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One of the most interesting label M&A deals from the past few months was Warner Music Group’s acquisition of indie dance label Spinnin’ Records, for a reported price tag of more than $100 million. Major labels buy up indie labels left and right, but this particular acquisition pointed to a key disruptor that much of the music industry is still struggling to understand and accept: YouTube.
The biggest bargaining chip for Spinnin’ Records is arguably its YouTube community. Having amassed nearly 19 million subscribers over the past ten years, the label currently owns one of the 30 most-subscribed channels in the world. In a statement, Stu Bergen, Warner Music Group’s CEO of International and Global Commercial Services, explained that Spinnin’ Records' YouTube savvy would prove invaluable for the Warner roster in an era when “the line between a local and a global hit, as well as the distinction between marketing and commerce, is blurring.”
It’s precisely because the music business still wants to separate marketing from commerce that it hasn’t exactly been comfortable partners with YouTube and other video streaming platforms. After all, the numbers paint a clear picture that YouTube not only is the most popular resource for listening to free music, but also yields a stubborn gap between consumption and revenue. The IFPI’s latest Music Consumer Insight Report claims that 1.3 billion YouTube users—or 85% of its user base—accessed free, non-monetized music over the span of a month. Public indie label data from January 2017 revealed that YouTube accounted for 21.7% of the label’s streams, but only for 3.8% of its streaming revenue.
Artists and trade bodies point to such numbers as evidence that YouTube encourages piracy while failing to return fair value back to content owners. Yet, it’s on this same platform where some of the most innovative models for artist development and distribution are taking shape, and where young, new entrants to the music industry are turning the traditional label structure on its head.
Perhaps the most standout example is Trap Nation, a channel run by 20-year-old Andre Benz that boasts over 16 million subscribers. Since its founding in 2012, Benz’s company has expanded to include other channels under the Nations network (Chill Nation, Rap Nation, House Nation, Bass Nation and R&B Nation), encompassing more than 24.2 million subscribers in total, and has produced live shows at SXSW, Amsterdam Dance Event and EDC Las Vegas.
What’s more, the Nations network has become profitable despite owning nearly none of the music it posts to YouTube. Instead, an artist signs a license that issues the Nations network the right to monetize their single and retain all the ad revenue from the corresponding video, but the license is non-exclusive—meaning the artist can still promote and monetize that single on any other platform or YouTube channel of their choice.
In another case, Alan Walker, the 20-year-old Norwegian DJ on the bill for the Nobel Peace Prize Concert this December, released his first breakout track for free on NoCopyrightSounds (NCS), a YouTube-first label that allows indie creators to use and even monetize its music freely as long as they give due credit back to the content owners. Unlike the Nations network, NCS, which has over 13.1 million subscribers as of press time, is a more comprehensive label and publisher in its own right, in the sense that it only uploads YouTube releases signed directly to its roster.
Other successful YouTube music channels include Monstercat (6.5 million subscribers), MrSuicideSheep (7.4 million), Majestic Casual (3.5 million) and UKF (10 million across three channels), all of which go against the traditional label grain by embracing a distribution- rather than licensing-first business model.
According to industry estimates, annual revenue for a given music curation channel can reach as much as $1.5 million for every 10 million subscribers. Coupled with relatively little overhead—most channels employ only around two to five people full-time, while the Nations network is a larger outlier with 12 employees—this consistent revenue flow makes for a surprisingly sustainable business that is "digital-native" in every sense of the phrase.
Despite this opportunity, persuading artists and traditional labels about the seriousness of a YouTube-first business can sometimes be difficult. Majestic Casual's weeklong shutdown in late 2015 due to alleged copyright violations only exacerbated the industry's pervasive skepticism.
“Our biggest challenge is justifying our existence as a label, in an age when any artist can self-release a record really easily,” Graham Best, Director of NCS, told me. “We try to solve that challenge by providing an amazing service to artists and proving to them that they’re not just another sausage in the industry factory, but becoming part of a much larger, more loyal community.”
Indeed, the secret to any YouTube channel’s success is similar whether its business is in music curation, unboxing videos, reaction videos or four-hour ASMR recordings: providing consistent content to a community that isn’t otherwise being fed.
Interestingly, many YouTube music channels found their community origins in gaming. Benz began curating music by uploading remix playlists to share with his fellow gamer friends; NCS founder Billy Woodfordsaw a gap in the market for free, copyright-safe music when he encountered licensing restrictions when trying to upload gaming videos of himself.
Over the long term, YouTube has proven to be a more effective space than Spotify for catering to these passionate communities, whether in gaming or beyond. Visual iconography plays a crucial role in visibility and stickiness on YouTube, adding a powerful marketing layer atop traditional methods. Video comment sections are ripe territory for engaging with fans and viewers in a two-way conversation that Spotify and Apple Music haven't yet mastered.
The pace of music discovery is also quite different: while a Spotify-programmed playlist can add as many as 50 new tracks every week, most YouTube channels upload only one song a day, or up to five songs a week. “Our YouTube audience doesn’t necessarily follow up on Spotify,” Daniel Lee, Label Manager at NCS, told me. “We see YouTube, Spotify and SoundCloud as serving three really distinct audience segments.”
