Subscription music services are set to be a key driver of the boost to digital revenues, according to Ovum, an independent telecoms analyst.
However, the music industry is not believed to maximising digital music revenues because of the amount of free music available online, including free internet radio services such as Pandora in the US.
Ovum analyst Mark Little said: “Digital music will experience what might appear to be healthy growth over the next five years, but there is a danger that this could mask the fact that the industry is not maximising revenue potential.
“There is too much free music available in the digital economy and not just the illegal kind. Free Internet radio such as Pandora or Grooveshark, and freemium on-demand music services such as Spotify, are offering free music without maximising advertising or premium subscription revenues for themselves or the industry.”
Ovum forecasts that globally, revenues from music subscription services will increase at a compound annual growth rate of more than 60 per cent from 2011 to 2015, as consumers recognise the benefits of being able to access millions of streamed songs for the price of a CD every month rather than owning individual downloads. Subscription growth will also be driven by technology giants Apple and Google which are expected to launch cloud-based digital music subscription services this year.
The combined effect of an increased share taken by music subscription services and the large amount of free music available is slowing growth in paid online music downloads, down to just 3% in 2010 in the US – a trend expected to cross the channel before long.
According to International Federation of the Phonographic Industry (IFPI) statistics, global digital revenue grew 34% in 2007, 37% in 2008 and 9% in 2009.
At the beginning of the 2010, the IFPI’s annual digital music report for 2011 showed that the growth of the digital music market had fallen to its lowest ever level in 2010 – with download revenues only rising by six per cent during 2010 – despite in excess of 400 global online licensed services. A summary of the 2011 digital music report is available HERE.
The report has revealed that digital music revenues only increased by six per cent during 2010, compared to a growth of nine per cent in 2009 and 30 per cent in 2008.
Thomas Hesse, president of Global Digital Business for Sony Music, said at the time that the growth drop was a sign of the digital music market and its most popular services, such as iTunes, “maturing”, but was also a reflection of the negative effects of digital piracy continuing to pose huge challenges to the industry.
The IFPI report said that global digital music revenues, which came in at $4.6 billion, accounted for 29 per cent of the record labels’ total trade revenues during 2010, which were overall down by nine per cent on the year, due to the decline of physical CD sales and internet piracy.
The report also warned that unless governments around the world took legal action to prevent people from persistently using illegal downloading services, such as Limewire, it would result in major job losses across the industry.
The Digital Economy Act’s anti-piracy measures, which will see repeat offenders’ internet connections temporarily suspended after a series of warning letters, has yet to come into action as it goes through its necessary review procedures.
COMMENTARY: It's hard to believe that cumulative European losses from music piracy between 2008 and 2015 will total 240 billion Euros. That's just in Europe. Doesn't even include the U.S.
Due to music industry inaction, Napster almost killed the music industry in 1999. Apple’s iTunes appeared in 2003 and finally got people to start paying for digital music downloads at $0.99 per song.
“That four-year lag is where the music industry lost the battle,” says Sonal Gandhi, music analyst with Forrester Research. “They lost an opportunity to take consumers’ new behavior and really monetize it in a way that nipped the free music expectation in the bud.”
Now, eleven years since Napster, the music industry is worth half of what it was in 1999. According to Forrester Research, the total revenue from U.S. music sales and licensing plummeted to $6.3 billion in 2009, that is a $8.3 billion drop in revenue since 1999. On the converse, Forrester is also saying that CD sales will be declining at about the same rate that digital downloads are growing.
Many industry insiders argue that the primary reason that the industry has see such a devastating decline is the growing popularity in digital music, which over the next couple of years will be over taking CD sales. David Goldberg, the former head of Yahoo Music, told CNN “The digital music business has been a war of attrition that nobody seems to be winning, the CD is still disappearing, and nothing is replacing it in entirety as a revenue generator.” Essentially, digital sales are replacing the declining CD sales, but they aren’t making up for the decline fast enough and there is still the $8.3 billion sales change to account for.
What everyone is seeing as the downfall of the music industry may actually be its greatest rebirth. In the face of declining sales, the infinite accessibility of the internet has exposed a massive audience to more music then ever. The industry is beginning to adapt to these new, content carnivorous consumers – how, where and when they listen to music has caused massive growing pains over the last year – they are just recently starting to touch the surface on how to monetize these changes.
According to Forrester, currently only 44% of U.S. Internet users and 64% of Americans who buy digital music think it is actually worth paying for. So how do we create more worth for the consumer?
The industry tried to keep up through multiple licensing opportunities – ring-tones, web-radio station like Pandora and music videos on YouTube. Digital licensing reached $84 million in 09′ and will continue to grow, but this is just putting a price on new media outlets, making it very analogous to the old industry model.
The IFPI believes that 2010 was a turning point for the music industry due to the support of governments worldwide which put a clamp on illegal music downloads and pirated music CD's. Music download sites have better controls to prevent music piracy and music pricing models have been proven to be sustainable.
The explosive growth smartphones like the iPhone, portable digital music players like the iPod and tablets like the iPad as mobile entertainment devices will become key drivers in the growth of digital music for years to come. How this will all pan out is anybody's guess.
Courtesy of an article dated March 9, 2011 appearing in The Telegraph and an article dated July 10, 2010 appearing in agency record and the International Federation of the Phonographic Industry (IFPI)