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3 APPLE/BEATS MERGER GAME CHANGERS FOR MUSIC THAT NOBODY HAS MENTIONED YET

Apple-n-Beats1) IN APP SUBSCRIPTION CAPABILITIES

The biggest hurdle to the adoption of subscription services by the masses is the difficulty in subscribing. Third party players would have to give up 30% of their subscription fee to the App Store if they allowed the ability to subscribe with one button in the app. Profit margins are small to begin with. Since that equals the total income most subscription stores have to operate, this is a financial impossibility. So they have to direct people out of the app to subscribe…without actually saying so in the app. This tiny little hurdle causes a very large number of people to give up on subscribing.

Now that Beats Music will be integrated into Apple, that 30% margin is all within the company. This will likely lead Beats Music to be the first significant app to have subscription occur with one button. It simultaneously makes the billing seamless and nearly invisible (as most people view app purchases now). It also puts nearly every other streaming service at a strategic disadvantage and will likely make Beats Music equal Spotify in paying customers in 18-24 months. Google Play is the one exception, so it’s no surprise that they’ve stepped up their advertising recently.

EDIT: As Ben Patterson pointed out to me, Beats Music already offers in-app subscription. It should also be noted that ad-free radio play subscriptions on Pandora and Slacker are also offered in-app. The reality of the marketplace for full on-demand subscription is that in-app purchases severely cuts into profit margins on a business that’s already got tough margins.

2) FREE SUBSCRIPTIONS TO COLLEGE KIDS

Anyone who’s ever bought a Mac in July or August probably knows that college students get some nice bonuses from Apple when they buy their computer for school. It can be a rare discount on their computer. Recently, it has also meant a $100 gift card to use in the iTunes store. Giving little bonuses to new college students via Apple stores is in the company’s DNA.

This means that it’s a pretty easy transition to give freshmen college students a free year of Beats Music for buying a Mac. Music as a loss leader is something my friend Moses Avalon spoke about a decade ago, though he predicted it would occur with a car purchase. That may still happen, but we’re very close to this happening with a computer purchase. Possibly as soon as next month. This, however, is a good thing. Since the aforementioned iTunes relationship is seamless, getting people hooked for a year and then moved into a paying relationship of $10/month will barely be noticed by them. When this happens, Beats Music will be everywhere on college campuses.

EDIT: Moses reminded me he did mention computers as well, though it was all around files on hard drives instead of subscription cloud streaming.

3) HITS WILL MAKE EVEN MORE MONEY

One of Beats Music’s selling points is that they focus on “curated playlists”. This is a sound strategy as the sea of music available is just overwhelming for the average music listener. While they technically have every song that other streaming services have, those get little use in favor of the focused attention on the playlist. So the flipside to a system focused on curation means the lion’s share of the revenue will only land in the hands of the curated.

While the depth of playlists is very extensive in the Beats ecosystem, you’re probably still talking about maybe 500,000 songs in total that have been selected for any playlist. In a world of these services having 30 million + songs, this means that only about 1-2% of the songs will take in the bulk of the money. That’s largely true anyway, but the gap will get even more exaggerated as Beats Music grows. This also means that the average musician will still have difficulty making a living just by natural virality. Curators will gain influence and a label or artist will need to convince the curator of a song’s merits. Curators become the new radio programmers, and the new music begins to look like the old music business.

STREAMING MAKES MORE MONEY! THE DATA IS IN!

digital-music-report-UBJ*280In the great streaming royalty debate, the focus has been on tiny royalty rates per stream. Artists are up in arms, many are opting out of streaming services, and the noise and debate has been growing louder. Lost in that noise is a voice that is seldom heard: that of the record companies. There’s good reason for that: they’re making more money from streaming and the future looks extremely bright for them.

Buried in the Christmas Eve edition of the Wall Street Journal (which is itself a day to bury news) is a short column by esteemed writer Ethan Smith. And buried in HIS column (not the lead paragraph, but 8th paragraph) is the vital important nugget that shapes the future music business:

Data reviewed by The Wall Street Journal showed that one major record company makes more per year, on average, from paying customers of streaming services like Spotify or Rdio than it does from the average customer who buys downloads, CDs or both.

