While you aren’t reading this newsletter for cultural commentary from a white American, it feels inappropriate to send this out – this newsletter in particular – without mentioning the systematic racism-induced protests occurring in the US.
I was compelled to write this week’s newsletter, in part, because of an ever-increasing interest around the globe in African entertainment, and culture more broadly. Which is great, except that at the same time African culture is being celebrated (or appropriated), we still see a woefully unequal and prejudiced society in the US.
In the tech space in particular, I’m also struck by the paradox of the Silicon Valley-types’ self-proclaimed liberalism, in partnership with their proclivity to tout their problem-solving abilities, with their cluelessness as it relates to solving for the tech industry’s extreme lack of diversity.
Take this tweet, for example, from a Partner at Sequoia, one of the largest and most powerful VC firms in the world, which asks “How can we work together to correct this systematic failure?” The responses show that the solution is actually pretty straightforward, and involve simple things like actually hiring black employees. Meanwhile, Sequoia has none.
The same challenge/opportunity exists for the African tech ecosystem, where a collage of the $1 million-plus fundraising rounds also shows a misrepresentative picture for the African continent. So while overcoming systematic oppression is a big task, perhaps hiring more black employees and investing in more black founders is the way to start.
Onto this week’s update – I’m especially interested in1 the global opportunity for African entertainers and the opportunity to serve African consumers with local content – which are both inextricably linked to platforms and technology.
This week, Billboard magazine put two African artists – Tiwa Savage and Davido – on its cover, accompanied by a feature interview that included a third, Mr Eazi.
This to accompany the launch Apple Music’s first radio show in Africa – Africa Now Radio – and during the same week that Universal Music Group announced that they would be bringing their Def Jam label to Africa.
And this, not long after Netflix launched in Nigeria, with plans to develop more African original content, after releasing their first African original, Queen Sono, earlier this year2. And this, not long after the NBA launching the Basketball Africa League, the inaugural Afro Nation music festival in Accra, to coincide with Ghana’s The Year of The Return, and so on. Things are happening. You get the picture.
There are two separate trends, the first being the global popularity and opportunity for African entertainers3, as evidenced by the Billboard cover. The other trend is the battle for African consumers. That’s what I’d like to talk about, and in particular, on the music streaming front.
The business of music streaming
From the West, there’s Spotify, Apple Music and Deezer. From the East, there’s Boomplay. Locally, there’s Spinlet, Playfre, Waw Muzik, Mdundo, telco-led initiatives including MTN MusicTime, Uganda’s MTN Tidal, Tigo Music, and various others.
And of course, all of these services are also in competition with YouTube, SoundCloud, terrestrial radio and alternative, analog (and illegal) means of listening to and distributing music.
Most music streaming companies have (at minimum) dual revenue streams – an ad-driven freemium model, and a subscription model. Meanwhile, on the cost front, music streaming services have a significant cost of revenue – driven by licensing and royalty costs. These licensing deals are done with record labels – Universal Music Group, Sony, Warner Music Group, and various independents. And these are marginal costs, as well, meaning that these costs go up as their active users increases.
Though Spotify is not necessarily the most appropriate company to use when discussing Africa – they still have not launched in Nigeria – since they are a publicly-traded company, we can use their earnings as a proxy. As a market leader, they are able to negotiate more favorable licensing agreements with record labels, yet they still operate at a loss4. Per their Q1 2020 earnings, gross margins on their subscription revenue is 28.3%, while ad-supported gross margins were -6.6% (down from 11.6% in Q4 2019, which they attribute to a COVID-19 induced decline in ad revenue).
This has implications for those looking at the continent. Adjusting prices downward for African consumers puts even more pressure on slim margins. And while the freemium model represents only 10% of Spotify’s revenues, it’s an even more difficult business from a cost perspective, and in markets with less ad spend overall.
And with the importance of a ground game distribution strategy on the continent, in addition to the above, we can see how a global player like Spotify will struggle to make any meaningful dent in African consumer markets.6
Which brings us to the other streaming services – how are they combating the above-mentioned challenges in the market and building appropriate strategies for Africa?
The music streaming leader in Africa is Boomplay Music, and their success comes down to one word: distribution.
Boomplay is a Transsnet-owned7 streaming company that comes pre-downloaded on Transsion smartphones. Transsion, of course, is the number one smartphone manufacturer on the continent, with 40% combined share across its subsidiary brands Tecno, Itel and Infinix.
Boomplay claims over 60 million users and its licensing deals with all three major labels, as well as other indie agencies, gives it a music catalog to compete with Spotify. Like Spotify, Boomplay has an ad-driven free tier, in addition to a paid subscription, and for the latter has integrated with mobile money providers like M-Pesa in Kenya.
How many paid subscriptions Boomplay has, however, is an open question. And if Spotify’s earnings are a representative indication, paid subscriptions are the overwhelming driver of revenue8.
