The music industry continues to evolve at a faster and faster pace. And for the first time in a long time, there is some good news to share. The IFPI reported that overall sales are up for the second year in a row. Not bad for an industry that experienced annual declines since 1999. However, revenues are still 35% below the $23.8 billion the industry earned in 1999.
Why should we care what the music industry makes? Because unlike a lot of other industries that sit on their revenues, the music industry reinvests heavily in their A&R divisions. A&R stands for Artists & Repertoire, the music industry’s equivalent of R&D or Research and Development.
In 2015, the music industry spent 16.9% of revenues on A&R surpassing the pharmaceutical and biotechnology’s 14.4% or the software and computer industry’s 10.1% spent on R&D. It’s even more impressive when you understand that the aerospace and defense industry only spends 4.5%. And that the healthcare equipment and service industry is only spending a meager 3.8% annually.
A Dynamic Industry
The music industry is dynamic and is undergoing considerable change in consumer behavior and business models. In order to survive the industry must keep pace with changing technology and new ways of delivering content. In 1999, nearly 100% of the industry’s revenues came from the sale of physical products, mainly CD’s. Today the industry is a multi-platform business where the physical delivery of a product is still important but the industry is relying more and more on digital sales.
In the 2017 Global Music Report, the IFPI (The International Federation of the Phonographic Industry) reports that overall revenues in the industry were $15.7 billion dollars. Up from 14.8 in 2015. Thirty-four percent (34%) of its revenues came from the sale of physical products, CDs, vinyl and yes, even cassettes. But half of its revenues now come from digital sales, downloading and streaming. The remaining 4% comes from performance rights and synchronization. Synchronization is the revenue raised from using licensed music in advertising, film, games and television.
Sustaining multiple revenue streams is complicated and accounts for the industry’s heavy investment in A&R. In the 1980s, the industry was selling music primarily as LP vinyl records. Later in the decade, they began selling cassettes. And then the CD became the primary mode of delivery. Three product types in less than a decade but few in the industry foresaw the tumultuous storm on the horizon.
On June 27th, 1994 Geffen records released the first digital song, Aerosmith’s ‘Head First’ on CompuServe. It’s a three minute and fourteen second song and took 60-90 minutes to download. But the genie was out of the bottle and the industry has been reeling ever since. Two decades later and digital music is still a controversial topic and is still evolving at a pace that plays havoc with industry business models and artist’s ownership rights.
In 2016 digital music accounted for 50% of industry revenues. But that simplistic fact belies the turmoil within the digital sector. Up until last year, the industry relied on sites such as iTunes, 7digital and Amazon’s Music Unlimited for the majority of its revenues obtained via legal downloads. But in 2016, digital streaming surpassed downloads and became the primary way buyers are obtaining their music. In fact, streaming was up a whopping 60.4% and digital downloading was actually down 20.5%.
There is little doubt that streaming is the future. And we’ll see more sites like Spotify vie for a piece of the action. It’s attractive to the industry because it provides more control over the distribution of content and in turn, over earning revenues within the digital market. It’s attractive to artists because it provides an opportunity for greater interaction with their fan base and an increase in overall remuneration. And streaming offers music fans access to a greater amount of music at a reasonable cost.
Revenue was down 7.6% in the physical sector. Whereas streaming was up 60.4%. But even with sales down, this sector still accounts for 34% ($7.8 billion) of the industry’s revenues. Still a tidy sum we cannot ignore. And it’s not all bad news within this area, in fact, an amazing story is unfolding, the resurgence of the vinyl record!
With the introduction of the CD in the late 80s, the sale of vinyl records began a steady decline. By 2006, vinyl record’s trade value was at an all-time low of $36 million. But then a strange thing started to happen, sales began to rise again. At first, industry experts wrote it off as a fad or the hipster generation’s rebuke of the 21st century. But by 2009 it became clear, something other than nostalgia was fueling the fire.
Just what it was, was not clear until folks began to take notice of the parallel rise in streaming, Beginning in 2008, with the birth of Spotify, music streaming became the focus of growth within the music industry. At first, experts perceived it as a coincidence but soon it became clear, fans were using the streaming service to explore new artists and music genres.
Today a new generation is experiencing the warm sound and subtle cracks pops, and hisses of analog music. Deloitte Global, in their 2017 Technology, Media and Telecommunications Predictions report, projected vinyl sales will reach $800-900 million. With the sales of turntables and other accessories, the vinyl record industry will once again become a billion dollar industry.
Music Industry Trends – 2017
Identifying trends and making accurate predictions is a tricky business, especially in an industry as volatile as the music business. However, during our research, we identified seven trends we think will impact your music related experiences in 2017.
- Music Streaming Will Continue to Grow – The music industry estimates that 100 million people are currently subscribing to a music streaming service. With more than 7.5 billion people on the planet, it’s kinda of a no brainer isn’t it?
- Facebook Live Will Rock You – Facebook Live and other video streaming platforms will enable artists and fans to interact as never before. We can expect to see some highly polished, well-structured performances but also keep your eye out for those spontaneous, raw encounters!
- Augmented Reality (AR) and Virtual Reality (VR) Will Further Transform the Music Industry – AR sites like Firstage will enrich the way you enjoy your streaming experience. Artists such as Beatie Wolfe will unveil stunning 3D virtual reality music experiences.
- Algorithms Will Begin to Define the Industry – The digital music industry is awash with raw data. Sophisticated algorithms will determine music rankings in real time. And underrated, fringe music will receive greater attention.
- Self-produced, Independent Artists Will Gain More Exposure – Live streaming will enable struggling artists to capture a wider fan base and build the foundation for sustainable careers.
- Labels Will Disrupt the Digital Music Pipeline By Offering Direct Access to Consumers. By developing, apps and distribution platforms akin to HBO and Netflix, labels will create new revenue streams and strengthen their return on investments.
- Bandcamp Will Emerge as a Major Player in Online Music Sales. The socially conscious online music store grew 35% last year. Consumers are now buying a record every three seconds, 24 hours a day, 365 days a year.