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Trends: Realising the revenue potential of free streams

By | Published on Monday 17 April 2017

Paid-for streaming is driving the record industry back into growth, to the extent that it’s tempting to write off the ad-funded free platforms. Though realistically, a significant slice of the market – probably the majority – will never pay to stream.

Assuming, therefore, that free streaming will be part of the mix for the foreseeable future, could the music business do more today to boost this extra income stream down the line? CMU Trends considers the challenge.

About ten years ago, when major label execs were finally accepting that digital was the future, but no one was quite sure if and how digital music services could replace then still plummeting CD sales, for a time some of those record company bosses warmed to ad-funded platforms. Perhaps through digital the music business, which had never really shared in the advertising pound, could get a cut of the big brands’ ad spend.

A few start-ups dabbled with ad-funded downloads, though that never felt like it was going to go anywhere. But with streaming some reckoned that the advertising model might just work, and provide an extra important revenue stream for a shrinking record industry. It was around about this time that the record companies did their initial deals with YouTube and Spotify.

Today, now that the record industry is back in growth, and it is paid-for streaming that is enabling that revival in fortune, most label bosses are feeling somewhat lukewarm towards ad-funded digital business models. Though, of course, plenty of ad-funded free-to-the-user streaming services still legally operate and generate some revenues for the music industry.

• Spotify free is tolerated – rather reluctantly by some – as most accept that freemium helps sell premium.

• Ad-funded personalised radio services like Pandora and iHeartRadio in the US can utilise a compulsory licence under American copyright law, so what the labels think is irrelevant. Though neither of those services have managed to make a profit exploiting said licence and are now working with the labels to try and develop paid-for products.

• In some emerging markets where the record industry – and certainly the Western record companies – never made much (if anything) selling CDs, and therefore any income from digital is an innovation, ad-funded services are more readily accepted.

• Meanwhile, we all know what the music industry thinks about ad-funded YouTube, which the labels argue is exploiting a loophole in copyright law to secure much more favourable terms from rights owners compared to its competitors. While that safe harbour loophole exists, the labels don’t feel they can cut off music from YouTube et al.

But, despite the labels generally being down on ad-funded music today, it seems certain that free streaming of some kind, paid for by advertisers, is part of the future of digital music. So it’s worth asking: how can the music industry make the most of this strand of its future business?

One of the key challenges for the music industry today is how to convert more people from the free streaming services to the paid-for platforms. Because it’s no secret that, while many more people access music streams via the free services, the vast majority of the money the music industry makes (nearly 90% of streaming income in the UK last year) comes from the premium platforms.

Both the music business – which needs streaming revenues to continue to rapidly grow – and the streaming companies – which are yet to reach the scale at which they become commercially viable – need more consumers to upgrade to premium. Spotify and Apple Music continue to sign up paying subscribers at quite a rate, though many reckon that a greater range of streaming music products and price-points will be required to get enough people paying overall.

Though, even if that is achieved, there will still be a sizable portion of consumers – probably the majority of consumers – who will never pay to stream, and who will continue to access music via the free channels. Cutting off the licensed free services – even if that was an option (which is to say issues around compulsory licences and safe harbour could be overcome) – is unlikely to change that fact.

Of course, this isn’t new. In the pre-digital age most people got most of their music for free via music radio (and to lesser extent music television), which paid nominal royalties into the music industry. Meanwhile some people got some of their music via CDs, which generated big bucks for the music business. The main difference in streaming, of course, is that the free services and the paid-for services are much more similar, whereas listening to the radio and playing a CD were very different experiences.

This has led some to suggest that there should be greater differentiation between the free streaming services and the paid-for platforms; because the similarity between the two products may be hindering the growth of the latter.

These differences can be content or functionality based. Spotify already offers more mobile functionality to paying subscribers than free users, and as a result of its recent new deal with Universal Music it now allows at least that major’s labels to keep the latest releases off freemium for up to a fortnight.

But maybe those content and functionality differences should be more significant to convert more users from free to premium. Perhaps the now defunct Rdio had the right idea by only offering a personalised radio experience for free, while the fully on-demand experience was exclusively available to paying customers. In essence, this is the model that has now been embraced by Pandora and iHeartRadio in the US.

But beyond the question of whether or not the free streaming services are hindering the growth of the all-important paid-for services – and whatever form the free services might ultimately take once the streaming music market really comes of age – there remains the challenge of how to maximise the music industry’s ad income.

Because even if the music business has to accept that free streams will always generate much lower revenues – and therefore that premium streamers are in essence subsiding the free streamers (of which there may be more) – it would be unwise to write off ad income as a lost cause when there may be ways to boost that side of the streaming game.

That said, it is easy to see why the record companies may be a little despondent about ad-funded streams. Spotify, which originally spoke about its free and paid-for offers as two different products for two different audiences, generally now speaks about the former as being an up-sell platform for the latter.

