Technology and the Recorded Music Industry

• Introduction
• A Brief History
  • How It Began
  • 20^th Century to 1930s
  • 1940 to 1990
  • The World Wide Web and MP3
  • File Sharing
• Physical and Digital Sales Trends
• How the Industry Is Changing
  • The Tide Has Probably Turned
  • Diversification
  • A Survey of Digital Music Consumers
  • Combating Piracy
• Conclusion
• Author
• References

Introduction

This article provides background for a statistical analysis of the Australian recording industry published as The Australian Recording Industry. The description is addressed to general users of the knowledge base, and the technical points appear mainly as footnotes or hyperlinks rather than in the main text — to be perused by the curious and the specially interested and skipped by others who just want the main storyline.

Technology has been such an all-pervasive influence on the recorded music product that it justifies a global perspective on what is indeed an global industry. This view is reinforced as we consider the past two decades when the traditional physically based range of products, themselves with a long history of technological change, has been affected by the advent of digital products. The industry can well be considered a case of what Joseph Schumpeter, the economist with perhaps the deepest understanding of the role of technology in a capitalist society, termed creative destruction — unsettling for participants but part of the real world.¹

The writing of this article follows only a month after the publication of the latest annual digital report by the International Federation of the Phonographic Industry (IFPI). In a brief space it gives a comprehensive up-to-date picture of the current state of the market, which is the main subject of the third and last main section.

A Brief History

How It Began

The industry has been shaped by technological change since it was founded a century and a quarter ago. This is evident from any timeline, starting with three major 19^th century events:

1. 1877: Thomas Alva Edison (1847-1931) invents the mechanical phonograph, which in his version is a hollow wax cylinder covered by tin foil (on which he recorded “Mary had a little lamb”). This technology was subsequently developed to play sound recorded as grooves in the wax itself, and the cylinder was popular from 1888 until 1915 when the flat disc won the commercial battle. Commercial production of cylindrical phonographs ceased in 1929.
2. 1887: German-born US immigrant Emile Berliner (1851-1929) patents the gramophone and flat-disc record.²
3. 1898: Danish engineer Valdemar Poulsen (1869-1842) patents the “Telegraphone” — the first device in history to use magnetic sound recording, based on a thin steel wire coiled around a brass cylinder. It is described in 100 Years of Magnetic Recording, 1898-1998: Poulsen’s Patent.

The following description of events from 1900 to 1990 is based largely on Chronology: Technology and the Music Industry, by Callie Trantor (published by PBS, the US Public Broadcasting Service).

20^th Century to 1930s

• At the turn of the century, improved materials and production techniques give both cylinder and disc recordings a clearer, stronger and more dynamic sound.

• 1901: The 78 rpm record has its debut — with subsequent refinements it lasts as a format until 1974.³
• 1900s: The popularity of player pianos leads to the first major copyright cases as piano roll companies refuse to play music publishers for the right to reproduce songs mechanically. The US Congress eventually passes a law requiring a royalty to be paid.
• 1920s: Mass production of commercial radios and the emergence of commercial radio stations cause record companies to forbid major artists to work in radio — in vain: record sales plummet. To remedy this, the industry seeks to improve the sound fidelity of its records. Bell Telephone Laboratories introduces electrical amplification, and the first electrically recorded discs go on sale in 1925 (putting an end to the so-called acoustical era of recordings).
• 1930s: The offer of free radio broadcasts during the Depression contributes to another decline in record sales.

1940 to 1990

• 1943: Vinyl (polyvinyl chloride, PVC) is adopted as the material for record production.⁴. Vinyl survives as the record industry’s material of choice long after WW2 ends.
• 1948: Columbia launches the first 12’’ 33⅓ rpm long-playing microgroove record. Over the following decade the LP becomes the dominant vinyl record technology.
• 1964: Decades after this technology was developed, the cassette tape finally becomes mainstream when Philips introduces its own 30-minute format for the tape cartridge and allows other manufacturers to duplicate the specifications. The first portable audiotape recorders were introduced in 1951.
• 1979: Cassettes hit the big time with the introduction of the Sony Walkman, providing portable sound that benefits from improved quality.
• 1982: Released in Japan, Billy Joel’s 52nd Street becomes the first commercially released compact disc in the world. By 1988, the CD surpasses the LP in sales. Within three years of the CD’s arrival in the marketplace, the US electronics industry sells one million CD players — a feat that took colour television eleven years to achieve.
• 1987: The Digital Audio Tape (DAT) meets immediate resistance from composers and music publishers who fear piracy due to its superior sound quality and capacity for near-perfect duplication. Due to the resistance from the industry, DAT did not break into the consumer market. However, it does signal the entry of serious competition from digital products as we enter the final decades of this brief history.

The World Wide Web and MP3

Around 1990, two momentous events set the industry on its future course: the birth of the World Wide Web and the birth of MP3 (both after considerable gestation periods). Subsequent sales of traditional physical recordings would peak in 1999 and move into a decline which has required a large amount of adaptation. Sales of digital products would skyrocket from the early years of the 21^st century — as discussed in the next main section, these sales reached almost 34% of the total value of physical and digital products worldwide in 2012 (46% in Australia according to a special IFPI report).

