CMU Trends Digital Labels & Publishers

Trends: Assessing the music industry in 2016 – is it saved yet?

By | Published on Monday 12 September 2016


Based on the keynote he delivered for Music Estonia last week, CMU Business Editor Chris Cooke considers the state of the music industry in 2016, and where the opportunities lie in the near future.

Over the last fifteen years, the media have declared an assortment of people and companies as the “saviours” of the music industry.

Steve Jobs and Apple are going to save the music industry. Mark Zuckerberg and Facebook are going to save the music industry. Daniel Ek and Spotify are going to save the music industry. Dr Dre and Beats are going to save the music industry. Though it’s worth asking, does the music industry actually need saving?

Now, it’s certainly no secret that the 2000s were a very challenging decade indeed for the recorded music industry. There were various reasons why. The explosion in online piracy was part of it, of course, but there were other factors too.

The growth in music-orientated radio and TV had already made music more freely available. Supermarkets and increasingly dominant mail-order websites drove down CD prices when record labels had become used to an artificially high profit margin on every album sold.

And, unlike with previous format shifts, it was too easy for consumers to convert their CDs into MP3s, meaning the industry didn’t enjoy quite the big resale of catalogue previous new formats had enabled.

With all these factors combined, the value of recorded music worldwide tanked. To what extent depends on how you do the maths, but it’s reasonable to assume the global record industry lost at least half its value in that decade of doom and gloom.

However, it’s also worth remembering that the record industry is just one strand of the wider music business and recordings are just one way that artists make money.

As the record industry went into steep decline, other strands of the industry – live, merch, brand partnerships – thrived. Even music publishing, the fortunes of which are in part linked to record sales, weathered the storm better than the record industry, because of the other revenue streams from which it benefits, which all grew.

That said, the record industry’s misfortune was felt across the wider music community because, traditionally, and especially in the big music markets, it was the record labels who were the primary investors in and marketers of new talent. Labels secured their risky investments in new artists by taking control of the sound recordings – aka, the one revenue stream that was tanking.

So, while other players in music might have felt a little smug that their side of the business was doing fine thank you very much, everyone’s long-term interests were in part dependent on the labels nurturing and growing new music, and that was dependent on those labels having profits to reinvest in the next generation.

Which meant, by the mid-2000s, the key questions were these:
• Can we revitalise the worldwide recorded music market?
• Can we change the way we invest in new talent?
• Can we empower artists to do more business direct-to-fan, requiring fewer middle-men?

And while everything seems to move so fast in the digital age, we’re still actually midway through answering all three of those questions.

While the 2000s saw steep decline in global recorded music revenues, the last five years have been more or less flat, with slight wobbles up and down.

But remember, ultimately, digital music is much more profitable than physical music. And while we may still be in the crossover period to an extent – where CDs still need to be pressed and distributed, and costs are still being incurred in building the infrastructure to deliver digital content and process digital royalties – each year the record industry’s profit margins should be widening.

In terms of revenues, while there are big variations between markets, we know that digital income now dominates on a global basis. Last year that was pretty much equally split between downloads and streams. But, the key trend for the last two years has been this: CDs continue to decline slowly, downloads decline steeply, streaming income is booming.

Which means the future stability and potential growth of the recorded music market is based on streaming. A by that, we really mean subscription streaming. Because while the free services – led by YouTube, Vevo, SoundCloud, iHeart Radio, Pandora and Spotify Free – all command by far the biggest audiences, it is the paid-for services – like Spotify Premium, Apple Music, Tidal, Deezer and Napster – that are bringing in the money. So what the music industry needs, therefore, is as many paying subscribers as possible.

The big questions on that front in 2016 are these: Quite how many subscribers are needed, and are there that many potential subscribers out there to be signed up?

We know that both Spotify and Apple Music are currently adding millions of paying subscribers each month, and that growth currently shows no sign of slowing. But at what point will subscriber growth peak? And will that be enough subscribers to keep two or three streaming services in business, while continuing to pay massive royalty cheques over to the music rights industry each and every month?

