digital music revenues in the recorded music industry

Posted on February 19, 2011

0


there have been a number of interesting blogs about the negative impact created by digital  music to the recorded music industtry, and its interesting to note a number of arguments on both sides to this discussion. Personally, i am bullish on the future on the music industry but do see a number of critical issues that arent really being managed by labels effectively.

firstly, where we are today. business insider ran a great piece of research (which i will provide below) about the current state of the music industry. inflation adjusted, the revenues for the US industry only (and this is important to note) is as follows below:

while this graph shows a massive decline for music from its peak in 2001, the analysis does leave out a number of critical factors:

1. with the introduction of the CD, there was also a reduction in volumes and sales before revenues really too off again. it has to do with transition and alternatives. people arent really keen to buy CDs because they can see the use of their ipod’s etc, but they arent really spending as much in digital yet either as its not part of their experience.

2. unlike the transition from vinyl and casette to CD, we dont have a technology issue that requires people to rebuy their album connection to work on their new music system. when CD palyers came out they literally stopped mass producing and selling LPs and Casettes, it was a superior format (though this can be argued) and thus all new HIFIs promoted it. this was a win both for the music industry (your LP collection was now irrelevant) and for the physical device manufacturers, as people had to buy a new device if they wanted to buy new music. This effect helped fuel the growth in CD sales. with digital reproduction, you can just convert your CDs to digital music, so no need to replace your entire library.

3. social changes in generations are also a factor. most of my generation pirated music anyway, just using the radio, we then pirated music online. the young people i have seen “share” music amongst each other. we did this via mix tapes, they do it via a variety of technologies inlcuding their cell.

also, take a look at the revenues margin adjusted. below is the revenues inflation adjusted first

and now a quick analysis done by me revenue margin adjusting this:

  revenue est cost for physical units margin
1979 12 30% 8.4
1997 14 20% 11.2
2000 16 20% 12.8
2001 18 20% 14.4
2009 8 20% 7.2

so while its still not a pretty revenue picture, it does provide a slightly different view, and my marginal cost assumption fo 20% may be l0w.

another comment comes from the underlying shft in technology being utilised by the public to access music as per the graph below from understatement:

the drop off in ringtone revenues and music subscription revenues must be linked to the iphone and growth of smart phones in general, which have eleminated the need to buy a ringtome via SMS as a specific music category as you can get it through an istore, ovi store etc.

the mobile operators have really shot themselves in the foot via this whole model too as they have really held back the music purchasing over mobile market with their high levels of revenue shares (over 50% in some markets) which has effectively made this market only lucrative for pirates and subscription services and marginalised legitamite operators. even more terrifying is the labels attempt to control the mobile music market by giving licenses to the mobile operators. what this will do is:

1. kill mobile music store growth, as there will be fewer people in the market with the desire to fight against the mobile operators, who are already taking a huge chunk of their revenues as charges anyway

2. if there are fewer specialist stores, then there will be fewer people marketing the service and thus less sales happening

3. the operators are not in the business of selling music, they are in the business of selling airtime. they generally havent done a great job to date and i dont see any reason why this will suddenly change as i believe those units are generally not a focus area for top management

4. when moble money becomes pervasice, there wont be a need for the operator to be involved in teh transaction, mobile store owners (that survive) will have a chance to grow and the price point to consumers will reduce.

i have written too much about this already as you can see in my other rant and blog posts regarding EMI

the original blog from business insider

In January, Bain & Company produced the following chart as part of their report on “Publishing in the Digital Age” (PDF):

 
Music Industry

Image: Bain Analysis

Then on Tuesday, someone posted it on Flickr. Subsequently, Peter Kafka of Wall Street Journal’s MediaMemo noticed it and passed it along to Jay Yarow, who made it Business Insider’s Chart of the Day on Wednesday, citing Kafka and the Flickr post. On Thursday, the excellent John Gruber at Daring Fireball linked to it and between those two postings the chart garnered a fair bit of attention, including from the likes of apparent digital music expert Bob Lefsetz (“First in Music Analysis”). No one seems to have tracked it back to the original source  nor noticed what happened to catch my eye straight away:

This chart sucks.

What’s Wrong With It

Oh, Bain – I hope no one has hired you for your expert “analysis” in this field:

  • The chart uses raw revenue numbers, not adjusted for inflation or population.
  • The chart is labeled “Global Music Turnover” but the data is actually US only. 1
  • The chart says “Bain Analysis” but it’s very unclear that they did any analysis, since anyone paying the RIAA $25 can login and immediately see virtually the same chart, albeit formatted slightly differently.
  • They fail to clarify how & if they distribute the RIAA’s 16 sometimes vague categories amongst the 4 they use.

