Author: Eric Peckham

Podcasts, smart speakers soar as social media stalls, based on new survey

The 2019 edition of a popular annual survey shows usage of social media by Americans is stalling while ownership of smart speakers and tablets has soared over the last year, as has consumer engagement with podcasts. The results are promising for Amazon and Spotify in particular.

Earlier today, Edison Research and Triton Digital presented their Infinite Dial report with findings from a phone survey of 1,500 Americans (age 12+) during January and February. Since 1998, the report has tracked the adoption of mobile devices, social media services, and online audio.

Here are my key takeaways from it:

1. Social Media: Consistent with the trend from last year, the market for social media users appears to be saturated. The percent of Americans who say they have ever used social media is 79%, up from 78% last year but down from the 80% peak in 2017.

Among Facebook, Instagram, Pinterest, Snapchat, LinkedIn, and Twitter, only Instagram saw an increase in the percent of the population who say they use it (39% compared to 36% in 2018). Facebook lost roughly 15 million users since 2017 based on this survey data. While the majority of people age 55+ now say they use Facebook, that doesn’t make up for the drop in usage among those age 12-34 from 79% in 2017 to 67% in 2018 to 62% now.

Pinterest, which recently filed to go public, also appears to be losing popularity among that key demographic. Now only 31% of Americans in the 12-34 age group say they use the social pinning platform, compared to 36% last year, and only 1% say Pinterest is their most used social app (compared to 3% in 2015). In this context, potential competition from Instagram looks especially threatening.

2. Smart Speakers: 23% of Americans now own a smart speaker, with 16% of them owning an Amazon Alexa device (that’s more than twice the percent who own a Google Home device). Just two years ago, only 7% reported owning a smart speaker. The percent of those owners who have 3 or more devices has more than doubled from 11% last year to 26% this year as well. Many consumers are crossing a threshold from testing these speakers to making them a ubiquitous presence throughout their home.

3. Tablets: While ownership of smartphones is flat, there was a 12% year-over-year increase in the population of tablet owners from 50% of the population to 56%. According to Triton president John Rosso’s commentary, Amazon’s Fire tablet led the pack with 23% year-over-year growth.

4. Online Audio: 24% of respondents said they used Spotify and 12% said they used Amazon Music in the last month. That compares to 20% and 9%, respectively, last year and places Amazon Music on equal footing with Apple Music.

5. Podcasts: 32% of Americans are monthly podcast listeners compared to 26% in 2018, representing the largest year-over-year growth in that statistic since Infinite Dial began. The format saw a 33% surge in popularity among young people (age 12-24) from 30% listening monthly to 40% doing so.

A full 22% of Americans are weekly podcast listeners and those people consume an average of seven episodes per week. Also, in a notable symbolic shift, the majority (51%) of Americans now say they have listened to a podcast at least once.

Amazon’s gains: The explosion in smart speaker ownership is disproportionately benefiting Amazon with its Alexa devices and the same scenario is occurring in tablets with the Amazon Fire. The company is the most immediate winner in the growth of these markets.

Moreover, people who own a smart speaker are dramatically more likely to use Amazon Music as their primary music streaming service (16% vs. 9% for the general population of people who have used online audio).

This could be a mere correlation that Amazon Music has an older demographic (according to this data, it does) and smart speakers are bought by an older demographic; on the other hand, it may suggest causation that people who buy smart speakers often adopt the default Amazon Music streaming service. If the latter is true to a substantial degree, it suggests Amazon Music’s momentum against Apple Music (and other streaming services) is likely to only pick up.

Spotify’s podcast push is working: Spotify is making a big play into podcasting. Its market share is growing substantially, it surpassed Apple’s podcast app in popularity in several countries, and just announced a major commitment to the format that included acquiring Anchor and Gimlet.

According to the Infinite Dial survey, the percent of Spotify users aged 12-24 who listen to podcasts monthly jumped from 32% last year to 54% this year. That’s 69% year-over-year growth. This shows Spotify’s users are buying into its new promotion of podcast content. It also lends credibility to the argument that Spotify is expanding the market of podcast listeners, not just poaching users from other podcast apps.

As I argued in my analysis about the entry of music streaming services and Hollywood into podcasting, Spotify has the ability to rapidly ingrain podcast listening among its 207 million monthly active users and to make premium (subscriber-only) podcasts mainstream by bundling them into a music subscription that 96 million people already pay for.

