Here’s Why The Music Industry Needs To Dump Non-Discretionary Pricing

Spotify’s 2015 UK accounts painted a vibrant picture with both profits and above average Average Revenue Per User (ARPU). However, a little caution is required before assuming all the answers to the streaming market’s woes can be found here. Firstly, only a portion of Spotify’s costs are based in the UK. For example, much of the (more highly paid) exec team is in the US and much of the development team is based in Sweden. Such are the vagaries of financial reporting for multi-territory companies. More importantly though, is Spotify’s higher UK subscriber ARPU (€6.47 per month compared to €5.20 per month globally according to the ever insightful Music Business Worldwide). On the surface this is clear success (and indeed the UK may well have a higher paid-to-free ratio). However, the main reason for the ARPU difference is the music industry’s fixation with non-discretionary pricing. 9.99 is 9.99 in the US, the UK and the Euro zone, even though each of those currencies have very different values. Especially now post-Brexit referendum.

At current exchange rates, the Euro Zone €9.99 is equivalent $10.86 and the UK £9.99 price point is equivalent to $12.18. Thus Euro Zone subscribers are paying 9% more than US subscribers while UK subscribers are paying 22% more. What makes matters even worse is that US per capita GDP (a measure of relative wealth of the population) is 55% higher in the US than in the EU and 27% higher than in the UK. So in effect that means a combined pricing ‘swing’ of 63% for the US compared to the Euro Zone and 49% compared to the UK.

In short, European subscribers are getting doubly hit by the music industry’s insistence on non-discretionary pricing for music subscriptions. While there are a host of commercial factors that can be cited in favour of the approach (e.g. it helps mitigate against currency fluctuations) there is zero customer value, unless of course you happen to be a US resident consumer.

Regular readers will know I am a long term advocate of a more sophisticated approach to subscription pricing (e.g. mid tier products and super-premium options) but before we get there, a first step should be to ensure that European music fans get a fair deal compared to their US peers. Or of course, we could try the alternative: increasing US subscriptions by 63% which would mean a $16.32 price point. Sounds crazy right? Exactly…

Ad Supported Is 56% Of US Streaming Revenue

Late 2014 a minor crisis emerged in the music industry, with major record labels at one stage looking like they were going to kill off freemium.  The outcome of the Freemium Wars was actually less dramatic, resulting instead in an effective continuation of the status quo.  The labels had however made it very clear to Spotify who held the whip hand.  Though their tones have softened, major label execs retain an at best sceptical view of free streaming.  The net result is that freemium has almost become the inconvenient streaming truth that no one really talks about.  However free is too big to ignore.  In fact free is much bigger than some would like to admit.

According to the IFPI ad supported streaming accounted for just 19% of all US streaming revenues in 2014, down from a high of 30% in 2011.  Which points to the success of subscriptions.  Except that those numbers ignore a major part of the equation: Pandora (and other semi-interactive radio services).  The IFPI has Pandora hidden away with cloud locker services, SiriusXM and a mixture of other revenues in ‘Other Digital’.  Extracting the semi-interactive radio revenues that count as label trade revenues wasn’t the most straight forward of tasks but it was worth the effort.  Once Pandora is added into the mix it emerges that 56% of US streaming revenues are from free, ad supported services.  While that share is down from a high of 66% in 2012 it remained flat in 2013 and 2014.  Which means that however fast subscriptions grew Pandora, Slacker, Rhapsody UnRadio and co grew even faster in order to offset the decline in on demand ad supported income.

Semi-interactive radio revenues grew by 40% in 2014 compared to 35% for subscriptions.  Subscriptions had grown much faster in 2013 (76% compared to 25%) but Pandora and co found their mojo again in 2014.  None of this is to suggest that subscriptions aren’t making great progress but it does show us that free is more than an inconvenient truth, it is both the most widely adopted behaviour and the largest revenue source in the US (which accounts for 48% of global digital revenues).

The music industry is beginning to get its head around the fact that the role of streaming as a retail channel (i.e. subscriptions) is always going to be smaller (in reach terms at least) than its role as a radio channel (i.e. free streaming).  This more accurate view of the US streaming market shows us that free is even more important than many thought.

Free streaming also has much bigger growth potential. The percentage of consumers that have the inclination to pay 9.99 a month for music is inherently limited, thus constraining subscriptions to a niche addressable audience.  Music radio listening by contrast has near ubiquitous reach.  Most significantly Pandora currently only represents about 10% of all US radio listening time.  The addressable market is much bigger and the vast majority of it remains untapped.

