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.

Global Recorded Music Revenues Grew By $1.1 Billion In 2016

Following on from the global market share numbers we released on Sunday, here are our findings regarding the growth of the overall market.

Throughout 2016 as the major label earnings were coming in there was a growing awareness that 2016 was going to be a landmark year for the recorded music business. It finally looked like streaming was going to push the industry into growth. Now with full year numbers in, the picture is even more positive than it first appeared. The recorded music market grew by 7% in 2016, adding $1.1 billion, reaching $16.1 billion, by far the largest growth the recorded music business has experienced since Napster and co pushed revenues into free fall.

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While it is too early to state that the corner has been turned, this is clearly a turning point of some form for the business. Underpinning the growth was streaming which grew by 57% in 2016 to reach $5.4 billion, up from $3.5 billion in 2015. Spotify has been key to this growth, accounting for 43% of the 106.3 million subscribers at the end of 2016. 2017 should see further strong streaming growth with another 40.3 million subscribers added, more than the 38.8 added in 2016. Apple Music and Deezer also both contributed strongly to growth and market share. Additionally, Amazon upped its game in 2016 and the introduction of the $3.99 Amazon Prime Music Unlimited Echo bundle could open up swathes of new, more mainstream users.mrm1703-fig0-5

Based strictly upon the recorded music revenue that is reported in financial accounts by the major record labels and / or their parent companies combined with trade association and collection society data, the 3 majors labels collectively generated $11 billion of gross revenue in 2016. Universal Music generated the most with $4.6 billion representing 28.9% of the market total. Sony followed with $3.6 billion (22.4%) and Warner with $2.8 billion (17.4%). These numbers do not include any corrections for any independent revenues that are recognised by major labels because they are distributed by majors or major owned distributors. Thus the ‘actual’ independent share will be higher but can only be accurately measured with a separate survey, so watch out for WIN’s forthcoming indie market share study that will do exactly this.

Volatile currency markets played a role in shaping the 2016 picture, with Sony’s revenues at the original Yen values increasing by just 0.9% but 13% in US dollar terms. In original currency terms, Warner Music was the standout success of 2016, with revenues increasing 11%.

To be utterly clear, these numbers represent the recorded music revenue that each of these companies report to their shareholders and to the financial markets. This is market share based purely on publically stated, financially regulated and audited filings. No more, no less. In this specific context record label recorded market share is simple arithmetic: the record label’s reported recorded music revenue divided by total global recorded music.

Conclusions

The recorded music industry changed gear in 2016 and the outlook is positive also with revenue looks set to be on an upward trajectory over the next few years. However, successive quarterly growth is not guaranteed. Streaming will have to work extra hard to offset the impact of continued legacy format declines as the 18% download revenue decline in 2016 illustrates. Thus, the midterm outlook is as much about legacy format transition as it is streaming growth. If streaming can outrun tumbling download and CD revenues as those walls come crashing down, then good times are indeed here.

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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