Beyond Boomplay, uduX is a Nigerian streaming service priced at $1.30/month that curates music from different regions in Nigeria, presumably to fill a content gap left by Spotify, Boomplay and other multinational services. They also have a licensing deal with Universal.
Mdundo is a Kenyan platform that boasts 2.5 million users, claiming to be a more artist-friendly platform than global alternatives. They share 50% of their turnover with the artists.
MTN’s MusicTime is a time-based service, which allows users to top up on listening minutes using airtime. Waw Muzik is a service focused on French-speaking Africa, whose acquisition strategy includes a distribution partnership with Orange.
And Playfre, as the name suggests, is a free platform that allows users to curate their own playlists on the service. Its innovation – when someone plays a song on Playfre they are actually streaming via YouTube, and any listens on Playfre add to that artist’s YouTube views.
Unbundling, piracy and non-consumption
The elephant in the room in a discussion on music streaming is piracy and an unwillingness of consumers to pay. It’s not just an African thing – particularly as we see an increasingly unbundled digital media landscape, platform exclusive content has brought with it a rise in piracy.
This issue is especially acute in African markets, where listeners are nonetheless spending money on data to download music. This reality makes the value proposition for streaming services – both paid subscription and ad-supported free tiers – that much more difficult here for mass market consumers. At least downloading music is a one-time data cost.
While rightsholders are generally inclined to fight piracy through digital rights management technology and copyright claims, piracy nonetheless prevails. I’m increasingly of the opinion that the solution9 lies in the business model and strategy.
After all, streaming services alike are in competition with a bigger enemy – nonconsumption (and nonconsumption via piracy).
What would it take for mass market adoption in utilization of streaming services? More affordable data costs, for one. In the meantime, should telcos subsidize streaming services or offer zero rated services?
While original content plays a role in both acquisition and retention for global streaming companies, perhaps it’s telling that content production costs sits within Netflix’s cost of revenue, meaning that it’s accounted as a retention cost to serve existing users.
And additionally, perhaps there are lessons we can take from the streaming competition in the US – in particular, Disney’s strategy behind their streaming service, Disney+.
Walt Disney’s Strategy
A discussion of Disney’s strategy with Disney+, and the decision to remove Disney and Pixar content from Netflix in favor of its own service, invokes the infamous strategy drawing from Walt Disney:
While Netflix and other streaming services are an end unto themselves, Disney+ plays a role in Disney’s larger relationship with their customers. As Stratechery’s Ben Thompson writes,
While obviously Disney+ will compete with Netflix for consumer attention, the goals of the two services are very different: for Netflix, streaming is its entire business, the sole driver of revenue and profit. Disney, meanwhile, obviously plans for Disney+ to be profitable — the company projects that the service will achieve profitability in 2024, and that includes transfer payments to Disney’s studios — but the larger project is Disney itself.
By controlling distribution of its content and going direct-to-consumer, Disney can deepen its already strong connections with customers in a way that benefits all parts of the business: movies can beget original content on Disney+ which begets new attractions at theme parks which begets merchandising opportunities which begets new movies, all building on each other like a cinematic universe in real life.
So who’s an equivalent in Africa, from a business model perspective? Perhaps it’s telcos. We can see Safaricom’s value chains paint a similar picture.
Or maybe it’s OEMs like Transsion. Both, like Netflix, have the opportunity to service existing users through investments toward retention (that also serve as acquisition levers).
Where does Boomplay Music fit into the Transsion equivalent of Walt Disney’s drawing? And does that give Boomplay a competitive advantage – as part of an overall initiative by Transsion, through Transsnet – to profit through content and software via its expansive user base on the continent?
Is the remedy to piracy for Transsion and its content subsidiaries, perhaps in partnership with telcos, to bundle and package offerings – backed by a Disney-esque integrated model? This being similar to the opportunities we see for embedded finance companies leveraging their existing relationships with customers to offer financial services.
Or, will limited spending capacity, and desire to spend on certain services, continue to hamper the opportunities on the continent?
I, for one, am excited to see how this space evolves.
- Fun fact – I worked in the sports/music/entertainment industry in a past life, with the global behemoth WME|IMG (now called Endeavor). And my venturing into the African startup ecosystem was largely a result of that experience. When I first moved to Cape Town a few years ago, I spent those early days running around the city asking people if a SXSW-style event – that sat at the intersection of technology, interactivity and music – was a good idea.
- Netflix also has a Head of African Originals (source)
- The majority of customers for Nollywood streaming service iROKO are in the US and UK (source)
- Save for one quarter in 2019 (source)
- Spotify does have Spotify Lite
- Africa is not even its own region in their earnings. And same goes for a service like Apple Music, given low iPhone penetration on the continent.
- Transsnet is a JV between Transsion and NetEase, whose NetEase Music boasts over 800 million users in China.
- Premium subscription revenue accounted for 91.9% of Spotify’s revenue in Q1 2020.
- While at the same time caveating that the problem is obviously larger and more complex than anything discussed herein.