Are “Superfans” the key to success in a post-AI music world?

1 Intro

“Superfans” - the topic of the hour in the music industry. A specific demographic of consumers to be retained and monetized, mentioned both in public companies’ quarterly earning calls and in the indie community’s plans to monetize fandom.

This current focus on superfans comes at a time when the industry announces record numbers, and the emergence of new tools and platforms in the fields of AI indicates that the tide of new music is not going to decline any day soon: both supply and demand are up.

So, if everything is going great, why are superfans crucial in the eyes of industry professionals? How are they expected to make a difference? And what are they, exactly?

2 Superfans?

The term “Superfan” has been floating around the industry for over two decades (1): superfans are willing to pay more for their favorite artist’s music and products than the average fan. This is measured over ARPU: Average Revenue Per User, and superfans represent the top grossing segment. Average fans stream the music and watch music videos, while superfans will stream, watch, but also attend several concerts a year and buy merchandise. The level of involvement is a lot higher. When music was tied to physical carriers (vinyl and CD era) it was easier to identify superfans as they bought multiple products over the counter. But, today, a stream of a highly involved individual on Spotify is monetarily valued just as much as a stream from a casual playlist listener. That’s why the industry established new KPIs to identify the level of involvement: organic searches (fans using the search bar to find their favorite artist on streaming services), streams per account, or how many times a user has added songs of their favorite artists to their own library. A study by Luminate classified around 15% of the U.S. population as superfans, who spend more than 80% more on music each month than the average music listener (2). On Spotify around 2% of monthly listeners make 18% of monthly streams (3).

The estimates vary, but on average between 2-4% of listeners are identified as superfans (4).

2.a A deeper bond

From a psychological angle, the relationship between the artist and the superfan is complex: very young and invested fans admire artists to a degree where they take small expressions of the artist - from vocabulary, dance, styling to political positions - and incorporate it knowingly or subconsciously into their own persona. It becomes part of their own identity: in 2018, hair extension sales in Australia skyrocketed - driven by Ariana Grande fans mimicking their favorite artist's preference for the hairstyle.

This imprinting process is part of how human identity is shaped and nurtured over time:

"As such, identity is not something that emerges from the self, but is instead a result of actions that are taken during social interactions within cultural situations." (6)

One of the core experiences that nurture human identity is music (7). The relationship between the artist, the music and the fan lasts long after the character-defining years are over - music becomes the soundtrack of our lives. The songs we love inform our identity and belonging, whilst artists act as the catalyst for the specific culture we want to be part of.?

3 Macro-environment

On a macro level, the importance of superfans within the music industry is growing due to two main drivers:?

1. Saturation: subscriber growth for music streaming services in western markets is gearing towards a saturation point and emerging markets won’t be able to keep the growth trajectory due to lower price points and ARPUs in new territories (8). As more new music hits the market (9), the battle over listeners will only intensify over time: 24% of all tracks on Spotify, which represents around 37 Million songs, have 0 streams (10).

1. Wall Street: two of the three majors and several independents are now public companies. And as any other public company, they need to champion a strong growth narrative. While streaming will still fuel the cash box, we already see Universal Music Group and Warner Music Group slowly crafting a new story that can live up to the growth expectations of the financial world: the new dawn of the industry will come through the monetization of fandom by expanding physical and virtual products for the biggest spenders, the superfans.

Currently, in music streaming, all incomes from user accounts are pooled together and each artist gets a share in relation to how many streams they made against all global streams of that period. The industry knows this model needs an upgrade. What it needs is a user-centric payout model, where the income from a single user's account is directly shared with the artists they listen to. This outcry comes at a time where thousands of new songs are released daily, partly containing artificial or generic music, or even no music at all: “It can’t be that an Ed Sheeran stream is worth exactly the same as a stream of rain falling on the roof.” (11)

Phony releases are accused of diluting real artists' value, as well as the value of music overall.

4 AI Music

The emergence of new technologies and products in the fields of artificial intelligence have made it easier than ever to create music. These new tools can generate music effortlessly over text inputs (prompts) in a very short period of time, relieving the user from any theoretical musical knowledge or the need to master an instrument. As the hype for prompt-based generative music (12, in notes section) reaches an inflection point, we see startups (Futureverse, Soundful , Cassette) as well as big tech (Google, Meta ) releasing new music AI tools nearly weekly (13). The hyped audience tends to overlook the legal challenges and the fact that prompt-based AI music currently only solves utility issues, e.g. the need for (generic) background music, for video live streams or apps (14).?

But music without an artist, a brand or more context attached to it, will hardly get people invested in the art. So far, generative music has not been able to feed into our sense of identity and belonging. And music that can’t touch us will have a hard time creating true fandom. Three trends underline that statement:?

