As a follow up to my inaugural post, “The Musical Artist P&L in Today’s Digital Streaming World”, where I first took a look at recorded music sales trends 1983 through 2014, this Rock&Roll “Super Fan” and finance analytical professional is excited to share 2015 results, my thoughts on what all of this means for Artists and record labels, and how fan music consumption is driving business today. In the evolving recorded music marketplace, with 2015 global revenue totaling $15.0 billion, today we see a continued shift away from physical sales and digital downloads toward digital streaming subscriptions. For the first time in history, total digital revenue of $6.7 billion at 45% of total, now exceeds physical revenue (CD, tape, & vinyl) of $5.8 billion, at 39% of total. In fact, within the digital revenue category, the explosive growth in streaming is close to overtaking downloads to become the industry’s primary digital revenue stream. Performance rights revenue, generated by radio and web broadcast play, totaled $2.1 billion or 14% of the total. Synchronization revenue, from the use of music in advertising, games, film, and television, totaled $400 million at 2% of the total.
Let’s take a closer look. According to the The 2016 IFPI Global Music Report, 2015 global recorded music revenue totaled $15 billion, up 3.2% to 2014, the first year of measurable growth in twenty years, driven by a commanding increase +45.2% in digital streaming sales. Overall global growth of 3.2% varied by geographic market, with Latin America leading the charge up +11.8%, follow by Asia +5.7%, Europe +2.3%, and North America +1.3%. Looking specifically at the U.S., the largest recorded music market, 2015 revenues totaled $7.0 billion, up a mere 0.9%.
While the first year of overall growth of 3.2% in a very long while is certainly encouraging news for an industry that has experienced seismic change since the highs of the late 1990’s and the introduction of the MP3 and digital formats, there is still a lot more work to be done to support and encourage an enduring legacy of artist creativity and growth. Global music advocacy groups, and there are many, including The Grammy Creators Alliance, The Future of Music Coalition, and the Berklee College of Music’s Rethink Music Initiative to name a few, are increasing their efforts in support of the Musical Artist. The key issues for Artists include a level playing field in ad-supported digital user upload platforms, the issue of sound recording revenue in the U.S. for terrestrial broadcast radio play, and the 2017 renegotiation of recently heralded progress in pre-1972 sound recording contracts. On a positive note, the explosive worldwide growth of streaming music has opened new markets. Further, digital streaming and social media platforms provide rich consumer consumption and sentiment data for record labels to feast upon and better target music promotion.
To refresh the basics of the Recorded Music Money Flow model, available from the Berklee College of Music Rethink Music Initiative, Songwriters and Artists are compensated in three specific ways, for musical composition, sound recording, and streaming mechanical royalty. Musical composition is specific to the Songwriter(s), who may also be the Artist(s) performing the track. Musical composition royalties are paid through Performance Rights Organizations (PROs) to Songwriters and music publishers where applicable, for terrestrial broadcast radio play (AM&FM), webcast & digital radio play (Pandora & Sirius XM), and digital streaming services (Spotify, Tidal, and Apple Music). Composition royalties for digital sales (iTunes, Amazon, Google Play, eMusic) flow through record labels rather than PROs. For digital sales and streaming services, third party aggregators will also receive a cut when handled by Indie labels or through self release where the Artist owns the recording copyright.
Sound recording revenue is paid for webcast & digital radio play, digital download sales, and digital streaming. For webcast & digital radio play, royalties are distributed through Sound Exchange with 50% going to record labels, and 50% to Artists. In the U.S. no sound recording revenue is currently awarded for terrestrial broadcast radio play. Big labels that offer direct deal services pay sound recording revenue directly to Artists for digital download sales and streaming service play. Indie labels follow the big label model but add aggregators like Orchard and INgrooves who get a piece of the action. For Artists who have gone the self release route and are not represented by a record label, these royalties are paid directly from an aggregator such as CD Baby or Tune Core.
Streaming mechanical royalty revenue is specific to digital streaming revenue and is disbursed to songwriters and publishers through PRO’s. In the case of indie labels and self release, a mechanical licensing agent also receives a cut.