OK…let’s quickly digest this. On a per-consumer basis, a major record label makes more money from streaming services than any other format. This might be a figure to look at skeptically if these services barely reached a million people, but worldwide streaming services generated $1.25 billion dollars this year and Spotify alone has over 24 million active users (which jumped massively in the last week with app installs up 4x over the previous week). But how much more is being earned?

The average “premium” subscription customer in the U.S. was worth about $16 a year to this company, while the average buyer of digital downloads or physical music was worth about $14.

Let’s take a look at that. Year over year, the premium subscriber was worth nearly 15% more than the person who bought music either digitally or physically. So, if there’s more money to be made in the streaming hills, why are so many artists unhappy? Because the artist has to rethink the business on multiple levels.

IT TAKES LONGER TO MAKE MORE MONEY
As Ethan points out, it took an “indie pop/rock group” 34 months to make more money from streaming than they did from sales. Some artists will do it in less time, and others in more time. Either way, the artist has to take the long view. It’s certainly easier and much better to run a music business with the money coming in quickly with an up-front sale. However, if you believe in your music and have patience, the long run pays off. In this way, the recorded music business will quickly resemble its partners in publishing. In another way, with many artists being financially irresponsible, is it so bad for them to get their money slowly over a prolonged period?

THE MONEY GOES TO MORE ARTISTS THAN EVER BEFORE
A person buying $14 worth of CDs a year has the money going to 3 artists at the most (3 CDs x under $5). A person buying $14 worth of downloads a year has the money going to maybe 18 artists at the most (18 downloads x $.79). However, $16 worth of streaming revenue conceivably goes to as many as 3,200 tracks (3,200 streams x $.005). Even if you take an assumption that a person does 100 listens of one artist in a year, that’s still spread out over 32 artists in a year, or nearly double the max average for download sales. As I’ve reiterated before, the real issue facing artists with streaming is that the very access that allows them to make money means the pie gets sliced thinner. There’s more money, but it just goes to more artists.

THE SONG HAS TO LAST A LONG TIME
Disposability of a song only works if you work it extra hard while it’s hot. If an artist/song takes 34 months to make more money, then the song needs to be relevant for those 34 months. No longer can you stiff a consumer who buys something and only listens to it a couple of times. Now, those listens need to reoccur and do so over a prolonged period. This also means continually marketing content to ensure it stays relevant.

Longtime readers of my book Futurehit.DNA have already been making music that plays into these trends. I’ve been predicting for years that music revenues will be based more on repeatability, and that is now taking firm root. Those who embrace these new realities are more likely than others to rise above the mass volume of music released and are poised to thrive in this new age of the music business.

ROYALTIES SUCK, MUSIC SALES ARE DOWN, PIRACY IS RAMPANT AND OTHER LINK-BAIT TERMS FOR MUSIC PUNDITS

The royalties artists get on streaming services are pitiful! Mere slivers of pennies and a million plays barely buys you a pizza. These need to go up because music sales are in the toilet. Did you see that iTunes sales are down 1% this year? Panic in the streets! The real scourge is piracy which, a decade on, is still left unchecked and easily found with a Google search! So, your music is being stolen, not being purchased, and then devalued heavily on streaming services.

Sound like a familiar refrain? Sure, many artists and music business pundits have been spouting off about this stuff for awhile now. As well they should to keep the debate healthy…and grow their own business. Wait, say what?

A new MIDEM white label report called Content Marketing In The Music Industry, put together by UK agency Venture Harbour, found that those are the Top 3 topics to generate social sharing and backlinks to the author’s site.
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This is not a surprising finding to me. I’ve tried to write on some issues that I felt were intelligent and important and even downright helpful to the artists and the industry. Yet these posts seldom get close to the traffic I receive when I talk about Spotify royalties.

In a lot of ways, this is a variation of the “Culture Of Fear” that permeates news broadcasting. If you watch the evening news, you’d think we’re living in some of the most violent and dangerous times. Instead, Chicago has the fewest murders since 1965, New York’s murder rate is the lowest since the 50s, and that we are likely living in the least violent time in mankind’s history.

This is not to say we should be complacent about artist rights and royalty rates. This is the music business, after all. It’s just that in the aggregate whole, things are much better than what pundits are saying. It just seems that it’s in their best business interest to continually tell you otherwise.

