Fresh from taking part in the Reeperbahn Festival conference, we look into the German music market. The ongoing strength of CD sales coupled with the growth of downloads and interesting developments in the streaming space make it one of the world’s top markets to watch.

According to the German trade body BVMI, recorded music sales totalled €644m in trade value in the first half of 2012 – a 0.2% year-on-year increase. Digital formats grew 32% to €143m, making up for the modest 6% decline of physical sales, which totalled €501m – the former now account for 22% of the whole market (fig.1).

The figures show the country consolidating its position as the world’s third largest recorded music market. After overtaking the UK in 2010, Germany’s trade value revenues totalled €1.407bn in 2011, falling only an annual 0.6%. Digital sales totalled €243m and physical ones €1,164m – respectively accounting for and 17.3% and 82.7% of overall sales (fig.2).

One of the most encouraging signs this year is the fact that digital revenues are growing significantly – both across subscription and download services. BVMI’s data shows that in 1H-2012 downloads grew just under 37% year-on-year to €123.5m, while subscriptions and ad-supported revenues increased by 48% to €15.1m and 14.8% to €3.1m respectively (fig.3).

Fuelled mainly by iTunes, Amazon and, to a smaller extent, local online store Musicload, downloads accounted for an impressive 86.5% of digital revenues in the first half of this year. Despite bringing in only 10.6%, subscriptions were one of the main topics of conversation at the Reeperbahn conference: they were the fastest growing revenue stream in the first half of this year, and much is expected following the recent launch of Spotify in Germany – specially after announcing a partnership with incumbent telco, Deutsche Telekom (DT).

The deal sees DT bundling Spotify Premium for new subscriptions to its two-year €29.95 mobile monthly plan, starting in October. At the end of the year, the service will also be available to other DT customers a €10/month add-on. While this is the same tariff for any Spotify Premium user in the country, the service’s data usage is free for DT customers, and payment is included in the telco’s bill – an aspect of which it is hoped to reduce Spotify’s friction and ease its customer acquisition. With 35.4m customers, DT’s 31% share of the German market is virtually identical to Vodafone’s. They’re both followed by E-Plus (21%) and O2 (17%).

Other on-demand streaming services available in Germany include local player Simfy, Sony Music Unlimited, Deezer, Rdio, WiMP and Rara. Most of them have only recently launched, with the exception of Simfy – of which we understand that its performance has remained underwhelming in the country. The fact remains that after years of being considered one of the toughest developed markets in terms of licensing (which explained why Spotify took so long to launch there), Germany now has 11 subscription services. Notably, however, it seems that Spotify has caught most of the spotlight this year – with public awareness of the service climbing rapidly (fig.4).

In talks with Music Ally, Britta Lüerßen (head of research & development, BVMI) explained that despite the interesting developments in the streaming space, Germany is not expected to become a massive streaming market along the lines of Scandinavia anytime soon. She stressed that it could take a decade or more for the landscape to evolve in such way, as Germans are (for now) tied to physical formats. She added that lower broadband penetration and scepticism against the use of credit cards online also play a part.

Another recurring topic of conversation in the German music industry is the ongoing dispute between YouTube and local collecting society GEMA. Much like in the rest of the world, Google’s video website has become the most popular online music discovery destination, but the row between the company and GEMA means that many contents remain blocked in Germany. Such is the situation that local industry expert Johnny Haeusler recently suggested in his influential blog Spreeblick that, upon signing with GEMA, artists could opt out from having it represent them in the online space (he even included a template of a letter for such purpose).

While such a move might be deemed controversial, it is worth considering that if BVMI’s forecasts for the streaming market prove to be correct, YouTube is bound to remain one of the most powerful platforms for music discovery in the country: as an artist, absence from the website might not be an option. This is even more complex in Germany, where radio is not considered to be as influential as in the US or the UK – and good placement at brick-and-mortar stores and the iTunes homepage are not easy to come by.

Looking at the future of the overall German market, Lüerßen sees it stabilised in the current form, expecting it to continue its evolution towards digital formats in the next years, but without substantial revenues. Indeed, GfK expects sales for this year to be on a par with 2011, and showing a discrete growth towards 2016 (fig.2).

That is not to say, however, that there’s a lack of potential for digital innovation in the years to come. Interviewed by Music Ally, Holger Cristoph (VP of digital sales, UMG Germany) claimed “the next step will be smart TVs which bring digital music to the living room and in-car entertainment solutions. The car is a very important place to listen to music. There will also be more API-based solutions which enable completely new players to come up with innovative solutions”.

While some of this might seem a bit far-fetched, and despite the YouTube row, the recent developments in the streaming space show that local rightsholders are indeed more open to new ideas. Add that to the involvement of telcos and the strength of physical formats, and Germany looks like one of the most interesting music markets in the years to come.

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