Global Recorded Music Revenues Grew By $1.4 Billion in 2017

2017 was a stellar year for the recorded music business. Global recorded music revenues reached $17.4 billion in 2017 in trade values, up from $16 billion in 2016, an annual growth rate of 8.5%. That $1.4 billion of growth puts the global total just below 2008 levels ($17.7 billion) meaning that the decline wrought through much of the last 10 years has been expunged. The recorded music business is locked firmly in growth mode, following nearly $1 billion growth in 2016.

Streaming has, unsurprisingly, been the driver of growth, growing revenues by 39% year-on-year, adding $2.1 billion to reach $7.4 billion, representing 43% of all revenues. The growth was comfortably larger than the $783 million / -10% that legacy formats (ie downloads and physical) collectively declined by.

Universal Music retained its market leadership position in 2017 with revenues of $5,162 million, representing 29.7% of all revenues, followed by Sony Music ($3,635 million / 22.1%) while Warner Music enjoyed the biggest revenue growth rate and market share shift, reaching $3,127 million / 18%. Meanwhile independents delivered $4,798 million representing 27.6%. However, much additional independent sector growth was absorbed by revenue that flowed through digital distribution companies owned by major record labels that were thus reported in major label accounts.

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But perhaps the biggest story of all is the growth of artists without labels. With 27.2% year-on-year growth this was the fastest growing segment in 2017. This comprises the revenue artists generate by distributing directly via platforms such as Believe Digital’s Tunecore, CD Baby and Bandcamp. All these companies performed strongly in 2017, collectively generating $472 million of revenue in 2017, up from $371 million the year before.  While these numbers neither represent the death of labels nor the return of the long tail, they do reflect the fact that there is a global marketplace for artists, which fall just outside of record label’s remits.

 

Up until now, this section of the market has been left out of measures of the global recorded music market. With nearly half a billion dollars of revenue in 2017 and growing far faster than the traditional companies, this sector is simply too large to ignore anymore. Artists direct are quite simply now an integral component of the recorded music market and their influence will only increase. In fact, independent labels and artists direct together represent 30.3% of global recorded music revenues in 2017.

A Growing and Diversified Market

The big take away from 2017 is that the market is becoming increasingly diversified, with artists direct far outgrowing the rest of the market. Although this does not mean that the labels are about to be usurped, it does signify – especially when major distributed independent label revenue and label services deals are considered – an increasingly diversified market. Add the possibility of streaming services signing artists themselves and doing direct deals with independent labels, and the picture becomes even more interesting.

The outlook for global recorded music business is one of both growth and change.

The report that this post is based upon is immediately available to MIDiA Research subscription clients herealong with a full excel with quarterly revenue from 2015 to 2017 segmented by format and by label. If you are not yet a MIDiA client and would like to learn more then email info@midiaresearch.com

The Real Value Of The Independent Sector

Over the course of the last year MIDiA has been working with WIN (the global indie label trade body) on a major study to define the independent sector’s contribution to the global recorded music business. The default accepted wisdom is that the indies account for something like 20% of the global revenue total. However, this study revealed, that figure strongly underestimates the actual share…it is in fact 37.6%. This matters not for bragging rights but because in the digital marketplace, market share shapes the deals that are struck, with more market share translating into better terms. So a more accurate measure of share can help the independent sector compete on fairer terms.

Distribution Versus Ownership

Distribution is the largest single contributor to the variance in market share. The 20% refers to the labels that distribute the music while the 37.6% refers to which labels actually own the music. Indeed, 3rd party distribution is becoming an ever more central element of the independent sector. The growth of streaming services and social media have helped create a burgeoning international opportunity for independent labels across the world. However, because most of these labels do not have the international infrastructure required to tap this global opportunity they often utilise 3rd party partners for distribution and other services. Often these parties are major labels or major label owned distributors. As the music market becomes more global, 3rd party distribution becomes more important for indies. But while this gives the independent sector global scale it also means that much of their revenue ends up being accounted as major label revenue, creating a distorted view of the market.

Most Indies Use International Distributors

In fact, 72% of independent labels use a 3rd party international distributor while 52% use a major label owned one or go direct via a major for distribution. The impact on the global market is huge. Just look at 2 of the biggest independent artist albums recently: Taylor Swift’s ‘1989’ on Big Machine but distributed by Universal Music, and Adele’s ‘25’ on XL/Beggars but distributed by Sony in the US and South America. 2 leading independent success stories that now appear as major label success stories in investor decks. There is no questioning the value that majors and major owned distributors bring but just as importantly these are nonetheless indie label artists.

