Is the UK the Canary in the Mine for Digital Music?

It is beginning to look like we are at one of the most important junctures in the music industry’s history since the dawn of the digital age.  Ever since the rise of Napster the music industry has navigated a number of tricky and outlook-defining decision points, such as: how to tackle piracy, whether to license to music services, whether to go DRM free, whether to support ad-supported, what to do with mobile?  But now there is an even bigger question which straddles all of those sub-factors: Is Plan A working and if not, what is Plan B?

It is easy to get the impression that the music market is moving towards being in a good place, that the corner is slowly being turned.  Indeed US sales, in volume terms at least, showed a modest upturn in 2011.   However when the Adele factor is stripped out of the equation, music sales across most markets, US included, look a lot less rosy.  But even leaving Adele in the mix, the UK – the world’s 4th largest music market – paints a concerning picture.

 

To illustrate the point, let’s compare the situation now compared to 2 years ago.  The view from 2010 (see chart) revealed full year 2009 trends of strong CD sales decline coupled with solid digital growth, but no enough to prevent overall market contraction. However the view from 2012 shows worryingly little progress.  Though CD sales decline did slow, the overall market continued to shrink (also H1 2012 numbers show an acceleration in CD decline once again). Most concerning of all though was digital: growth slowed not just in percentage terms but also in absolute terms, down from £75 million new digital revenue in 2009 to £63 million in 2011.  As a market grows it is expected that % growth slows too, but at this relatively early stage of the market’s development absolute growth should be continuing to grow too.

The UK music market has spent most of the last decade in decline but if the current metrics and dynamics remain in place the UK recorded music market could end up losing a cumulative total of £1.3 billion between 2012 and 2017, more than its entire current value (see figure two).  The good news is that digital will represent more than 70% of revenues, but that will be a larger slice of a much smaller pie.

There are many contributory factors (piracy, the lost music buyer generation etc.) but there are two observed trends which merit particular attention:

  • Digital buyer growth has slowed.  Of the total UK digital music growth between 2008 and 2011, just 31% came from new buyers, the remainder came from increased spend per buyer.  Increasing spend per buyer is of course an important strategic objective, but in these early days of digital music more of the growth should be coming from new customers, not from consolidation around the early adopter niche. With Apple’s iTunes accounting for such a large share of the UK and US digital music markets, it is unsurprising that digital growth is closely aligned with the rates at which Apple acquire new device customers (which, to be clear, is a very different metric from the rate at which they sell new devices) and the rate at which they grow average music spend.
  • Music buyers are disappearing.  Extrapolating from Kantar’s UK music panel (as reported in the BPI Yearbook) approximately 5 million music buyers have disappeared from the UK market since 2008.  Granted many of these buyers were probably low value customers and not all of them are necessarily lost for good, but it is clear that digital services are not doing a good enough job of converting music buyers from physical to digital and certainly nowhere near a good enough job of preventing lapsing CD buyers from disappearing out of the market all-together: against the total 7.9 million CD buyers ‘lost’ between 2008 and 2011, there were just 1.9 million new digital buyers.

What Can Be Learned from the British Experience?

The UK is not the same as the US, Japan, Germany, Sweden or any other music market.  Nor is it a direct predictor of what will happen in each of those markets.  However the overall direction of its market fundamentals are directionally similar – and in some cases functionally similar – to many other markets.  The UK is not a failing music state like Greece or Spain, it is a robust market (by music industry standards) with a mature and established digital sector and – for now – an established high street retail presence.  Over the last few years the UK’s story has been one of ‘steadying the ship’, of the corner slowly being turned.  So the UK trends should be viewed in the context of how quickly a solid market can potentially veer off course.

It is possible that the 2011 UK numbers will be followed by H2 upsurge in CD sales and an acceleration of digital growth, and I for one hope that this proves to be the case, but the safer bet is an evolution of the status quo. Across most key music markets it is clear that the current digital product mix is not delivering enough.  The US has passed the 50% digital mark and in the case of this market it is the sign of robust market fundamentals.  But passing the 50% mark in itself is not necessarily a measure of success.  It is only a commendable achievement if it is not an artefact of a shrinking overall market (as was the case with South Korea when it crossed that point with much fanfare in the mid 2000’s).

The UK’s music market is not about to implode, nor is the global market.  But it would be wise to view the UK as the canary in the mine for global digital music strategy, to assess whether the air is truly safe to breathe, whether Plan A is up to task.