The IFPI’s global market results for 2013 feel like an accurate reflection of the developing music economy labels observe on a daily basis, David Balfour comments

21 March 2014 - Editorial

No one could herald the IFPI’s global trade figures for 2013, released earlier this week, as evidence of a booming industry without serious challenges ahead.

The 2012 figures had shown industry growth for the first time in many years (albeit of less than 1%). The 2013 figures have returned to a more familiar shape as global recorded music revenues returned to decline, down 3.9% year on year.

The significant fall is being blamed in no small part on a drastic failure in the Japanese music market during 2013. There, the market dropped 16.7% in value, with physical sales declining rapidly and digital sales also suffering, falling 23%. The IFPI was quick to point out that without the Japanese results the global fall in 2013 would have been a less serious 0.1%.

How should this Japanese failure be interpreted therefore as part of the bigger picture? It’s important to remember that Japan is anything but a typical market and shouldn’t be seen as a bellwether for the future performance of other markets. Physical sales still account for the bulk of revenue in Japan and are unsurprisingly in decline. The 23% digital fall especially needs to be put into context. Japan was an early-developing digital market and enjoyed great strength in mobile-focused formats which are much less significant in other developed countries, such as over-the-air downloads of music, videos and ringtones. It is these formats which are in the most serious decline, meaning that this particularly severe digital fall is unlikely to be matched in other countries. Japan does face a more universally-felt problem however: as physical sales decline its digital market is coming nowhere close to replacing that revenue.

It’s also worth pointing out that the Japanese music market has always been heavily dominated by sales of local repertoire. As such, it’s really only the big multinational companies, as well as Asia specialists, which will have felt significant pain from the recent collapse in Japanese sales. For much of the rest of the industry Japan has never been as big an income source as one would be tempted to think. What other patterns should these companies therefore look for in the IFPI figures which might prove more directly relevant to their business?

The key headlines of the IFPI Digital Music Report are the 51% rise in streaming revenues during 2013, as well as the 2% decline in global downloads revenue. Whilst streaming’s growth is impressive, it’s crucial to get the importance of the market into perspective. Even after such remarkable 2013 growth, streaming still only contributes 27% to the global digital music income. A la carte downloads account for the lion’s share at 67%. The streaming growth in most markets is enough to make up for the decline in download sales. There is still debate to be had about how closely linked streaming growth is to downloads decline. It seems reasonable to suspect that there is some link between the two but it’s still impossible to clearly claim that streaming is cannibalising download income. What’s absolutely certain however, is that streaming’s growth against a backdrop of falling download sales is not coming anywhere near to replacing the income from falling physical music sales. We always need to remind ourselves that physical sales make a large chunk of industry revenues and that for digital growth to be overall growth, it also needs to replace these disappearing physical customers.

Several commentators have noted that with streaming income around the $1bn mark in 2012, Spotify would appear to account for around half that total, according to reports the company made about its payouts to rights holders. If one considers that YouTube is likely to be the next largest contributor of streaming revenue, one has to question the health of the streaming market as a whole, especially in the paid subscription space. Paying subscriber numbers now at $28m are heading in the right direction but are many of the businesses in this market sector? The arrival of Beats Music in 2014 is likely to rebalance the figures somewhat but the picture is still one of a market dominated by one big player. We can be thankful Spotify is such a close and trusted partner of the music industry. We should perhaps also be fearful about the development picture for a sustainable streaming market as a whole. 

It’s important that we don’t underestimate the contribution of music downloads to our bottom lines, just because they have started to fall. That market remains the most vital digital contributor and we as an industry should seek to nurture it. This could be via more exciting ‘ownable’ products such as Beyoncé’s last album. Perhaps it’s also increasingly becoming necessary to review the prices being charged for catalogue on download stores and potentially reduce them to encourage sales.

One aspect of the IFPI figures which certainly shouldn’t be overlooked: global performance rights revenues grew by 19% during 2013. This is a massive growth for a sector of the industry which is becoming more and more important as we move towards a usage model of music consumption. Whilst non-interactive music services such as Pandora are currently much higher profile in the US than in the UK, we expect this to change rapidly over the next couple of years. As services such as Tesco’s Blinkbox start to gain traction, this type of revenue should continue to grow apace. Also likely to grow is debate around whether these digital performance revenues should be administered by collecting societies as has traditionally been the case, or whether rights holders will seek to get more direct control over those revenues. Whilst direct control might make sense for record companies, many of the performers who also benefit from this revenue stream would be unlikely to welcome a declining collecting society role in this economy.

There’s cause for great optimism in the growth experienced in many developing markets during 2013. Leading performers included Argentina (up 69%), Peru (up 149%) and South Africa (up 107%). Whilst these markets are growing from an admittedly low base, their contribution to the industry’s bottom line will grow more and more important in coming years. 

We feel that the IFPI figures for 2014 serve to underline many of the trends that we’ve been pointing to for some time. Streaming income growth is fantastic but it’s not big enough or fast enough to be the only game worth focusing on. Download sales are declining, but there’s much the industry can do to support this format which will remain hugely important for many years yet. Performance income is one of the emerging key income sources for our industry. Meanwhile, engagement with smaller and emerging markets is increasingly a vital part of any forward-looking strategy.