The Right Chart

 

 
Music Industry

Image: Recording Industry Association of America

All discussion herein is for US recorded music as covered by the RIAA. The above chart is adjusted for inflation & population – for full details, see below.

So let’s correct the inaccurate conclusions one might reasonably draw from the misleading Bain chart:

Wrong: The music industry is down around 40% from its peak in 1999

Correct: The music industry is down 64% from its peak.

Wrong: At least the music industry is almost 4 times better off than in 1973.

Correct: The music industry is actually down 45% from where it was in 1973.

Wrong: The CD era was the aberration. (Mr. Gruber’s reasonable take)

Correct: The CD peak was only 13% better than the vinyl peak, not over 250% better as the Bain chart implies.

The overall conclusion is that the music industry is actually doing much worse than the Bain chart implies:

10 years ago the average American spent almost 3 times as much on recorded music products as they do today.

26 years ago they spent almost twice as much as they do today.

What Happened?

Turns out that, somewhat unsurprisingly, the recording industry makes almost all their money from full-length albums:

 
Music Industry

Image: Recording Industry Association of America

Equally unsurprising, no one is buying full albums any more:

 
Music Industry

Image: Recording Industry Association of America

That’s just over 1 album per person per year now, and only 0.25 downloaded albums per year. Here Mr. Gruber’s guess is more on target, though current numbers are still substantially below pre-CD numbers. In addition to piracy and the general lack of interest in buying albums vs singles (see below), it’s also possible that consumers’ ability to convert CD to digital versus having to rebuy vinyl albums on CD accounts for some of the disparity as well.

What Does The Future Hold?

Let’s dig deeper into those precious few newer sources of revenue, all of which were at zero in 2003:

 
Music Industry

Image: Recording Industry Association of America

Downloaded albums & singles have grown nicely, but we’ve already established that is not nearly enough to offset the loss of the physical equivalents.

Mobile, which includes “Master Ringtunes, Ringbacks, Music Videos, Full Length Downloads, and Other Mobile”, hit its peak in 2007 and has actually been in decline the past 2 years.  Looks like the death of the ringtone – and possibly the birth of the iPhone?

Subscriptions – presumably Rhapsody, Zune Pass, and the like — have also drifted downward the past 2 years.

To reiterate what I was very surprised to find: two of the big new areas, mobile and subscriptions, appear to both already be in decline.

That only leaves internet & satellite radio – Pandora, etc — and others that pay via SoundExchange. It had a good uptick since 2007, but that’s when they negotiated royalty rates for online broadcasters. Even if they maintain some solid growth, it still adds up to a pittance.

Looks like the smaller and shrinking recorded music industry is here to stay.

A Few Additional Charts

Digital really does appear to have brought about the era of the single:

 
Music Industry

Image: Recording Industry Association of America

For what it’s worth, here is the inflation adjusted (but not population adjusted) version of the revenue chart:

 
Music Industry

Image: Recording Industry Association of America

Finally, since I couldn’t be sure what was and wasn’t included in the Bain chart, here’s my version of the raw unadjusted revenue numbers:

 
Music Industry

Image: Recording Industry Association of America

The Gory Details

  • The population data I used comes from http://www.census.gov/popest/
  • The inflation data I used comes from the CPI-U at http://data.bls.gov/cgi-bin/surveymost?cu
  • I used 2011 dollars (January 2011, the latest available) because I feel present day dollars provide a better visceral understanding of the sums involved than using some other arbitrary date.
  • Here’s how I grouped the RIAA categories:
    • 8-Track: Includes “8-Track” & “Other Tapes” (described as “reel-to-reel and quadraphonic”)
    • Vinyl: Includes “LP/EP” & “Vinyl Single”
    • Cassettes: Includes “Cassettes” & “Cassette Single”
    • CD: Includes “CD”, “CD Single”, “DVD Audio”, & “SACD”
    • Videos: Includes “Music Video”
    • Digital: Includes “Download Single”, “Download Album”, “Kiosk”, “Download Music Video”, “Mobile”, “Subscription”, & “Digital Performance Royalties” (described as SoundExchange royalties)

1. The RIAA at http://www.riaa.com/shipmentfaq.php: “This database includes year-end shipment statistics for the recorded music industry in the United States going back to 1973”

Read more: http://www.businessinsider.com/these-charts-explain-the-real-death-of-the-music-industry-2011-2#ixzz1ERJnZgPW

Advertisements