music-related films and shows, and game developers like Epic Games, which signs one-off deals for in-game events and digital goods.)

In the context of big tech, the commoditization of music takes two primary forms:

A. Paid or freemium streaming services (e.g. Apple Music, Amazon Music, YouTube Music)

In this model, music streaming is a loss-leading commodity that helps sell other products and services for the parent company. For example, by my calculations, Apple Music and Amazon Music are each at most 4% of Apple and Amazon’s annual revenue, respectively. But those music services hold incredible marketing power, and play an important role in driving sales of the iPhone, Amazon Echo and Amazon Prime.

The margins on commoditized music streaming alone are quite low, as competing services race to the bottom on price — especially in markets like Asia and Africa where the subscription fee can be as low as $2/month. In fact, it’s increasingly common for big-tech companies that treat music as a commodity to bundle their music offerings with other services. For instance, Apple Music is part of the heavily discounted Apple One bundle, and student subscribers to Apple Music get Apple TV+ for free. Amazon bundles a discounted music subscription with Prime, and has previously bundled music with its Echo devices. Internationally, you’ll be hard-pressed to find a music streaming service that is not owned by a telco or tech conglomerate. You can even argue that Spotify is now a multimedia content bundle, offering access to music, podcasts and soon videos for a discounted price.

B. Social apps with music (e.g. Facebook, Instagram, Snapchat)

In this case, music is treated wholly as a marketing cost, not a revenue stream. These companies do not charge their users for access to music, but rather bear all the blanket licensing costs on their own, for the purpose of facilitating official and user-generated music content on their respective platforms.

That said, these licensing costs end up being relatively minimal from the companies’ perspective. For instance, rumor has it that Facebook paid around $500 million to labels and publishers in 2017 in exchange for its first set of blanket licenses. While that sounds like a significant number, it comprised just 2% of Facebook’s annual operating expenses at the time ($20.4 billion). And the presence of music is intended to increase users’ time spent on the app, which would increase ad sales and stock performance.

Again, while a social-first approach to music is perhaps more delightful and engaging for the fan, it is still a commodity business, because all of these major social apps are licensing the exact same music as each other. In many cases, the user experience across platforms also ends up being identical or non-differentiated, minimizing the impact of any given strategy. This brings us to the next theme:

2. Impact = licenses + ecosystems + interfaces

The second theme relates to how in any business, a good strategy is not enough — you also have to think critically about the strategy’s execution and subsequent impact. In the context of music and big tech, this means asking: Do the music strategies at these companies actually help the music industry drive revenue growth and/or encourage new forms of consumption and behavior?

When thinking about the impact of content-driven music strategies, three interlocking parts come to mind: Licenses, ecosystems and interfaces.

As illustrated in my diagram above, all three of these elements have to work together for a music strategy to take off, and the absence of even just one element can present a major obstacle to growth. Let’s walk through each scenario:

A. A big-tech music strategy with great licenses and UX, but no product ecosystem, is difficult to profit off of.

Pure-play streaming services — i.e. ones that make their revenue only off of music and audio subscriptions, like Spotify, Deezer and Tidal — fall into this category. Spotify is a standout example because it is the world leader in music streaming subscriptions, arguably innovates the fastest on UX among its competitors and has the licenses necessary to host tens of millions of tracks on its service. Yet it has been profitable only for around 5% of its decade-plus existence, and does not have the benefit of a diversified business model around it (hardware, ad revenues, retail/ecommerce, etc.) to help cover its costs.

As far as this commoditized music streaming model is concerned, all signs point to a future where bigger tech conglomerates win out — particularly those who have the most robust and diversified ecosystems to market, distribute and subsidize a loss-leading music service.

B. A big-tech music strategy with great UX and product ecosystems, but no licenses for content, is difficult to sell to the end user.

Most early-stage, content-driven music startups fall into this category — whereby they shut down after just a few years, purely due to the overbearing costs of licensing the content that most fans want to listen to. As I wrote in 2018, it’s a classic chicken-or-egg problem: Startups cannot commit the cash for a content license without proving the traction of their business models, but also cannot have the chance to show that traction without the right content.

But many established big-tech companies fall into this category as well. We’re seeing this in real time with Amazon-owned Twitch: The livestreaming platform has seen more than 3x growth in music activity since March, but still does not have the proper sync and mechanical licenses to clear its live and VOD content. Even the launch of its music service Twitch Soundtrack was only a bandaid over the platform’s wider licensing gap. Twitch Soundtrack only covers master rather than sync or mechanical licenses, does not pay master royalties and is apparently not preventing several high-profile Twitch creators from receiving a barrage of DMCA takedowns from the RIAA.