The World Wide Web naturally had to wait for the establishment of the Internet and its associated technologies. The Advanced Research Projects Agency Network (ARPANET) was initially funded by the US Department of Defense for use by its projects at universities and research laboratories. It was the world’s first operational packet-switching⁵ network, the first to develop the necessary communications protocols (TCP/IP),⁶, and the progenitor of the global Internet. ARPANET began in 1969 as a network of computers based at four American universities but had expanded to 213 host computers by 1981, when the National Science Foundation (NSF) developed its network to enable access for computer science departments at academic and research institutions that couldn’t join ARPANET for various reasons. In 1983, ARPANET was split into civil and military sections. It was decommissioned in 1990.

Internet service providers (ISPs) began to emerge as businesses in the late 1980s and early 1990s, another requirement in the commercialisation process. The last restrictions on the use of the Internet to carry commercial traffic were removed in 1995 when the NSFNET was decommissioned.

The World Wide Web depends on the existence of an open Internet to work. On 12 November 1990, Tim Berners-Lee and Robert Cailliau working at CERN, the European Organisation for Nuclear Research, wrote WorldWideWeb: Proposal for a HyperText Project, which was adopted the following month.⁷ This became the final link in a development process that would last a decade and enabled use of the web to grow between 1992 and 1995, with most early adopters being university-based science departments and physics laboratories. The only large hurdle left to jump was the lack of a suitable graphical browser. Mosaic was launched in 1993 and is the browser credited with popularising the World Wide Web.

The genesis of MP3⁸ was the work of a German electrical engineer, Karlheinz Brandenburg (born 1954), who gained his PhD in 1989. His research became the basis of MP3 and other modern audio-compression schemes.

MP3 is the common format for consumer audio storage, and the de facto standard of digital audio compression for the transfer and playback of music on most digital audio players. Its algorithm is designed to greatly reduce the amount of data required to represent the recording while ensuring that the result still sounds like a faithful reproduction of the uncompressed original for most listeners.

MP3 was officially released in 1995, the same year the Internet and World Wide Web could function freely, following the withdrawal of the NSF Network. Between them they would act as the catalysts for much of the structural change the international recorded music industry would have to go through over the ensuing 15 years and more.⁹

File Sharing

The illegal aspects of file sharing (relating to copyrighted content) remain one of the main concerns of recording companies, and their organisations, everywhere.

File sharing has been around for decades but until fairly recently largely concerned physical products (punched cards and tapes, magnetic data tape storage, cassette tapes). In 1971, however, IBM introduced the original floppy disc which became a frequently used form of data storage and exchange. It was the predecessor of the CD-ROM and today’s flash media which are used in a wide range of portable devices including smartphones and tablets — not to mention USB drives which make it easy to share files. First marketed in 2000, USB drives are smaller, faster, have thousands of times more capacity (increasingly so as capacities reach new heights unimaginable a few years ago), and are more durable and reliable than the CD-ROM because they have no moving parts.¹⁰

These devices are not themselves primarily associated with the Web, though they can be used to transmit and copy files. The major problem for the recording industry began in 1999 when a company called Napster set up a pioneering peer-to-peer (P2P) music file-sharing service on the Internet. It promoted the sharing of audio files encoded in MP3 format. The original Napster company peaked at 26.4 million users in February 2001 but was sued by A&M Records in a landmark case, which found that Napster could be held liable for infringing the plaintiff’s copyright. Napster shut down its entire network in July to comply with the injunction, and in 2002 lost its appeal to have the verdict overturned.¹¹

Second-generation P2P companies (exemplified by Gnutella) used a different model, connecting users remotely to each other rather than through a centralised service like Napster. The current third generation BitTorrent model allows users to create an index of the files they want to share, and uploads them to dedicated websites where they can be downloaded.

The current situation, as reported, is that file sharing remains a serious issue for the music industry and for policy makers. The BitTorrent protocol is said to have created more technical stability, using the lightweight User Datagram Protocol (UDP).¹² So far no other file sharing protocols have been introduced, only patches to the existing protocol.

Much of the basis for increased legal action against file-sharing services was created when the Digital Millennium Copyright Act (DCMA) was passed unanimously by the US Senate in October 1998, implementing two World Intellectual Property Organisation (WIPO) treaties. The DCMA criminalised production and dissemination of technology, devices, or services that allows users to circumvent technical copy-restriction methods used to control access to copyrighted works (known as digital rights management or DRM). It also criminalised the act of circumventing an access control, whether or not there is actual infringement on the Internet.¹³

In March 2003, an Open Music Model was published, advocating an alternative business model for the recording industry. Described as an economic and technological framework for the recording industry based on research conducted at the Massachusetts Institute of Technology (MIT), it predicted that the playback of pre-recorded music will be regarded as a service rather than individually sold products, and that the only system for the digital distribution of music that will be viable against piracy is a subscription-based system supporting file sharing and free of digital rights management. The research also suggested a price point of five US dollars per month subscription for unlimited downloads as the market clearing point. The Open Music Model lists five necessary requirements for a viable commercial digital music distribution network.

1. Open file sharing. Users must be free to share files with each other
2. Open file formats. Content distributed in MP3 or other formats, without DRM restrictions
3. Open membership. Copyright holders must be able to freely register to receive payment
4. Open payment. Users must be able to access the system using credit cards or cash
5. Open competition. Multiple systems must exist which can tie into each other’s file-sharing databases — monopolies whether or not “legally” designed must be excluded.

Criticism of the model included that it wouldn’t eliminate piracy. Others countered that it was the most viable solution, since piracy was inevitable anyway. Supporters argued that it offered a better alternative to the current law-enforcement based approach by the recording industry.