Of course, it’s not quite as simple as setting a target figure. The value of a paying subscriber can vary greatly according to what country they live in and what kind of subscription they pay for (eg full price, student discount, mobile bundle etc). Though it would be interesting to know what the approximate target figure – for each service, and for the industry at large – might be.

The pessimist’s view
A pessimist’s take on the recorded music industry as it currently stands might be this: labels are increasingly reliant on a small number of subscription streaming services for ever more significant percentages of their income, yet all these services are currently loss-making.

The monies the labels receive are also artificially high, because the streaming services commit to pay advances and minimum guarantees on top of the core revenue share deals done between the record companies and the digital firms. But these commitments are not sustainable long-term.

The hope is that the services will reach a scale at which revenue share consistently out-performs the advances and minimum guarantees, rendering those latter elements of the deal irrelevant.

Then the streaming services will get to keep about 30% of their revenue which, they reckon, will be enough to run their businesses and make a nice profit. But can the services actually reach that scale? And will it really all work if and when they do?

The optimist’s view
An optimist might believe that current subscriber growth at the big two services suggests that sufficient scale may indeed be reached, by Spotify and Apple Music at least, and then we’ll be fine. Or, perhaps more realistically, that this will happen, but in itself will only be phase one of the emerging streaming market.

Once as many people as possible are signed up to the current premium model, a ‘medium’ offer will be added with less functionality and a lower price point, and more effort will be put into bundling music services with the video-on-demand platforms. Then ad-funded will be used to monetise the remaining mainstreamers who simply won’t pay. And somehow these free and lower-price services won’t deter core music consumers from continuing to sign up to the full premium packages.

Then, while the record industry will likely never see the revenues it commanded in the 1990s, there will be a return to stability, and maybe a little revenue growth, on top of the aforementioned widening profit margins. So it’ll all be alright in the end.

For now, you can decide for yourself whether you buy the theories of our optimist or our pessimist, or something in between. But remember, recorded music is just one strand of the wider music business. The fortunes of the labels only affect everyone else in the music community because of the industry’s traditional new talent investment approach.

Many labels, of course, have started evolving the deals they do with artists so to tap into other revenues, so their risks are no longer solely secured simply on one unstable income stream. Such deals have not been without controversy, though they are increasingly the norm when new artists seek investment and marketing from a label.

Despite the controversy, these multi-revenue stream deals – sometimes dubbed ‘360 degree deals’ – do seem logical, and could actually benefit the artists as well as the labels, if done right. Though arguably artists, managers, labels and lawyers are still learning exactly how these deals should be structured, and what a label should look like to truly deliver benefits for all.

Which means that, while the fortunes of the big streaming services and the size of the royalty cheques they pay the record industry dominate the headlines, actually the long-term future of the music business is also dependent on further honing the artist-management-label relationship, and the way the wider industry invests in new artists and new music.

That, in part, will likely be impacted by the still under-tapped potential of direct-to-fan, which for me remains the biggest impact the web has had on music.

Truth be told, prior to the web, artists didn’t know who their fans were. Record labels and gig promoters didn’t really know either. It was retailers and ticketing agents who had the consumer relationship. But now artists can be directly connected to, talking to and learning from core fanbase. And the potential of that is huge.

Because for all the complexities around digital licensing and streaming business models, the music business in 2016 is actually pretty simple from an artist perspective. Build a fanbase. Understand that fanbase. Sell them stuff. It doesn’t matter what you sell, you just have to find the products or services that your fans most value.

There are artists, managers and labels already excelling in this space, of course, though there are still many opportunities to be capitalised upon here. And that, in the main, requires innovative thinking by artists, managers and the labels themselves, meaning the real saviours of the music industry are likely closer to home than Apple, Facebook, Spotify and Beats.