IFPI and RIAA 2013 Music Sales Figures: First Take

The IFPI and RIAA today released their annual music sales numbers.  Though there are positive signs, overall they make for troubling reading 

• Total sales were down 3.9%.  Based on 2012 numbers the trend suggested that 2013 revenues should have registered a 2% growth, so that is a -6% swing in momentum.
• Digital grew by 4.3% which was not enough to offset the impact of declining CD sales, which has been the story every year since 2000 except last.
• Download sales declined by 1%. Continued competition from apps and other entertainment, coupled with subscriptions poaching the most valuable download buyers is finally taking its toll.
• Subscriptions up by 51%: An impressively strong year for subscriptions but not enough to make the digital increase bigger than the physical decline on a global basis nor in key markets, including the US.

Global numbers of course can be misleading and there is a richly diverse mix of country level stories underneath them, ranging from streaming driven prosperity in the Nordics, through market stagnation in the US to crisis in Japan – where revenues collapsed by 16.8%.  The Nordic renaissance helped push Europe into growth but data from the RIAA, show that total US music revenues were down a fraction – 0.3%.  US download sales were down by 0.9% while subscriptions were up an impressive 57% to $628 million.

On the one hand this shows that Spotify has managed to kick the US subscription market into gear following half a decade or so of stagnation.  But on the other it shows that subscriptions take revenue from the most valuable download buyers.  This backs up the trend I previously noted, that streaming takes hold best in markets where downloads never really got started.  Thus markets like the US with robust download sectors will feel growth slowdown as high spending downloaders transition to streaming, while in markets like Sweden where there was no meaningful download sector to speak of, subscriptions can drive green field digital revenue growth.

The Download Is Not Dead Yet

Though subscriptions now account for 27% of digital revenue, the value trend obscures the consumer behavior trend.  For Spotify’s c.9.5 million paying subscribers (or 6 million last officially reported) Apple’s installed base of iTunes music buyers stands at c.200 million (see figure).  The IFPI report that there are now 28 million subscription customers globally.  In the US and UK this translates into 4 or 5% of consumers. Subscriptions do a fantastic job of monetizing the uber fans, just like deluxe vinyl boxsets and fan funding sites like Pledge do so also.  But they are inherently niche in reach.  This is why downloads remain the music industry’s most important digital tool.  Downloads are the most natural consumer entry point into digital music, and if anyone else had been able to come close to matching Apple’s peerless ability to seamlessly integrate downloads into the device experience, then the sector would be much bigger than it is now.

Do not confuse this with being a luddite view that streaming and subscriptions are not the future, they are, but there is a long, long journey to that destination that we are only just starting upon for most consumers.   And before that there is a far more important issue, namely how to get the remaining CD buyers to go digital.

Sleepwalking Into a Post-CD Collapse

Last year the IFPI numbers showed a modest globally recovery but despite the widespread optimism that surrounded those numbers I remained cautious and wrote that it was “a long way from mission accomplished.”  My overriding concern then was the same as it is now, namely that the music industry does not have a CD buyer migration strategy and it desperately needs one.  So much so that unless it develops one it will end up sleepwalking into a CD collapse.   In fact I predicted exactly what has happened:

“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?

The IFPI have stressed the fact that Japan’s dramatic 15% decline was the root cause of the global downturn.  While this is largely true – without Japan included global revenues still declined 0.1% – Japan’s problems are simply the global industry’s problems squared.  In 2012 a staggering 80% of Japanese music sales were physical but despite the digital market actually declining 4 successive years total revenues increased 4%.  As the world’s second biggest market, when Japan sneezes the global industry catches a cold.   But expect Japan to continue to drag down global revenues and also keep an eye on Germany.  Germany saw a modest 1.2% increase in revenues in 2013 but only 22.6% of sales were digital.  The most likely scenario is that Germany will follow the Japanese trend and go into a CD-driven dive in 2014 and / or 2015.

In conclusion, there is still cause for optimism from these numbers.  Subscriptions are going from strength to strength, at least in revenue terms, and the download sector remains robust in buyer number terms.  But unless the CD problem is fixed, the best both those digital revenue streams can hope to do is consolidate the market around a small rump of digital buyers.