There may be a trend towards reduced reliance on digital rights management (DRM), the class of access control technologies used by hardware manufacturers, publishers, copyright holders and others to limit the use of digital content and devices after sale. DRM is or has been used by Amazon, AT&T, AOL, Apple, Microsoft, and Sony among others. It has been alleged that the DMCA may have been largely ineffective in protecting DRM systems, as software allowing users to circumvent DRM apparently remains widely available.

Since the Open Music Model was published, some of its principles have been adopted by the recording industry. While abolition of DRM would be a major shift for the industry, as long as IFPI is adamant about supporting it, aided by the major legislation — convincing the industry of any advantages of an “open music” business model would at least depend on significant recovery of the recorded music market. However, [http://en.wikipedia.org/wiki/Apple_Inc. Apple] CEO Steve Jobs called for an end to DRM in music in 2007, and iTunes which had been launched with full DRM provisions in May 2003 abolished it on most of its music in 2008. There have also been a number of variations on the Open Music Model’s suggested $5 monthly subscription price, including Yahoo! Music and the prominent music streaming service founded in Sweden in October 2008, Spotify.

Mary Madden, a senior researcher with the respected Pew Internet and American Life Project, wrote a paper in 2009 on what media analysts have called “Napsterization”¹⁴ “to refer to a massive shift in a given industry where networked consumers armed with technology and high-speed connectivity disrupt traditional institutions, hierarchies and distribution systems”. Her final section is headed, “Done Restricting Music: The end of DRM and the future of music online.” Apple’s decision prompted the following comment, “And now that iTunes and many other legitimate digital music offerings are DRM-free, the labels have effectively set a new industry standard in freedom and flexibility for consumers.” She concludes: “Looking ahead, as users’ engagement with cloud computing activities becomes more pervasive and seamless, there may come a time when the difference between downloading and streaming music files becomes moot. At the moment [in 2009], Pew Internet Project data shows that 69% of online Americans have already taken advantage of some form of cloud computing such as using webmail services, storing data online, or using other applications whose functionality is located on the web.”

Madden’s paper has a large number of references to other work on the subject and is recommended reading.

The industry will undoubtedly continue to protect its labels and artists as it should, but it is getting through much of the transition, and new strategies may emerge as the market settles down following the “creative destruction” that Napster was instrumental in putting into top gear. Ensuring that the industry is viable and its artists receive their due rewards is essential, but the business model may be changing.

Mary Madden notes that the music industry had been in the front line to “convert freeloaders to become paying customers”, and it goes without saying that it is being watched closely by other industries that are undergoing digitization, including newspapers, book publishers, movies and videos.

Physical and Digital Sales Trends

The purpose of the remainder of the article is twofold: to present current total trends in retail value globally and in individual countries, and in the concluding sections idenfify some main factors driving the global music industry in its future course.

The latest annual IFPI Digital Music Report, published in February 2013, confirms the more cautious optimism that was expressed in the preceding report — a sign that the situation is stabilising further with a growing digital market and steadying sales of physical records and other items. Referring to the developing music technology, the latest IFPI report is subtitled “Engine of a digital world” with the total retail value of physical and digital products edging up if only by a marginal 0.3% in 2012, compared with 2011.

The general picture can be considered from available statistics. Though there are no published global retail value figures going back into the 1990s, it is known from the press release announcing the annual IFPI report that sales of physical recordings peaked in 1999. In 2003, the first year shown on Chart 1 when the digital market was in its infancy, the global total remained as high as $34 billion, followed in 2005 by $33 billion including digital sales hitting their first billion dollars.

Physical sales then fell into something resembling free fall from 2005 to 2010, after which the decline has been gentler. By 2012, sales of digital music product have grown to a level that for the first time resulted in a (tiny) total market increase. In fact, digital channels now account for the majority of total income in markets including India, Norway, Sweden and the US (IFPI report p 6). Australia, according to a special press release experienced its first increase since 2009. “This growth can be attributed to the growing demand and consumption of digital music products, which made up 46.3% of the industry’s dollar value in 2012, compared to 36.7% in 2011 and 27.2% in 2010.” These are impressive changes in market share for digital products, over just two years.

The published IFPI data do not allow strict comparison of the sales value from year to year because the statistics are adjusted each year and we don’t see the revised statistics for previous years. For example, global sales were reported at $16.15 billion for 2010 in the most recently available global table, but the latest IFPI report estimated global production at 16.5 billion in 2012. Applying the 2011 decline of 3.0% and the 2012 increase of 0.3%, a revised global retail value works out at about $16.9 billion for 2010. The annual rates of change quoted in the IFPI report would be based on the comprehensive long-term database available for industry specialists.¹⁵ The statistics in Chart 1 represent the estimated trends which we are confident present a reasonably true picture.¹⁶

It is hard, however, not to be struck by the difference in magnitude of the two segments making up the global recorded music market. It really seems to be a case of Schumpeter’s “creative destruction”, which has left the consumer considerably better off at the expense of those supplying the traditional product range of physical albums, singles and DVDs. The most extraordinary thing about the physical versus digital market forces over the period since the rapid decline began in 2005 is that by 2012 physical sales had declined from $33 billion to $11 billion (by $22 billion) while digital sales of what would be substitutes to physical recordings rose by only $4.4 billion, from $1.2 billion to $5.6 billion. In other words, the value of physical sales decreased by almost five times more than digital sales rose over those seven years. Today, physical sales are still falling (by 7% in 2011 and an estimated 4% in 2012), though for the first time the (9%) increase in digital sales was ever so slightly higher than the fall in physical sales, generating the net increase of 0.3% in the global retail value.

