Quick Take: IFPI Revenue Numbers

Today the IFPI published their annual assessment of the global recorded music business. The key theme is the first serious year of growth since Napster kicked off a decade and a half of decline, with streaming doing all the revenue heavy lifting.

The findings won’t come as much of a surprise to regular readers of this blog, as at MIDiA we had already conducted our own market sizing earlier in the year. The IFPI reported just under a billion dollars of revenue growth in 2016 (we peg growth at $1.1 billion) with streaming driving all the growth (60% growth, we estimate 57%). IFPI also reported 112 million paying subscribers (our number is 106.3 million, but the IFPI numbers probably include the Tencent 10 million number as reported, while the actual number is closer to 5 million).

IFPI report physical sales declining by 8% (we have 7%) and downloads down by 21% which is 3 percentage points more decline than the majors reported; this implies the IFPI estimates the indies to have had a much more pronounced decline than the majors. MIDiA is currently working with WIN to create the 2017 update to the global indie market sizing study, so we’ll be able to confirm that trend one way or another in a couple of months’ time.

Overall, the IFPI numbers tell the same good news story we revealed back in February, namely that streaming is finally driving the format replacement cycle that the recorded music business has not had since the heyday of the CD. Without streaming, the recorded music market would have declined in 2016. Streaming is driving revenue growth by both growing the base of users and, crucially, increasing the spend of more casual music spenders, changing them from lower spending download buyers into monthly 9.99 customers.

Also, streaming is unlocking spending in emerging markets (especially Latin America). The old model was based on people being able to afford a CD player and being able to afford to buy albums. The new model monetizes consumption on smartphones (which are becoming ubiquitous in emerging markets). Expect each year from now to see a reallocation of recorded music revenue towards emerging markets. It will be a long process but an irresistible one. Indeed, as Spotify’s Will Page put it:

“Spotify’s success story has expanded beyond established markets, with Brazil and Mexico now making up two of our top four countries worldwide by reach. Back when the industry peaked in 2000, Brazil and Mexico were 7th and 8th biggest markets in the world respectively. A combination of increasing smartphone adoption [reaching far more users than CDs ever did] and Spotify’s success makes the potential for these emerging markets to ‘re-emerge’ and to exceed previous peaks.”

One surprising point is that the IFPI reported a total of $4.5 billion for streaming ($3.9 for freemium and $0.6 billion for YouTube, etc.). However, the major labels alone reported revenues of $3.9 billion (see my previous post for more detail on label revenues). That would give the majors an implied market share of 87% in streaming. Which seems like a big share even accounting for majors including the reveue of the indie labels they distribute in their revenue numbers (eg Orchard distributed indie label revenue appearing in Sony’s numbers). Last year the IFPI appeared to have put Pandora revenues into US performance revenues rather than treat them as ad supported streaming, so that could account for an extra $400 million or so.

Nonetheless, taking the IFPI’s $3.9 billion freemium revenue and the 112 million subs number both at face value for a moment, that would equate to an average monthly label income of $2.90 per subscriber or a combined average monthly income of $1.53 for total freemium users (including free). These numbers are skewed in that they are year end numbers (mid year user numbers would be lower, so ARPU would be higher) but they are still directionally instructive ie there is a big gap between headline 9.99 pricing and what label revenue is actually generated due to factors such as $1 for 3 month trials and telco bundles.

All in all, a great year for recorded music. And despite a slow-ish Q1 2017 for streaming and the impending CD revenue collapse in Japan and Germany, it looks set to be another strong year ahead for streaming and, to a lesser extent, the broader recorded music business.

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Quick Take: UK Recorded Music Industry Grew By 5.1% in 2016

The recorded music industry’s run of good news stories continues with the BPI’s announcement that UK revenues grew by 5.1% in 2016. As in other markets, streaming is the fuel in the engine. Revenues hit £925.8 million in 2016, up from £881.3 million with streaming accounting for 30% of the total. Streaming grew by 61% (slightly above the global average of 57%) with subscriptions accounting for 87% of the streaming total. Downloads continued their death spiral, falling by 27% however the £56 million in lost download revenue was more than offset by the £97 million that streaming grew by. Physical revenues fell by just 2% (most of the CD buyers that were going to switch have now done so).

Throughout the 2000s the narrative was one of waiting for new formats to grow faster than legacy formats declined. That eagerly sought format replacement effect never happened with downloads, but streaming resoundingly hit that point in 2016. Although streaming doesn’t appear to have started quite as strongly as it finished 2016, the odds are still on 2017 being another year of strong streaming growth.

That is not to say that the next 3 years or so are going to be uninterrupted growth across the globe (there will be some speed bumps along the way). Nor are we likely to see the global business recover to its pre-Napster levels. But these certainly look like the foundations of a new, leaner recorded music business. Think of it as a successor state. One with different rules, in which artists have more choice, where routes to market are numerous and technology-led change is the norm. Numerous challenges remain (eg accountability and transparency, commercial sustainability, growing power of the platforms) but it is easier to fix problems when everyone isn’t spending their entire time simply struggling to keep their heads above water.

IFPI First Take: Declining Legacy Formats Continue To Hold Back Growth

 

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This post has been updated following a conversation with the IFPI

The IFPI today announced its annual assessment of the size of the global recorded music business.  For the first time in a long time the music industry has been able to announce a significant growth in revenue: 3% up on 2014 to reach $15 billion. Except that the growth isn’t quite what it first appears to be. In fact, the IFPI reported $15 billion last year for 2014, and for 2013 too. So on the surface that appears to actually be three years of no growth.

