Global music market up 3.2% but IFPI trains guns on 'value gap'

The IFPI has published its figures for global music sales in 2015, revealing a 3.2% growth in industry revenues to $15bn.

The year saw digital revenues overtake physical sales for the first time, with the overall growth driven by a growth in streaming subscriptions. The IFPI’s report hailed 2015 as “the industry’s first significant year-on-year growth in nearly two decades”.

However, the body and its major-label members are training their fire on a “value gap” between the amount of free, ad-supported on demand streams on services like YouTube, and the money those streams generate for the industry.

“3.2% sounds very good, but you’ve got to remember that we’ve had almost two decades of decline. During that two decades of decline we’ve slumped by something like 35%,” said IFPI boss Frances Moore in the IFPI’s press conference this morning.

“Music consumption is exploding worldwide, and it’s a 3.2% increase. The question could be why is it not higher?”

We’ve got analysis of the report and quotes from the IFPI and the major labels below, but first, here’s a primer on the key figures from this morning’s report.

Note, these are figures for recorded music: they do not include the live market, merchandising and other non-recorded music revenue streams.

2015 GLOBAL RECORDED-MUSIC REVENUES

– Overall revenues up 3.2% to $15bn (2014: down 0.3% to $14.5bn)
– Physical sales down 4.5% to $5.8bn (2014: down 8.5% to $6.1bn)
– Digital revenues up 10.2% to $6.7bn (2014: up 2.7% to $6.1bn)
– Within that: Download sales down 10.5% to $3bn
– Within that: Streaming revenues up 45.2% to $2.9bn
– 68m paid streaming subscribers (2014: 41m)
– Subscription streaming revenues: $2bn
– Ad-supported streaming revenues: $680m

KEY THEME: STREAMING DRIVING THE MARKET

As with recent figures from the RIAA in the US, the IFPI’s report hails streaming as the driving force behind the industry’s growth, more than making up for the decline of physical AND download sales.

Streaming revenues grew 45.2% in 2015 to a value of $2.9bn – “the industry’s fastest-growing revenue source,” in the IFPI’s words, although sceptics will point out that given that the other sources are physical and download sales, this field of growing (recorded) revenue sources is a field of one.

Yes, you can split vinyl out from the overall ‘physical’ figure to provide another, but as much as we love that trend, it’s still a niche in the scheme of things.

The message from the IFPI and its labels is positive on streaming, however. “The music industry has successfully emerged from digital disruption, and the future is bright,” said Edgar Berger, chairman and CEO, international at Sony Music, at the event this morning.

“The three biggest markets in the world – the US, Japan and the UK – are up. And so are Asia, Europe, North America and Latin America – the latter by 11.8%. Around the world, seven countries are showing double-digit growth. And the main driver is streaming.”

That emphasis on the global recovery came through clearly. “One of the most striking features of our industry’s recovery is its global nature. The largest growth came in markets as diverse as China, Argentina and Sweden,” said Stu Bergen, CEO of international and global commercial services at Warner Music Group.

“Technology and digital deal making have opened markets previously rife with piracy as well as emerging economies like Russia, China and Brazil.”

KEY THEME: IS STREAMING A TWO-HORSE MARKET?

The IFPI estimates that there are now 68 million people paying for a music subscription service, up from 41 million at the end of 2014, and just 8 million in 2010. It’s a good growth curve, but here too there are caveats.

First, the lion’s share of streaming subscription growth is coming from just two services. Apple Music launched in June 2015 and reached around 10 million subscribers by the end of the year. Spotify had 15 million in January 2015 and 28 million by the end of the year.

That’s 23 million net subscriber additions between the two, in an overall market that added 27 million net new subscribers to the 41 million it ended 2014 with.

(Note, this doesn’t mean only four million new subscribers among all the other streaming services: the disappearance of services including Muve Music and Rdio means there’s a bigger non-Spotify/Apple pool of new subscribers within these figures.)

Labels batted back Music Ally’s question during the press event about whether they are worried about the dominance of just two (out of more than 400 legal digital services worldwide) in adding new subscribers in 2015.

Left unaddressed, too, was the question of whether there will be a ceiling on this growth in $9.99-a-month on-demand subscription streamers. In 2015, Spotify and Apple Music’s competition spurred sharp growth, but how long can that continue?

There are hopes for new rivals like SoundCloud Go and YouTube Red – despite the other issues around their free tiers – as well as Pandora’s global expansion plans, and the potential for growth from Deezer, Rhapsody and other players in the market.