The Curious Case of the South Korean Music Market

(NOTE: you can download and keep this blog post as a pdf report by clicking on the report image at the bottom of the page)

Psy’s ‘Gangnam Style’ might have catapulted the South Korean music market into the global consciousness but to industry observers like myself it has long been a market of particular interest.  Being the first major music market to pass the 50% digital mark – in 2006 – South Korea has been held up both as a digital trailblazer and as a canary in the mine for the global music industry.  Strong growth over recent years hinted at a brighter international future, but just as ‘Gangnam Style’ was propelling South Korean music to unprecedented global heights the South Korea music market went back into decline.

The South Korean music market is one of contradictions and idiosyncrasies, but crucially it also holds many lessons that the global music market would do well to pay heed to

Bucking Global Trends

According to the IFPI’s invaluable Recording Industry in Numbers, South Korean recorded music revenues declined by 5% in 2012, breaking a run of four years of successive growth. But unlike the global market, it wasn’t the CD that was to blame for the fall but digital.  Physical revenue grew by 19%, the third successive year of growth, while digital actually declined by 25%, dragging the entire market down with it. The mirror opposite of the global music market where 7% digital growth wasn’t enough to prevent a 5% physical decline drag down total revenues by 1%.

2012 wasn’t the first year that South Korea stood out from the pack though, indeed the last 13 years have been vastly different from the global market (see figure):

• Revenue collapse: between 2000 and 2005 South Korea lost a whopping two thirds of its value while the global market shrunk by a more modest 18%
• Digital crossover: in 2006 South Korea became the first major music market to become more than 50% digital (the 2012 global rate was just 38%)
• Subscription dominance: a vast 74% of digital revenues were subscription in 2012, having hit 22% back In 2008 (the global rate was just 20%)
• Physical boom: physical revenues have risen all years but one since 2007, compared to a global market decline every year since 2000

A Tale of Booming CD Sales and Tumbling Download Revenues

There is no single explanation for the unique picture that South Korea’s last 13 years of music history paints, but there are a few key factors:

• Piracy: piracy is of course just one contributory factor to the downturn in music revenues (albeit a crucial one) but the effect was felt particularly keenly in South Korea.  The South Korean government was an ardent supporter of the telco sector in the 1990’s and early 2000’s, resulting in some of the best high-speed broadband infrastructure on the planet.  However this support came at the cost of the government effectively turning a blind eye to rights holder concerns.  Unsurprisingly piracy boomed with file sharers and networks alike operating with near impunity.   South Korea became a perennial fixture on the US Trade Representative’s piracy watch list but finally the government started to redress the balance from 2007/8, introducing new copyright legislation, including a graduated response initiative in 2009.  And since 2007 the market has grown by an impressive 58%, nearly reaching 2000 levels by 2011.  But just how much of this can be attributed to government action is open to question as music revenues had already grown by 84% in 2006 alone.   (The rate of growth in 2006 is however skewed by the fact digital numbers were not reported in prior years).
• Subscriptions: the central force in South Korea’s digital market is SK Telecom’s MelOn subscription service which was the first in the world to amass a million paying subscribers and now numbers 2 million paying users and 18 million registered users.  MelOn was competitively priced (less than $3.00) and included mobile downloads from the start, enabling it to have immediate impact.  South Korean subscription revenues more than doubled between 2009 and 2012.  Rights holders have not been entirely happy though, including Lee-Soo Man (founder of K-Pop power house SM Entertainment) who claimed that 1 million tracks consumed on MelOn do not cover the costs of making a music video for a single.  The pressure resulted in government intervention and in January 2013 MelOn doubled its subscription rate to 6,000 won (about $5.60).  Time will soon tell whether the increased revenue per user is cancelled out by the likely decline in number of users.
• Download collapse: MelOn’s price hike of course came after 2012 digital decline, which instead was caused by a collapse in music download revenue, dropping by a staggering 71% in 2012.  The download collapse was the single biggest driver of the overall decline in revenue in 2012.  In fact, if download revenue had remained flat, total revenues would have grown by 6% in 2012.  Much of the decline is attributed to a tough year for another of SK Telecom’s properties, the social network Cyworld.  Once the dominant Korean network, Cyworld enables users to buy music tracks to personalize their profiles but it has struggled to compete against Facebook and spent 2012 bleeding users.
• Physical longevity: physical revenues have bucked the global trend, with 2012 revenues 128% bigger than their 2006 low.  This compares to a 14% rise for digital (though the 2012 collapse obviously skews the rate down). It is not a unique trend though, with Japan also experiencing a physical uptick in 2012. What links these two markets is the way in which the respective local pop sectors (K-Pop and J-Pop) have created ardently loyal fan bases that eagerly buy lavishly packaged CD products, often with merchandize extras, and frequently resulting in fans buying multiple editions of the same release.  Thus for all the surge in digital, the South Korean and Japanese pop markets have found a way to deliver unique, tangible value with physical products.
• K-Pop: though the success of K-Pop has been key to South Korean market growth there is growing criticism of this highly manufactured genre. Artists complain of being ‘contract slaves’ while others point to the huge concentration of power in the K-Pop talent agencies. A cultural critique is that this industrialized pop methodology places too heavy an emphasis on presentation over content, and too strong a focus on ‘safe bet’ lowest common denominators.  A clear echo of the American Idol and X-Factor phenomenon in the West.  Whatever its issues though, there is no denying that K-Pop is central to the resurgence in South Korean music revenues.