The IFPI has done this before. For example, it had previously announced a small 0.2% growth in 2013 (which was the big headline of the numbers that year). But it then downgraded that to a small decline the following year before then upgrading it to a small growth again in 2015.

The IFPI explained that they have retrospectively downgraded their 2014 number to $14.5 billion to reflect some changes in the way they report performance royalties (a minor revenue impact) and, more importantly, to create ‘constant currency’ numbers i.e. to try to remove the impact of currency exchange fluctuations. That approach works well for company reports but less well for the macro picture. The IFPI have to report this way as they are essentially summing up company reports, however when we are talking about global macro markets we run into difficulties, for example looking at music revenue as a % of GDP etc.

The approach also has the effect of generating very different growth rates. For example, if we assume that the top 10 music markets each grew at 3% in local currency terms in 2015, using the exchange rates the years took place (i.e. 2014 USD to local currency and 2015 USD to local currency) there would only have been 0.48% growth in US dollar terms. If, however, we take the constant currency approach we see 3.2% growth. When we are talking about individual companies there is a lot of value in reporting at constant currency rates as those companies are dealing with repatriating and recording revenue from across the world into their local reporting HQs. But when we are talking about global markets comprised of many local companies (e.g. the vast majority of South Korean and Japanese revenues stay in local companies so are not directly shaped by currency fluctuations) the methodology is less useful. The cracks really begin to show when you take the long view. For example if we went back 5 years with constant currency rates the value of the music business as a % of the global economy would be over stated.

So, with all that said, for the purposes of this analysis I am going to use as my baseline for comparison the IFPI’s previously reported 2014 numbers stated in its ‘Recording Industry In Numbers, 2015 Edition’.  Here are some of the key takeaways (further charts at the end of this post):

  • Revenue was flat: Despite all of the dynamic growth in streaming declining legacy formats (CDs and downloads) offset their impact, keeping revenues flat. Also, once performance and synchronization revenues are removed from the mix, revenue fell slightly. This highlights the industry’s transition from a pure sales business into a multi-revenue stream model. It also emphasises the fact that we are still some way from a recovery in consumer spending on music
  • Downloads and physical still both falling: Download revenue was down 16% while physical was down 4.5%. The physical decline was lower than the 8% decline registered in 2014 and played a major role in helping total revenues grow. If physical revenue had fallen at the same rate as 2014 there would have been $0.25 billion less revenue which in turn would have brought total revenues down into decline. The Adele factor can once again be credited for helping the industry out of a sticky patch. The download decline was more than double than in 2014 (6.6%) and that drop is accelerating in 2016, with Apple Music playing a major role in the cannibalization / transition trend (delete as appropriate depending on your world view). What is clear is that downloads and subscription growth do not co-exist. Though it is worth noting that the move away form purchase and ownership is a bigger trend that long preceded Spotify et al.
  • Streaming growth accelerating, just: Total streaming revenue was up 31% in 2015, growing by $0.69 billion compared to 39% / $0.62 billion in 2014. This is undeniably positive news for subscriptions and a clear achievement for the market’s key players. However, it is worth noting that over the same period the number of subscribers by 63%, up from 41.4 million to 68 million (for the record MIDiA first reported the 67.5 million subscribers tally last week based on our latest research). So what’s going on? Well a big part of the issue is the extensive discounting that Spotify has been using to drive sales ($1 for 3 months) coupled with 50% discounts for students from both Spotify and Deezer and finally the surge in telco bundles (which are also discounted).  The number of telco partnerships live globally more than doubled in 2015 to 105, up from 43 the prior year. But even more significant was…
  • Ad supported revenue fell: Ad supported streaming revenue was just $0.634 billion in 2015, down very slightly from $0.641 billion in 2014. YouTube obviously plays a role, and that was a key part of the IFPI’s positioning around these numbers. You’ll need to have been on Mars to notice the coordinated industry briefings against YouTube of late, and these numbers are used to build that narrative.  But YouTube is far form the only ad supported game in town, with Soundcloud, Deezer and Spotify accounting for well over a quarter of a billion free users between them. Also, the IFPI doesn’t count Pandora as ad supported, one of the most successful ad supported models. Then there are an additional quarter of a billion free users across services like Radionomy, iHeart and Slacker. So the music industry doesn’t just have a YouTube problem, it has an ad supported music problem.
  • Streaming ARPU is up but subscription ARPU is down: The net effect of streaming users growing faster than revenue is that subscriber Average Revenue Per User (ARPU) fell to $2.80, from $3.16 in 2014, and $3.36 in 2013. Ad supported ARPU was down from $0.10 to $0.08 while subscription ARPU was down. The fall in subscriber ARPU is down to a number of factors including 1) discounting, 2) bundles, 3) churn, 4) growth of emerging markets services such as QQ Music (monthly retail price point $1.84) and Spinlet (monthly retail price point $1.76). For a full list of emerging markets music service price points check out the MIDiA ‘State Of The Streaming Nation’ report. The irony is that the major record labels are increasingly sceptical of mid tier price points yet they have inadvertently created mid tier price points via discounted pricing efforts. Total blended monthly streaming ARPU for record labels was $0.37 in 2015. And if you’re wondering how ad supported and subscription ARPU can both be down but total ARPU up, that is because subscriptions are now a larger share of total streaming revenue (up to 78% compared to 71% in 2014).

So the end of term report card is: an ok year, with the years of successive decline behind us, but long term questions remain about sustainability and the longer term impact of incentivized growth tactics.

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