The above comparison of the physical and digital sales trends and relative magnitudes is based on the assumption that the total market would have remained static in the absence of the digital boom. It is hard to imagine, in any case, that total industry sales would have been halved in seven years without any available digital substitutes, just because people suddenly got tired of buying albums and listening to recorded music generally.¹⁷

Looking forward, time will show whether one swallow will make the summer in this case and the industry’s optimism, as expressed in the IFPI report, is justified. The concluding sections of this article will go some way towards sharing the optimism in view of the extraordinary expansion of innovative activities, both in product range and geographically, which is currently taking place. We may also be reaching a stage where the market for physical products (albums, singles, and DVDs) is reaching a plateau (or even start trending up again as is happening in a few countries already).¹⁸

It is difficult to imagine, however, how the global market could once again grow to the size it achieved at the end of the 20^th century. The composition of the market has changed too much, digital products have proven to be of equal or superior quality and less expensive for what consumers want, and the rapid expansion into new markets which is happening is likely to follow similar trends towards digital sales. The news that more than half of the Indian market is now digital is a case in point.

Table 1 shows the standard IFPI table for individual countries, here represented by the top 10 in terms of retail value in 2010. Australia was the sixth-largest market, as it had been in previous years.

The left half of Table 1 shows that the physical market is dominated by albums supplemented by singles and DVDs. The largest single market measured by number of physical units was the US followed by Japan, Germany and the UK. The ranking was approximately similar for total retail value which includes digital products.

The right-hand column shows that by far the highest consumption per head of population in 2010 was in Japan, and Italy and Brazil spent much less per head than the other eight nations (which at least in Brazil’s case would be due to a dual economy with some rich but many more poor). Australia, on these per capita data, was in an intermediate position together with Britain and the two Western European countries in the table. The US and Canada are fairly low on the list, but the IFPI report noted that the US now spends more than half its recorded sales on digital products, which provide more value for money spent.

It is unclear whether there is a connection between the extent to which the digital market has taken over, the extent to which recordings are bought by all population segments, and whether price levels for particular products vary among countries. The left-hand box shows that total sales per head in 2005 were considerably higher in all the countries included in Table 1. Britain topped the list at over $55 per head followed by Japan and the US around $38, Australia and France around $32, and the two Western European countries around $26. This suggests that the digital factor has been influential in all these countries, including Italy and Brazil where total sales per head remain relatively low.

The greatest decline in per capita sales over the seven years was in America (69%), compared with 60% in the UK and 40% in Australia. The smallest declines were in Germany (20%) and Japan (16%), suggesting a higher degree of loyalty towards traditional recordings.¹⁹

Published annual statistics exist for sales of physical units (albums, singles, DVDs, previously also VHS cassettes). These physical entities cannot be compared with the total retail value in Table 1 which includes a growing component of digital products. They can, however, be used to provide an approximation of national market trends. Chart 2 uses a logarithmic scale on the vertical axis to provide a visual impression of what in this case are rates of decline. The chart shows trends in the six countries with the highest sales in 2010:

• The US market declined from 744 million units in 2005 to 236 million units in 2010, that is, by 68%. The compound annual rate of decline over these five years was 20.5%, shown in the right-hand margin of Chart 2. It is clear from the slope of the US line that the rate of decline exceeded that of any other nation on the chart.
• The second-largest decline was in France, with a total fall of 61% over five years, which translates to an annual rate of decline of 17.1%.
• The British and Australian markets measured by total physical units both declined by 49% over the period, which is equivalent to an annual compound rate of about 12.6%. This rate of decline, as it happened, was identical with the decline in global sales of physical products over the same period (Chart 1).
• Japanese sales declined by 40% over the five years, or by 10% per annum. The German market performed best among the six top countries with a total 20% decline, or 4.4% pa. — the German line on Chart 2 is the flattest of all on the log scale.²⁰

The statistics in Chart 2 are distorted to the extent that the product mix has been changing, whether or not it is associated with the switch to digital product, or with changing pricing policies and other marketing strategies. The right-hand box shows that physical sales are dominated by albums (CDs). The following summary describes changes in product mix between 2005 and the situation in 2010 illustrated by the box:

• Sales of singles recordings reached very low levels in 2010, except in Japan. In 2005, these sales were already below 1% of the total number of physical products in the United States, and have remained there. In Germany, singles accorded for 6% of that number, in France for 3%, the UK 2.3%, and Australia nil. Singles levels were considerably higher in 2005: 19% in France, 13-14% in Germany, Britain and Australia. It is understood that the reason for the decline in the physical single format is that these were largely replaced by downloads whereas the albums they were promoting stuck to the CD format. This temporary discrepancy between a product and what it was promoting would have aggravated the trends shown in Chart 2 to some extent. In Japan, however, the share of singles in total units increased from 21% in 2005 to 25% in 2010.
• The share of albums in 2010 fell to 65% in Japan, from 72% in 2005. The second-lowest share of albums to total units was in Germany (86%), followed by Australia (90%), France (91%), UK (94%), and the US (95.5%).
• The residual, indicated in the box by the difference between the columns and 100% is almost exclusively DVDs. The residual varied from almost 10% in Japan and Australia (both up from 7% in 2005), and increased slightly from about 7% to about 8% in Germany. The share fell in France from 11% to 7%, and remained at 3-4% in Britain and the US.

