TikTok is upending the music industry and Spotify may be next

Zoe Lerma was working at a bagel shop in Los Angeles in early 2020 when she first heard Benee’s song “Supalonely.”

She liked it so much that she choreographed a dance to the tune and posted it on TikTok. Since then, her video has garnered more than 45 million views, making her a TikTok celebrity and helping Benee become a global sensation.

As of September 2, “Supalonely” has appeared in more than 5.7 million videos by thousands of TikTok users. Benee performed two sold-out arena shows in New Zealand in October 2020 and was nominated for New Artist of 2020 at the People’s Choice Awards. Her hit song has gone platinum, meaning it has sold the equivalent of 1 million copies in eight countries and has more than 2.1 billion streams across all platforms.

“When it started to take off on TikTok and take off on TikTok, I would hear it on the radio or, you know, hear it in stores,” Lerma, now 20, said in an interview with CNBC. “I would hear it anywhere.”

Far from her days in a hot kitchen in Southern California, Lerma now has 6 million followers on TikTok and makes a living promoting music on the app and using her influence to partner with brands. She’s also part of TikTok’s creator fund, which pays popular contributors when their videos take off.

TikTok, owned by China’s ByteDance, is turning the music business upside down as it increasingly becomes a hit-making machine. Artists can go from obscurity to global superstardom thanks to a viral video that can be posted by a complete stranger. Even Fleetwood Mac’s “Dreams” re-entered the charts in 2020 after a clip of a man drinking cranberry juice on a skateboard went viral on the app.

Record labels, artists and creators are trying to figure out how to win in the new TikTok-dominated world and make sure they aren’t left behind.

“If a song goes viral on TikTok and the artist is unsigned and gets millions of streams on Spotify as a result, labels are scrambling to sign that song or that artist,” said Tatiana Chirisano, music industry analyst and consultant at Midia Research. “They’re obsessed with expanding their market share and making sure they don’t lose any market share to independent artists.”

The importance of TikTok is undeniable. A year ago, the app surpassed 1 billion monthly users. Last month, a Pew Research Center survey found that 67% of US teenagers use TikTok, with 16% saying they use it almost constantly.

The rest of the social media industry is trying to catch up. Facebook and Instagram parent Meta, for example, is putting money into its short video feature called Reels.

Although TikTok’s financials are still confidential because ByteDance is privately held, industry analysts say the app is gaining a larger share of the online ad market as brands follow suit.

In 2021, more than 175 songs that are popular on TikTok are on the Billboard Hot 100, twice as many as the previous year, according to TikTok’s annual music report.

“It’s a household name and it’s really effective,” said Mary Rahmani, a former TikTok executive who last year founded the agency and record label Moon Projects. “It’s still the No. 1 platform that leads to streams.”

In terms of the current flow of dollars in the music industry, TikTok’s main influence lies in its ability to drive listeners to services like Apple Music and Spotify.

In 2021, Spotify paid out more than $7 billion in royalties, according to a company report. The company pays record labels, artists and other rights holders based on their “streamshare”, which is calculated monthly. An artist who gets one out of every 1,000 US airplays for the month would bring in $1 out of every $1,000 paid to rights holders from the US royalty fund.

TikTok is positioned to cash in on its role as a tastemaker in the music industry, but the company hasn’t revealed its plans. But there are some hints at the parent company’s thinking.

In May, ByteDance filed a trademark application for “TikTok Music” with the US Patent and Trademark Office. The service will allow users to play, share, buy and download music, according to the filing. A TikTok spokesperson did not provide any additional details and sent CNBC a general statement about the company’s role in the music industry.

“With hundreds of songs generating over 1 billion video views and dozens of artists signing record deals as a result of the platform’s success, TikTok is starting trends that reverberate across culture, industry and charts,” the statement said.

TikTok currently has partnerships and licensing agreements with major labels such as Universal Music Group, Warner Music Group and Sony Music Entertainment, all deals signed between 2020 and 2021. Midia Research’s Cirisano said artists are not paid directly on based on how often their music is viewed or used.