• Virtual artists: they give fans someone to relate to, a likeable character with defined traits - all to create a bond between them and the artificial content. This relation has clear economic upside: fandom drives retention and value, while the creators of the virtual influencers have full control over the IP and content output.
• Faceless artists: We have seen artists singing choruses for EDM DJ’s and pop producers, or being included in large utility playlists. Through that, these artists rank up millions of streams - but struggle to sell 250 tickets for a live show. The consumption does not translate into a relationship to the audience: playlisting doesn’t necessarily equate true music discovery, and a faceless artist will have a harder time building up following.
• Name and likeness: The rights to use the name and likeness of an artist are becoming increasingly more valuable: being able to work the image and brand of known artists (for marketing and additional products) increases the value of the songs and catalogs immensely (15).??

There is an increasing amount of content competing for our attention, and more and more of that content - because it is generative and generic - lacks the deep artist-listener connection that audiences care about. Are we at risk, then, to see a potential emotional disconnect between fans and this gradually dehumanized creative process?

Could fandoms and superfans be the key to fend off that risk, and offer a different approach to valuing music IP (intellectual property) and music itself?

5 Valuing Music IP

The commercial value of music is captured in different ways: from selling physical products (e.g vinyls), to licensing music (for commercial use) to streaming royalties. The basis for all exploitation is the copyright of the creative work, the intellectual property, belonging to the rightsholder. The value of the intellectual property is calculated over the income method: the expected income generated in a certain period of time gets adjusted to its present day value (16). This method is used across the music industry to value music catalogs or to estimate artist deals. Calculating the value by projecting the historical music consumption earnings in a linear fashion works well for diverse bundles over a song by song basis.

But in this new environment, with less time and more content at hand, songs from (active) artists with strong brands that have historically had linear or slight growth might be undervalued assets bearing potential upsides.

Real (monetary) value in music comes from the combination of the quality of the song (is it a hit?) and the artist brand (how well is the artist known?). If the song is valuable (a hit) without a known artist behind it, it’s usually classified as a “one-hit wonder”. In this case the consumption of the song can be used as a value indicator for the IP. But in the future, if the same song is?tied to a successful artist, the song could automatically become more valuable. The reason is that the one song will be amplified through the artist’s real fans (proactive listeners), engaged over multiple touchpoints (communication channels, socials etc.) and products (merchandise, tickets, collectibles). These products and touchpoints serve as synergetic marketing: each time a fan engages with products or media, there is a higher chance the music comes back to mind, and the fan listens, consumes and might even promote. The probability is more likely for a fan who is deeply involved and is willing to spend more than the average - a superfan.?

To understand if the song being assessed is undervalued, the artist brand needs to be measured by the relationship the artists has with their fans:?

1. Overall reach, respectively the total number of fans (addressable market)?
2. in relation to their superfans and their spending power (ARPU in highest cohorts) and?
3. the optimized margin over savings in synergetic marketing (lower customer acquisition costs) (17).?

Let’s dive in:??

5.a Real fandom?

A valuable artist brand enhances identity - and the more a fan engages, the more likely they’ll become a superfan. Reactivating those fans is (a lot) less expensive than acquiring new ones, therefore less marketing spendings are needed than to break a new and unknown artist.

Putting this into economic language: lower our customer acquisition costs (CAC) and maximize profits by activating an existing customer base, instead growing the overall revenues. The customer relationship management (CRM) needed to achieve this is more cost effective than frontline marketing, which usually requires massive budgets.

If the industry switches to an user-centric payout model, songs without strong artist brands will be less valuable in the future, as passive streams will count less and CRM is not possible without a distinct audience to target. Artists with a high ratio of superfans will create better metrics on the streaming services (KPIs explained in the top section) and will need less spendings to activate consumption.

These economics will be applicable for any product (merchandise, virtual goods, experiences) tied to the artist brand, especially if premium and high priced. The price point will correlate with the quality of the artist brand: the bigger the artist, the higher the willingness of superfans to spend more on goods and experiences. We will see more premium experiences and products (higher margins) on the market for top notch artist brands (18)(19).

6. Conclusion?

Taking all the above into account, we identify several trend lines emerging:

6.a Chef’s table

In our opinion, quality and legacy artist brands will be considered “premium” and become more valuable over time, as prompt-based generative music only serves “utility” and faces a downward spiral: the release of more generative and generic music dilutes the overall value of generative music. We will likely see a (cost) race to the bottom for utility music, and new records for prices of premium experiences of premium artist brands (20). The run on vintage catalogs and name and likeness rights is not over yet - the value could potentially even grow further.?

6.b New purpose?

The ease of use for AI tools will open the gates to a new flock of music creators: it will nurture the next wave of professional artists, but also grow a new segment: the ones without professional ambition (hobbyists), creating purely out of recreational motives.?