How the Industry Is Changing

The first part of this section describes the main message of the IFPI digital music report presenting the situation at the end of 2012 when the CEO, Frances Moore, concluded that the tide may have finally turned for the global industry after years of considerable havoc. It then provides a brief explanation of how the global recording market, driven by digital products, is becoming highly diversified, as well as having expanded strongly across countries and continents in the past two years. The third subsection presents the main findings of a survey into music consumers’ attitudes, centred on the piracy issue, before discussing this issue verbally in the final part.

The Tide Has Probably Turned

Frances Moore, IFPI’s chief executive, notes in her executive summary in the digital music report that the previous report did express cautious optimism, based on “Expanding choice, going global”, which was the subtitle of the 2012 report. She comments, “One year on, the optimism does not seem to have been misplaced.”²¹

The main events underpinning the present feeling of increasing optimism come under the following headings in the executive summary:

1. Expansion has gone truly global: two years ago the largest international digital services were present in only 23 countries — now they cover more than 100 including major markets such as Brazil, Russia and India.
2. The record companies’ strategies of proactively licensing across different revenue channels: most revenue streams are growing — downloads, subscriptions, advertising-supported, video, performance rights, synchronisation rights.
3. Consumers are on side as revealed by the survey commissioned for the report.

“These are hard-won successes for an industry that has innovated, battled and transformed itself over a decade. They show the music industry has adapted to the internet world, learned how to meet the needs of consumers and monetised the digital marketplace.” Moreover: “Music has not only adapted to the Internet — it is at the very heart of this development, driving technology, helping sell services, fuelling economic growth … .”

The main challenge is that the industry remains “rigged by illegal free music.” Cooperation is sought from advertisers, search engines, Internet service providers, payment providers (credit cards, PayPal), and other intermediaries. Some of these gain from having customers among the illegal operators. Moore notes that some “commitment” was expressed in 2012 to give priority to legal music sites but “in 2013 we look for tangible results in this area.”

The CEO also questions current views on copyright reform in government circles. “Copyright rules have provided the foundation for our industry to reinvent itself in a digital world. Any suggestion of change should be based on rigorous evidence that there is in fact a problem. A weakening of copyright rules would set back the music industry at the very moment when it is on the path to recovery. The real priority, in our view, should be to make sure existing copyright rules are properly enforced.”

Diversification

Downloads: Download stores continue to grow steadily and spread globally. They represent around 70% of global digital revenues and sales increased by 12% in 2012 — digital albums enjoyed twice the growth rate of digital tracks (17% compared with 8%).

The major players, Amazon, Apple, Google and Microsoft, have all joined the market and upgraded their services. Download stores would also be major contributors to, and beneficiaries from, the globalisation that has seen national markets growing from 23 two years ago to more than 100 at the end of 2012. Record companies are able to reach customers where there was little retailing infrastructure until recently — there are now more than 500 licensed digital music services worldwide, offering some 30 million tracks to consumers.

The four major players have expanded their services by offering cloud-based features which provide customers with access to their entire music collections wherever they are and on whatever their devices. Consumers research in the UK suggests this is a key feature for music fans.²²

The IFPI report refer to these services saying that download services have received “a boost from the cloud.” The companies are going about the cloud development in different ways, with a typical annual payment of $US24.99 (the most recent cloud-based service, Google Music, is free at least in the form in which it was introduced). These services use a “scan and match” system in which a customer’s local music collection is compared with the main database of music. When it finds a match, a copy of that song is placed in the local library and it then uploads any remaining songs that it can’t match. Once the songs are stored in the central database they become available for streaming through apps.

Some services, such as Apple which holds some 26 million songs in its iTunes Store, do not charge if a song is bought from that store, but charges a fee if the song is from a CD track or otherwise not part of iTunes. In a rapidly developing market, it is probably inevitable that grey areas develop, in this case when the boundary between download and subscription services seems to be blurring.

Subscription services are now an integral part of the recorded music market with 20 million paying subscribers in 2012, an increase of 44% on 2011. These services probably crossed the 10% market share of total digital music revenue in 2012 for the first time. The share is higher in Europe, helped by fast growth in Scandinavia. The market survey quoted in the next section illustrates the competitive situation relative to downloading (see Chart 4).

As noted above, there are some grey areas in what are included as subscription services. Some operators such as the Swedish-based Spotify offer a choice between free services and subscriptions, others offer subscriptions only. Spotify has increased its user base to 20 million, of whom about 25% pay a monthly subscription of either $4.99 or $9.99 (over one-third in Sweden itself). These services are limited to music provided by the service, in contrast to the cloud-based services which can expand their central libraries from users’ collections.

Advertising-supported services: This seems to be another overlapping concept. The IFPI report makes a great show of advertisers earning money from unlicensed services. However, the legitimate services would also be highly dependent on advertising revenue. In the report, the main examples of these services refer to music videos. Ole Obermann, a senior Sony executive, comments (p 16) that “some advertising-supported video streaming services are performing well and demonstrating significant growth rates, improving revenues and a more compelling customer experience.”