In the US, both Pandora and iHeart are diversifying beyond the ad-funded model to try and become profitable. And Guvera, which always claimed ad-funded free streams was at the heart of its business, shut down various divisions and bailed on numerous markets after a failed attempt at an IPO last year.

Then there is ad-funded YouTube, owned by one of the most successful companies in the internet advertising game, and a site where video consumption – including music video consumption – has risen significantly in recent years. Yet the ad income the music industry sees from YouTube, whether directly or via third parties selling ads on the platform, like Vevo, has seen only modest growth.

By creating Vevo, which is allowed to sell ads on the YouTube channels it manages, Universal Music and Sony Music hoped to generate bigger ad income around their content than Google’s own ad sales business was bringing in. That the music industry continues to berate the size of its video streaming income – which includes Vevo money – suggests this didn’t go as well as many major label execs hoped.

But what are the issues for those trying to sell ads around music streams?

1. The perceived value of audio ads. The obvious advertising product for a standard streaming music platform to sell is short audio ads that appear between the tracks, radio style. The only problem is that ad agencies will immediately equate that product with radio advertising, and radio advertising was always much cheaper than TV advertising. Which means immediately the budgets available to brands will be much less substantial.

Persuading media buyers that ads on a streaming music service are a standalone product that should be valued differently is a challenge. The other option is to go with video advertising, though this jars within a predominantly audio platform.

2. Radio advertising was always local. Which is to say that for commercial radio, local advertisers were always a key part of the business in addition to ads bought by national brands. For each station, the local taxi firm, car dealer, gym and pizza delivery shop were among the most lucrative advertisers.

Most streaming platforms know where a user is accessing the internet so can serve up local ads. However, the streaming firms do not have local sales teams on the ground to have the relationships with the local taxi firm, car dealer, gym and pizza delivery shop, so they miss out on this business. But investing in building those teams would be costly, and a flood of local advertising isn’t assured even if such a network of teams was in place.

3. Ad targeting requires scale. One of the USPs of digital advertising over ads in traditional media, of course, is that the digital platform is serving commercials to individual users, and can pick which ad spots to play based on data it has about that user. This means the advertiser can target its advertising to the right kind of consumer, and users – in theory at least – don’t have to tolerate lots of ads for products they would never buy.

The streaming platforms have the technology to offer this targeting. But being able to effectively target advertising requires a large library of current ads in the system, to allow selection to take place, but also ensuring each user isn’t hearing the same ad again and again. Few streaming services have a sufficient number of advertisers.

4. Ads on freemium platforms are a weird pitch. In the audio streaming space, most of the platforms have both free and paid for platforms, with the former at least in part existing to upsell the latter – aka ‘freemium’. One of the key selling points for premium is that the user will get rid of the irritating ads. But this makes for an odd sell to the advertisers along the lines of: “pay us to run ads on our platform that will sufficiently annoy people that they will sign up to our core business”.

Which brand wants to be the irritant that upsells a premium subscription that will prevent it from subsequently reaching that consumer? Traditional media like newspapers, magazines, and cable or satellite television charge a fee to access their content, but also carry advertising; paying the former doesn’t stop you from receiving the latter.

The problem, for advertisers, with advertising on a freemium upsell platform may mean that ultimately the free ad-funded streaming platforms will need to be separate from the premium services, which may wind down their free options anyway once their premium set-ups have sufficient scale.

5. The ad industry needs to adapt. This issue is most apparent on YouTube, but applies to other streaming services too. Advertisers generally treat streaming platforms like broadcast – so that audio is the online version of radio, and video the online version of television. But on-demand streaming platforms are very different to traditional broadcast channels. Google knows this, which is why [a] it only serves one ad at a time on YouTube rather than multiple ads each sitting; [b] it doesn’t serve an ad with every video; and [c] it encourages advertisers to offer the skip button.

This creates a user-friendly system. It recognises that few people are going to sit through a TV-length commercial – thirty to ninety seconds – ahead of a video that is in itself only a few minutes in length. Most users will skip an ad that long if that’s an option, or skip the entire video and find something else to watch if it’s not an option. But Google’s system means fewer ads being served and, crucially, fewer ads being watched. And content owners only earn when ads are both served and not skipped.

Rejecting Google’s system and forcing more advertising onto users will likely result in said users finding content or platforms elsewhere. But content owners need to serve more ads overall. So what they really need is for advertisers to learn how to sell their products and brands in a few seconds rather than a few minutes, so that instead of having a skip at five seconds, the ad is complete, possibly with the option to click through to a fuller video on the brand’s own channel or website.

All the content creators sharing in the ad revenues of services like YouTube have an interest in trying to persuade the advertising industry that very short form ad spots are the future of their art and business, and that they have as much to gain as the rights owners in finding a way to better engage the on-demand consumer.