Professionals who’ll find success will find it predominantly locally: it is becoming harder to foster global, pop cultural moments that are needed to transcend local borders and build international careers and fan bases. This will empower labels and branches of major labels, who focus on signing and marketing music locally. As Will Page, former Chief Economist of Spotify , puts it:

“This all points to a growing marketplace where power has been devolved from global record labels and streaming platforms to their local offices and from old linear broadcast models to new models of streaming which empower consumers with choice” (21).

6.c Power law?

The major labels are doing better than ever and are still the only institutions who can create internationally relevant artists. There are single cases where independent players launched global careers - but in the long run these artists usually end up signing with the big three.? Warner Music Group , Universal Music Group and Sony Music Entertainment develop, nurture and monetize artist brands and IP on a global scale - wether we like it or not. This will keep them on top of the food chain, even in the advent of AI and generative music, especially as they sit on the most valuable data sets (catalogs) to train these algorithms. Their challenge lies within discovery (speed) and marketing (predictability): new listeners, who grew up with more freedom of choice, local repertoire and with a sheer endless suite of content are more difficult to market to. The traditional setup does not work anymore - there is no “go-to” marketing playbook.?

6.d Bull market?

Nurturing their new Wall Street narrative will be the industry's next big hurdle: monetizing superfans, and doing it over direct-to-consumer lanes and outside of music consumption in the long run. This can’t be the task of the current merchandise departments, who historically have not been prioritized and don’t have the scale to deliver for a vast array of artists. Going D2C, especially for virtual products (skins, sample packs, gaming content) is a different ball game and includes a completely different set of rights and skills.?

In summary we expect several trends to continue and shape the industry further:

Expectations for music industry

• M&A activities and investments into D2C and merchandise companies.
• Increased headcount for D2C, E-Commerce and CRM divisions.
• Adding needed rights for D2C to artist contracts.

Expectations for market

• Less new, globally relevant cultural moments, focus on established events (sports events, major tours, Eurovision etc.).
• Artists and Labels experimenting with derivative products of IP and catalog for revenue and marketing purposes (sample packs, UGC over AI etc.).
• Increased CAC: superfans don’t come for free, it will be harder than ever to create a real bond and a long term career.

Expectations for AI Music

• AI tools will drive more people to produce original music, without the necessity of distributing or marketing it.
• Pure prompt-based generative music will lose relevance and become a commodity (utility).
• AI will find its footing in marketing: enabling fans to create UGC based on artists stems will drive involvement and excitement.

7 Outlook

The challenges for the industry are clear: adapting to glocalization to go from a centralized to federal structure and empowering local offices to find new ways to market music. Doubling down on D2C to serve superfans at higher price points and leverage their artist brands will be key to increase revenues outside the streaming scope. In order to deliver, labels will need to transform into enterprises with a more nuanced rights approach and a complete direct-to-consumer (D2C) strategy and infrastructure. It will require change in culture, workforce and management.?

But the spearhead won’t be AI music.

We used to differentiate between Indie and Major artists. In the future we will distinguish between generative music and artist brands. The utility aspect of music got solved over AI, but the emotional layer did not: the biggest legacy artists' in the world have deep running relationships with their core fans, which drives engagement, spendings and long-term attachment in ways artificially-made tracks have not been able to. New emerging superstars will keep needing to sign to the major labels to access their global infrastructure and build out their fanbases.

That system will prevail and won’t change for now.?

But the way we value music will.?

About us.?

We have scanned +400 startups in the intersection of music and technology, identifying trends and growth segments in the market. We develop in-house tools and models, to value music, corporate assets, superfans and artist brands. If you are interested in our findings, research and models please reach out: [email protected]

Notes:

• (12) Prompt based generative music does not include music created by artists using AI tools e.g. effect plug-ins or ideation tools.
• (15) Excellent Podcast on the "Name & Likeness" subject: Monetizing Media media by Eric Peckham-Cohen https://podcasts.apple.com/us/podcast/deals-why-name-image-and-likeness-contracts-are
• (17): Measuring the brand value of Artists brands is a science itself which includes quantitative and qualitative aspects on different layers and is out of scope for this article. Aspects, aside of financial KPIs, include: social media, live streaming, tone of social chatter (perception of the brand), price points, quality of audience etc. As a science in itself, a starting point can be found here: .https://www.qualtrics.com/blog/brand-equity-measure/
• (18): A great example here is the work of the Swedish company Pophouse Entertainment, who have built premium immersive experiences for ABBA and Avicii: https://pophouse.se/
• While the financial markets focus on the generative music segment of AI, several music companies are embracing the technology differently: We see record labels using AI to identify new music (Snafu Records), startups creating sound extensions of artists' worlds (albums) over AI (Endel) or using it to automate marketing processes (SymphonyOS), all the way to public companies optimizing their?infrastructure for a competitive edge (Believe Digital).
• Thank you Louise Bernard for your help in editing, reviewing and refining this article. Without your help this wouldn't have seen the light of day.

Other Sources:?

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