The Necessity of Changing the Strategy Conversation

Streaming is probably one of the biggest digital shifts we’re seeing. Around the world, conversations are taking place with companies about how to build successful business models around streaming—whether it’s books, audio, video or podcasts. These companies range from giants like Netflix to small indie podcast producers.

I have a client who is an executive in strategy at a fairly large streaming organization in the United States, and I’m going to paraphrase some of the discussions we’ve had to underpin this overarching theme about the economics of streaming.

Her business and many others are facing an underlying issue: Artists who supply content for streaming platforms are complaining because they’re not being paid enough. Whether it’s artists streaming on Spotify or podcasters streaming on other platforms, they feel that the percentage of revenue they make is not big enough. In the old model of the music industry, large record labels would listen to many potential stars, pick a few, pay them an advance, assign them a big budget and massive promotion, share around 30% of the profits or less, and only after the advance was paid off would the artists continue to get 30% of profits.

In the new model, anyone can create music and distribute it through numerous streaming sites. You could go on Spotify or YouTube Music and use a number of monetization models like getting a percentage share of profits through Spotify or ad revenue from YouTube. There’s little to no budget required to start up. No one’s putting a big advertising or promotional budget behind you. No one’s giving you an advance. To generate sales, most of your capabilities are about optimizing your titles but also building a large social media following so that people will listen to you.

This is happening across many sectors: books, podcasts, music and TV. In the conversation I had with this client, their entire organization was caught up in how they should strategically manage this overriding set of complaints from artists who are complaining that they’re not being paid enough. I had her step back and told her that the underlying premise of everything her company is doing is saying that the complaints are the problem. The population of the countries where that platform is available has obviously grown over time, but the percentage of people who are listening to music has stayed roughly the same. At the same time, there’s been an explosion in the number of artists who have music streaming through technology and apps. There’s been an explosion in the amount of music. There’s been an explosion in the number of channels to get music to customers.

Here’s some basic math. If you have roughly the same amount of people listening but more artists, more music and roughly the same amount of money being created overall in the industry—in fact, it’s even less now because people pay less for streaming—the returns per artist are going to drop. That’s just basic math. Let’s assume that the economics of streaming are not different. Let’s assume the profit per song was the same as profit from CDs. If you have many more artists with the same number of listeners, the profit per artist is going to drop. At the same time, the market value of streaming is less than the value of CDs or DVDs, so they pay less for it, and there’s an even steeper drop. It’s not that her company is doing something wrong or trying to steal money from everyone—the economics have just changed. That’s the first thing I got them to look at.

Secondly, why is their strategy about validating the complaints? The complaints, to some degree, may be true because maybe the technology company is keeping too much of the profit for itself. But the reality is, it doesn’t really matter much what the technology company is doing, the economics have changed. In this situation, the artists who have entered the music industry will still do what they’ve always done: produce songs and then try to produce better songs. They were doing that 5, 10 and 15 years ago. But there’s a very big difference here. Without the backing of a big record label, they don’t have the capabilities to run what is essentially a mini business because, previously, a record label managed the business side and the artist just performed. But now, each of these indie artists produce songs, but they also need a different skill set because the economics have changed and the business has changed.

Rather than developing a strategy of trying to minimize complaints by saying, “It’s not your fault,” maybe you need a strategy of trying to give the artist tools they’ve never had and educating them about why they need these tools. It’s like a DIY model. A lot of artists are going to need to do it themselves. They don’t have the record label to help, and many of them now think they actually cannot be successful without that help.

Imagine you decide to remodel your home. You do a pretty good job, but you do it all by yourself. You want Architectural Digest, a premium architectural magazine, to review your house. But why would they do that if you don’t have a world-class designer working on the house, you don’t have a world-class contractor, and you don’t know anyone at Architectural Digest? It’s the same with indie content producers. They want the result of working with a big label, but they don’t have the tools. Even if they had the tools, many of them don’t understand why they need those tools.

The big insight here is that this company was essentially being defensive about why content producers had lower profits. I showed them that they need to shift the conversation away from one of combativeness to one of saying, “It’s going to be lower because the economics and the industry has changed. You can’t avoid that. But we acknowledge there are certain things you need because you’re an independent producer of content, and we’re going to produce those tools for you.” This company’s strategy changed from being defensive to seeing an opportunity to create tools that artists would pay a slight premium for. It’s a subscription-based model, and it bolstered their revenue.

The insight here is that strategy is about knowing what’s happening and knowing the numbers, but even when you know the numbers, you can get caught in a paradigm of being defensive. If you’re constantly under attack about how revenue and profit have fallen, you could start believing something is your fault even if it’s not your fault. In this particular case, it’s not the fault of the technology company that there’s an explosion of content with a reduction in the perceived value from customers. But there’s also an opportunity for giving content producers tools they don’t get from a studio to bolster the skills they need.

You can see how strategy and tactics change, and that’s how you need to think about things. There will be many opportunities like this because the streaming wars are still young. Many things that exist offline will go online, and you’re going to get more and more independent content producers.

This is an excerpt from Monday Morning 8 a.m. newsletter, issue #17.