Elsewhere, Amazon Music’s native integration with Twitch is actually a great example of a tech company creating wholly new user experiences by leveraging its distinct product ecosystems. But Twitch’s ongoing licensing debacle has led to a frustrating and opaque platform experience for its two biggest customers — namely, streamers and fans.

C. A big-tech music strategy with great licenses and product ecosystems, but poor UX, is difficult to discover.

This is the most underrated problem out of the three. To some extent, the importance of licenses and diversified product ecosystems to scale a music strategy is already common knowledge in the industry. But we don’t talk nearly enough about how interfaces can make or break a strategy’s execution. A company can have all the licenses it needs, and the best ecosystem around it — but if it’s not designing its user experience to make its on-platform musical journey easy and fun to navigate, it’ll all be for moot.

One example that stands out to me is Facebook’s implementation of official music videos, which launched on the platform for U.S. users back in August. Industry insiders and the media positioned the announcement as a significant challenge to YouTube — which counts eight music videos among its top 10 most-viewed videos of all time, and is a popular destination for artists to host live video premieres.

But I don’t buy this framing, because Facebook’s music videos are buried under a category that a lot of people don’t even know or care about: Facebook Watch. As you see in the screenshots below (taken by me), the only way to access a centralized repository of music videos on mobile is to click through “Videos on Watch” in the menu sidebar, click the music button on top and then search for a specific artist and/or browse Facebook’s own music video playlists (which, to the point of commoditization, look a lot like the kinds of playlists you would find on Tidal or YouTube Music).

The amount of views that these videos are getting still pales in comparison to YouTube, implying minimal audience engagement or training to view Facebook as a music destination. In fact, since the feature’s launch, Katy Perry remains one of the only major-label artists who has opted to premiere a music video exclusively on Facebook.

Ironically, Instagram also implemented this undiscoverable user experience with its rollout of Reels, a direct competitor to TikTok. Instead of creating a dedicated algorithmic feed for Reels the same way TikTok delivers videos in its “For You” tab, Instagram hid Reels videos in its existing Explore feed, which features a wide variety of other content including photos and longer-form videos. Creating your own Reel as a user is also relatively unintuitive without reading step-by-step instructions. And to bring it back to licensing, Instagram automatically strips out any music from Reels saved to a user’s device because it doesn’t have the proper go-ahead from rights holders, which prevents the shareability that makes TikTok so popular.

3. No corporation is a monolith, but most of them are generalists

To tie everything together, this last theme is about companies’ wider priorities.

There’s a subtle but important distinction between a corporation trying to reach everyone and a corporation being a monolith. Most big-tech companies, by way of their expectations for annual growth and profit, are looking to reach the mass consumer on a global scale. At the same time, these corporations can be better understood not as single entities, but as internally warring camps fighting for prioritization. For instance, Facebook’s music team is probably relatively low on the totem pole compared to Facebook Groups, Messenger, Marketplace and the company’s ongoing fight with disinformation.

This has two main implications. One, many of the latest news around recorded-music licenses involve big-tech companies that have other motives on their minds, and that will find it difficult to prioritize music amidst all the other social and political fires they have to put out. Two, because many of these companies are taking a maximally generalist approach to growth, their content-driven music features will be minimally innovative as they try to appeal to their lowest common denominator of users.

What does this mean for the music industry? Hopefully, this analysis will inspire some of you to think about new kinds of big-tech music partnerships that lead to user experiences that are more discoverable, delightful and monetizable in ways that we haven’t seen before.

Is there a way that music licenses can unlock new kinds of user experiences and business models for artists and rights holders, instead of taking a more homogenized and commodified approach? Examples of some existing experiments include licensing stems rather than songs for music creation tools, building interactive, choose-your-own-adventure soundtracks for films or releasing free, label-branded music packs for fans to incorporate into their own games.

In fact, I think the pioneers laying the ground for the future of music-tech partnerships will come from outside of the mass-market streaming and social media landscape, and instead from early-stage startups and from companies like Netflix, Epic Games and, hopefully at some point, Twitch. In general, music and tech partnerships feel the most exciting and fruitful when they bring out, rather than bury, each other’s uniqueness.