You can review the the full Infinite Dial deck here.

Why IGTV should go premium

It’s been four months since Facebook launched IGTV, with the goal of creating a destination for longer-form Instagram videos. Is it shaping up to be a high-profile flop, or could this be the company’s next multi-billion dollar business?

IGTV, which features videos up to 60 minutes versus Instagram’s normal 60-second limit, hasn’t made much of a splash yet. Since there are no ads yet, it hasn’t made a dollar either. But, it offers Facebook the opportunity to dominate a new category of premium video, and to develop a subscription business that better aligns with high-quality content.

Facebook worked with numerous media brands and celebrities to shoot high-quality, vertical videos for IGTV’s launch on June 20, as both a dedicated app and a section within the main Instagram app. But IGTV has been quiet since. I’ve heard repeatedly in conversations with media executives that almost no one is creating content specifically for IGTV and that the audience on IGTV remains small relative to the distribution of videos on Snapchat or Facebook. Most videos on it are repurposed from a brand’s or influencer’s Snapchat account (at best) or YouTube channel (more common). Digiday heard the same feedback.

Instagram announced IGTV on June 20 as a way for users to post videos up to 1 hour long in a dedicated section of the app (and separate app).

Facebook’s goal should be to make IGTV a major property in its own right, distinct from the Instagram feed. To do that, the company should follow the concept embodied in the “IGTV” name and re-envision what television shows native to the format of an Instagram user would look like.

Its team should leverage the playbook of top TV streaming services like Netflix and Hulu in developing original series with top talent in Hollywood to anchor their own subscription service, but do in it a new format of shows produced specifically for the vertically-oriented, distraction-filled screen of a smartphone.

Mobile video is going premium

Of the 6+ hours per day that Americans spend on digital media, the majority on that is now on their phone (most of it on social and entertainment activities) and video viewing has grown with it. In addition to the decline in linear television viewing and rise of  “over-the-top” streaming services like Netflix and Hulu, we’ve seen the creation of a whole new category of video: mobile native video.

Starting at its most basic iteration with everyday users’ recordings for Snapchat Stories, Instagram Stories, and YouTube vlogs, mobile video is a very different viewing environment with a lot more competition for attention. Mobile video is watched as people are going about their day. They might commit a few minutes at a time, but not hour-long blocks, and there are distracting text messages and push notifications overlaid on the screen as they watch.

“Stories” on the major social apps have advanced vertically-oriented, mobile native videos as their own content format.

When I spoke recently with Jesús Chavez, CEO of the mobile-focused production company Vertical Networks in Los Angeles, he emphasized that successful episodic videos on mobile aren’t just normal TV clips with changes to the “packaging” (cropped for vertical, thumbnails selected to get clicks, etc.). The way episodes are written and shot has to be completely different to succeed. Chavez put it in terms of the higher “density” of mobile-native videos: packing more activity into a short time window, with faster dialogue, fewer setup shots, split screens, and other tactics.

With the growing amount of time people spend watching videos on their social apps each day—and the flood of subpar videos chasing view counts—it makes sense that they would desire a premium content option. We have seen this scenario before as ad-dependent radio gave rise to subscription satellite radio like SiriusXM and ad-dependent network TV gave rise to pay-TV channels like HBO. What that looks like in this context is a trusted service with the same high bar for riveting storytelling of popular films and TV series—and often featuring famous talent from those—but native to the vertical, smartphone environment.

If IGTV pursues this path, it would compete most directly with Quibi, the new venture that Jeffrey Katzenberg and Meg Whitman are raising $2 billion to launch (and was temporarily called NewTV until their announcement at Vanity Fair’s New Establishment Summit last Wednesday). They are developing a big library of exclusive shows by iconic directors like Guillermo del Toro and Jason Blum crafted specifically for smartphones through their upcoming subscription-based app.

Quibi’s funding is coming from the world’s largest studios (Disney, Fox, Sony, Lionsgate, MGM, NBCU, Viacom, Alibaba, etc.) whose executives see substantial enough opportunity in such a platform—which they could then produce content for—to write nine-figure checks.