MORE SONGS ARE SELLING

imageLast week, Bob Lefsetz extrapolated information from the new book by Anita Elberse entitled “Blockbusters: Hit-Making, Risk-Taking, And The Big Business Of Entertainment” in a blog post entitled “The Most Important Thing You Will Read All Day”. While Bob just quoted an extended passage from the book, the intention is stated in the final sentence of the first paragraph:

The trend is clear: as the market for digital tracks grow, the share of titles that sell far too few copies to be lucrative investments is growing as well. More and more tracks sell next to nothing.

The data is pretty clear and the inference is certainly correct. The share of tracks that sold fewer than 100 units grew from 91% to 94% from 2007 to 2011. Based on the overall number of tracks released in those years, the number of tracks that sold less than 100 units more than doubled, growing from 3.55 million tracks in 2007 to 7.5 million tracks in 2011. The number of tracks that only sold one copy also increased dramatically, going from just under a million in 2007 to over 2.5 million in 2011. Clearly, the inference is that getting involved in music is a fool’s errand because the odds are stacked so much against you.

But the title of this article is that MORE songs are selling. So how can this be? The main reason is because the numbers in this article specifically favored the huge enormity of songs selling under 100 copies and the relative few blockbuster songs that sold over a million. If you extrapolate the number of titles that sold over 100 copies from the percentage data (an admittedly low benchmark), the number of songs sold also increased 37% from around 350,000 titles in 2007 to around 480,000 titles in 2011. In a lot of ways, if you know what you’re doing, the chances that you sell at least a modest something has increased as the public is now comfortable with downloading.

The odds have gotten worse, but this is largely due to the number of artists entering the game. Once again, the real barrier to success is shown to be the competition amongst releases. If it was piracy, then it would be unlikely that we’d see an increase in the number of titles that actually sold. Instead, the number of titles that sold in meaningful amounts went up substantially.

What’s also happening is that distribution outlets such as Tunecore have lowered the barrier to entry so much that the market is flooded with releases put out by artists inexperienced in marketing. The net result is an enormous percentage of titles that fail to sell. On the other hand, if you’re willing to put in some marketing efforts to get started, you’ll vault into the top 5-6% of all releases, which is a pool that also continues to grow.

No wonder people like myself continue to be bullish on where the music business is headed.

DAVID BYRNE: GREAT MUSICIAN, TERRIBLE MATHEMATICIAN

The latest anti-Spotify editorial screeching around the internet is David Byrne’s editorial on why he’s taking as much of his music off Spotify as he can. As an artist who owns their music, he’s totally within his right to do so. His personal reasons to do so are ones I can certainly respect. However, his public forum explaining his reasoning is full of gross inaccuracies, misrepresentation and bad math. In fact, this isn’t even the first time he’s used bad math to prove a point. Believing Byrne’s anti-streaming diatribe can be harmful to a musician’s own future earning potential. Let’s look at the facts.

Most of the misinformation is found in the fifth paragraph where Byrne mentions several previous artist posts about streaming revenue. To correct each point:
Damon Krukowski’s payouts for “Tugboat”, a 25 year old song that was not originally a hit, largely focused on minuscule songwriting revenue, while Byrne is referring to royalties from the master recording. Once again, an artist uses most people’s lack of knowledge of the different revenue streams to forward an anti-streaming agenda.
• David Lowery’s widely-distributed blog post on Pandora also referred specifically to his songwriting revenue. See: previous bullet point. Plus, I debunked this here.
• The number of streams quoted by Byrne to make minimum wage for a group of four people comes from data that is actually four years old. Based on royalties rate my own label receives, the figure in 2013 would likely be around 75,447,280 streams a year. This is 68% lower than the figure Byrne mentioned, and while still a large number, the decrease is an indication that Spotify’s royalties are improving as adoption increases.
• Similarly, based on Byrne’s presumption of a 15% royalty rate, each Daft Punk member would earn close to $42,000 each for “Get Lucky”, not the $13,000 Byrne claims. But the 15% is likely a very low figure considering that Daft Punk’s record was the subject of a major label bidding war that certainly resulted in both a high advance as well as a higher royalty rate.

The rate that I used for the above math is $.00533 per stream, which is the blended worldwide gross royalty rate for Spotify that my label personally received for all recordings in a sample month from 2013. The rates for each song vary depending on how many plays are from subscription vs. non-subscribers. The rates also vary greatly from country to country, which can be as low as $.002 in countries such as Poland and Estonia, and get as high as nearly a full penny per stream in many of the Scandinavian countries with large adoption rates.