A Diverse Global Picture 

Even using the ownership approach, there is a massively diverse global picture, with indie market share ranging from just 16% in Finland, up to 64% in Japan and 88% in South Korea. In fact, Japan, South Korea and the US (where the distribution methodology has been in place for a few years now) account for 64% of all global indie revenue.

The disparity between ownership and distribution measures will only increase as music’s shift to streaming accelerates. The more that international markets open up, the more that smaller labels need to utilize international partners to reach music fans in those markets.  And the more that happens, the less relevant distribution market share becomes.

You can download the entire report by following this link.

Meanwhile, this graphic highlights some of the key findings.

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Taylor Swift, Streaming And The Changing Tide

Taylor Swift made big waves over the weekend with her open letter to Apple protesting it should pay for its 3 month free trial.  Her voice was just one more following protests from across the indie community of which Swift and her label are both members. But it turned out that her voice was the loudest and Apple’s Eddy Cue swiftly announced a u-turn on Apple’s free trial pay outs. This is just one more twist in the much bigger streaming story but it does highlight some interesting dynamics, not least of which is how Swift’s worldview differs from many of her contemporaries.

Taylor Swift’s Sales Outlook Is Surprisingly Old School

As paradoxical as it may sound for such a digitally savvy artist as Taylor Swift, she is in fact from the old school when it comes to recorded music.  Swift started her career so early – she signed her first label deal when she was just 14 years old – that she is effectively further into her recording career than most successful 30 something artists.  So she is an album era artist who, with her label Big Machine, managed to build a long-standing successful music sales career.  Streaming, with all of its substitutive impact on sales, does not fit well with the Swift / Big Machine model.   In many respects Swift’s recorded music worldview has more in common with artists of Coldplay’s generation than it does hers.  The contrast with successful contemporary mainstream pop artists is stark. The take of Ed Sheeran (who is just one year younger than Swift) on the role of recorded music is “I’m in the music industry to play live. That’s why I make records” while Calvin Harris (currently romantically linked with Swift) is famously a co-owner of streaming platform TIDAL.  Both of those artists have been supremely successful on Spotify and neither has a decade of platinum selling albums behind them.  For them, streaming is simply how it is and they are learning how to make that work.

Streaming Is Fundamentally Substitutive

None of this is to belittle the hugely disruptive impact of going from a sales model which guaranteed up front revenue to an access model where revenue is fractionalised over many years.  In the sales era a purchased album generated $10 of gross revenue whether it was listened to once or a thousand times.  In a streaming service an album that is listened to once generates $0.10 and only reaches $10 when listened to a hundred times.  If you are a superstar artist you can probably swallow the near term pain because a) your streaming volumes are in the billions so the pennies add up and b) you make the majority of your money from playing live.  If you are a smaller artist the outlook is bleaker for getting through the transition period i.e. until streaming services are big enough to ensure a high tide rises all boats.

Live Is Where The $$ Are For Superstars

Interestingly for Swift, for all her sales success, live is also where she makes her money.  She ranks as the highest earning artist on Billboard’s top earners list with $39 million but $30 million of that came from live.  She explains in her post that “[I] can support myself, my band, crew, and entire management team by playing live shows” and that she is raising her voice for “the new artist or band that has just released their first single”.  This may well be the case but she is also very much doing this for her label Big Machine Records (which doesn’t get to benefit in any truly meaningful way from Swift’s live revenue).   Swift’s rise to prominence and continued success is intrinsically linked to that of her label Big Machine Records and it is fully understandable why she has been so perfectly aligned with Big Machine’s stance on streaming.  But it is a position nonetheless.

Apple Doesn’t Need Any Commercial Bail Outs To Launch Apple Music

None of this though detracts from the core issue at stake here, namely Apple not paying for a 3 month free trial.  Apple is in the business of selling music in order to sell hardware.  Apple’s primary concern is not what % of iTunes sales become substituted by free trials (near term) and subscriptions (long term) but instead how it helps them gain and retain device buyers. Swift, Big Machine and the rest have very good reason for being very cautious with Apple’s streaming strategy.  Apple is the leading source of digital music sales and accounted for approximately $2.8 billion of music sales revenue in 2014, or 40% of all digital music revenue.  If Spotify messes up a free trial the labels risk slowing the rate of new streaming revenue growth.  If Apple messes it up the money that keeps the lights on is at risk.