The Problem With Streaming Exclusives

Jay-Z’s ambitions for TIDAL has triggered a lot of discussion about how streaming models can evolve.  One focus has been exclusives with a number of references to TIDAL ‘doing a Netflix’ by commissioning exclusives.  Netflix can attribute much of its growth over the last couple of years to its flagship ‘Netflix Originals’ such as ‘House Of Cards’ and ‘Orange Is the New Black’.  It is an appealing model but the Netflix Originals approach cannot so easily be transferred to music.

There are three main types of exclusives:

1.    Service Window: album is released exclusively to a single music service for a fixed period of time e.g. only on TIDAL for 1 month

2.    Tier Window: album is released across one type of music service tier before others e.g. only on paid subscription tiers for 3 months

3.    Service Exclusive: music service acquires exclusive rights to an album so that it will never appear anywhere else unless the service decides to let it

The first two will become increasingly common components of the streaming landscape over the next couple of years.  Daniel Ek and Spotify fought a brave rear guard action against Taylor Swift and Big Machine to ensure the Tier Window model did not carve out a beachhead with ‘1989’ but it is an inevitability.  If free tiers are to have a long term role alongside paid tiers they have to be more clearly differentiated.

TIDAL and Apple look set to become the heavyweight players in the Service Window, duking it out for the biggest releases.  TIDAL will argue it pays out more to rights holders (75% compared to 70%) while Apple will argue that it can directly drive download sales (which is where everyone still makes their real sales revenue).  Apple will have to play that card carefully though as it stands just as much chance of accelerating download cannibalization as it does driving new sales.

When Is A Label A Label?

The really interesting, and potentially most disruptive, exclusive is the Service Exclusive.  This model would start blurring the distinction between what constitutes a music service and what defines a record label.  If, for example, TIDAL was to buy out the rights of the next Beyonce album or sign a deal for the next two Calvin Harris albums TIDAL would effectively become the record label for those releases.

The irony is that this ‘ownership of the masters model’ by streaming services is emerging just as the next generation labels are distancing themselves from it.  A new breed of ‘labels’ such as Kobalt’s AWAL and Cooking Vinyl’s Essential Music are focussing on providing label services without taking ownership of the masters and in turn putting the label and artist relationship on a more equitable agency / client basis.  But there are far more impactful challenges to the Service Exclusive model for music than simply being out of step with where the label model is heading:

• Scarcity: ‘House Of Cards’ is only available on Netflix (and some download to own stores such as iTunes). It is a scarce asset, which is not something that can be said about any piece of recorded music.  As TIDAL found with the near instantaneous Beyonce YouTube leak, music scarcity is ephemeral in the YouTube age.  As long as YouTube is allowed to hide behind its perverse interpretation of ‘Fair Use’ and ‘Safe Harbour’ there will be no music scarcity.  (Of course true scarcity is gone for good, but if that can be made to only mean P2P then the problem is manageable, as it is for TV content).

• Consumer expectations: Consumers have learned to expect their video experiences to be fragmented across different platforms and services, to not find everything in one place.  For music consumers however the understanding is that catalogues are either near-complete or useless.  So if all music services suddenly started having high profile gaps then subscribers would be more likely to unsubscribe entirely than they would be to take up multiple subscriptions.  Ironically the net result could be a return to download sales at the expense of subscriptions.  Talk about going full circle….

• Industry relationships: Netflix started out as a pure licensee, paying TV companies for their shows.  Now it competes with them directly when commissioning new shows.  It has become a frenemy for TV companies and is finding many of its relationships less favourable than before.  And this is in an industry that is built up the frenemy hybrid licensee-licensor model.  The music industry does not behave this way, so any service that took up the Service Exclusive model could reasonably expect itself to find itself developing tense relations with labels.  Which could manifest in those labels giving competitor services preferential treatment for their own exclusives.  Labels have long feared the disintermediation threat posed by the web.  It is unlikely to materialize any time soon but they are not exactly going to encourage retail partners to kick-start the process.

• Appetite for risk: Buying up the rights to the latest release of an established superstar is the easy part, and we already have some precedents though neither were exactly run away successes (Jay-Z’s ‘Magna Carta Holy Grail’ with Samsung and U2’s ‘Songs Of Innocence’ with Apple).  But being a label, at least a good one, isn’t simply about signing proven quantities, it is about taking risks on new emerging talent.  And that doesn’t simply mean having a DIY platform on a streaming service – though that can act as a great talent identification tool.  If streaming services want to start playing at the label game they need to also start nurturing and marketing talent.