One of the issues artists need to wrestle with in a new streaming world is their ability to attract a global audience. If our music catalog were only attracting a US audience on Spotify, our rate would actually be lower than our overall royalty average. However, we’ve been able to have music that attracts people throughout the world which raises our overall rates. This also occurs with iTunes revenue, which typically pays out at higher rates in first world countries than the US does.

Another issue is the need to have a large body of work. I have been an advocate of artists releasing more music more often. This both creates more opportunities for revenue as well as more possibilities for a song to become popular enough to sustain an artist. Complaining about Spotify’s royalty rates and focusing on individual song examples rather than whole artist catalogs is a classic misdirect. It’s similar to when news media describe a trend, yet focus on one individual’s story (as outlined in Barry Glassner’s great book ‘The Culture Of Fear’). Saying that each member of Daft Punk only got $13,000 for one hit song sounds scary. Yet add in the streams from the other tracks from the new album, and then add in the new Spotify streams for tracks from previous albums that almost always occurs with new hits (not to mention the correct math). Even with Byrne’s likely incorrect assumption of a 15% royalty rate, each member of Daft Punk is likely to be receiving over $500,000 this year. Each. Just from Spotify. Music royalties are part of the reason that Celebrity Net Worth cited the duo as the #2 richest electronic DJs in the world.

But part of Byrne’s doomsday scenario is a world envisioned by Spotify dominance. For my label, Spotify only represents 15% of all digital revenues, and gets smaller when other income streams are factored in. Logic would dictate that as Spotify’s percentage of sales increases with us, so would the amount of streaming because they also would bring along more music listeners. In the last year, this has indeed been the case.

Byrne, however, points out that he’s concerned about tomorrow’s revenues, stating that if Spotify’s growth continues, there won’t be other sources of revenue. A very similar argument made around similar technology shifts such as the advent of radio. Yet my royalty statements include revenues from brands such as EMusic, Nokia and Myspace, all brands that have been left for dead. The future will certainly see the royalty percentage mix shift, but it will likely be one where some people stream, some download, and they’ll all do it on a variety of different types of sites around the world.

The real issue is the larger question that Byrne addresses about the overall effect free and cheap streaming has. But the issue is really about supply and demand. Spotify as a whole is paying out hundreds of millions of dollars yearly, which is a net positive for recorded music. But even with the claim that 4 million songs go unplayed, there’s still tens of millions that are, which means the collective pie of revenue is spread much thinner than it ever has. The good news is the new music business allows more artists in. The bad news is that most get paid less because the pool doesn’t grow proportionally.

The fundamental issue an artist has to deal with is not one of royalty rates, but this simple concept of supply and demand. If any service, download or streaming, is going to have millions of tracks at your fingertips, than there is an overabundance of supply. The only way to make money is to increase the demand by a significantly higher factor. By this simple definition of business, music is in the volume business game. Those who are able and willing to play that game are reaping enormous benefits.

The other way to combat supply and demand is by creating diversified revenue streams. Each artist I’m currently working with has a different mix of what those streams look like. But the important thing is that while there may be one dominant player in one revenue stream, that doesn’t mean that this is all recorded music revenue streams. Our label generates revenue from download sales of singles, download sales of albums, streaming transactions on demand, streaming transactions in radio players, online licensing revenue, sync revenue, performance revenue, direct sales from band websites, road sales, advertising, and even physical product.

So, in a way, I’m thrilled when artists choose to take their music off Spotify. Because in a small way, this limits the number of songs that may take attention away from songs in my catalog. We are still in the throes of a very disruptive period that is clearly resulting in winners and losers. There are many successful artists, both commercial and creative winners, who are not complaining about royalty rates. They are focusing on making amazing music that is desired by many people the world over. Rather than Byrne’s comment on the internet sucking “all creative content out of the world”, what’s actually happening is artists are finding even more creativity to succeed. Because that’s what artists do. Those that focus on improving their craft and growing their body of work are finding varying levels of success. At that point, the math starts to take care of itself.

MUSIC DEPRECIATES THREE TIMES AS FAST AS MOVIES

Screen Shot 2013-07-23 at 9.06.57 PMHow fast does music depreciate? Try three times as fast as movies. This isn’t quantified by me just making a random statement. This is actually what the US government is saying.