Apple doesn’t need any financial assistance in launching Apple Music (it does after all have $178 billion in cash reserves) but it does need careful attention from labels and artists alike to ensure it gets the strategy right. Whatever the outcome though the streaming transition is an inevitability and Taylor Swift is no more able to hold it back than King Canute was able to hold back the tide.

Apple, The Indies And The Rise Of The Digital Monopsony

Much of the independent label community have come out in public opposition to Apple’s request for a 3 month free trial that crucially would not involve any royalty payments to labels. Besides the fact this has revealed inconsistency in major label licensing strategy (some services have to pay royalties for their free trials) it also raises questions about Apple’s growing role as a content platform. In the old model (i.e. selling CDs on the high street and mall) retailers held all the power, charging labels for prime placement, priority shelf space and carving out additional commercial benefits such as breakage (whereby they were given a discount on a set assumption of a % of shipments that would break in transit, even if they didn’t). In the old new model (i.e. where we are now) the power shifted to the labels with music stores and services having to pay advances, minimum guarantees etc. in order to sell the labels’ content. Even breakage got reinvented and turned into a commercial benefit for labels (they get paid for under usage of services). Now a new model is emerging where a few big platforms are beginning to exercise the power they have been quietly building for the last half a decade or so.

Apple, Amazon And Google – The Digital Superpowers

Apple, Amazon and Google are all digital content platforms. They each own the customer, control billing, know everything about him/her, control some or all of the hardware and have a diverse portfolio of content assets. Each has also become super important to media company partners. For music labels Apple has become the dominant source of digital retail revenue, Amazon the dominant source of physical retail revenue and Google the dominant digital discovery platform. Each holds the whip hand in their respective area of dominance. Now they all want more. They may each want slightly different things but none are shy of wielding their respective spheres of influence to get to what they want. This is where the indies’ dispute with Apple comes into play. Apple is in the business of music in order to sell hardware and has known for a number of years that streaming is going to be how it transitions that role in a post-download world. It has thus far taken a very responsible approach to its sales role and has been sensitive to the risk of decimating label revenue if it does not time its streaming transition properly. But the first step on that journey has now been taken and the point of no return is fast approaching. Which is why it is crucial that all rights holders have the right agreements in place and which is why the indies are making the noise they are.

The Power Of The Platform

In an echo of Google’s heavy-handed YouTube Music Key negotiations with indies and DIY artists, one independent artist has claimed that Apple has threatened to remove his music from the iTunes Store if he does not allow his music to be used in the free trial. Whether this is true or not (and it may well not be) is almost not the point. What it highlights is Apple’s power as a platform. Artists and labels alike simply cannot do without iTunes revenue. Whether Apple needs to overtly play the card or not, the implication of the veiled threat is clear. And Apple is not exactly alone. Last year Amazon clashed with book publisher Hachette over eBook pricing and during the dispute employed a number of pressure tactics including: refusing to take pre-orders on Hachette titles, placing a 6 week delay on delivery of them and even pointing users to competitor titles when they searched for an Hachette book. All of these were clear misuse, possibly even abuse, of Amazon’s role as distribution platform but no regulatory body even raised an eyelid. Apple will have watched the development with acute interest.

The Rise Of The Digital Monopsony

Apple, Amazon and Google are all unique cases. They have become de facto monopolies for their respective sectors, exercising control over the entire platform of user, supplier and interaction between them. There isn’t really an economic term that properly explains them but monopsony is the closest: a company that is the only effective buyer and seller of a product and can thus dictate terms at both ends of the equation. These digital monopsonies are growing pains of the digital economy. After all, we are still in the very early stages of the digital economy. If this were the industrial revolution Robert Stephenson wouldn’t have developed the steam locomotive yet. Consider this phase market adolescence. This raises challenges for regulation with regulatory bodies largely unable to deal with companies that exercise effective monopoly power but that do not meet the criteria of a pre-digital era economy monopoly. Of course the indie labels cannot afford to wait for that dynamic to change so in the meantime they must seize the initiative in this issue and others like it.

