The record labels’ TikTok opportunity cost

With their short-term music licensing agreements soon to expire, record labels are reportedly pressuring TikTok to sign an ad revenue share agreement, which would see TikTok pay a share of advertising revenue to music rightsholders. It is easy to compare TikTok’s trajectory to YouTube’s. But the platforms have key differences, and every opportunity comes with costs. An ad revenue deal would have ripple effects on what types of artists benefit most from TikTok, and how.

What makes TikTok especially contentious

Negotiations between labels / publishers and user-generated content (UGC) platforms have always centred around to what degree the platform is purely a promotional tool versus a form of music consumption. TikTok is both, and more intensely so than any platform before it. No UGC platform has ever rivalled TikTok’s power to vault songs to hit status, and TikTok is also becoming a form of consumption in its own right. Consumers already spend more time on video platforms, including YouTube and TikTok, than they do streaming music. To get even more meta, TikTok is also growing at the expense of YouTube, where UGC generated $2 billion for the music industry last year. To labels and publishers, TikTok’s growth cannot come without making up for potential time lost on higher-paying platforms. Even so, music remains a net winner. For now, TikTok is carving out its own consumption space while also driving traffic to DSPs.

The more subtle — but perhaps more fundamental — competition is on the cultural front. Even if this is all a net gain for streaming in commercial and consumption terms, TikTok is winning in cultural impact. It is the place where fandom and culture are building around artists, while streaming services offer only passive consumption. In pushing listeners to streaming, TikTok implicitly highlights exactly what streaming services lack.

The final major difference between TikTok and platforms of the past, of course, is that it has developed tools that compete directly with the majors, such as A&R and music distribution platform SoundOn. 

The upside is obvious

The short-term blanket licensing deals that labels and publishers signed with TikTok were always meant to be just that — short term — giving TikTok time to establish itself and its business model, while preventing labels / publishers from locking themselves into a long-term arrangement too early. Now that TikTok has become a multi-billion-dollar app with over 1 billion monthly active users, the music industry says that that time is up. Details about the negotiations remain speculative, but an ad revenue share model aligns all parties’ incentives: when the platform earns revenue, the music industry earns revenue. 

Yet this upside was not always so obvious to the labels, whose initial “value gap” argument was based around YouTube’s ad revenue share model. Now — if the reports are true — the labels’ new value gap argument focuses on getting TikTok to adopt exactly what was the basis of the first value gap. The takeaway: it will always take time for labels (and the rest of the industry) to understand the value of new models, and perhaps the ad revenue share was the right one all along. 

The ripple effects are more subtle

So long as it does not distribute revenue by market share, an ad revenue share deal could somewhat democratise licensing for artists. An ad revenue share model would compensate rightsholders proportionately to uses of their music — think of it like an iteration of user-centric streaming. This arguably benefits all artists and also insulates major record labels from the long tail of artists diluting their revenue share, as is happening on streaming. 

But that democratising impact can only go so far, and certain types of artists are bound to benefit more than others. While the hits still dominate on TikTok, song usage has less to do with what sounds good and more to do with factors like trends, the mood of the song, whether it has any quirky sounds or lyrics, and a good degree of sheer randomness. Currently, my TikTok “Recommended” sounds list — the first option when creating a video — contains many more smaller, independent artists (WILLIS, Ted Fresco) than big names (Taylor Swift and Nicki Minaj). As TikTok’s userbase grows, it is also harder for one song to overtake the entire platform in the same way tracks like Lil Nas X’s “Old Town Road” or Megan Thee Stallion’s “Savage” once did, which means that while superstars still dominate, they dominate less so over time. This is all good news for smaller and emerging artists, but diminishes labels’ dominance on the platform. 

It is also worth questioning what behaviours this will incentivise. Artists and labels are already incentivised to “go viral” as a way to boost streams — with TikTok ad revenue as an added bonus, would they become even more obsessed with virality? TikTok has always drawn analogies to entering the lottery, but for the first time now, money will be directly involved. It makes sense for the music industry to ask TikTok to share more of its revenue (although perhaps what we really need is a new format entirely). But, as with everything else, the second-order impacts of a potential deal are worth consideration too.