The IFPI report also notes that YouTube is the most popular video streaming device in the world, with more than 800 million active users per month, and nine in ten of the most watched videos have music-related content. Vevo is the most viewed channel on YouTube with four billion music videos streamed per month, and is a music-video platform in its own right. Mobile is the fastest growing area, with 21 million mobile and tablet apps downloaded at the end of 2012. Having launched in seven new national markets including Australia in 2012, the service is now live in 11 countries. “Vevo also invests in its own programming, improving and broadening its content offer to appeal to the global TV advertising market, valued at US$ 197 billion”.²³

Music videos have just been mentioned in connection with advertising, including the size and influence of YouTube and the presence of Vevo, one of the two main specialist music video services. It and the other specialist, Warner Music Sound, are two of the top three channels on YouTube.

Performance rights income — “revenues generated from the use of music in TV and radio broadcasts, and public performance in venues such as bars, nightclubs, restaurants and shops — continues to increase. The sector grew by 9.3 per cent in 2012, and accounts for 6% of total industry revenues globally and as much as 10% in Europe and Latin America. A glaring anomaly exists in this market, however, due to the lack of a broadcast right in the US. This deprives performers and producers in the US of income they are entitled to in virtually every other country of the world.” (p 9)

Internet radio is increasingly popular with leading service Pandora accounting for 8% of all radio listening in the US (up from 5.6% in 2011), or 66 million active listeners. Pandora expanded to Australia and New Zealand in 2012. Slacker is another Internet radio service, available in Canada and the US. It offers three service tiers from free “Basic Radio” supported by advertising (another example of that) to “Premium Radio” at $9.99 per month. Most customers (60%) belong to the latter tier typified by male 25-34 year olds — slightly older than those using the basic service.

Synchronisation rights are licences granted by a holder of the copyright for a composition allowing the licensee to “sync” the music with a visual medium like film or TV. These rights were first included in the IFPI 2012 report, referring to 2011 when it amounted to $342 million. The IFPI 2013 report noted that it grew in 2012.

Use of social media: The IFPI report includes case studies of musical groups who have expanded their market through Facebook and other social media. This is another important development which can only be based on anecdotal evidence for now, as far as impact on the music industry is concerned. The report quotes surveys that clearly demonstrate the importance of these media, including:

• “Artists fuel huge levels of engagement across digital and social media. Research shows that 67% of social network users in 20 countries discuss music and movies, ahead of community issues (46%), sports (43%) and politics (34%) as topics of conversation. Social networks have developed vast user bases, with 66% of global internet users accessing them.”²⁴ (p 22)
• “The art of digital marketing” on p 18 about the band One Direction is compelling reading. The band expanded its reputation immensely across nations by generating 8.1 million followers on Twitter. “Social media enables artists to have a powerful direct relationship with fans, something that wasn’t possible to achieve with traditional media simultaneously on an international scale.”

Physical records and DVDs: The IFPI report includes a reminder that the this market still represented 58% of the global value. While the share has been declining, the level may be reaching a plateau or may even start to recover.

Geographical expansion: The expansion of national digital markets from 23 countries in 2010 to more than a hundred in 2012 is among the most dramatic in terms of potential growth. It should be possible to demonstrate statistically when local data are compiled but for now is just noted as another important factor.

A Survey of Digital Music Consumers

A survey by IPSOS MediaCT, a large specialist research firm (“media, content and technology”), was published on the IFPI website in February 2013 as background for the IFPI digital music report. The survey was conducted online with 7,502 Internet users aged 16 to 64 years in nine countries, chosen to be part of what would be a representative global average. The countries were USA, Brazil, the United Kingdom, France, Germany and Japan, each with 1,000 respondents, and Mexico, Sweden and South Korea (500 each).

The Internet penetration in each country except Brazil and Mexico was about 80%. Internet users in the two Latin American countries (penetration about 40%) are considered to be early adopters and not typical of the wider population.

The survey focuses on licensed versus unlicensed digital services. To encourage respondents to be honest about their use of pirate services, the term “unlicensed” was used rather than “illegal”. However, the company notes that some people may still not admit using such services. “Therefore piracy usage levels should be treated as the minimum levels within each country.” (p 2)

Charts 3 to 5 below have been redrawn from the survey.

Chart 3 compares Internet usage in the seven countries surveyed where it has reached a “mature” stage. The emphasis is on people using the Internet generally but having specifically used legal digital music services in the past six months. The question was, “When, if at all, did you personally last do each of the following?” — download services, music subscription services (paid/free), music video streaming services, internet radio or mobile products (e.g. ringtones).

The proportion of the total sample of 16-64 year olds is noted on Chart 3, ranging from 70% in South Korea to 53% in Japan (global average 62%). Usage was uniformly higher among the 16-24 year group, and varied less. Four countries showing 80-82% were close to the global average of 81%; in Britain, Germany and Japan the ratio was 74-75%. In Mexico, assumed to be dominated by early adapters, 90% used the Internet for legal digital music services (93% of 16-24 year olds). The corresponding figures in Brazil were 84% and 90%.

Music subscription services in 2012 according to the IFPI report experienced the fastest growth of all those on offer (by 44% to a level estimated to be above 10% of global digital music revenue). It has been competing successfully with download stores in Europe (Sweden, France) and also in South Korea according to Chart 4. In these three countries, at least, subscription services have now surpassed download services. This is not the case in America, Britain and Germany, nor in Japan where the general digital market remains relatively weak.

