In recent months TikTok has become the music industry’s new focus in the promotion/revenue debate. Eamonn Forde takes a look at why labels and publishers are trying to negotiate better deals with the platform, and why exposure alone is not sufficient currency.
The promotion/revenue debate has been one that has dogged the music industry since the early days of radio in the US over a century ago. It reemerged in the 1980s with MTV when labels and artists were initially happy to deliver expensive videos to the nascent broadcaster as they felt the payoff (i.e. driving record and ticket sales) was worth it. Videos were happily classed as a marketing expense for records. Until labels realised that, by giving MTV these videos, they had made MTV the centre of gravity for global promotion and they now needed MTV more than MTV needed them.
The same promotion/revenue debate has had a habit of repeating itself: the argument is often the same, only the platforms change. This June marks the 20th anniversary of the arrival of Napster and that was key to its initial legal defence – circulating the idea that it was a “taster menu” and people who shared files were deep music fans who, in being exposed to more music, actually bought more music. It even had research that it claimed proved this was the case. Again, with the P2P and torrent sites that came in Napster’s wake, the same thesis was punted around. It reappeared in a slightly different guise just over a decade ago as YouTube became “the new MTV”, reminding one of the old Karl Marx line that history repeats itself “the first as tragedy, then as farce”.
So those long of tooth and grey of hair in the music industry will no doubt sigh heavily when an identical argument is being pushed by the latest and hottest new app on the block – in this case short-form video service TikTok.
The app as we know it has a convoluted history. It originally began as Douyin in China in September 2016, having been developed by ByteDance, and took on the name TikTok when it was launched in international markets in 2017. Ploughing a similar furrow in the West was musical.ly, which actually pre-dates Douyin by two years. In November 2017, ByteDance bought musical.ly for $1bn and merged it with TikTok. It has become a global phenomenon, with over 1bn app installs to date according to Sensor Tower (although it is important to remember that “app installs” and “active users” are far from synonymous). And it is still growing. It was the third most downloaded app globally in Q1 this year (just behind WhatsApp and Facebook’s Messenger) and it has also been the most downloaded iOS app each quarter since the start of 2018. There is no sign of it running out of road any time soon. Which is both good and bad news for labels, publishers and artists.
At the start of May, Billboard reported that TikTok was facing down a licensing crisis in that all its deals with the major labels were set to expire around the same time. Normally deals with licensing partners will be staggered as part of a negotiating tactic (so if X is up for renewal and threatens to pull its content, the service still has Y and Z in contract, making it trickier for X to simply walk away).
“The problem, according to Billboard, dates back to ByteDance’s acquisition of musical.ly and the fact the deals were “grandfathered in” at the time of the purchase but have now expired.”
The problem, according to Billboard, dates back to ByteDance’s acquisition of musical.ly and the fact the deals were “grandfathered in” at the time of the purchase but have now expired. This means that TikTok is currently running on a patchwork of short-term deal extensions. This in itself is not necessarily a disaster as iTunes, during its imperial period a decade ago, was said to have had a rolling contract with at least one major label, with some heavily hinting it was on a monthly basis. Business carried on as usual despite the precarious nature of the deal terms – showing it can be done.
At the heart of the TikTok licensing negotiations is what the business model is now and, more importantly, what it could be in the future.
TikTok, for the moment, does not have ads or a subscription tier. It does, however, have the option for users to buy virtual goods as tips for creators (note: creators, not copyright owners) using virtual coins. Sensor Tower suggested this was a $7.4m sub-economy on the platform in April this year.
That lack of an all-encompassing revenue model is, one could argue, TikTok following the Jeff Bezoz strategy for Amazon – worry about hitting scale first in order to become market leader, which can boost your share price, and then focus on the revenue streams.
But that could all change and this is the backdrop against which all licensing negotiations will take place. ByteDance is not keen to publicly discuss business models but a leaked pitch deck sent to advertising agencies in Europe could give an indication of what TikTok would look like with all commercial engines switched on.
Digiday was leaked the deck at the end of January, suggesting that TikTok had just begun testing ads in the UK and the US. The deck had all manner of user data (e.g. 3.7m monthly active users in the UK, spending an average of 41 minutes per day in the app); but its possible revenue sources includes brand takeovers, branded hashtag challenges (challenges being one of the big spurs for videos and tracks going viral on the platform) and branded lenses (taking the lead from Snapchat, where sponsored lenses can cost over $700,000 for major events and $500,000 for weekends).