TechCrunch’s Josh Constine argued last year Snapchat should go in a similar “HBO of mobile” direction as well, albeit ad-supported rather than a subscription model. The company indeed seems to be stepping further in this direction with last week’s announcement of Snapchat Originals, although it has announced and then canceled original content plans before.

Snapchat announced its Snap Originals last week.

Facebook is the best positioned to win

Facebook is the best positioned to seize this opportunity, and IGTV is the vehicle for doing so. Without even considering integrations with the Facebook, Messenger, or WhatsApp apps, Facebook is starting with a base of over 1 billion monthly active users on Instagram alone. That’s an enormous audience to expose these original shows to, and an audience who don’t need to create or sign into a separate account to explore what’s playing on IGTV. Broader distribution is also a selling point for creative talent: they want their shows to be seen by large audiences.

The user data that makes Facebook rivaled only by Google in targeted advertising would give IGTV’s recommendation algorithms a distinct advantage in pushing users to the IGTV shows most relevant to their interests and most popular among their friends.

The social nature of Instagram is an advantage in driving awareness and engagement around IGTV shows: Instagram users could see when someone they follow watches or “likes” a show (pending their privacy settings). An obvious feature would be to allow users to discuss or review a show by sharing it to their main Instagram feed with a comment; their followers would see a clip or trailer then be able to click-through to the full show in IGTV with one tap.

Developing and acquiring a library of must-see, high-quality original productions is massively capital intensive—just ask Netflix about the $13 billion it’s spending this year. Targeting premium quality mobile video will be no different. That’s why Katzenberg and Whitman are raising a $2 billion war chest for Quibi and budgeting production costs of $100,000-150,000 per minute on par with top TV shows. Facebook has $42 billion in cash and equivalents on its balance sheet. It can easily outspend Quibi and Snap in financing and marketing original shows by a mix of newcomers and Hollywood icons.

Snap can’t afford (financially) to compete head-on and doesn’t have the same scale of distribution. It is at 188 million daily active users and no longer growing rapidly (up 8% over the last year but DAUs actually shrunk by 3 million last quarter). Snapchat is also a much more private interface: it doesn’t enable users to see each others’ activity like Facebook, Instagram, LinkedIn, YouTube, Spotify, and others do to encourage content discovery. Snap is more likely to create a hub for ad-supported mobile-first shows for teens and early-twentysomethings rather than rival Quibi or IGTV in creating a more broadly popular Netflix or Hulu of mobile-native shows.

It’s time to go freemium

Investing substantial capital upfront is especially necessary for a company launching a subscription tier: consumers must see enough compelling content behind the paywall from the start, and enough new content regularly added, to find an ongoing subscription worthwhile.

There is currently no monetization of IGTV. It is sitting in experimentation mode as Facebook watches how people use it. If any company can drive enough ad revenue solely from short commercials to still profit on high-cost, high-quality episodic shows on mobile, it’s Facebook. But a freemium subscription model makes more sense for IGTV. From a financial standpoint, building IGTV into its own profitable P&L while making substantial content investments likely demands more revenue than ads alone will generate.

Of equal importance is incentive alignment. Subscriptions are defined by “time well spent” rather time spent and clicks made: quality over quantity. This is the environment in which premium content of other formats has thrived too; SiriusXM as the breakout on radio, HBO on linear TV, Netflix in OTT originals. The type of content IGTV will incentivize, and the creative talent they’ll attract, will be much higher quality when the incentives are to create must-see shows that drive new subscribers than when the incentives are to create videos that optimize for views.

Could there be a “Netflix for mobile native video” with shows shot in vertical format specifically for viewing on smartphone?

The optimization for views (to drive ad revenue) have been the model that media companies creating content for Facebook have operated on for the last decade. The toxicity of this has been a top news story over the last year with Facebook acknowledging many of the issues with clickbait and sensationalism and vowing changes.

Over the years, Facebook has dragged media companies up and down with changes to its newsfeed algorithm that forced them to make dramatic changes to their content strategies (often with layoffs and restructuring). It has burned bridges with media companies in the process; especially after last January, how to reduce dependence on Facebook platforms has become a common discussion point among digital content executives. If Facebook wants to get top producers, directors, and production companies investing their time and resources in developing a new format of high-quality video series for IGTV, it needs an incentives-aligned business model they can trust to stay consistent.