Focusing on the United States, 2015 U.S. Record Industry sales revenue, available from the RIAA 2015 Year End Shipment and Revenue Report, totaled $7.0 billion on 1.3 billion units sold, at a total average unit price of $4.29. In comparison to 2014, sales revenue was essentially flat up 0.9%, with volume down 14% from 1.5 billion units sold, offset favorably by a 15% increase in average unit price from $3.75. In comparison to U.S. industry highs in 1999, 2015 sales revenue was down 66% from $20.7 billion, and the average unit price was down 76% from $17.87. Current trends across the globe in recorded music consumption are consistent. Consumers are purchasing fewer CD’s and digital downloads, instead increasingly subscribing to digital streaming services. The 2015 total average unit price of $4.29 in the U.S. has stabilized to near 2009 level of $4.51, and also represents the third consecutive year of price improvement, up 21% to a low of $3.53 in 2012, driven by increased demand in digital streaming paid subscriptions, at an average unit price of $112.90 in the 2015.
Speaking to the key issues forward, the elephant in the middle of the room is the value gap between the huge ad-supported user upload audience of an estimated 900 million users, the world’s largest on-demand music audience, and the tiny piece of digital streaming revenue it generates, a mere $634 million globally or 4% of total global recorded music revenue value in 2015. Of course I’m referring to Google’s You Tube platform, that claims protection from “safe harbour” rules that were established in the early days of the internet, intended to protect truly passive online intermediaries from copyright liability. Musical rights advocates view this platform as active engagement in the distribution of music and should therefore be subject to music licensing practices that all other forms of digital music are governed by today. Expect the pressure to build as advocacy groups and musical fans around the globe, particularly those with passion and energy, continue to raise awareness and seek practical solutions from judicial and legislative branches to ensure a rich and enduring legacy of musical creation in our world.
Additionally on the legislative front, is the issue that U.S. terrestrial broadcast radio stations do not pay sound recording royalties to Artists, as is the case in all major countries outside of the U.S., as well as for webcast digital platforms like Pandora and Sirius XM. Learn more here. A related and final legislative issue surrounds the payment of sound recording royalties for pre-1972 music that clearly includes some of the most iconic records of all time. There have been three large recent victories for performing Artists, all against Sirius XM resulting in negotiated settlements that provide an opportunity in 2017 to negotiate license fees through 2022. Sirius XM to pay $210 million. To learn more on the full background and implications forward, read more here.
To wrap up it all up on a positive note, the discussion returns to the subject of digital revenue and how growth in digital streaming platforms and music listener consumption are shaping the industry going forward. Globally, digital revenue totaled $6.7 billion in 2015, comprising 45% of total revenues, up 10.2% to 2014. For record labels in the U.S, this amounted to $4.8 billion, at 68% of total revenues, up 6.2% to 2014. Clearly the U.S. dominates in digital revenue, but the rest of the world is catching up. Digital streaming music has opened new markets in China and Mexico, and has led to a resurgence of record label investment in Sweden and the Netherlands. Opportunity exists in Germany and Japan, where physical sale currently dominates, with streaming comprising only 11% and 5% of the total respectively. In the U.S., for the first time in 2015, digital streaming revenue of $2.4 billion equals digital download revenue. Also, for the first time in 2015, the average unit price in the U.S. for paid subscription streaming service increased to $112.86, following five years of decline from a high of $189.58 in 2009. This was fueled by explosive growth in subscription volume demand from a low of 1.3 million when first introduced in 2005, to 3.4 million in 2012, to 10.8 million in 2015.
The final point to note, is that with music consumption data widely available on digital platforms, and music sentiment measures available on social media platforms like Twitter, where 7 of the top 10 followed people are music stars, record labels now have a large palate of analytical data to discern fan trends and grow an enduring legacy of music creation. Fine tuning the “fan favorite strategy” will likely differentiate the leaders and the followers. Thank you to my good friend Robert Finn, for this little gem.
I’ll leave you with this classic 2008 Rock ballad, that I figure will start presenting prominently in current streaming play lists as global Rock&Roll sentiment is huge and passionate on this band’s epic 2016 reunion. Enjoy!
Cover Photo credits: KEXP Fundraiser at NYC Winery with Danish singer & songwriter Soren Juul.
*All U.S. data is sourced by the Recording Industry Association of America database, with all $ figures expressed in 2015 inflation adjusted dollars. Also note that certain forms of revenue cannot be quantified in units sold and are therefore excluded in the average price calculations. This includes Sound Exchange Distribution & Ad-Supported On-Demand Streaming under the Digital Streaming Category, as well as Synchronization revenue. All Global data is sourced by the IFPI 2016 Global Music Report Summary.
