January 24, 2011 at 11:59 am

Digital Music Sky Not Falling, Contrary To Reports

The IFPI Digital Music Report 2011 reveals new numbers and projections for the music industry.

Piracy is killing music, and the music industry will never make as much money as it did back when everyone was replacing their tapes and records with compact discs, according to the latest reports. Haven’t we heard this one before?

In a Sunday article called Music Braces for the Unthinkable, the New York Times finds much cause for alarm in a report (.pdf) released last week by the International Federation of the Phonographic Industry.

“In each of the past two years, the rate of increase in digital revenue has approximately halved,” reads the Times’ article. “If that trend continues, digital sales could top out at less than $5 billion this year, about a third of the overall music market but many billions of dollars short of the amount needed to replace long-gone sales of compact discs.”

The Times quotes Forrester Research’s Mark Mulligan as saying, “Music’s first digital decade is behind us and what do we have? Not a lot of progress. We are at one of the most worrying stages yet for the industry. As things stand now, digital music has failed.”

There are a few problems with these assertions that the sky is falling where music is concerned. For starters, revenue (including services like Pandora, Spotify, YouTube) is not the same thing as sales (CDs, iTunes, Amazon), so when the New York Times talks about “digital music sales,” it’s leaving many of the most popular music services out of the discussion.

The cover of the IFPI report alludes strongly to music apps.

And for now, we’ll leave aside the question of whether the height of the CD-buying craze represents the best benchmark for the entire history of the music industry. (Although, really, it doesn’t.)

The IFPI’s report also found several bright spots, which the Times admittedly mentions: a new generation of subscription services accessed through music apps that run on smartphones, televisions, and computers (the IFPI report calls out Deezer, Slacker, Spotify and Vodafone specifically). Smartphones and other connected devices can now talk to online servers in “the cloud,” and so apps that run on them — including the ones the IFPI calls out as holding particular promise — don’t need to be laden down with consumer-facing (and consumer-hated) digital rights management technology, or DRM.

This is a major development — and a very recent one, as the above-referenced commentary fails to take into account.

It may be, as Mulligan notes, that the switch to digital music started to take hold about ten years ago. But what he and the Times fail to address is that these new, easier-to-use subscriptions, which both admit are promising bright spots in the IFPI report, were only made possible by technologies that appeared within the last couple of years — and have yet to hit the mainstream the way the iPod and MP3 did during the past decade.

Only 31 percent of cellphone users in the United States currently own a smartphone, according to eMarketer, while “smart” televisions that run apps are still finding their way into consumers’ homes and most of them have yet to run user-installable apps (although Google and possible Apple will likely start doing so later this year). The platforms on which the most promising music services run are still in their infancy, relative to the computer or MP3 player, so all of the IFPI’s good news about music apps only applies to a small, new segment of the market.

Contrast the Times’ gloom and doom with these sections of the IFPI’s report (.pdf):

Breaking the seal on subscriptions
The music subscription model made major advances in 2010, firmly establishing itself in the market and among consumers. Subscription services such as Rhapsody and Napster
have existed for several years, but portable subscriptions only worked on certain devices, limiting flexibility for consumers. Only recently has the sector been able to take advantage of improved compatibility, underlying technology and broadband penetration levels. Today, consumers can use subscription services widely across mobile devices, vastly improving quality and the consumer experience.

Services such as Spotify, Deezer, We7 and Slacker broadly present two kinds of offering to consumers: a free advertising-supported streaming service, and a premium paid-for service. The use of these two tiers by a single service has become commonly known as the ‘freemium model’.

These services expanded their audience significantly in the past year, with growth coming from both tiers. Spotify has attracted more than 750,000 paying subscribers across all its markets…

New frontiers of music access: smartphone

The growth in smartphone usage has also brought other benefits. Digital services offer mobile applications (apps) that significantly increase the value of premium subscription offers, expanding the paying audience for services such as Spotify. Apps can also be used to market music alongside other digital tools such as Facebook and Twitter. Apps are expected to be a key sector of innovation in 2011.

As the IFPI mentions, “the seal” has only recently been broken on these new services, and the apps that connect to them are expected to be a “key sector of innovation” this year. Meanwhile, the most popular on-demand subscription referenced in the study, Spotify, has yet to launch in the world’s biggest music market.

Digital revenue increased over a thousand percent since 2004, according to the IFPI report, while overall music industry revenue sank 31 percent. Until now, gains in digital have yet to balance out losses to the industry in general, as noted by the Times. But the most promising aspects of the music industry — as determined by the same report — are still far too new to support these assertions that the sky, once again, is falling.