An Opportunity To Change The Narrative

Right now though the indies have an opportunity to use this case to genuinely move the needle. Apple has pushed them out of their comfort zone. Instead of just digging in their heels they can decided to push Apple out of its comfort zone and request something similarly game changing of Apple in return. In short, turn a defensive move into an offensive one and help set the agenda rather than being stuck in the familiar rut of responding to the one set by the major labels and Apple. Apple Music may have underwhelmed at launch but the company still has the most important music monetization platform on the planet. Most indie labels and majors alike would all but collapse if iTunes revenue disappeared overnight.

Right now Apple still wants to play the role of good partner, albeit one that negotiates hard. So the labels still have a chance to help shape what the next chapter in Apple’s music story can look like. That may not always be the case, especially if Artist Connect has developed into a label like service layer 3 years from now, which I suspect will be the case. Apple is no Google, it still wants first and foremost to sell music rather than give it away. That may not always hold true.   Similarly the power of the digital monopsonies will likely strengthen over the coming half decade or so. So right now the indies are probably in the strongest position they will be in for some time, even if it might not feel like it to them. They need to seize this moment.

YouTube, Record Labels And The Retailer Hegemony

YouTube (i.e. Google) has put itself in the midst of a music industry conflict that may yet turn into a much needed process of soul searching for the labels as they weigh up whether YouTube’s contribution to their business is net positive or net negative.  The controversy surrounds the imminent-ish launch of YouTube’s premium subscription service and the refusal of some independent labels to sign the terms Google is offering them.  Whereas normally this would just result in a service launching without a full complement of catalogue, in this instance YouTube is also the world’s second largest discovery platform after radio.  YouTube execs have been quoted as stating that labels that do not sign their terms will have their videos blocked or removed.  Exactly from where (i.e. the main YouTube service, or the premium offering) remains a matter of conjecture with both sides of the debate more than happy to allow the ambiguity cloud the debate.    But the fundamental issue is clear either way: YouTube has become phenomenally powerful but delivers comparatively little back in terms of direct revenue and is now happy to flex its muscle to find out who is really boss.

The Retailer Hegemony 

Google’s stance here fits into a broader phase in the evolution of digital content, with the big tech companies (Amazon, Apple, Google) testing how far they can push their content partners in order to consolidate and augment their already robust positions.  It fits into the same trend as Amazon making life difficult for book publishers Hachette and movie studio Warner Bros.  The big tech companies are becoming the three key powerhouses of digital content and each is fighting to own the customer.  Media companies are becoming collateral damage as the new generation of retailer behemoths carve out new territory

The record labels, indies included, have to take much of the blame here.  They let YouTube get too big, and on its terms.  The big labels had been determined not to let anyone ‘do an MTV again’ and yet they let YouTube do exactly the same thing, getting rich and powerful off the back of their promotional videos.  But this time YouTube’s resultant power is far more pervasive.

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Stealing The Oxygen From The Streaming Market

Labels are beholden to YouTube as a promotional channel.  They have turned a blind eye to whether its ‘unique’ licensing status might be stealing the oxygen out of the streaming market for all those services which have to pay far more for their licenses.  The underlying question the labels must ask themselves is whether YouTube’s inarguably valuable promotional value outweighs the value it simultaneously extracts from music sales revenue.  Indeed 25% of consumers state that they have no need to pay for a music subscription service because they get all the music they need for free from YouTube (see figure).  This rises to 33% among 18 to 24 year olds and to 34% among all Brazilians.

Reversing Into Subscriptions Is No Easy Task

Of course the aspiration here is that YouTube is finally going to start driving premium spending, but reversing into a subscription business from being a free only service is far from straightforward.  It is far easier to make things cheaper than it is to raise prices, let alone start charging for something that was previously free.  Add to the mix that free music is not exactly a scarce commodity and you see just how challenging YouTube will find entering this market.  Indeed, just 7% of consumers are interested in paying a monthly fee to access YouTube music videos with extras and without ads.  The rate falls to just 2% in the UK.

The counter argument is that only a miniscule share of YouTube’s one billion regular users are needed to have a huge impact.  But if the price the music industry pays to get there is to kill off the competition then it will have helped create an entity with such pervasive reach that it will truly be beholden unto it.  If the music industry has hopes of retaining some semblance of power in this relationship, it must act now.