Even so, labels know they cannot afford to rest on their laurels and celebrate the 27 million new subscribers from 2015: if that growth stalls in 2016, they will have some serious thinking to do about how the market evolves.

KEY THEME: OWNERSHIP IS STILL DECLINING

Subscription-based access may be doing well, but paid-for ownership continues to slide. Digital now accounts for 45% of industry revenues, overtaking physical sales for the first time – a tipping point already foreshadowed in financial results from labels like Universal and Warner.

Yet the flipside of streaming’s growth is the continued decline of the CD and downloads market, which may spur thoughts of a ticking clock for music ownership.

That’s not how the IFPI sees it: it noted that two of the world’s biggest music markets – Japan and Germany – still get 75% and 60% of their respective music sales from CDs. But these increasingly look like anomalies.

The physical market was down 4.5% last year, but this was termed “a slower rate that in previous years” by the IFPI (8.5% in 2014 and 10.6% in 2013). Take your pick of whether this is a sign that things are going to start bottoming out soon and more proof that there’s not much left to crumble off.

Meanwhile, the downloads market fell by 10.5% in 2015 to a value of $3bn, a bigger slump than the 8.2% decline in 2014. Music Ally has and never will predict that the market will be 100% access-based, but the emphasis is certainly tilting in that direction and away from ownership – even in markets where the latter is still the biggest chunk of revenues.

KEY THEME: THE VALUE GAP IS THE NEW INDUSTRY BUGBEAR

You already know this from recent pronouncements by the RIAA, BPI and other industry bodies: this year’s not-so-panto villain for the music industry is the “value gap” between free, ad-supported streams, and the revenues they generate for labels.

Well, it’s the symptom of the real villain in their eyes: outdated legislation around “safe harbours” on the internet, and companies who take advantage of them to make music available for free.

YouTube is the company everyone talks about, even if the IFPI and other rightsholder bodies are keen to be seen as talking about the ad-supported on-demand category as a whole rather than one company.

Here’s how the IFPI’s report quantifies the value gap: it claims that 68 million streaming subscribers contributed $2bn in revenues last year – an average revenue per user (ARPU) of $29.41. But that 900 million users of free, ad-supported services generated just $634m – an ARPU of $0.70.

“The single biggest source of online music is generating only 4% of our revenue. This is a gigantic mismatch between volume and rewards,” said Berger at its event.

“We’ve got services like the YouTubes or the SoundClouds or the others who are shoehorning themselves into those safe harbours, saying that they – companies making available music – are entitled to use those safe harbours,” said Frances Moore.

The report quantifies this, with a diagram comparing annual revenues per user for Spotify and YouTube.

“Our figures show that something like 80% of people going to YouTube are looking for music, yet on page 24 of our report you can see that the estimated [annual] revenue per user from Spotify is $18, and from YouTube it’s $1,” said Moore.

“80% of people going to YouTube are looking for music, and we are seeing a return from YouTube of a dollar per user per year.”

KEY THEME: YOUTUBE MAKES ITS CASE

YouTube wasn’t present at the IFPI event, but the company has been getting its defence out in recent weeks. Today was no exception, with YouTube’s spokesperson sending Music Ally a statement.

“To date, Google has paid out over $3 billion to the music industry – and that number is growing significantly year on year. Only about 20 per cent of people are historically willing to pay for music,” said the spokesperson.

“YouTube is helping artists and labels monetise the remaining 80 per cent that were not previously monetised. The global advertising market is worth $200bn. This is a tremendous opportunity.”

Google’s recent filing to the US Copyright Office tackles the value-grab question head-on, too – and is being sent out to journalists covering the issue.

“Some in the recording industry have suggested that the safe harbours somehow diminish the value of sound recordings, pointing to YouTube and blaming the DMCA for creating a so-called ‘value grab’. This claim is not supported by the facts. As an initial matter, it is important to understand that YouTube has had license agreements in place with both major and independent record labels for many years; it is simply incorrect to say that YouTube relies on the DMCA instead of licensing works,” claims that filing.

This is true, although the labels and rightsholder-bodies aren’t disputing the fact that YouTube has licensing deals – topically, those deals are up for renewal this year, with YouTube already in a rolling monthly deal with Universal Music after its existing agreement expired.

The label argument is that YouTube is able to use its safe-harbour protection to impose “distorted” licensing terms on the music rightsholders.

“They are able to go to the record companies [with deal terms] and say ‘The music’s up there, it’s a take it or leave it deal’… The music companies are between a rock and a hard place,” said Moore today.

