Why the music industry is headed for a tussle with TikTok over royalties

TikTok’s parent ByteDance has a plan to topple Spotify. Trouble is, that plan is struggling to get off the ground.

ByteDance’s music subscription platform, Resso, is currently available in just three markets – Brazil India, and Indonesia.

According to the Wall Street Journal, ByteDance wants the music industry to license Resso for 12-plus more global territories, with an eventual plan to launch in the US (and, more than likely, for Resso to be renamed as ‘TikTok Music’).

None of these 12-plus territories, MBW hears, are considered major music industry markets.

Either way, the record industry – led by the three major music companies – isn’t playing ball.

For one thing, Sony Music recently refused to re-license Resso full-stop, with its catalog pulled off the service as a result.

At the same time, there’s a much bigger tussle going on: The ginormous growth in TikTok’s advertising revenues isn’t – according to a handful of very senior figures in the music industry interviewed by MBW – being reflected in the money the platform is paying through to the record business.

And the record business is losing patience.

The slowing advertising situation

To understand why the record industry is growing increasingly aggravated by TikTok’s payouts, it’s worth briefly delving into numbers released last month by US trade body, the RIAA.

For one thing, the US record industry saw a significant slowdown in growth in subscription streaming revenues in H1 2022.

According to RIAA data, the US recorded music business saw subscription revenues (‘premium’ and ‘limited tier’ subscriptions combined) hit USD $5.03 billion in the first half of this year. That was up by $462.2 million on the same period of 2021.

This was a smaller annual jump than every equivalent increase since 2015 – surely the first solid sign of a predictable plateauing of growth for music streaming subscriptions in the States.

But let’s be honest: No one’s going to be getting overly worried by a YoY increase of nearly half a billion dollars.

What’s much more likely to be rankling/concerning the world’s biggest music companies right now?

Advertising.

As you can see above, ‘on-demand ad-funded streaming’ generated $871.5 million for the US record industry in H1 2022.

That’s an RIAA figure, and refers exclusively to advertising generated on free on-demand services, including YouTube, the ad-supported tier of Spotify, plus Facebook… and TikTok.

(This figure does not include money generated by YouTube or Spotify’s subscription tiers, nor money from advertising on ‘lean-back’ digital radio services.)

“That’s a contraction of annual ad streaming revenue growth of nearly two-thirds in real terms (2021 vs. 2020) year-on-year.”

The $871.5 million paid by these services to the record industry in the first half of this year was up by $123 million on H1 2021 – again, not a figure to be sniffed at.

Except when it is. Because in 2021, the US record industry saw revenues from these ad-supported services grow by $327.1 million, according to RIAA data analyzed by MBW.

That’s a contraction of annual ad streaming revenue growth of nearly two-thirds in real terms (2021 vs. 2020) year-on-year ($123m vs. $327.1m, i.e. the two orange bars furthest to the right below).

Some of that contraction, of course, is down to the digital advertising market’s strong bounceback in 2021 following the uncertain Covid-hit period of H1 2020.

And some of it is down to the macro-economic uncertainties of 2022, with many experts predicting a softening of digital ad spend generally in the second half of this year.

But there’s another narrative at play here, too.

According to eMarketer published in March, US advertising revenues generated by TikTok are expected to nearly triple in the US this year – up from $2.10 billion in 2021 to $5.96 billion in 2022.

That would represent YoY growth of over +180% (vs. +170.0% in 2021), and mean TikTok generates more US ad revenues this year than Snapchat and Twitter combined.

So with that explosive growth taking place, why is it that music’s US ad growth from TikTok (and other services) in H1 2022 didn’t jump as fast as some would like?

The challenge at hand

One answer to that question is simple: The capped licensing deals that, to date, the major record companies have struck TikTok.

This is a subject we’ve covered before on MBW:  ‘buy-out’ agreements being inked with TikTok by music’s biggest companies.

In essence, these deals see TikTok pay a lump sum to use licensed music across its service from a major’s catalog for two-year periods.

Some in the music industry believe this is easy ‘additional’ money: i.e. they’re only licensing TikTok for sub-30-second videos which – some argue – essentially act as promotion for properly monetized music (i.e. on subscription platforms like Spotify).

