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Record industry returns to growth, but would rather talk about the value gap

By | Published on Wednesday 13 April 2016


So, few surprises in the annual stats pack put out by the International Federation Of The Phonographic Industry yesterday. Basically 2015 was a good year because of Spotify. But it could have been a whole lot gooder if it wasn’t for bloody YouTube. The end.

Well, we probably shouldn’t ignore the two big developments that occurred in the global record industry last year, even though both key trends had already become apparent from country specific figures previously published, and financial reporting from the three majors.

First, 2015 saw global recorded music revenues grow by 3.2% to $15 billion. The record industry went into steep decline during the 2000s of course, and has been more or less flat in recent years, so the uplift is welcome news.

The record industry of 2016 is still a long way off the record industry of the late 1990s, but it’s worth remembering that these figures are revenue. Digital is much more profitable than physical, and will get more so once the initial set-up costs of digital infrastructure are paid off. Plus record labels are increasingly cut into other artist revenue streams beyond recordings, especially with new talent, and that income is not reported in the record industry’s official stats.

The second key trend in 2015 was that digital finally became the record industry’s primary revenue stream worldwide. Digital now accounts for 45% of total revenue, while physical sales (mainly CD with a bit of vinyl revival) is 39% of the pie. Sync and growing public performance income account for the rest of the loot. Of course the physical-to-digital shift varies greatly from market to market, but digital now outperforms physical in nineteen countries.

Within digital, downloads are still down loads, meaning the success story – of both the digital market and the record industry in general – is all because of streaming. Revenues from streaming services were up 45.2% last year to $2.9 billion, meaning the streaming market has grown more than four-fold over the last five years.

That said, don’t write off downloads just yet. Income from the download stores was down 10.5% last year to $3 billion, which was a steeper decline than in 2014. But download money was nevertheless slightly ahead of streaming income last year, even though streams are likely to become the biggest digital revenue generator in 2016.

Within the streams, really it’s all about the premium on-demand services which, together, now have about 68 million users worldwide, the IFPI reckons, up from about 41 million in 2014, and about eight million five years ago. Though, record industry bosses are keen to stress, while those sign-up figures are good, they’re not good enough.

So why aren’t they higher? Is it because it’s still relatively early days for the streaming market? Is it because the industry has left all the marketing to the digital services, who then often outsource it to the tel cos, who don’t necessarily sell the concept of subscription streaming particularly well? Is it because artists still tend to drive fans towards downloads – or promo content on SoundCloud – rather than bigging up subscription streams? Is it because the media narrative on streaming is that all artists hate it? Is it because the highest profile artist advocates of streaming have often done exclusivity deals with one platform, which just pisses off music fans in general?

No, obviously not. It’s all because of bloody YouTube. “There is good reason why the celebrations are muted”, said IFPI boss Frances Moore yesterday, despite noting the good news for her industry in 2015. And that good reason? “Revenues, vital in funding future investment, are not being fairly returned to rightsholders. The message is clear and it comes from a united music community: the value gap is the biggest constraint to revenue growth for artists, record labels and all music rightsholders. Change is needed – and it is to policy makers that the music sector looks to effect change”.

Ah, the value gap. We all knew that was coming. It was while releasing last year’s global industry stats that the IFPI first put safe harbours and the value gap at the top of its lobbying agenda, ahead of any calls for new laws to combat piracy.

As much previously reported, user-upload services like YouTube and SoundCloud say that they are not liable for copyright infringement – even though users routinely upload music to their servers without licence – because of the so called safe harbours in US and European law.

They get this protection providing they offer rights owners some kind of takedown system, like YouTube’s Content ID. But even good takedown systems – and Content ID is probably the best – require labels and music publishers to invest time and money in taking down their content when others upload it. Which means you might as well monetise your content on YouTube, to at least recoup that cost.

But – argues the music rights industry – YouTube has exploited that fact to secure much better terms from labels and publishers than the premium streaming services. Meanwhile the existence of free on-demand platforms like YouTube and SoundCloud make it harder for Spotify, Deezer, Apple Music, et al to sign up paying users.

To this end, the music industry wants copyright law rewritten, so that YouTube type services no longer benefit from safe harbours.

“Today the safe harbour rules are being misapplied”, said the IFPI yesterday. “They were intended to protect truly passive online intermediaries from copyright liability. They were not designed to exempt companies that actively engage in the distribution of music online from playing by the same rules as other online music services. The effect is a distorted market, unfair competition and artists and labels deprived of a fair return for their work”.

Copyright law is being reviewed in Europe, and safe harbours specifically are up for review in the US, so the music industry is hopeful it may get the safe harbour amendments it wants. Though that said, our sources in Washington and Brussels aren’t so certain the music industry can take on Google et al in this domain, especially as other branches of the entertainment industry have other copyright law priorities, particularly in Europe.

Even if the music industry did get its way on safe harbours, and the rewritten laws were very clear, and each country in Europe implemented them quickly, and the labels and publishers’ respective negotiating hands were strengthened with YouTube et al, enabling them to get the kinds of deals they would like, one key problem remains.

Realistically only a minority of consumers will ever pay £10 a month for recorded music, and a sizable portion will never pay any monthly subscription fee. So even if the music industry could close the value gap, what would the mainstream streaming services look like?

What kinds of bundling, advertising and upselling could be employed to make the high-consumption-low-revenue music services that are an inevitability (and which we used to call radio) work for service providers, rights owners, artists, songwriters and, maybe let’s not forget that important group, the fans.

So, while – as a trade group – the IFPI is probably right to employ its lobbying skills if it feels the record industry’s return to growth is being hindered by the good old ‘value gap’, at the same time labels, publishers, artists and songwriters shouldn’t assume that fixing safe harbours will be some kind of panacea.

The music industry at large needs as many as people as possible to sign up to the current subscription services – so that the loss-making businesses driving the record industry’s growth can survive long-term – and at the same time labels and service providers need to work out what mainstream streaming could look like.

That said, for artists, securing a fair share of the digital income already being generated, and building good direct-to-fan businesses that sell directly to core fanbase while circumventing all this nonsense, is also a priority.

But hey, 3.2% growth, woo! Well done everybody.