Imagine a free, ad-supported tier for videos by influencers and media partners (plus select “IGTV Originals”) to draw in Instagram users, then a $3-8/month subscription tier for access to all IGTV Originals and an ad-free viewing experience. (By comparison, Quibi plans to charge a $5/month subscription with ads with the option of $8/month for its ad-free tier.)

Looking at the growth of Netflix in traditional TV streaming, a subscription-based business should be a welcome addition to Facebook’s portfolio of leading content-sharing platforms. This wouldn’t be its first expansion beyond ad revenue: the newest major division of Facebook, Oculus, generates revenue from hardware sales and a 30% cut of the revenue to VR apps in the Oculus app store (similar to Apple’s cut of iOS app revenue). Facebook is also testing a dating app which—based on the freemium business model Tinder, Bumble, Hinge, and other leading dating apps have proven to work—would be natural to add a subscription tier to.

Facebook is facing more public scrutiny (and government regulation) on data privacy and its ad targeting than ever before. Incorporating subscriptions and transaction fees as revenue streams benefits the company financially, creates a healthier alignment of incentives with users, and eases the public criticism of how Facebook is using people’s data. Facebook is already testing subscriptions to Facebook Groups and has even explored offering a subscription alternative to advertising across its core social platforms. It is quite unlikely to do the latter, but developing revenue streams beyond ads is clearly something the company’s leadership is contemplating.

The path forward

IGTV needs to make product changes if it heads in this direction. Right now videos can’t link together to form a series (i.e. one show with multiple episodes) and discoverability is very weak. Beyond seeing recent videos by those you follow, videos that are trending, and a selection of recommendations, you can only search for channels to follow (based on name). There’s no way to search for specific videos or shows, no way to browse channels or videos by topic, and no way to see what people you follow are watching.

It would be a missed opportunity not to vie for this. The upside is enormous—owning the Netflix of a new content category—while the downside is fairly minimal for a company with such a large balance sheet.

What Spotify can learn from Tencent Music

On Tuesday, Tencent Music Entertainment filed for an IPO in the US that is expected to value it in the $25-30 billion range, on par with Spotify’s IPO in April. The filing highlights just how different its social interaction and digital goods business is from the subscription models of leading music streaming services in Western countries.

That divergence suggests an opportunity for Spotify or one of its rivals to gain a competitive advantage.

Tencent Music is no small player: As the music arm of Chinese digital media giant Tencent, its four apps have several hundred million monthly active users, $1.3 billion in revenue for the first half of 2018, and roughly 75 percent market share in China’s rapidly growing music streaming market. Unlike Spotify and Apple Music, however, almost none of its users pay for the service, and those who do are mostly not paying in the form of a streaming subscription.

Its SEC filing shows that 70 percent of revenue is from the 4.2 percent of its overall users who pay to give virtual gifts to other users (and music stars) who sing karaoke or live stream a concert and/or who paid for access to premium tools for karaoke; the other 30 percent is the combination of streaming subscriptions, music downloads, and ad revenue.

At its heart, Tencent Music is an interactive media company. Its business isn’t merely providing music, it’s getting people to engage around music. Given its parent company Tencent has become the leading force in global gaming—with control of League of Legends maker Riot Games and Clash of Clans maker Supercell, plus a 40 percent stake in Fortnite creator Epic Games, and role as the top mobile games publisher in China—its team is well-versed in the dynamics of in-game purchasing.

At first glance, the fact that Tencent Music has a lower subscriber rate than its Western rivals (3.6 percent of users paying for a subscription or digital downloads vs. 46 percent paying for a premium subscription on Spotify) is shocking given it has the key ingredient they each crave: exclusive content. Whereas subscription video streaming services like Netflix, Hulu, and Amazon Prime Video have anchored themselves in exclusive ownership of must-see shows in order to attract subscribers, the music streaming platforms suffer from commodity content. Spotify, Apple Music, Amazon Music, YouTube Music, Pandora, iHeartRadio, Deezer… they all have the same core library of music licensed from the major labels. There’s no reason for any consumer to pay for more than one music streaming subscription in the way they do for video streaming services.

