MBW Explains is a series of analytical features in which we explore the context behind major music industry talking points – and suggest what might happen next.
What’s happened?
TikTok shook the music world last Thursday (July 6) with its announcement that it’s launching TikTok Music, a new paid-subscription-only streaming service that will be available initially in Brazil and Indonesia.
This “social music streaming service” will “harness the power of music discovery on TikTok,” the company announced, adding that it will offer users a “full catalog of music from thousands of labels and artists, uninterrupted ad-free listening and a download function for listening offline.”
On top of that, the service will include a feature that lets users stream songs that are going viral on TikTok, a Lyrics Search function, the ability to sing along karaoke-style through the Real-Time Lyrics feature, and a Shazam-style song identification tool called Song Catch.
TikTok has secured agreements with the big three recording companies – Sony Music, Universal Music Group and Warner Music Group – ensuring a large catalog at launch.
At the same time, the company announced it will be shutting down Resso, its music streaming service in Indonesia and Brazil, with users of the service being given the option to port their subscriptions to TikTok Music ahead of Resso’s shutdown on September 5.
Resso will continue to function in India, where TikTok was banned in 2020, and where TikTok Music has yet to be announced.
The fact that Resso will remain in India points directly to TikTok’s strategy in developing a music streaming service: It aims to convert its massive user base into paying customers of TikTok Music. No TikTok customer base in India means no TikTok Music – at least for now.
As for the rest of the world, the company is keeping mum on just when TikTok Music will be arriving, telling MBW last week that “we don’t have anything to share on future plans.”
If there’s one company that TikTok Music is likely to impact, that company is Spotify. The world’s leading music streaming platform saw its stock price drop 2.6% on the New York Stock Exchange on Thursday (July 6), the day TikTok Music was announced.
Something similar happened last October, when the Wall Street Journal reported on TikTok’s ambitions to take on Spotify in the music streaming space.
While there are plenty of other music streaming services out there, it makes sense that investors see Spotify as having the most to lose from the arrival of a major competitor.
Many of the other major global music streaming services are part of a larger media or tech business, and are integrated into particular user ecosystems. For instance, Apple Music is tied to iOS devices; YouTube Music is linked to Android devices and Google services; and Amazon Music is tied to Prime subscriptions.
Unlike all those, Spotify is a pure-play streaming platform – although the Sweden-headquartered company has been expanding into podcasts, audiobooks and video to shore up its offerings and expand its potential customer base.
What’s the context?
TikTok’s move into streaming music comes amid a full-court push by TikTok parent ByteDance to leverage the integral role of music on TikTok into a presence in the music industry.
What that presence will look like is anyone’s guess at the moment – likely not even ByteDance knows – but it’s clear that the company’s goal is to become a player in the music scene, beyond simply hosting short videos featuring a soundtrack.
On June 30, the company launched an invitation-only beta version of Ripple, a new music production app with two core features, a “melody-to-song” AI music generator and a virtual recording studio. The app will allow users to upload their music to TikTok or other social media platforms.
That followed TikTok’s launch in the spring of 2022 of SoundOn, a music promotion and distribution platform that lets creators upload their songs to platforms like Spotify, Apple Music and Instagram.
Coming as it does amid negotiations between TikTok and the major recording companies over the fees paid for licensed music used in TikTok videos, some wondered whether the company’s various moves into the music world may be a way for TikTok to reduce (or maybe eventually even eliminate) the licensing fees for music by creating its own, user-generated music ecosystem.
But just as likely, if not more so, is simply the idea that TikTok spies an opportunity to build on its success as a music discovery platform and viral hit-maker.
However, TikTok’s entry into music streaming comes at a less-than-opportune time for Spotify. Though the company’s stock has rebounded this year, trading at nearly double where it was at the end of 2022, its current price around USD $157 per share is still well off its peak above $300 per share in late 2021.
And perhaps more importantly, Spotify continues to lose money.
It’s a truism about tech companies that the most successful ones often find the capital to grow market share and become dominant in their field, even as they fail to turn a profit.
That has certainly been the case with Spotify, which reported an operating loss of €156 million in Q1 2023, despite growing revenue by 13% YoY in the quarter, to €3.06 billion and increasing its Premium Subscriber base by 15%, to 210 million worldwide.
The company has consistently lost money year after year, and with capital drying up amid rising interest rates, it’s had to clamp down on costs. Since late last year, Spotify has announced repeated rounds of layoffs, instituted a hiring freeze and shut down its live audio app, Spotify Live.
