Digital music revenues overtake physical revenues for the first time

The global music market achieved a key milestone in 2015 when digital became the primary revenue stream for recorded music, overtaking sales of physical formats for the first time, according to new data from IFPI, which represents the interests of 1,300 record companies across the globe. Digital revenues now account for 45% of total revenues, compared to 39% for physical sales.

IFPI's Global Music Report 2016 also reported a 10.2% rise in digital revenues to $6.7 billion, with a 45.2% increase in streaming revenue more than offsetting the decline in downloads and physical formats. Total industry revenues grew 3.2% to $15 billion, leading to the industry's first significant year-on-year growth in nearly two decades. Digital revenues now account for more than half the recorded music market in 19 markets.

However, there’s a fundamental weakness underlying this recovery, according to IFPI. Music is being consumed at record levels, but this explosion in consumption is not returning a fair remuneration to artists and record labels. This is because of a market distortion resulting in a "value gap" which is depriving artists and labels of a fair return for their work.

"After two decades of almost uninterrupted decline, 2015 witnessed key milestones for recorded music: measurable revenue growth globally; consumption of music exploding everywhere; and digital revenues overtaking income from physical formats for the first time,” IFPI Chief Executive Frances Moore says. “They reflect an industry that has adapted to the digital age and emerged stronger and smarter.  This should be great news for music creators, investors and consumers. But there is good reason why the celebrations are muted: it is simply that the revenues, vital in funding future investment, are not being fairly returned to rights holders. 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 rights holders.”

Streaming services such as Apple Music remain the industry's fastest-growing revenue source, according to IFPI. Revenues increased 45.2% to $2.9 billion and, over the five year period up to 2015, have grown more than four-fold.

Helped by the spread of smartphones, increased availability of high-quality subscription services and connected fans migrating onto licensed music services, streaming has grown to represent 19%of global industry revenues, up from 14% in 2014. Streaming now accounts for 43%of digital revenues and is close to overtaking downloads (45% to become the industry's primary digital revenue stream.

Premium subscription services have seen a dramatic expansion in recent years with an estimated 68 million people now paying a music subscription. This figure is up from 41 million in 2014 and just eight million when data was first compiled in 2010.

However, downloads from services such as iTunes remain a significant offering, accounting for 20% of industry revenues. Income was down 10.5% to $3 billion - a higher rate of decline than in 2014 (- 8.2%). Full album downloads are still a major part of the music fans' experience and were worth $1.4 billion. This is higher than the level of sales in 2010 ($983 million) and 2011 ($1.3 billion).

IFPI says performance rights revenue grew. Revenue generated through the use of recorded music by broadcasters and public venues increased 4.4% to $2.1 billion and remains one of the most consistent growing revenue sources. This revenue stream now accounts for 14% of the industry's overall global revenue, up from 10% in 2011.

Revenues from physical formats declined, albeit at a slower rate than in previous years, falling by 4.5% compared to 8.5% in 2014 and 10.6% in 2013. The sector still accounts for 39% of overall global income and remains the format of choice for consumers in a number of major markets worldwide including Japan (75%), Germany (60%), and France (42%).

Moore says the aforementioned "value gap" arises because some major digital services are able to circumvent the normal rules that apply to music licensing. User upload services claim they don’t need to negotiate licenses for the music available on their platforms, or conclude licenses at artificially low rates, claiming protection from so-called "safe harbor" rules that were introduced in the early days of the Internet and established in both US and European legislation, he adds.

“Today the safe harbor rules are being misapplied. They were intended to protect truly passive online intermediaries from copyright liability,” says Moore. “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.”

The user upload platforms benefiting from the misapplication of "safe harbours" reportedly have an estimated user base of more than 900 million. Yet the entire advertising-supported revenues sector they are part of, generates revenues of $634 million, accounting for only 4% of global music revenues, says Moore.

He adds that an important step forward was made in December 2015, when the European Commission published its Communication Towards a modern, more European copyright framework. While acknowledging that music and other creative content and online services are both important for economic growth and jobs in Europe, the paper clearly identifies the "value gap" is a problem. The Commission plans to make its first proposals on how to deal with the "value gap" public in 2016.

To access the report click here .