• Limited horizons: Stream is still only a small fraction of recorded music revenue.  There are few non-Nordic artists that rely on streaming for the majority of their sales income.  That will change but not for a few years yet.  So a release that only exists on streaming, let along a single streaming service, is only going to deliver on a fraction of its potential.  TIDAL and Apple especially could easily choose to loss-lead and pay over the odds for Service Exclusives to ensure artists aren’t left out of pocket.  But that only fixes part of the problem.  An artist locked into one single streaming service will see his or her brand diminish.  ‘House Of Cards’ may be one of Kevin Spacey’s most assured performances yet only a few tens of millions of people globally have ever seen it.  If it had been on network TV the audience would have been hundreds of millions.  With touring becoming the main way many artists make money the album is the marketing vehicle and if that album is locked behind the pay wall of one single music service the marketing potential is neutered.

Streaming music services will find themselves locked in total war over the coming years and while Apple’s cash reserves will likely make that warfare appear asymmetrical at times, exclusives of some kind or another will be utilised by most of the services.  Just don’t expect them to deliver them Netflix-like success because that’s not going to happen.

Why The Music Aficionado Was To Blame For Declining Music Sales In 2014

Music revenues declined by 2.9% in 2014, down from $6.9 billion in 2013 to $6.7 billion across the US, UK, France, Italy, Australian, Sweden and Norway. Much has been made of the fact that revenue fell in the Nordic markets where streaming had previously driven growth. One year’s worth of revenue numbers does not make an industry trend. The one year fall off in strong streaming markets is not proof of a fundamental weakness in the streaming model in just the same way a couple of years of growth was not proof of its strength. We are in the midst of a transition period and there will be further anomalies and blips along the way. They key reason for the volatility is the music industry’s growing dependence on an increasingly small group of consumers: the Music Aficionados. Music Aficionados are consumers that spend above average time and money with music. They represent just 17% of all consumers but a whopping 61% of all recorded music spending. These consumers shape the fortunes of the music business. In the past this did not matter so much because:

1. So many passive majority music fans were spending strongly
2. Aficionados were behaving predictably

Now that has all changed. Passives are sating their appetites on YouTube while Aficionados are making major changes to their buying habits. Last year 14% of Aficionados said they were stopping buying CDs while 23% said they were buying fewer albums of any kind and 23% also said they were buying fewer downloads. The 2014 revenue numbers show us just what impact these changes had. If we extrapolate those percentages to Aficionados’ share of spending in those markets in 2014 we see:

• Aficionados spent $192 million less on CDs, which was 67% of the total $326 million lost CD spend in 2014
• Aficionados spent $250 million less on downloads, which was 86% of the total $290 million lost CD spend in 2014

In total the Aficionados accounted for 76% of the lost CD and download revenue in 2014. So what’s going on? Why are the super fans jumping ship? Well first of all, they aren’t. This is a transition process. They are shifting their spending towards subscriptions. For some of them this will mean spending less (especially the 23% that stopped buying more than an album a month and are now spending $9.99 instead of $20 or $30). For others it will be an increase in spending. At a macro level though, lost download and CD spending accounted for a $617 million decline while streaming growth accounted for a $351 million gain, which means that there was a net loss of $265 million. Because the music industry has largely stabilized after years of dramatic decline, it only takes relatively minor fluctuations one way or the other to determine whether a market grows or shrinks. This is why both the Aficionado needs more attention now than ever and also why the Passive Massive needs engaging at scale. Aficionados have been taken for granted for too long and are now being migrated away from products without a spend ceiling (albums) to a product with a fixed ARPU cap (9.99 subscriptions). When the Aficionados sneeze the music industry gets a cold. It is time for a cure.

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.

A Tale of Two Cities: What Sweden and the US Tell Us About the Outlook for Streaming

Streaming is the digital zeitgeist, that much is clear.  How it will shape the future of the music business, from artists through to labels is less clear and things are not helped by an increasingly confusing and diverse set of data, each suggesting a slightly different outlook.  A look at two very different digital music markets – Sweden and the US – gives some sense of what the next couple of years should hold.

Notes: for sake of readability the term ‘streaming’ is used to refer to subscriptions and ad supported streaming combined. Also all current year figures are 2013, extrapolating half year figures to create full year estimates.

