The music industry's hectic mix

For the Australian recorded music industry, a year where revenue doesn’t go backwards is a good year.

By that logic, 2012 was a good year for the industry. Revenue was up $15 million to $398 million, an increase of 3.7 per cent. So 2012 year marked the first time since 2009 that wholesale recorded music revenue increased, and only the second time the industry had seen year-on-year growth in the past nine.

On the surface a 3.7 per cent increase is cause for celebration for an industry desperately seeking a win. However, a large chunk of the revenue gain has come from new revenue streams – revenue generated from premium paid subscription sources, such as Spotify and Rdio, and ad-supported music models which are free for users, such as VEVO and YouTube.

When you take a close look at the numbers the music industry appears to the outsider to operate like a confusing beast. Music appears to be more central to consumers than ever before, yet the industry that fuels it continues to face challenging trading conditions.

There are businesses that rely solely on recorded music to survive who are paying what amounts to little more than a rounding error to broadcast. And there are others with market valuations somehow higher than the labels that are contributing little more than 3 per cent of the recorded music industry's total revenue.

And in the middle of all this, there only appears to be only one company that is seeing the benefit of all this change and commotion.

So here are the key factors facing the recorded music industry based on 2012’s revenue data.

1. Digital singles grew 63 per cent in 2012 in terms of volume, yet 23 per cent in terms of revenue

Labels sold more singles via digital channels in 2012, selling more than 110 million units, however the average cost per unit for a single dropped 23.4 per cent. For the first time the average wholesale price of a digital single dropped below $1 to $0.89.

A lower price point can be a handy tool to raise exposure for an up and coming artist, but labels need to be careful to manage yield when it comes to singles.

With a wholesale average of $0.89 it means that a single would need to go 14-times platinum to net a label $1 million in revenue – a difficult feat considering Gotye’s Somebody That I used to Know has only gone 10-times platinum in Australia.

2. No matter how you look at it, consumers are buying fewer albums and albums as a category are earning less revenue

Albums are still the key revenue source for labels and, many would argue, the key marketing tool for artists. The problem is, people are buying fewer albums.

In 2009 Australians purchased 41.8 million albums across physical and digital formats; in 2012 this had dropped to 34.1 million units.

In 2009 albums generated for the industry $342 million in wholesale revenue; in 2012 albums generated $256 million.

In this area digital is not plugging the hole created by falling physical album sales and perhaps never will. Since 2009 physical album revenue has dropped by $127 million, with digital album revenue increasing by only $41 million.

3. Streaming revenue is increasing, but perspective is needed

Revenue from ad-supported streaming products increased to $9 million in 2012. This is up but accounts for less than 3 per cent of the industry's total revenue.

While this may look like incremental revenue, it is still lower than the revenue the industry enjoyed at the peak of the mobile ring-tone market. In 2006 this was a $10.3 million market for the labels, however as phones have changed the category has shrunk to $2.7 million. Still, based on that, the mobile ring-tone market is contributing more to the industry currently than premium subscription services – which paid out $2.1 million to labels.

Based on $2.1 million in label payments, our estimate is that there are approximately 60,000 consumers in Australia who are active paid subscribers to a premium service such Spotify, rdio or Deezer.

4. How long can the radio industry maintain its current recorded music royalty rates?

Estimates are that streaming services are paying labels 25 per cent of the revenue they generate in recorded music licensing fees. Even if this estimate is double or triple the actual amount (no service nor label will disclose their royalty rates) it is radically higher than the amount the commercial radio industry is required by the government to pay the labels to access all of their recorded material.

According to industry body PPCA, the present rate of the commercial broadcast licence fee is about 0.4 per cent of gross revenue of the commercial radio industry. Based on Commercial Radio Australia’s revenue reports for 2012, this would mean the metropolitan radio industry only paid out $2.69 million to labels for recorded music access for the year. That’s $2.69 million from $674 million in advertising revenue if the PPCA’s claims are accurate.

The recorded music industry is right to be asking for these royalty rates to be renewed, it is difficult to work out why the federal government feels a company like Southern Cross Austereo – which saw $95 million of net profit for the 2012 full-year – needs such a free kick when it comes to paying for the music recordings which are central to their business.

5. Careful observation needs to be maintained on the impact of streaming album services

As mentioned above, album review is critical to the health of the recorded music industry… and it continues to drop.

While the singles market in 2012 grew despite music being easier than ever to access for free, labels need to be careful that premium subscription or ad-supported services that give consumers thousands of albums at their fingertips don’t hasten the sales decline of the album format.

If subscription and ad-supported service revenues increase in 2013 by 100 per cent to $22 million, and album sales decline at the same rate they did in 2012, the result will be a net gain of zero.

6. Among all the disruption, there is one real winner

It is amazing to think that the real beneficiary of the change in the music industry is a company that looks at music as a complimentary service to its core products.

Apple’s share from recorded music sales via iTunes in 2012 for Australia would be north of $40 million (based on iTunes 30 per cent clip and an assumption iTunes has 80 per cent of the digital market), an increase from $14 million in 2009.

As sales continue to migrate from physical to digital, Apple’s revenue is guaranteed to increase and the labels' reliance on Apple will continue to grow.

Ben Shepherd is a media and technology consultant. He blogs at Talking Digital.

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