In China, however, Tencent Music has exclusive rights to the most popular Western music from the major labels. The natural strategy to leverage this asset would be to charge a subscription to access it. But the reality is that piracy is still enough of a challenge in China that access to that music isn’t truly “exclusive.” Plus while incomes are rising, there’s extraordinary variance in what price point the population can afford for a music subscription. As a result, Tencent Music can’t rely on a subscription for exclusive content; it sublicenses that content to other Chinese music services as an additional revenue stream instead.

“Online music services in China have experienced intense competition with limited ability to differentiate by content due to the widespread piracy.” Tencent Music, SEC Form F-1

This puts it in a position like that of the Western music streaming services—fighting to differentiate and build a moat against competitors—but unlike them it has successfully done so. By integrating live streams and social functionality as core to the user experience, it’s gaining exclusive content in another form (user-generated content) and the network effects of a social media platform.

Some elements of this are distinct to Tencent’s core market—the broader popularity of karaoke, for instance—but the strategy of gaining competitive advantage through interactive and live content is one Spotify and its rivals would be wise to pursue more aggressively. It is unlikely that the major record labels will agree to any meaningful degree of exclusivity for one of the big streaming services here, and so these platforms need to make unique experiences core to their offering.

Online social activities like singing with friends or singing a karaoke duet with a favorite musician do in fact have a solid base of participants around the world: San Francisco-based startup Smule (backed by Shasta Ventures and Tencent itself) has 50 million monthly active users on its apps for that very purpose. There is a large minority of people who care a lot about singing songs as a social experience, both with friends and strangers.

Spotify and Apple Music have experimented with video, messaging, and social streams (of what friends are listening to). But these have been bonus features and none of them were so integrated into the core product offering as to create serious switching costs that would stop a user from jumping to the other.

The ability to give tips or buy digital goods makes it easier to monetize a platform’s most engaged and enthusiastic users. This is the business model of the mobile gaming sector: A minority percentage of users get emotionally invested enough to pay real money for digital goods that enhance their experience, currency to tip other members of the community, or access to additional gameplay.

As the leading music platform, it is surprising that Spotify hasn’t created a pathway for superfans of music to engage deeper with artists or each other. Spotify makes referrals to buy concert tickets or merchandise —a very traditional sense of what the music fan wants—but hasn’t deepened the online music experience for the segment of its user base that would happily pay more for music-related experiences online (whether in the form of tipping, digital goods, special digital access to live shows, etc.) or for deeper exposure to the process (and people) behind their favorite songs.

Tencent Music has an advantage in creating social music experiences because it is part of the same company that owns the country’s leading social apps and is integrated into them. It has been able to build off the social graph of WeChat and QQ rather than building a siloed social network for music. Even Spotify’s main corporate rivals, Apple Music and Amazon Music, aren’t attached to leading social platforms. (Another competitor, YouTube Music, is tied to YouTube but the video service’s social features are secondary aspects of the product compared to the primary role of social interaction on Facebook, Instagram, and WhatsApp).

Spotify could build out more interactive products itself or could buy social-music startups like Smule, but Tencent Music’s success also suggests the benefits of a deal that’s sometimes speculated about by VCs and music industry observers: a Facebook acquisition of Spotify. As one, the leading social media company and the leading music streaming company could build out more valuable video live streaming, group music sharing, karaoke, and other social interactions around music that tap Facebook’s 2 billion users to use Spotify as their default streaming service and lock existing Spotify subscribers into the service that integrates with their go-to social apps.

Deeper social functionality doesn’t seem to be the path Spotify is prioritizing, though. It has removed several social features over the years and is anchoring itself in professional content distribution (rather than user-generated content creation), becoming the new pipes for professional musicians to put their songs out to the world (and likely aiming to disrupt the role of labels and publishers more than they will publicly admit). To that point, the company’s acquisitions—of startups like Loudr, Mediachain, and Soundtrap—have focused on content analytics, content recommendation, royalty tracking, and tools for professional creators.

This is the same race its more deep-pocketed competitors are running, however, and it doesn’t lock consumers into the platform like the network effects of a social app or the exclusivity of a mobile game do. It recently began opening its platform for musicians to add their songs directly—something Tencent Music has allowed for years—but this seems less like a move to a YouTube or SoundCloud-style user-generated content platform and more like a chess move in the game of eventually displacing labels. Ultimately, though, building out more social interaction around music will be critical to it in escaping the race with Apple Music and the rest by achieving more defensibility.