Now, before we get to the “huff-and-puff” part that the internet likes to flame over, let’s talk about the positive. Starting on July 31st, the U.S. Bureau of Economic Analysis will be restating and recalculating how they come up with the US gross domestic product (GDP). For the first time, they will actually take into account artistic creation (defined mostly as movies, TV, books & music) as part of the economic engine of the United States. They are estimating that it all adds up to about 0.5% of the US GDP, which is $70 Billion dollars. For the government to recognize creatives in this fashion is a huge deal, and will probably result in benefits that we don’t even realize yet.
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But what really caught my eye in the deck from the May briefing and the Businessweek article is the annual depreciation value. Read More…

2013 MIDYEAR US SALES TRENDS: WHAT DOES IT ALL MEAN

The release of music sales stats halfway thru 2013 are always time for analysis. This year offers some figures that could probably bolster many people’s arguments, depending on how you’d like to skew the data.

The main highlight is that in the US, digital singles have declined 2.3% year-over-year. Even more interesting is that the Q1 decline was 1.34%, while it was 3.3% in Q2. Many people will suggest that streaming usage is finally eroding single sales. This may indeed be the case, but where is the erosion taking place? It’s actually in the middle and the bottom. For while sales are down, the number of titles selling over 1 million copies actually increased 8.5%. The biggest selling title, “Thrift Shop”, sold over 5 million copies, which is similar to last year’s top seller by this point (Gotye).

Certainly, streaming is likely to erode sales in the future. Where this is eroding sales in the present is in the niche and fringe songs, not in the hits. If anything, what also seems to be happening is that the gap between revenue of hits and non-hits appears to be widening. This can be occurring due to a multitude of factors. Streaming availability is one, but so is the abundance of song titles available to the public. As we head to a point where digital single sales are likely plateauing, it becomes increasingly clear that the hits are taking up an ever-increasing percentage of this pie.

Where the niches may be finding success is in the digital album sale. The one sales increase stat so far this year is digital albums which are up 6.3%. Overall album sales are down, but that could be due to an increasingly shrinking shelf space at retail amidst tighter ordering of physical product. This suggests that while niche single sales might be down, niche album sales of quality acts might be on the rise. This can certainly explain recent career-strong debut weeks for acts as varied as Queens Of The Stone Age, The National and Wale. On top of that, the albums that have sold “gold” (500,000 or more) in the first 6 months of this year also increased 36%.

Certainly streaming will continue to affect sales numbers as they become more pervasive. For the moment, though, the hits increasingly take up a bigger piece of the pie and it becomes more incumbent to hit those benchmarks in order to make a profitable music venture.

Another bright note…for the second year in a row, the top selling single is a song developed independently by the artist and then upstreamed to a major.

PANDORA ROYALTIES: THE REAL ANSWER

Pandora royalties came under fire once again last week, with a firestorm of blog posts pointing a ton of virtual fingers. Facts become “facts” as each side is skewing the story to their benefit. All sides should take equal blame for misrepresentation. The truth is that online plays equal audience impressions, and this disparity causes confusion on both sides. When you do the actual math, Pandora is likely paying songwriters less than other broadcasters, but also has a royalty at an enormously higher multiple compared to others for their “all in” rates. Yet even if royalty disparities get fixed, it won’t solve the issue of low payments to artists and songwriters because Pandora’s enormous catalog means tiny slices to a greater range of creators.

For those who haven’t been following, here’s what happened:

Read More…

SINGLES DEFINE THE MODERN MUSIC BUSINESS

Singles versus albums. This has been a big music business debate for the last several years. It remains such a debate, that I’m literally doing just that this afternoon at New Music Seminar in New York City in a panel entitled “The Great Debate: Singles Vs. Albums”. I expect a very spirited discussion about this, but I also sit and wonder…what’s the debate?

In the scope of music history, the album is a blip on the radar. When some of the first music was created, our ancestors didn’t decide to sing an entire specific body of work around a fire. Early church leaders didn’t ask people to sing a hymnal front to back, but instead cherry picked songs to sing that were appropriate to that day’s service. So why should we expect the album to be so special that it’s supposed to permanently remain in the music business?