Two Very Different Streaming Stories

Sweden is streaming’s heartland, home of Spotify and the stand out good news story for music subscriptions. Streaming now represents a whopping 95% of digital revenue in Sweden and 67% of all recorded music revenue while downloads make up a paltry 4%.  Streaming growth has been equally impressive (see figure one) and has propelled the total Swedish music market into growth for two successive years.  That growth came at the direct expense of downloads (which declined by 15%) and it accompanied a dramatic 51% collapse in CD sales.  But 2013 revenues look set to come in at just a little below 2003 levels, no mean feat.   Although we need to bear in mind that a surge in growth can easily reverse (as the experience of South Korea shows us) it is clear that streaming has been a strong positive force on total Swedish music revenues.

The picture is very different in the US however, where streaming has grown less dynamically and only represents 23% of digital and 14% of overall spending.  As I previously noted, the strength of Apple and the download sector have acted as a pronounced brake on streaming growth in the US.  Neither, however are invincible, and some of Spotify’s 2013 growth has come at the direct expense of download spending which looks set to decline by a percentage point in 2013 (see figure two).  Little wonder Apple has launched iTunes Radio, though ironically the app may well spur a resurgence in download sales.  So in the US streaming is becoming an increasingly important part of the market but shows no sign of suddenly acquiring Sweden-like ubiquity.  Which in part explains a 5% decline in total music revenues between 2010 and 2013.

CONCLUSION: streaming can quickly drive strong growth in markets where downloads never got a foothold but takes more time to impact strong download markets.

The Impact on Total Digital Revenue

Streaming’s impact on the total digital market and indeed on total music sales is of course what counts most, and it is here we see a really interesting divergence between Sweden and the US. Over the last 6 years streaming drove a comparable rate of overall digital growth in Sweden that downloads powered in the US in the mid 2000’s.

But when we plot the growth of digital as a percentage of total music sales in the US between 2005 and 2010 against the same data for Sweden between 2008 and 2013 a stark contrast is immediately apparent (see figure three). Whereas digital share growth remained strong throughout the 6 years in Sweden it slowed markedly in the US.  Though growth returned later it didn’t ever replicate those pre-2008 levels.  The number one slowdown factor was the end of iPod sales growth (see this figure to see just how strong the effect was).  Interestingly digital share growth looks likely to slow moderately for both Sweden and the US in 2013.  In Sweden some level of slowdown is to be expected (there isn’t much physical market left to transition!) but there is still a lot of CD ground to be made up in the US.

CONCLUSION: streaming has driven market growth in Sweden and accelerated transition away from the CD and the download. While in the US the CD and the download both still hold much greater sway, culminating in something of a worst of both worlds, with streaming apparently eating into downloads but not having enough headway to transform the market.

The Artist Conundrum

But what does all this mean for artists?  It often feels that something doesn’t quite seem to add up when artist income is brought into the equation. For all the growth in streaming income, a vocal minority of artists and songwriters feel that streaming is damaging, destroying even, their ability to earn a living from music sales.  As I have argued before, a rounded understanding of streaming income for artists must both put streaming in a revenue continuum (i.e. compare it to radio not just downloads) and consider the life time value of a song (i.e. think of the income it will generate over a period of years instead of the revenue full stop a download represents).  In this context streaming is still worth less than a download, but nearer to 5.5 times less valuable rather than 280 times (see my Consumption Analysis piece for more on this).

There is however an added complexity, namely the amount of artists that get revenue from streaming versus downloads and streaming (see figure four).  If we take Spotify’s reported US metrics from 2012 as a benchmark and assume that the average subscriber listens to a modest 5 different artists a month then this is equal to 60 different artists per year per subscriber.  Working with an average total royalty pay out of $0.01 per stream this translates into an average royalty per artist per subscriber of $0.72 in the US.  When applied to the 3 million reported US Spotify subscribers this would equal an average annual royalty of $2.17 per artist.  (Though it is crucial to note that this refers to the total royalty payment made to rights holders and not to whatever share is eventually shared with the creators themselves). Also, there is of course no such thing as an average artist, and in practice a comparatively small number of artists would earn much more than that and most much less (there are after all 27 million tracks’ worth of artists so the tail is super long).

For downloads, extrapolating from Nielsen mid year numbers, the average downloader buys 2 albums and 27 single tracks.  If we assume each of these is for a different artist then we end up with 26 artists per downloader and an average royalty of $1.22 per artist per downloader (using a 70% royalty assumption).  This isn’t actually that much higher than streaming, but things change when it is applied to the total number of download buyers (which at 63 million far outstrips paying subscribers) and results in an average royalty per artist of $76.34 (again total royalty before distribution to creators).

In Sweden though, where there are more subscribers than downloaders the picture is very different.  Applying the same Spotify metrics to an assumed subscriber base of 2 million in Sweden (which feels about right based on survey data and IFPI numbers) we see an average royalty per artist of $1.44 compared to $1.22 for downloads.  (The average royalty per buyer is higher in Sweden because a smaller number of people are buying a smaller number of downloads resulting in the revenue being split fewer ways).