Others in the music industry, however, view things differently.

These people argue that TikTok is growing off the back of music’s popularity on its platform, and that the music biz’s biggest companies must strike ‘revenue-share’ agreements with TikTok sooner rather than later. This would give music rightsholders a guaranteed proportion of all revenue generated on music-led TikTok videos.

There are potential signs that this latter cohort may now include Sir Lucian Grainge, Chairman and CEO of Universal Music Group – i.e. the world’s most powerful music rightsholder.

We’ll get to why shortly.

The bigger problem

There is one reason above all others for record companies to be a little scared of TikTok: eMarketer concludes that today, nearly two-thirds (61.3%) of ‘Gen Z’ in the US uses TikTok at least once a month.

To put that in simpler terms: TikTok has become an active part of the lives of the majority of young people in the United States.

That’s the next generation of music consumers, relying on TikTok for their entertainment, their marketing, their information – and their new music listening habits.

“That’s the next generation of music consumers, relying on TikTok for their entertainment, their marketing, their information – and their new music listening habits.”

You can see why some music executives are now starting to draw historical parallels to other platforms – MTV and YouTube, in particular – which grew to such a level of cultural power, the music industry consequently struggled to dictate commercial terms in licensing negotiations.

This was a point touched on by Sir Lucian Grainge speaking at the Music Matters conference in Singapore last month, where he called on the music industry to “avoid repeating past mistakes” that had led to power imbalances with MTV and YouTube in particular.

“[We] were given a lot of reasons why our artists shouldn’t get paid,” said Grainge of certain digital platforms over the past 20 years.

“People said, ‘It’s great promotion’, or ‘you can use it as a platform for discovering new artists’ [and then] technology platforms were built on the backs of the artists’ hard work and those who invested in artists early in their careers, with very little return.”

Grainge then noted how Universal Music Group – and the music industry alongside it – has made major progress in more recent times by striking forward-looking partnerships with companies such as YouTube and Meta/Facebook.

Discussing YouTube, Grainge pointed to the platform’s recent announcement that it paid music rightsholders $6 billion in the 12 months to end of June 2022 – and that around $2 billion of this figure came from ads on user-generated content.

Grainge called this a “sea change” from ten years prior – days when the record industry would routinely attack YouTube for the so-called “value gap” between the amount of consumption happening on its platform and the size of the payments making their way to artists, labels, songwriters, and music publishers.

Discussing Meta, Grainge noted that, five years ago, the music industry generated “almost no money” from the world’s most powerful social platform.

Now, he said, not only is Meta in UMG’s Top 10 revenue-generating digital partners, but a ground-breaking revenue-sharing agreement has just been inked between Universal Music Group and Meta for certain types of videos on Facebook across the world.

Grainge called his company’s recent partnerships with YouTube and Meta “win-win relationships” where artists are being “more fairly compensated” for the engagement they drive on the platforms.

So should TikTok now follow Meta and also commit to paying a fixed proportion of its ad revenues to music industry rightsholders?

Grainge stopped short at demanding that – and, indeed, of even mentioning TikTok by name – at Music Matters.

But in MBW’s view, Grainge’s subtext was clear: The rapid growth of short-form video companies, thanks to music on their platforms, is going to become a problem if the money paid by these platforms to artists doesn’t start fairly reflecting their own revenue growth.

The Universal boss raised concerns that, just as the music industry has seen “significant progress” in narrowing the “value gap” on services like YouTube, “another gap is [now] forming fast in the new iterations of short-form video”.

“another [value] gap is forming fast in the new iterations of short-form video… Let’s work together as an industry —majors, indies, and DIY artists alike — to ensure music has both cultural and commercial value.”

Sir Lucian Grainge, Universal Music Group

Grainge then tellingly called on the entire music rightsholder business – “majors, indies, and DIY artists alike” – to ensure “music has both cultural and commercial value”.

Added Grainge: “If we’ve learned anything from the past, we will lead that charge, and create even greater opportunities for a new generation of artists emerging from markets all over the world.”

Some, MBW included, will see these comments as something of a rallying cry from the world’s biggest music company for all players in the modern music business to start demanding better terms from short-form video services – TikTok in particular.

Watch this space.Music Business Worldwide