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Digital Music Finally edged out CD's for the first time in 2014 as Streaming Music takes 32% of the Industry's Revenue

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Last Friday we posted a report titled "Apple in Talks with Taylor Swift and other Major Artists to Bring Exclusive Content to Apple's new Beats Music Service." The battle in the music industry is to over time kill off the freemium streaming music services so that artists could make more money. With the reinvented Tidal music streaming service launching last month, Apple wanted to step up its game by trying to sign on exclusive content from Taylor Swift and other artists. This is likely to be a major trend going forward. In a new report published today, we're learning that revenue from digital-music downloads and subscriptions edged out those from CDs for the first time in 2014, holding overall sales steady at about $15 billion globally. Our report presents you with more statistics and various key elements that were found in this major report from the music industry. 

 

Sales of CDs and other physical formats declined 8%, to $6.82 billion, while digital revenue grew nearly 7%, to $6.85 billion, the International Federation of the Phonographic Industry said in a report on Tuesday. Each of those represented 46% of overall music revenue. The other 8% came from sources such as radio airplay and licensing songs for television shows and films.

 

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Streaming services such as Spotify AB and Apple Inc.'s Beats Music, which have been controversial because some artists believe they don't pay enough royalties, nonetheless exhibited growing importance to the industry. Online services that let users listen to music at no cost with audio ads, or for a monthly fee, grew a combined 39% from 2013.

 

Subscription services generated $1.57 billion, or 23% of digital revenue; ad-supported services were 9% of digital revenue. Their combined 32% of digital revenue is a sharp increase from 2013, when they represented 23% of digital revenue.This is why Apple went out and acquired Beats Music and why they're going to put an incredible push into streaming music in the second half of this year.

 

Download sales declined slightly by eight percentage points from 2013, but were still 52% of digital revenue.

 

Key Trends in Digital Music

 

The International Federation of the Phonographic Industry published their full report today. The following information is in-part from their report, and more specifically, from a segment titled Key Trends in Digital Music.

 

According to the IFPI, "Consumers engage with licensed services. Exclusive IFPI-commissioned research demonstrates consumer engagement with licensed digital music services is high. The study, undertaken by Ipsos across 13 of the world's leading music markets in 2015, shows 69 per cent of internet users accessed a licensed digital music service in the last six months. Significantly more people say that they use these types of services more than they did 12 months ago, compared to those who say that they use them less.

 

Awareness of licensed services, such as iTunes, Spotify and YouTube, is high and some 38 per cent of respondents agree strongly or agree a little that they are happy to access music online, rather than own a CD or digital file.

 

However, IFPI estimates that 20 per cent of internet users (down from 26 per cent in 2013) still regularly access unlicensed services such as P2P file-sharing networks, cyberlockers and aggregators.

 

The rise of streaming: The defining positive characteristic of international music markets in early 2015 is the continued surge in consumer uptake of streaming services. Much of this is driven by young consumers with little or no experience of owning music and, therefore, less geared to traditional ownership models.

 

Potential for growth: Within the streaming sector, there is substantial untapped potential for growth within the paid-for category. The Ipsos research shows that 35 per cent of consumers have accessed free music streaming services in the last six months, compared to 16 per cent using paid-for music subscription services. While consumer use of free and paid-for services varies markedly between countries, there are showcase markets, such as Sweden and South Korea, proving that consumers will pay in large numbers for premium music subscription.

 

Bundling partnerships: Leading telecoms companies are now offering bundled music services to their customers as standard. These partnerships combine the marketing muscle and billing infrastructure of the telcos with the catalogue and curation of digital music services. Such offerings are playing a significant role in opening up emerging markets.

 

New payment models: Digital services are increasingly tailoring their offerings to reach different segments of consumers. At one end of the spectrum, UK service MTV Trax offers users access to up 100 tracks for £1 (US$1.49) a week, while at the other Deezer Elite offers users a high quality audio experience for US$20 a month.

 

Artist royalties: The rise of streaming services has also prompted wider discussion around the issue of artists' royalty payments in the digital environment. In order to better inform this discussion, IFPI conducted research in 2014 to obtain an accurate picture of how royalty payments have changed as the market has shifted from physical sales to digital channels. Industry data compiled by IFPI from the three major companies, covering local sales for locally signed artists in 18 major markets outside Japan and the US in the five year period to 2014 shows that while sales revenue fell 17 per cent, total artist payments – in the form of royalties and unrecouped advances – declined much less in real terms (down 6 per cent) and increased significantly as a share of sales revenue, by 13 per cent. Over the five year period, the data shows that total payments by record companies to local artists totalled more than US$1.5 billion across the 18 markets.

 

Some of the charts and graphics from this report are presented below. All graphics can be enlarged if you click on them.

 

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Addressing the Value Gap

 

According to the IFPI report, "The music industry has made the changes needed for it to continue leading the creative industries in the digital world. Yet further steps are needed to secure the industry's long-term success. Above all, there is a "value gap" which arises from the application of current legislation and has created a very significant mismatch between the value that certain digital platforms extract from music, and the value that is returned to rights owners. This legislative issue is the primary reason, along with piracy, why, despite offering consumers better choice, access and value than ever before, the recorded music industry has not achieved sustainable year-on-year revenue growth.

 

An illustration of this can be seen in comparing the share of revenue derived by rights owners from services, such as Spotify and Deezer, and those derived from certain content platforms, like YouTube or Daily Motion. IFPI estimates music subscription services have 41 million paying global subscribers, plus more than 100 million active users in their "freemium" tiers. This sector generated revenues to record companies of more than US$1.6 billion in 2014. By contrast, YouTube alone claims more than one billion monthly unique users and is thought to be the world's most popular access route to music. Yet total global revenues to record companies generated by certain content platforms including YouTube amounted to just US$641 million in 2014, less than half the total amount paid to the industry by subscription services such as Spotify and Deezer.

 

Frances Moore, chief executive of IFPI, stated that "The value gap is a fundamental flaw in our industry's landscape which sees digital platforms such as Daily Motion and YouTube taking advantage of exemptions from copyright laws that simply should not apply to them. Laws that were designed to exempt passive hosting companies from liability in the early days of the internet - so-called "safe harbours" - should never be allowed to exempt active digital music services from having to fairly negotiate licences with rights holders. There should be clarification of the application of "safe harbours" to make it explicit that services that distribute and monetise music should not benefit from them."

 

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