Maybe it’s a question of money vs. influence. There’s no question that the recorded music business has lost money in the last decade, and that most of that has come from lost album sales. Yet look at the influence that music has gained in the process. We used to be amazed when an album sold 10 million copies worldwide. Now, several songs sell that many worldwide every year. We now see songs get 100x that influence by hitting a billion streams on YouTube.

If you influence people, the money will follow but not the other way around. Today, that’s exactly what is happening. Because once these songs reach influential levels, they have far more revenue streams than ever before. In addition to sales, these songs are streamed heavily on internet and satellite radio generating revenue. Their official videos make millions on YouTube and Vevo. Millions more come in when the songs are used in regular people’s viral videos and remixes. Sync uses are more prevalent and also adding more and more dollars into the coffers.

Even in their still relative infancy, subscription services such as Spotify and Rdio contribute both dollars and influence. In the last month, one of the biggest songs in the world, Macklemore’s “Can’t Hold Us”, was streamed over 25 million times on Spotify alone.. This is on top of being a Top 10 selling single on iTunes in 14 countries as of this writing. . Spotify streams not only add influence, but also additional money to the bottom line. Compare that with Daft Punk, the biggest worldwide album release in the last month. Less than 40% of the 28 countries that Spotify is in has their album tracks in the Top 15 most played songs, even though the single is. And this is the only album in the last month to have any serious representation on Spotify streaming worldwide.

This newly diverse revenue stream is causing all those involved with songs to make money like never before. Last year, writer/producer The-Dream stated that he made around $15 million for co-writing Rihanna’s “Umbrella”.. And he was one of four writers on that record. While the album did sell 6 million plus copies worldwide, as a 1/4 writer of the song The-Dream’s take on that is estimated to be around 1% of his total income from the song. This makes 99% of the revenue to be likely derived from single-based activity, not album based.

There’s still a place for the album for those artists still committed to making a suite of thematic musical works. The album still has a vital place in the overall diverse revenue stream for an artist. But its power has diminished so greatly that for most artists it is no longer relevant. When you look at usage patterns on radio, television, online and on portable devices, it’s clear that the pathway to the hearts, minds and wallets of music fans is thru the single.

BILLBOARD HOT 100 COUNTS YOUTUBE VIEWS, AND BOT VIEWS WILL SUFFER

On Wednesday February 20th, Billboard added YouTube views to their Hot 100 methodology which radically changed the makeup of the esteemed chart. The most immediate change came at the top, where “Harlem Shake” by Baauer, the viral sensation, debuts at #1. It marks the first time that a relatively unknown artist debuts at #1 with very little radio airplay to aid it. Given the ubiquity of the song last week, with everyone from the Today Show to college swim teams to the Norwegian Army joining in, it feels culturally right to see the song at the top spot. As many writers have noted, this is probably the biggest change to the Hot 100 chart in a very long time.

But why did it take this long to add YouTube (and VEVO) views to the chart? With numerous videos being seen north of 100 million times, YouTube’s influence on pop culture has been clear for a few years. At a minimum, it’s been two years since the game changing Rebecca Black video. Shouldn’t Billboard have been counting YouTube all along?

The likely reason why they haven’t is because YouTube numbers have to be trustworthy if they are going to influence the bellweather singles chart. Simply scraping numbers from YouTube is not valid as it doesn’t account for country discrepancies within a US based chart. But it also doesn’t account for activity from bots, a practice many labels and artists have used to varied success over the last few years.

In advance of the Hot 100 announcement, YouTube stepped up its enforcement of its Terms Of Service forbidding bot views. The most noticeable result was a 2 BILLION view decrease in major label videos 2 months ago, but similar audits of videos at all levels have been ramping up for months now. With a chart influence now on the line, both parties are more incentivized to stay honest. The timing of these events feel like more than coincidence, and certainly suggests a concerted effort to increase YouTube’s credibility for chart eligibility. As such, I would anticipate enforcement to get more strict, with account deletions a likely punishment for bot activity.

Last week’s #1 was “Thrift Shop”, another song that broke out of YouTube. Getting the credit as the “breaking spot” for back to back chart-toppers is crucial to reinforcing and growing YouTube’s brand. Having more credible numbers is certainly good for everyone in the long run. For those who think they can do an end-run around the system, it feels very likely that this one is closing rapidly.