Contrast this with TikTok’s expansion into music distribution, music creation and music streaming over the past six months, and the shape of the problem for Spotify becomes clear. While TikTok has the financial backing of a $220-billion company (ByteDance), Spotify is a standalone firm with a market cap of around $30.5 billion.
From a financial standpoint, this looks a bit like the David-and-Goliath story, with Spotify in the (perhaps surprising) role of David.
What happens next?
TikTok is likely (and wisely) waiting to see how its streaming service performs in Brazil and Indonesia before announcing any further expansion plans.
The choice of these two countries isn’t random; Indonesia and Brazil are TikTok’s second- and third-largest markets, behind only the US, according to Datareportal.
(TikTok’s Chinese sister app, Douyin, is generally counted as a separate app, but if it were considered part of TikTok, China would be far and away the largest market, with 750 million daily active users.)
It’s practically impossible to forecast just how well TikTok Music will perform in these markets, given that the company’s apparent strategy of enticing customers from its short video app to its streaming platform is uncharted territory.
But these are both markets where TikTok Music’s predecessor, Resso, has been operating, and looking at Resso’s market share is illuminating.
After launching in India in 2020, Resso took less than two years to build a market share that was close to Spotify’s, with about 17% of the music streaming market, to Spotify’s 23%. That’s according to data from business intelligence firm Apptopia, as cited by Business Insider.
Resso took little time to catch up to Spotify in Indonesia as well, racking up an estimated 8.3 million monthly active users (MAUs) in the country in early 2022, compared to Spotify’s 9.5 million.
The ByteDance-owned app has performed somewhat less well in Brazil, where it had around 9 million MAUs in January 2022, compared to Spotify’s 28 million, per Apptopia data.
All the same, it’s clear Resso has given Spotify a run for its money in the three markets where the two streaming platforms have gone head-to-head.
Yet Spotify has one important element on its side: Time.
Building a music streaming service is a slow process. For every new country entered, there are regulatory hurdles to be overcome, and licensing deals with rights holders to be signed. Note that Spotify itself took over a decade to complete its entry into the 184 countries where it operates.
That gives Spotify some breathing room to prepare for the arrival of TikTok Music – room to solidify its market share in those countries, while finding a path to profitability.
Spotify will also benefit from the fact that it’s already operating as the market leader in mature streaming markets such as the US and Western Europe, places where TikTok Music has yet to make an entrance.
The music markets where Resso has succeeded in gaining market share are developing economies that lagged behind wealthier countries in attracting paid music consumption, but are catching up today.
In Brazil, the recorded music business grew 15.4% in 2022, according to IFPI. The Southeast Asia region, of which Indonesia is a part, is the second-fastest growing region globally for internet users, as Spotify itself has noted.
When TikTok Music arrives in the ‘developed’ world, gaining subscribers will be less about convincing new users to sign up, and more about convincing existing streaming users to change services – a potentially much harder task.
One final thought…
One last area worth exploring is what TikTok Music’s arrival could mean for pricing.
It’s hardly a secret at this point that Spotify and other music services are coming under increasing pressure from the music industry to hike its monthly subscription plans.
A growing number of industry execs are declaring that music is underpriced as a consumer good, especially when compared to streaming TV subscription prices.
While some music services such as Apple Music and YouTube Premium have raised some of their subscriptions rates over the past year, Spotify seemingly remains in “startup mode,” concerned primarily about building market share. Its price for individual Premium subscriptions remains at $9.99 in the US, €9.99 in core Western European markets and £9.99 in the UK – the same as it was when the service launched more than a decade ago.
TikTok Music’s prices in its launch countries are competitive, though not market-beating. The service will charge a monthly fee of BRL 16.90 in Brazil (around $3.50) and Rp 49,000 (around $3.25) in Indonesia for iOS users, with Android users getting an introductory price of Rp 44,900 for the first 12 months.
Those prices may seem low from the perspective of developed-country markets, but they are roughly standard for music streaming in those markets.
While TikTok Music doesn’t seem to be out to start a price war, its arrival could trigger renewed concerns about subscriber growth at Spotify, potentially prompting the steamer to push any planned price hikes even further out on the horizon.
In which case, the industry may be chagrined to find that music will continue to be “underpriced” for some time yet to come.Music Business Worldwide