Chart 5 shows awareness of six major digital services, expressed as averages of the total sample across those countries where a particular service was available in 2012.²⁵ The note in the body of Chart 5 suggests (not surprisingly) that services enjoy greater than average awareness in the country where they originated: iTunes in America, Spotify in Sweden, and Deezer in France. But awareness of these services was indeed high globally, including recently introduced services such as Vevo (December 2009). Deezer seems to have had a difficult start in 2007 and ran into financial difficulties — it introduced a rejuvenated service model in November 2009.

The remainder of the Ipsos presentation presents key points; for full information refer to the document:

Different models appeal to different consumer needs (proportion of the 64% of the total sample who used legal music services):

• The main reasons for paying to download from online sites were that payment is easy/secure (48%), and legitimate (45%)
• Streaming for free for Internet radio services attracted users because it is free (62%), to hear/discover new music (42%), one can listen to music without having to purchase each song (42%), and it is legitimate (41%)
• Streaming music subscription services (paid or free) were attractive for their legitimacy (41%), to hear/discover new music (40%), for being free (39%), and being able to listen to music without having to purchase each song (38%).
• Streaming music videos for free online appealed because it is free (70%), one can listen to music without having to purchase each song (48%) and hear/discover new music (46%). Being legitimate was a reason ticked by 37%.

Even those who use unlicensed services agreed that the standard of legal music services is good. The following list shows the proportion of pirate users (P) and legal digital users (L) who agreed with each statement:

• There are good services available for legally accessing digital music (P 57%, L 64%)
• The quality/choice of legal music services has improved recently (P 56%, L 57%)
• There is less need to use pirate services because there are more legal digital services available nowadays (P 48%, L 54%)
• With the amount of music available legally on digital services, there is no excuse for accessing pirate services (P 43%, L 52%).

An average of 77% of legal services users agreed these services are either excellent, very good or fairly good. The proportion varies from 85% in Mexico and 82% in the US to 68% in Japan and 65% in South Korea.

Finally, more should be done to tackle piracy. Even many pirate users agreed (percentage of pirate users and legal digital users, P and L):

• Search engines should give priority to legal digital music services over pirate services when they show their search results (P 59%, L 64%)
• Accessing music through services that don’t have the copyright owner’s permission is unfair to those creating and producing the content (P 58%, L 63%)
• Companies should not advertise on websites that offer music without the copyright owner’s permission (P 56%, L 59%)
• It is acceptable for people to be fined or have their internet account suspended if they persistently file-share music without the copyright owner’s permission, after multiple warnings (P 45%, L 50%)
• Internet providers should have the responsibility of ensuring the internet is not used to distribute content without the copyright owner’s permission (P 48%, L 49%)
• Websites offering music without the copyright owner’s permission should be blocked/shut down so people can’t access them (P 43%, L 48%)
• I don’t know where to find legal music online so I use other services instead (P 31%, L 24%).

Combating Piracy

As an illustration of the continued serious threat, IFPI estimates … that as many as 32% still regularly access unlicensed sites (IFPI p 28).²⁶

The threat from illegal online services is part and parcel of what IFPI, and national recording institutions, focus on. This is understandable in view of the turmoil the industry has been through, and on recent indications successfully fought against. Whether alternative models will have a look-in later when the turmoil has faded from memory will need to be seen at the time.

Meanwhile we note some encouraging effects of the increasing market sophistication from the IFPI report:

“Today’s legitimate services are a compelling alternative to piracy — not just for the industry, but for the consumer too.” (p 5) The statement is backed by the positive attitude revealed by the survey. “Even those who admitted that they use pirate services believe that there are good services available for legally access digital music.” (p 9)

A senior executive of Universal Music Group, Bob Wells, stated (p 14): “Pirate services are clunky and old-fashioned compared to the legal services available. They are being usurped by mass consumer migration to smartphones and access to millions of tracks from legitimate subscription networks. Consumers can also tap into their social network and see what their friends and family are listening to. The pirate option just cannot offer that complete consumer experience.” (p 14)

“We need to challenge the notion that piracy hurts no one and explain to consumers that there are plenty of ways to get content legally.” Jill Lesser, Center for Copyright Information. (p 30)

The chairman of IFPI, Plácido Domingo, has the last word (p 4):

“I believe passionately in the right of artists to earn a living from their craft. It is only if artists, and those that invest in them, have their rights promoted in the digital environment that they can continue to make the music we all love. Copyright is the key ingredient to ensure this. Policymakers around the world are now debating how best to protect artists’ rights in the digital age. It is important they are able to ensure that copyright is respected in the digital environment, so that musicians can continue to develop as artists and the recording industry can grow and be able to invest in their careers.”

Conclusion

The recording industry in its physical and digital manifestations is truly global and during 2012 appeared to have turned the corner after having reshaped itself following a decade of traumatic developments. The indication as this article nears its completion in late March 2013 is that the global music industry is restructuring itself successfully for the digital age.

Author

Hans Hoegh-Guldberg. Entered 27 March 2013. Some revisions and additions 31 March and 4 April 2013.

