Thanks YouTube, But There’s Still a Value Gap

In many ways, YouTube is the most valuable asset that the music industry has. It boasts the largest audience for streaming music—in the US MusicWatch estimates their audience at 120M active users. The platform accounts for about one in four music listening hours, according to MusicWatch’s audiocensussm tracking study. Many Americans believe it to be the most influential force for music discovery. And yet we have observed a year in which YouTube has been excoriated by all sorts of stakeholders, from artists to executives—even the acclaimed business manager Irving Azoff took on YouTube. This quarrel has centered on the “value gap,” a term which has joined the music lexicon next to “vinyl,” “EDM” and “Adele.” Put simply, the value gap is a measure of the amount of music purchased or listened to relative to the dollars received by artists and rights holders.


This week YouTube reported that their 2016 contributions to the music industry will exceed $1B. Considering that IFPI set global digital revenues at nearly $7B (US) last year, the YouTube contribution is a healthy portion of the overall pie. So what’s the problem?

Based on numbers presented by the RIAA, our estimate is that about 30 percent of YouTube revenue filters to the US, or roughly $300M. If first half trends hold up, US streaming revenues will be in the neighborhood of $3.5B, meaning YouTube contributes almost nine percent of revenues. With that 120M user base, ARPU (average revenue per user) is about $2.50 per music listener.

Through Q3 2016 Pandora reported $522M in content acquisition costs. At that run rate the total 2016 expense will be roughly $700M. With 80M active users, Pandora’s industry ARPU is $8.75, or 3.5 times higher than YouTube.

Look at it another way. YouTube has a 27 percent share of music listening in the US and will pay $300M to rights holders, or $11.11M per share point. Pandora has a 27 percent share and pays $700M, or $29.17M per point. Therein lies the value gap. And certainly the YouTube user has much more flexibility to determine how they interact with YouTube, with more options to skip, replay or create individualized playlists.


Therein lies another rub. When we surveyed streamers who claimed YouTube was their primary music listening service:

  • 74% chose it as favorite because it was free
  • 31% chose it because of its on-demand features
  • 26% chose it because there were unlimited song skips

For many YouTube users it operates just like a subscription on-demand service, or at minimum a hybrid of internet radio and on-demand. What is the ARPU for those on-demand services? The rates paid for subscription streaming licenses are privately negotiated but let’s assume stakeholders receive somewhere in the range of 70 percent of revenues. Your $120 annual Spotify Premium or Apple Music subscription nets $84 to artists and rights holders. It is actually lower thanks to discounts, student or family plans, and the sharing of log ins with family members or a friend. But it is still significantly higher than YouTube’s $2.50.

YouTube deserves credit as the most influential music discovery platform. However new MusicWatch research demonstrates that video streamers are MUCH less likely to buy music after they discover it, especially compared with paid streamers, so the ARPU isn’t being made up in downstream sales.

Forget what Irving Azoff believes. Many YouTube users believe that it does what Apple Music and Spotify Premium accomplish, and it does it for a fraction of the ARPU. YouTube’s contribution to the music industry is important and significant. But until the revenue contribution better aligns with its artistic contribution, expect to hear more on the value gap.

Will iHeart’s Audience Pay? You bet, maybe!


As iHeartRadio rolls out the beta of its PLUS paid streaming service, it’s fair to ask if anyone will pay for it come the live launch in January. PLUS is targeted at the $4.99 monthly price point and offers features such as saving, song replay, search and unlimited skips. MusicWatch’s soon to be released “Light Makes Right” report will examine consumer reactions, purchase interest, and pricing sensitivity for lighter versions of streaming services such as Pandora Plus and iHeartRadio Plus. Positioned between free and ad supported offerings and full on-demand services at ~$9.99—“light” is the hot new category in streaming at the moment.


The basis of the “Light Makes Right” report is a research project that surveyed 7800 internet users 13 and older. The core of the study was a concept and pricing test around a “Plus” like product. Here’s what we found:

ONE in FOUR free music streamers listened to iHeartRadio in the past month—or nearly 40M. That’s almost the audience level that Spotify Free obtains, and better than Google Play Music, Vevo or SoundCloud (among streamers listening at least one hour per week). iHeartMedia reports 90M registered users for the app, meaning it is seeing strong monthly conversion among potential users.

OVER 40 PERCENT of iHeartRadio listeners expressed interest* in paying for a plus-like service. That’s pretty good, and higher than the benchmark for the average streamer. Remember though, that consumers typically overstate their willingness to pay for services. This is an indicator of interest, and does not suggest that 40% of the 90M registered users will actually subscribe. Some of that interested group now pay for Apple Music or Spotify Premium, and there are hurdles to switching. Some will share their account log-ins with friends or family members. Caveats aside, the response is encouraging.


It’s NOT just payers. Three out of four iHeartRadio listeners don’t pay for a music subscription.  Among those virgins, one-third of iHeartRadio listeners expressed interest in the “Plus” concept. These users have to be sold on the value of a paid subscription; free trials are proven to help. On the positive side they haven’t built a bank of favorites, playlists or stations, which would make switching painful.

*interest is based on respondents who said definitely/probably would pay (top two box)

iHeart can quickly get to FOUR MILLION PLUS subscriptions. How? The math is simple. There are 40M monthly users. Purchase interest might be half of the reported 40%. There are typically two users per account.


 Four million (4M) may not sound like a lot but considering the entire US paid on-demand universe is around 20M, that’s a solid chunk of growth in the paid sector (# does not include Amazon Prime Music or Pandora One). And the number rises as iHeart taps into more registered users who aren’t listening on a regular basis.

 REPLAY enhances the music discovery process. What are the features that motivate iHeart listeners who don’t currently pay for a streaming service? Replay was at the top, with 51% citing it as one of the “musts” in order to get them to pay. iHeart Plus offers listeners the ability to replay, then return to the station. We know the more that listeners replay the more they get engaged with the artist, song, and the service.

As the number of paid streaming services grows, iHeart appears to have hit on a formula that will appeal to its current listeners—most importantly the ones who aren’t used to paying for a music subscription.