For those media that have always relied heavily on the advertising pound – ie newspaper and magazine publishers and commercial broadcasters – the biggest issue of the digital age has been having to go head-to-head for internet ad budgets with the web giants like Google and Facebook. Both of which have massive audiences, relatively low overheads (in that they don’t have to produce a steady stream of their own content) and sophisticated ad-targeting technology.

The music industry will face a similar challenge if and when it tries to grow the advertising side of its streaming business. Though, of course, when it comes to ad-funded streaming, Google and Facebook are both simultaneously competitors and business partners for the music companies (Google now and Facebook in the future).

Of course, you could question just how committed Google and Facebook really are in building ad products that sit alongside third party content, and where revenue is shared with third party content creators. On one level, for the web firms, better that the majority of a brand’s ad spend goes on Google search and boosting their own Facebook posts, where the ad income doesn’t have to be shared with anyone else.

Though media owners and the music business may be able to both compete with Google and Facebook – and concurrently persuade them to prioritise the ad products that share income with content creators – by exploiting recent sensitivities within the advertising community over where a brand’s ads are appearing.

The aforementioned Vevo – still controlled by Universal Music and Sony Music – recently took advantage of a backlash that has occurred this year against Google, and YouTube especially, in the wake of a report in The Times on how the web giant’s automated ads system has been placing big brand commercials alongside videos posted by political extremists and groups promoting hate crimes and terrorism.

Although not actually a new phenomenon, this time those big brands have responded, with a flurry of firms vowing to take their ads off Google platforms like YouTube. AT&T was among the American brands to follow the lead of European advertisers in bailing on the video site. A spokesperson told reporters last month: “We are deeply concerned that our ads may have appeared alongside YouTube content promoting terrorism and hate. Until Google can ensure this won’t happen again, we are removing our ads from Google’s non-search platforms”.

Google has been trying to play down the problem, while also seeking to reassure advertisers it will do more to monitor where their ads appear. Though Vevo rightly recognised that this was an opportunity, as a company which sells advertising that appears on the YouTube platform, but only on channels that it manages and alongside content that it vets and controls.

“YouTube is an incredible open platform that’s grown rapidly, democratised video, and created opportunities to reach a seemingly unlimited audience”, Vevo’s Chief Sales Officer Kevin McGurn wrote in a recent blog post. But, he added, “like all opportunities, it can come with risks, and is central to the current industry conversation around brand safety”.

He continued: “With hundreds of millions of hours of content created and consumed on YouTube daily, some brands have found themselves in the unenviable position of being associated with highly objectionable content. I believe YouTube will take steps to address these issues. That said, we believe there is a safer way for brands to maximise their reach today, with the confidence of knowing who and what they’re aligned with”.

That safer way, of course, is the Vevo way. “Vevo’s content is not UGC, it’s premium, licensed, and professionally produced, with an enormous and unique global reach. The content is vetted through multiple layers of quality control to ensure the safest environment possible for advertisers including automatic categorisation if the word ‘explicit’ is in the title or content tags, and manual categorisation if the content includes any of the following: vulgar language, violence and disturbing imagery, nudity and sexually suggestive content, or portrayal of harmful or dangerous activities”.

McGurn concludes: “What this categorisation process does is give brands greater transparency into where and how their campaigns run, and the ability to customise how they target. We believe our clients are better served in the safer environment that Vevo offers on YouTube and other platforms. This approach allows them to maximise reach and minimise risk as they tap into the enormous audience consuming music videos online”.

Vevo was originally set up to try to persuade brands that they should pay more to advertise alongside official music videos than user-generated content, because of the production values of the music industry’s output. That argument doesn’t necessarily work though, because the social media revolution has demonstrated – in case there was any doubt – that production values and popularity are not always linked.

However, now that things like ‘fake news’, the posting of ads alongside ‘non-brand-safe’ videos, not to mention various controversies involving YouTubers, are big talking points, there is definitely an opportunity. Which is to say, an opportunity to persuade advertisers that being more selective in where they advertise online – and recognising that there are premium channels – can ensure that both their brand awareness and corporate reputation are enhanced and protected via their ad campaigns.

Whether content creators – including traditional media and rights owners like record companies – should try to sell that argument to the ad industry directly, or in partnership with the Googles and Facebooks of this world, is debatable. Though convincing the web giants that it is also in their interest to promote the idea of premium channels could be a big win, if that could be achieved.

Of course, while for record industry bosses free streams are simply an irritant necessary to upsell premium, to enter emerging markets, and as a way to cut losses where copyright law is (in their opinion) failing, it’s unlikely that any great effort will be made by the labels on pitching to ad land. Though, with ad-funded streams definitely part of the digital music mix long-term, doing so now could help maintain growth down the line.

For its part Vevo, which has, of late, been threatening to shift away from its original mission to get more ad money for music content, could get back to its roots and lead on this. It if does, McGurn’s blog post was a good starting point.