Another key reason why some curators are more loyal to YouTube is data accessibility. Spotify’s value proposition to the music industry centers around its ability to break artists through its complex system of playlists. In order to maintain that position of power, the service only gives sparse data to third-party curators.
“In a sense, we’re like Spotify’s direct competitors, because they don’t want user-grown playlists to be bigger than their own,” Benz told me. “I’ve tried to work with Spotify to help them grow their playlists via my YouTube channel, but they’re not really about that, either. I respect their approach, because it’s what any smart businessperson would do.”
In contrast, at the moment, YouTube has no ambition to become a music curator in its own right, so can afford to offer superior analytics to independent channels. “Because I get so much data from YouTube like skip rate and demographic info, I use that to my advantage when navigating Spotify and other platforms, especially when it comes to advertising,” said Benz. As a result, Spotify has become more of a secondary port of call for YouTube music curators, offering the opportunity to monetize a wider audience after building a robust community through video.
“If you’re an artist looking to make it big on Spotify, the only people who can really give you that guaranteed big break work at Spotify," added Luke Hood, Founder and Director of UKF. "In contrast, if you're looking to make waves on YouTube, the curators and the fans are the community. You cannot game it."
In fact, Warner’s acquisition of Spinnin’ Records points to a growing trend of major labels seeking collaborations with YouTube curators, particularly around remixing songs by established artists. Typically, a major label arranges for five to six remixes of a hit single across various genres, including but not limited to Latin, dubstep and drum & bass, with the intention of covering as many audiences and media outlets as possible.
In such arrangements, YouTube channels become valuable marketing tools for traditional labels, allowing them to test tracks and measure feedback and engagement in a more responsive environment. “There are also times when an NCS artist breaks on our channel and then get signed to a major, but still keep their music on NCS for the sake of staying in touch with our community,” said Lee.
Occasionally, however, major labels will misunderstand the business models behind YouTube channels, especially for those like NCS that are proper labels and publishers in their own right. “A few big labels have asked us how to get their latest signees on our channel, and our only legitimate answer is to hand over all their masters and publishing rights to us,” said Best. “But we can look at more of a partnership where one of our artists reworks an existing track that we think has a lot of potential.”
In this vein, the biggest mistake the music industry can make—and one that the industry continues to make often—is putting all of these YouTube music channels into a single box. Digging deeper, one realizes that each channel has a distinct business model, target audience and long-term vision, refuting the claim that YouTube is “just” a lean-back streaming service or “just” a free promotional platform.
In an effort to prove the Nations' viability as a label alternative for artists, Benz has also been busy growing his indie label imprint Lowly Palace, which is separate from the Nations business but still leverages the latter's promotional reach. Lowly Palace encompasses a wider range of genres, including pop, R&B and alternative in addition to dance, and signs exclusive single-level deals spanning 10 to 15 years, with a 50/50 split on the masters rights.
“A lot of execs will look at our model and wonder why we’re not signing away a higher percentage of the masters, given our huge promotional channels,” said Benz. “I strongly believe you don’t have to take as much of the masters away as possible in order to do something good for the artist.”
Even though a 10- to 15-year deal seems rather extensive, Benz argues that he still provides a much more flexible offering than that of traditional label contracts—especially with the single-by-single rather than artist-by-artist model that mimics a typical YouTube promotional license. “We give artists a choice: if that single ends up working well, let’s just work together again,” he said. “There are some artists who have signed more than 10 singles in a row with us already, and haven’t gone to another label yet.”
Aside from recorded music, YouTube music channels are also using live events to gain leverage over industry incumbents. Historically, the connection between streaming and live data and revenue has been spotty at best. In fact, Spotify’s recent “fake artist” controversy revealed a new class of artists nurtured by the growth of streaming, namely those who could rack up millions of streams without the ability (or desire) to sell tickets to a single show.
The most serious channels are determined not to fall into this trap, and are slowly but surely proving their ability to rally their online communities to live shows. Trap Nation just hosted its first ticketed show, Enter The Vortex, at Amsterdam Dance Event last weekend; UKF hosts around 30 live shows annually, and operates its own ticketing platform UKF Live; NCS is just starting to venture into the live space, hosting a lounge at TwitchCon showcasing NCS artists.
As with any music company, the next crucial task for these curators is mastering an increasingly wide range of viable international markets, especially given YouTube's global reach. In general, only around 15% of YouTube music listeners are in the U.S., with India, Brazil, Mexico and Indonesia among the next top countries.
Each territory has its own musical preferences and subsequent product dynamics, which presents both a challenge and an opportunity to curators with strong roots in Western markets. “We can see from our YouTube stats that we have significant audiences in the Middle East and North Africa, but we haven’t been able to engage them properly yet due to language barriers,” said Lee.
Likewise, only 14% of Trap Nation’s audience is based in the U.S., with Germany tapped as its second-biggest market. The channel is also actively pursuing partnerships in China and Thailand, having just launched on China's Weibo, WeChat and Youku this past February.
Amidst this global expansion and maturation into full-fledged media companies, these YouTube brands are reframing the conversation about the potential value the site brings to the music industry not as a standalone streaming service, but as a data-rich community-building tool that can generate profits if utilized smartly.
“To what extent have you actually tried speaking and engaging with your fans on YouTube, aside from just posting your content? A lot of people haven’t taken that next step,” said Hood. “You get out of the platform as much as you give.”