This leak has, inevitably, piqued the interest of labels and publishers and is surely going to be central to licensing negotiations. As is the fact that, back in October, ByteDance raised $3bn in a funding round led by SoftBank Group. This gave the company a valuation of $75bn, making it the most valuable startup in the world, passing the $72bn valuation of Uber at the time. Uber recently had its IPO and this is obviously another factor for labels and publishers – perhaps negotiating with that in mind or, as they did with Spotify, negotiating for both rates and equity so that if or when ByteDance eventually cashes in, they will all benefit from the windfall. To put this in context: ByteDance’s valuation of $75bn is more than double that of Spotify when it listed on the New York Stock Exchange last year. There is potentially an enormous amount at stake here.
“ByteDance’s valuation of $75bn is more than double that of Spotify when it listed on the New York Stock Exchange last year. There is potentially an enormous amount at stake here.”
For now, ByteDance is not quite pleading poverty, but it is still hammering the line that it is of enormous promotional benefit to the industry and hoping this will get it more favourable licensing terms. Details of the negotiations, as they inevitably do, leaked and last month Bloomberg claimed the major labels were seeking “hundreds of millions” in advance guarantees.
Bloomberg also spoke to TikTok about this and it claimed that, as it was not a music streaming service (akin to Spotify or Apple Music) it should get different treatment.
“TikTok is for short video creation and viewing, and is simply not a product for pure music consumption that requires a label’s entire collection,” Todd Schefflin, head of global music business development at ByteDance, told Bloomberg. “The platform provides an exciting way for content to trend and break through to wider audiences.”
The company is clinging tightly to the promotion/revenue debate and there are many example of where a song clip going viral on the app has led directly to that song becoming a global smash on other (monestised) platforms, with the belief that “monetisation over there” is enough to quell the “monetisation over here” demands.
‘Old Town Road’ by Lil Nas X is the most obvious example of a track catching fire on TikTok recently and it has been a massive hit on Spotify as well as a US number 1. The original has had 241m streams there and, combined with a version featuring Billy Ray Cyrus on vocals as well as a Diplo remix, the three iterations of the same track have a combined 472m streams on Spotify alone. Russian band Little Big also had an international hit with ‘Skibidi’ after intentionally focusing on TikTok to create a viral dance challenge. The KYLE and Lil Yachty track ‘Hey Julie!’ also benefitted from the TikTok effect. Others like Alan Walker, Sigrid, Ro Ransom and Patrick Martin have all used it in their marketing, while Sony Music India proclaimed its power in pushing ‘Haaye Oye’ by Ash King earlier in the year.
As marketers at labels, artists and their managers all get wise to this, TikTok will grow in importance as a promotional platform for songs and a way to break new artists. But the backlash is starting.
Pitchfork wrote about the rise of TikTok in February this year and was damning in its conclusion that there was a massive gulf between the financial benefits to ByteDance and the financial benefits to the artists. It suggested that smaller artists were not in a good position to negotiate if their music took off there, essentially having to swallow the “promotion is better than revenue” thesis. Some small acts and their managers are happy with this, regarding it – as Pitchfork puts it – “as a means to an end, like trickle-down economics”. Whereas others, like Brett Gurewitz (founder of the Epitaph label), see it as another industry smash and grab. “It’s what we saw with Chuck Berry getting a Cadillac instead of royalties,” he said, referencing the dubious practices that defined the music business in the 1950s.
ByteDance is, for now, sticking to its guns, but it is also dangling the carrot of future monetisation in front of righsholders. Speaking at the WISE conference in Beijing this month, Zhu Jie, head of music operations for Douyin, argued again that TikTok and Douyin are “a showcase for the promotion of music”, but hinted at what was to come. There could be ringtone partnerships with the leading telcos in China for Douyin (something that would not work in the West given the ringtone market there evaporated years ago). But most interesting was that brands could also pay acts for music use in ad campaigns and they could then be added to Douyin for use as background music.
Another monetisation option could be linked to the rumoured subscription service ByteDance is said to be planning. Linking the TikTok app straight into a subscription service could give a whole new dynamic to music marketing (with each platform supporting and complementing the other) but, for now, it all remains purely hypothetical.
Some might see this promise of new business models as proof it is finally listening to rightsholders; others of a more cynical bent might see it as a diversion tactic until it nails down its latest round of licensing deals.
But that should not fuel TikTok’s arguments that it is purely promotional and therefore deserving of special treatment. This should never be an either/or debate about revenue and promotion. As TikTok sees its install base rise rapidly upwards, as it raises more money from investors, as its valuation skyrockets and as its owner mulls an IPO, this promotion/revenue argument becomes exponentially weaker.
“The trick for labels and publishers seeking deals is in the timing. Go too easy and they miss out on the future upside; go too hard and the company crumples under the weight of unprofitability and everyone loses out.”
The trick for labels and publishers seeking deals is in the timing. Go too easy and they miss out on the future upside; go too hard and the company crumples under the weight of unprofitability and everyone loses out. But those deals still need to be done.
The clock is tik-tok-ticking.