References

1. “The opening up of new markets … and the organizational development [of firms], illustrate the same process of industrial mutation … that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. …” (Schumpeter’s Capitalism, Socialism and Democracy, 1942, p 82) For the complete quote see The Nature of Technology which places the concept of technology in a general theoretical context influenced by Darwin’s theory of evolution as well as Schumpeter’s perception that technology is an integral part of the economic structure, rather than an external influence.↩︎
2. The master disc was composed of zinc covered with a thin layer of acid-resistant wax. The original recording scratched lateral-cut spirals into the wax, and the scratched disc was dipped in acid. The resulting grooves in the exposed zinc became a negative stamp that allowed Berliner to mass-produce discs in vulcanised rubber. (In about 1895, a shellac-based compound was introduced and became standard for four decades or more despite being brittle.)↩︎
3. The earliest speeds of rotation varied widely, but by 1910 most records were recorded at about 78 to 80 rpm. In 1925, 78.26 rpm was chosen as a standard for motorised phonographs, because it was suitable for most existing records, and was easily achieved using a standard 3,600-rpm motor and 46-tooth gear (78.26 = 3,600/46).↩︎
4. It was initially used to make morale-boosting “V” (for victory) discs for US troops overseas↩︎
5. First proposed for military uses in the early 1960s and implemented on small networks in 1968, this method of data transmission became one of the fundamental networking technologies behind the Internet and most local area networks. It groups all transmitted data, regardless of content, type, or structure, into suitably sized blocks, called packets. Packet-switching remains the dominant basis for data communications worldwide.↩︎
6. ”Transmission Control Protocol”/”Internet Protocol”↩︎
7. The proposal focused on the HyperText Transfer Protocol, known by the acronym http to all Internet users.↩︎
8. MP3 is formally known as “MPEG-2 Audio Layer III” and is technically a patented encoding format for digital audio. MPEG stands for Moving Pictures Expert Group, which was formed to set security standards for ISO and IEC, the International Organisation for Standardization and International Electrotechnical Commission.↩︎
9. [http://en.wikipedia.org/wiki/2000s_in_the_music_industry A Wikipedia article makes an important additional point on how the digital trend was intensified: “By 2001, the cost of hard drive space had dropped to a level that allowed pocket-sized computers to store large libraries of music.”↩︎
10. Technically, the USB drive is a data storage device that includes flash memory (which can be electrically erased and reprogrammed) with an integrated Universal Serial Bus (USB) interface. IBM’s flash drive became available in December 2000 with a storage capacity of 8 megabytes, more than five times the capacity of a floppy disc. A one-terabyte USB drive was unveiled in 2013 (one million MB).↩︎
11. It is irrelevant to this story that Napster reopened later with a different business plan, was taken over, went broke, and has since been integrated into other P2P operations (and is listed as a provider of paid services). That just illustrates the volatile nature of this part of the industry. Subsequent generations of major file-sharing companies have had less checkered histories.↩︎
12. The alternative protocols have advantages and disadvantages as outlined here. For file sharing using BitTorrent, the trend is to go for the simpler UDP protocol though it may be less reliable than TCP (Transmission Control Protocol). It makes transmission simpler than the more heavyweight TCP because no acknowledgement (“handshake”) is required and the datagram technology allows packets to be sent individually and are checked for integrity only if they arrive.↩︎
13. The DMCA exempted Internet service providers (ISPs) and other intermediaries from direct and indirect liability. Legislation similar to the DMCA, also based on the WIPO treaties, was adopted by the European Union in 2001.↩︎
14. Mary Madden,”The State of Music Online: “,Ten Years After Napster, Jun 15, 2009.↩︎
15. IFPI’s Recording Industry in Numbers is described on the website.↩︎
16. Another possible weakness in the statistics is that there is no apparent way of applying an inflation index to obtain “constant prices”, but this might be a very difficult task in view of the disruptions to that the industry has suffered to date in the 21^st century. One price index would not suffice for such different market segments. The subject is explored for a single country in The Australian Recording Industry based on detailed statistics on sales quantities and values, but the published data are insufficient for the global market.↩︎
17. It is also implausible that piracy has made all the $16 billion difference to annual sales. Which doesn’t mean that illegal operations should not be controlled either through legislation or changing structures in some way as exemplified by the Open Music Model, or both.↩︎
18. The IFPI report, p 9, mentions that revenue from physical sales have increased in Japan and South Korea.↩︎
19. In Germany, digital sales reached €247 million in 2011, 16.7% of total sales of €1,483 million according to the national recording organisation, Bundesverband Musikindustrie, BVMI. Digital sales are projected to reach about €510 million by 2015, 33% of a total market of €1,550 million. The main projected growth is in downloaded albums and downloaded singles followed by subscription services (one minor digital market is expected to shrink — mobile ringtones). The March 2013 news page of the BVMI website may contain items like “Every second German listens to music on smartphones” and “Legal music downloads exceeds 100 million in 2012”, but another headline notes that the physical version of the CD remains the most popular Christmas present.↩︎
20. The rates were measured from actual levels in the beginning and ending years, using the compound annual growth rate (CAGR) formula. The results would have been similar though not identical using formal statistical regression analysis to calculate the trends.↩︎
21. She started her previous executive summary as follows: “Looking through the pages of this latest IFPI Digital Music Report, you see a striking paradox: on one hand, there is the innovation and drive of a business that has led the way for creative industries in adapting to the digital age; on the other hand, the extraordinarily difficult environment in which these changes are taking place.”↩︎
22. Wiggin 2012 Digital Entertainment Survey (note in IFPI report).↩︎
23. PWC Global Entertainment and Media Outlook.↩︎
24. Pew Research Center↩︎
25. Amazon MP3: USA, UK, Germany. Spotify: USA, UK, France, Germany, Sweden. Vevo: USA, Brazil, UK, France. Deezer: Brazil, Mexico, UK, France, Germany.↩︎
26. Based on data from Nielsen and ComScore as noted by IFPI.↩︎