YouTube, again, has got its retort in early.

“Those pressing the ‘value grab’ argument also assert that the royalty rates in these licences are too low, allegedly because the DMCA’s notice-and-takedown process makes it too difficult for record labels to withdraw their works from YouTube in the face of users re-uploading those works. This claim, however, ignores Content ID, which has been in existence since 2008 and which record labels (and many other copyright owners) use every day to monetise their works on YouTube,” claimed the Google filing.

“Thanks to Content ID, record labels do not have to rely solely on the DMCA’s notice-and-takedown process on YouTube – they can remove any or all user-uploads of their works from the platform on an automated and ongoing basis. Indeed, since January 2014, over 98% of all YouTube copyright removal claims have come through Content ID. Although business partners can be expected to disagree from time to time about the price of a license, any claim that the DMCA safe harbours are responsible for a ‘value gap’ for music on YouTube is simply false.”

Without getting too he-said she-said about all this, the argument here will be around how labels can use Content ID if they DON’T agree licensing terms with YouTube: the company says that they can choose to be ‘partners’ instead and make full use of Content ID. This has been a subject for arguments in the past – see this blog post from musician Zoë Keating for another perspective on how the system works – and we’re not sure the debate will die down soon.

KEY THEME: LABELS PRESSING FOR LEGISLATION

In any case, the IFPI is pinning its hopes on legislators in the US and Europe, where consultations are underway about how and whether safe-harbour legislation should be modernised.

“We’ve done everything possible as an industry to help ourselves, but we’ve got to the stage now where we really do need the policymakers’ help,” said Moore.

“There’s a gross mismatch between music consumption, which as we say is exploding worldwide, and what is actually returned to artists and record companies. It’s a structural problem… a problem that we need to have fixed by legislation.”

The delicate issue for the industry is how on one side to hail strong growth in streaming subscriptions from the very services (Spotify and Apple Music) that it says are being hurt by the existence of safe-harbour-protected rivals like YouTube and SoundCloud’s free tier – while striking deals with both the latter for their Red and Go subscription tiers – but then on the other side to argue that the industry is being stymied by safe harbour.

The argument, judging by this morning: ‘Yes, we are growing again, but we could be growing MUCH faster’.

“It is a fact that we should be growing much faster as the streaming business is exploding. If we continue to recover at the same speed as last year, it will take us more than 10 years to reach a market level we had pre-digital-disruption,” said Berger.

“Music is more embedded into people’s daily lives than ever before… and it is driving the broader economy and social media. Our market should be way bigger. The music industry is performing below its potential: music consumption is soaring, the revenues returning to artists and rightsholders are not.”

Asked whether YouTube Red is an encouraging sign that YouTube wants to move towards a premium model, or a ‘trojan horse’ to convince the music industry that its intentions are good, Bergen opted for a diplomatic answer.

“I would never be so arrogant as to try and suppose what YouTube is, whether it’s a Trojan horse or what their end game or objective is. Our inclination as an industry is that we lean in to innovation and consumer choice. But we have to balance that with the constant struggle to make sure our artists and labels get paid appropriately,” said Bergen.

“At Warner, our view is constantly evolving, but we are not allergic to advertising-supported models. It’s a matter of how strong the support is.”

KEY THEME: IT’S NOT ALL ARGUMENTS

To end on a positive note, there were some olive branches held out in the IFPI’s event, with labels keen to stress that they want positive relationships with the technology industry, not just the opportunity to squeeze the pips of the streaming firms even more if legislation changes go their way.

“Our future depends on harmonious convergence of media and technology. We need the partnership of tech companies. They must be fairly rewarded if we expect them to continue to bring innovation and creativity to music,” said Michael Nash, EVP of digital strategy at Universal Music Group.

He praised Spotify, Apple Music and SoundCloud, while looking further ahead. “As technological change advances we see new business opportunities in everything from mobile messaging to virtual reality,” said Nash.

Meanwhile, Nash warned that there needs to be a “nuanced view of the marketplace” including the interplay between different services. “Consumers tend to consume from multiple services. They don’t just consume from one service that happens to be free and one that happens to be paid,” he said.

Those $18-a-year Spotify users and $1-a-year YouTube users aren’t two entirely-separate groups: they’re a Venn diagram. A welcome note of caution in what’s becoming an increasingly heated (again – it flares up every few years around licensing-renewal time) debate.

For now we can say at least: the recorded-music market is growing; there are lots of positive signs; and the “value gap” argument is going to run and run this year.

Words: Eamonn Forde and Stuart Dredge