Music is not a new market for TikTok. In 2017, ByteDance acquired a startup called Musical.ly, which was a popular app that allowed users to create videos using other people’s music. ByteDance merged the service with its own TikTok app next year.

Singer-songwriter Jay Sean, whose hit single “Down” topped the Billboard charts in 2009, started posting on TikTok in 2019 as a fun way to express himself and be creative. He now has more than 460,000 followers on the app and said he is exposing it to the younger generation.

“I’m reaching a whole new fan base,” Shawn said in an interview. “I’ve been making music for 20 years, so some of them were just kids when my music came out and they started discovering my back catalog through that. So it’s really quite a fascinating tool for that.”

Like many major labels and managers, Sean also uses TikTok as a tool to discover new artists. He signed singer Véyah after finding her on TikTok, where she has more than 470,000 followers.

“Now she’s going from this girl who used to sing in her bedroom on TikTok to being in L.A. working on an album and working with mainstream huge producers who have produced mega hits for so many big artists,” Shawn said .

Jeremy Sklar, co-founder of management, media and production company The Heavy Group, has warned of the risks of skyrocketing fame that can come with TikTok’s virality. Not everyone is prepared for what comes next, he said.

“Once a label signs you for $1 million, the pressure to perform overwhelms the art, so getting a deal too soon can derail what would otherwise be a beautiful, long career,” Sklar said.

Even established artists face challenges on TikTok.

Artist Halsey recently complained about the pressure to post on the app, writing in a TikTok video: “My record company says I can’t release [new music] unless they can fake a viral tiktok moment.”

Halsey’s label, Capitol Music, later released a statement on Twitter pledging support for the singer.

Chirisano said the artists relied on their label for marketing. But with the fame of TikTok, they now do much of their promotion themselves.

“It’s just an extremely demanding thing for artists,” Cirisano said, “on top of everything else they’re already doing,” which is frustrating for many of them.

But there are benefits. Some artists can turn their TikTok following into greater wealth without the help of a label, a path that was nearly impossible before social media.

Loren Medina, owner of Guerrera PR, said music marketing is “a different world” than it was 10 years ago. Medina, who worked at Sony from 2005 to 2009, now represents cutting-edge Latin artists such as Jesse Reyes and Omar Apollo. Historically, she said, for artists to succeed, they had to be a priority for a label that would be willing to back them financially.

“It was so different,” she said. “We really had to hire street crews to go out and give people flyers, give people CDs. It was a lot more face-to-face, hand-in-hand.”

Labels are still very important in the industry, but they are “not the end all,” she said. Artists are now using the huge audiences they reach on TikTok to create a dedicated fan base that can eventually buy a lot of merchandise and fill bars and concert halls.

One of Medina’s clients is Cali Uchis, whose song “telepatía” exploded on TikTok and now has over 700 million streams on Spotify. Although Uchis had an established career before going viral, Medina said the app’s exposure is what ultimately propelled her to global fame. She won Best Latin Song for “telepatía” and Best Latin Female Artist at the 2022 Billboard Music Awards.

“Her career blossomed, really, really, really blossomed because of one song on TikTok,” she said. “It wasn’t going to be a single, and so we had to turn around and kind of just restructure everything and make that song the focus, because it exploded.”

Services like Zebr have sprung up to try to streamline the work that comes with TikTok celebrity. Record labels and artists can use Zebr to pay creators to use a piece of music in their content. The app allows creators to choose which campaigns they want to work on and manages the payment process.

Zebr CEO Josh Deal, who was named to Forbes’ Europe 30 under 30 entertainment list this year, said labels and artists have become much smarter with their approach to marketing on TikTok.

“For a long time, they were just throwing money at agencies and hoping they would market it to their influencers,” he said. “Now the strategy is becoming much more sophisticated. They understand why rails break down and how they break down. And it’s really just reverse engineering.”

From choreographing the hit video for “Supalonely,” Lerma has partnered with artists and labels to promote music. She is hired to work on specific songs, but retains a great deal of creative control over what she publishes.

“They don’t really tell you what dance to do or what they want it to look like,” Lerma said. “You kind of just get your own freedom with what you want to do.”

WATCHING: The streaming business is inherently profitable