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David Balfour predicts that artists and labels must also face a whole new reality relating to income made from music.



We wrote last week how many labels face an impending revenue crunch from falling download sales. Developments in the last few days further strengthen the idea that 2014 may not just herald the start of not just a revenue blip but a more fundamental reshaping of the business as a whole. 

Last week saw US album sales reach a new record weekly low of 4.25m, further cementing the feeling that sales – both physical and digital – are now on a downwards slide in that country after years of digital growth. Some potentially more cheering news came from Canada, which reported that its digital album sales rose 9% in 2013, whilst even digital single track sales were up 2% in that country. One might suspect however that it’s the US, as the more developed digital market of the two, which is acting as the bellwether here. We’d put our money on the Canadian market following this trend before long.

More important and potentially cheering stats were released from IFPI Norway this week. The Norwegian music market as a whole was up 11% during 2013, with streaming revenue now accounting for 63% of the entire Norwegian music market. We commented previously how we feel it’s unlikely the really major music markets such in those in America, Britain and Germany are likely to neatly follow this trend at a similar speed. Whilst the eventual goal for US, DE, GB etc must certainly be to eventually achieve similar levels of streaming penetration as seen in Norway, the route to achieving this is likely to be more arduous.

Whilst an impending revenue crunch seems likely for many labels in the short to medium term, these trends also point to a fundamental re-shaping of established music economics. Services and users are increasingly moving away from the sales-based, quick financial return model which has been the bread and butter of the recorded music industry throughout its history to date. The rise of streaming in particular takes us to a place where revenues arrive more slowly following the release of an important album. Whilst one can speculate about whether streaming revenues might equal or even eclipse download and CD sale revenues in future, one trend which seems certain is that few will continue to enjoy the quick financial injection which came with the sales-based model and high first-week sales. 

Labels have historically been able to judge the success of projects quite quickly, based on early week sales. As such, they’ve often reacted quickly in deciding to put further investment into a project or to abandon in completely. The longer release cycle which is now emerging could mean that labels will have to wait longer to judge the success of a project, and will perhaps also slow down their investment cycle in new artists as a result. It was interesting to read IFPI Norway’s claim therefore that ‘the new business models increase the revenues which can be reinvested in new talents.’ Our reading of the new dynamic’s impact on the A&R process was perhaps less positive. As Helienne Lindvall wrote in The Guardian this week, this trend may also prove painful for artists, who could see recoupment time further increased and the prospect of significant earnings from their releases seeming like a far-off dream.

Whilst a quick return on investment might increasingly seem like a thing of the past, this new revenue dynamic also offers positive opportunities. There is now less motivation for labels and acts to work towards release date hype than there is for them to collaborate on building long-term projects with lasting and sustainable appeal. Furthermore, the sheer amount of highly detailed data which is available from services such as Spotify means that labels and artists can increasingly take fact-based rather than gut-based decisions on topics like which tracks to promote, where to tour, what kind of fans to target and so on. This could increase the sense of collaboration and trust between artists and labels, whilst additionally encouraging them to try subtle tweaks to improve longterm success rather than desperate measures to save a troubled album release. 

Another clear concern about this new dynamic is that it seems to economically favour those with the deepest pockets. Smaller labels may actually need to make significantly more and longer-term investments before meaningful revenue streams emerge. One silver lining in this cloud is the likelihood that licensing income continues to rise significantly, with Deloitte predicting that revenue from performance rights will top $1bn for the first time in 2014. Such licensing incomes will provide a welcome and reliable boost to the bottom line of companies which invest in music. As licensing income increasingly rises however, so too will questions about the organisations which collect and distribute this money to its rightful owners. Whilst some organisations, such as the UK’s PPL, have a strong record of efficiency and transparency, others do not stand up so well to scrutiny. As the importance of licensing increases, so too must pressure on those which hold statutory rights to collect and distribute royalties. In a world where we might wait longer than ever for income due, we need to be confident of actually receiving what’s due. 

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