Note: this post has been updated to reflect some clarifications provided by IFPI. Thank you to Gabi Lopes IFPI for the guidance. Changes are noted below.
The IFPI today announced that for the first time ever growth in digital trade music revenues outpaced the decline in physical trade revenue. (The emphasis on ‘trade’ is important as we’re talking about revenue to the industry rather than consumer spending and so can include income such as advances paid by services in anticipation of sales.) That caveat aside, this is clearly a key industry milestone that has been a long time coming and is a sign of a digital market that is beginning to reach some degree of maturity. However this is a long way from mission accomplished, here’s why:
- 57% of music revenues still come from physical (see figure). With the exception of the US the few other markets that have surpassed the 50% digital mark (e.g. Sweden, India) are minor music markets in revenue terms. The simple fact is that the majority of music buyers still buy CDs. And to be clear, I said the majority of ‘music buyers’ still buy CDs, not the majority of ‘people’. So even forgetting for a moment the consumers lost to the music industry through piracy and other means, the majority of its core customers have still not seen reason enough to go 100% digital. And the interesting additional factor here is that the vast majority of people who are buying digital still buy some music on CD. So even among the vanguard of digital customers, the CD’s embrace is a lingering one.
- CD sales decline will likely accelerate. Among the top 10 largest music markets in the world CD revenue decline will likely accelerate markedly in the next few years. In France and the UK leading high street retailers are on their last legs while in Germany and Japan the vast majority (more than 70%) of sales are still physical. So the challenge for digital is can it grow as quickly as the CD in those markets will decline?
But there is hope. Streaming services present meaningful opportunity and despite the fact 9.99 is far from a mainstream price point (it is in the entire monthly spend of the top 10% of music buyers) it is a great way to deliver disproportionately high revenue from a small base of consumers. If that model can be effectively transitioned to the mass market via more telco partnerships like Telia Sonera and Cricket then we may just have a mass-market digital music proposition on our hands.
The Continued Dominance of Apple
But while premium streaming offers future potential, it is expected to total no more than 10% of 2012 digital revenues. By contrast, Apple is the here and now.
Downloads meanwhile are close to half of all digital revenues with about $3 billion. (The remaining 40% of digital revenue is a mixed bag, including ring tones, advertising and probably advances.) So with downloads by far the largest single digital revenue source Apple is the here and now – though we have to do some forensic work to find out just how big a role it plays…
The IFPI reports that the total number of paid downloads for 2012 was 4.3 billion units. (The IFPI have clarified that albums are counted as single units are not counted as total number of tracks). Earlier this month Apple reported reaching the milestone of 25 billion songs sold, with the previous reported number being 16 billion in November 2011. Allowing for January 2013 being a particularly strong month (following all those Christmas iPad and iPhone sales) that gives an annual sales number of about 6.6 billion. This translates translates to $3.9 billion which is about 70% of all digital revenues.
Which is still 2.3 billion more than the global total reported by the IFPI. The most likely explanation is that Apple’s February press release headline “iTunes Store Sets New Record with 25 Billion Songs Sold” was misleadingly incorrect – just as I suggested in fact at the end of this blog post – and that the actual numbers instead actually refer to ‘purchased and downloaded’ (i.e. a mix of the two).
Apple remains the biggest and most important game in town. And even without Apple getting into the streaming game this is still good new for the music industry. As I posted a few weeks ago, Apple’s growth in iPad and iPhone sales has driven an upsurge in iTunes downloads, which coupled with iTunes’ expansion into multiple new emerging markets will bring even further digital growth.
Finally, for some additional perspective, if you add Apple’s $2.6 billion to the $10.9 billion in CD sales, Apple and the CD combined accounted for 90% of music industry revenue in 2012. So for all the talk of streaming and new service innovation, in 2012 the CD and Apple remained the bedrock of music sales.