Lessons for the Global Market

South Korea is a truly unique music market and, just as with Japan, one has to tread carefully when attempting to project trends onto western markets.  But even with that caveat there is clearly much that can be learned from the South Korean experience:

• It is possible for music revenues to return to 2000 levels (if only for a fleeting moment)
• Subscriptions can reach significant scale when competitively priced (sustainability issues aside)
• Physical revenues can be given new impetus with smart product strategy (though don’t expect Westerners to start behaving like K-Pop fans)
• Concentration of any one segment of digital revenue in a single player can leave a market highly vulnerable

But perhaps most importantly of all, just like in the disclaimer of a financial services advert: music revenues can go up and down.  Even when a market eventually starts to grow again, don’t expect that to mean that the corner has been permanently turned.

To download a pdf report version of this blog post just click on the image.  You can find more free reports to download here.

 

Q1 UK Music Sales and the Role of the Post-Holiday Surge

Today UK music industry trade body the BPI announced the milestone of digital music revenues exceeding physical music revenues for the first time. At first glance the numbers are impressive but there is important context.  Although it might appear that the UK is closing the gap on US digital music ‘channel shift’ there still remains clear blue water.

Digital revenues surpassed 50% of total recorded music sales in the US last year, but almost reached that point in 2010, level pegging physical sales on 49% at year end (performing rights made up the rest according the IFPI).  By comparison full year digital revenues in the UK in 2011 made up 35.4% of total trade revenues according to the BPI’s (invaluable) 2012 Yearbook.

The BPI’s announcement today refers to 1^st quarter data alone.  In Q1 2012 digital accounted for 55% of income at £86.5 million, up from £70 million in Q1 2011 when it accounted for 46.1% of income.  The eagle eyed of you will have noticed that even in 2011 digital’s Q1 share was markedly above the annual total of 35.4%.  Underlying this disparity is the emergence of a new wave of seasonal purchase behaviour, what I call the Post-Holiday Surge.

Christmas / holiday period sales have always been by far the most important for record labels (highlighting why it is so important that someone somewhere gets digital gifting fixed – and iTunes vouchers are not the answer).  The advent of digital has created a second wave of festive spending: after the Christmas / holiday period we now see a surge in digital sales as people fill up their brand new MP3 players, tablets and smartphones with new music.  Although because Apple accounts for c.75% of digital download sales it is probably more accurate to restate that as ‘we now see a surge in digital sales as Apple customers fill up their brand new iPods, iPads and iPhones with new music from the iTunes Music Store’. (Other digital channels such as Spotify of course play a major role in digital revenue, but less so in the post-holiday boom).

This is why Q1 increasingly over reports for digital sales.  That is not to take anything away from the numbers reported by the BPI (it is a key milestone worthy of celebration) but it shouldn’t distract us from the fact that the UK remains somewhere between 1.5 and 2 years behind the US in terms of the shift to digital.  If trends continue at their current rate the end of year digital revenue share in the UK should hit somewhere in the region of 46% to 48% i.e. pretty much where the US was in 2010.

Digital sales are growing, but still not quickly enough across the entire year.  Full year 2011 UK trade data shows that physical income declined by £84.2 million while digital grew by £55.8 million (a net loss of £28.4 million).  In Q1 2012 a very different picture appears: year-on-year digital increased by £16.5 million while physical declined by £12.3 million, a net gain of £4.2 million.

The Post-Holiday Surge phenomenon illustrates where digital needs to be performing at now and for the whole year, namely growing more quickly than CD sales contract across 12 months of sales. In the UK, Q1 is digital’s quarter, now it needs to take ownership of the entire year just like it did in the US.