CONCLUSION: streaming can generate meaningful revenue at scale but will still be lower than downloads because of the above mentioned life time value factor and because revenue is split more ways across a wider selection of artists.

The Cost of Democratization of Artist Income

Thus artists are effectively paying the price for the democratization of music: more artists are getting listened to more regularly and as a consequence the pie gets cut into smaller slices. Which raises the interesting dilemma of whether artists speaking out against streaming are also indirectly speaking out against a more equitable distribution of income among artists?!  The core question though is whether the pie can get large enough for those slices to represent anything more than an apetizer for the average professional artist.

All of this extra data may appear to add as much fuddle as it does clarity to the debate, but it is crucial that debate is based upon reasoned understanding of the most complete grounding of data available.    The next couple of years will see streaming go from strength to strength but its impact on global music revenue will be less dramatic than it has been in Sweden, if perhaps more vibrant than it has in the US.

How Downloads Will Determine the Future of Streaming

There is no doubt that streaming subscriptions will play a major role in the future of digital music, but their impact is going to be far from immediate. There also needs to be great caution applied to interpreting the encouraging early signs of the advanced streaming markets and the potential impact on total music sales.

Norway and Sweden both experienced an upturn in music sales in the first half of 2013 thanks largely to the impact of streaming subscriptions, while most of the rest of the global music market continued in its struggle to return to growth after more than a decade of decline.  The easy conclusion to draw is that when streaming subscriptions take hold across the globe, music revenue grow.  While there is some truth in the argument, it is too simplistic.

An analysis of the leading streaming markets (Sweden, Norway, France, Netherlands) and the leading download markets (US, UK, Germany, Japan) – see figure one – reveals that streaming took hold in markets where downloads had not.  The markets where downloads represented the lowest share of total music sales in 2010 (before streaming really kicked off) are those that in 2013 had the rates of streaming as a share of digital music revenue.  In markets where downloads were making the biggest contribution to total music income (not just digital) streaming did not get much of a look in in 2013.  In the US and UK streaming subscriptions were in market long before Spotify and Deezer, but most digital music consumers opted for downloads and have been unwilling to switch allegiances since.  It will happen over time, but right now downloads have a firm grip and that is largely because of Apple.

When we look at the same countries plotted by streaming share against Apple device penetration we see an even more pronounced trend – see figure two.  Here the relationship is clear: streaming has taken hold where Apple has not.  In short, there was no established mainstream digital music service and streaming subscriptions filled the void.  But of greatest significance is the impact on total music revenue.  These strong streaming markets contribute just 10% to global digital revenue, even though France and the Netherlands are two of the world’s top 10 music markets.  Meanwhile the UK and US alone count for 54%.  If you factor in Japan and Germany too you have 71% of all digital music income, and within these four countries (the four biggest music markets) streaming accounted for just 10% of digital revenue.

On the other side of the equation, streaming has brought unparalleled growth in its core markets: across Sweden, Norway and the Netherlands digital revenue grew by an average of 213% between 2010 and 2013, compared to an average of just 40% across the big four markets (though Japan’s declining digital sector pulls that average down).  And of course the Swedish and Norwegian music markets both grew in 2012 and 2013 while the rest did not.

While there is not a clear cut ‘answer’ to streaming’s likely long term impact we can however draw a few important conclusions:

• Streaming will grow more slowly in markets where Apple and the download market are strong (which helps explain why growth of Spotify et al appears to have slowed in markets like the US and UK).
• Streaming can make a digital market grow more quickly than downloads can (though it does so normally at the direct expense of downloads – download sales shrank in both Sweden and Norway in 2012 and 2013)
• ‘Home turf’ counts.  Most of the big streaming markets have their own local heroes (Sweden – Spotify, Norway – WiMP, France – Deezer) – all of whom also benefited from hard bundles and marketing support from their incumbent telcos. Meanwhile Apple of course prospers on its home turf and that of the English speaking UK.
• Consumer behavior and technology are all edging towards a more access based world and it is inevitable that the download will become less important.  So although these brakes on streaming adoption exist in many markets, they will slow rather than halt the transition. Streaming will near 50% of global digital revenues by 2018.

Streaming remains bedeviled by countless issues – not least artist payments – but what is clear is that it has the ability to transform the shape of the digital music market.  And while that change may be slower to come than the Swedish and Norwegian experiences might suggest, come it will.

 

 

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.