State Of The Music Business: What The Numbers Tell Us

Today we report 2015 music industry revenues. Our SVP of Strategic Data Analysis, Josh Friedlander, provides a deeper dive into the specific numbers here. Let me offer a few additional thoughts and visual ways to understand the data we’re reporting.

First, the numbers and data reflect a business that continues to undergo considerable changes in consumer behavior and business models. The music labels we represent have embraced that change, working tirelessly to find and nurture great artists, bring their music to billions of fans, and work with today’s digital distribution platforms to offer music in new ways.

The music industry is now a digital business, deriving more than 70% of its revenues from a wide array of digital platforms and formats. The share of revenues from those digital formats surpasses that of any other creative industry.

Another headline? In 2015, digital music subscription services reached new all-time highs, generating more than $1 billion in revenues for the first time, and averaging nearly 11 million paid subscriptions for the year. Heading into 2016, the number of subscriptions swelled even higher — more than 13 million by the end of December — holding great promise for this year.

But at its core, music is about artists and their art.

While today’s data is encouraging, the challenges facing us are significant. The consumption of music is skyrocketing, but revenues for creators have not kept pace. In 2015, fans listened to hundreds of billions of audio and video music streams through on-demand ad-supported digital services like YouTube, but revenues from such services have been meager — far less than other kinds of music services. And the problem is getting worse. Check out the alarming disparity between the growth in the number of ad-supported streams compared to the growth in revenues generated from those streams:

This is why we, and so many of our music community brethren, feel that some technology giants have been enriching themselves at the expense of the people who actually create the music. We call this the “value grab” — because some companies take advantage of outdated, market-distorting government rules and regulations to either pay below fair-market rates, or avoid paying for that music altogether. These unjustifiable inequities (really, special-interest favors) include: the exemption AM/FM broadcasters enjoy from having to pay artists and labels for the music they play, satellite radio’s unfair and inexplicable below-market rate standard, and the hopelessly outdated “notice and takedown” provisions of the Digital Millennium Copyright Act (DMCA), which many services have distorted to rake in billions of dollars of revenue on the backs of artists, songwriters and labels.

Need further proof that some fundamental market distortions are at play? Last year, 17 million vinyl albums, a legacy format enjoying a bit of a resurgence, generated more revenues than billions and billions of on-demand free streams: $416 million compared to $385 million for on-demand free streams.

I’m confident that music’s future is bright. The popularity of music is greater than ever. Like never before, it drives our culture and commerce. It is the throbbing heartbeat of social media and it is a must-have ingredient of any major technology platform. But reforms are necessary to level the playing field and ensure that the entire music community derives the full and fair value of our work.

Cary Sherman, Chairman & CEO, RIAA

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If You Love Music,

We Should Work Together to Update the DMCA

Let’s face it: most people have never heard of the Digital Millennium Copyright Act (DMCA). But, for some of us, this Internet law from the days of “dial-up” has a profound effect on our business. And for all of you who love music, the current debate about whether to modernize it will affect you, too.

My colleague at the Internet Association, Michael Beckerman, recently argued that the DMCA operates just fine the way it is, thank you very much. But can an online enforcement law from 1998 (i.e., the last millennium) actually operate effectively in the high-speed digital age? (To put things in context, Google opened its first office in 1998, Shawn Fanning wouldn’t release Napster for another year, Apple’s iPod was three years away and YouTube wouldn’t start for another seven years.) Spoiler alert: it can’t, and we in the music community have the (unfortunate) data to prove that some recalibration is urgently needed.

Let’s be clear: We have never called to “unwind the balance struck in the law and hold internet companies liable for policing every single piece of online content.”

Rather, recording artists, songwriters and the entire music community merely strive to restore that initial balance — to ensure that the DMCA lives up to its original intent and promise — to provide, as Mr. Beckerman reminds us, a system that “would grow the internet and protect rights holders’ ability to thrive online.” Regrettably, that balance has been dramatically upended in recent years, and continues to be steadily eroded by the DMCA’s outdated and ineffective notice and takedown system.

It doesn’t take a rocket scientist to figure out that the current system just isn’t working.

Try Googling your favorite song and see how many links to unlicensed works you get in the first few results. Look no further than new data from MusicWatch Inc. reporting that 57 million people in the U.S. still get music illegally. To date, the RIAA and our fellow music trade associations BPI and IFPI together have collectively sent Google 280 million DMCA notices, the overwhelming majority for songs that have already received a prior takedown notice. And IFPI has reported that 94% of all takedown requests they sent in 2015 related to recordings uploaded repeatedly to sites already notified that the content was infringing! Who would consider that a productive and efficient system? Think of the Sisyphean task outlined by artists like Maria Schneider, who begins each day deciding whether to make music or to send a never-ending stream of takedown notices to sites illegally offering the songs she’s already created. It’s a no-win proposition.

This isn’t “pushing a divisive narrative,” as Mr. Beckerman suggests. Rather, it’s narrating a growing divide in the benefits afforded by the DMCA.

So how has this growing divide contributed to the difficulties faced by the music industry? For one thing, the DMCA has allowed blatant pirates to operate openly and with impunity for years until expensive and time-consuming lawsuits can shut them down. Grooveshark streamed music for nine years without paying a dime to creators, all the while depriving legitimate music services of the customers they needed to operate successful businesses that pay creators.

But perhaps even more disturbing is that, even in the case of legitimate actors like YouTube, the DMCA provides an unfair competitive advantage, hurting other music services and undermining the value of music. With YouTube, creators are presented with a “Hobson’s Choice”: accept bargain basement licensing terms, or be relegated to the futility of the DMCA’s notice and takedown process. This is a de facto government subsidy to some giant Internet companies (the very ones who argue against modernizing the DMCA), and devalues copyrighted content for the entire marketplace.

All of this amounts to what we call a “Value Grab.”
Consider the striking disparity between the amount of revenues proportionately being returned to creators by two leading companies, namely Spotify and YouTube. Spotify does not rely on users to upload music to its service, so it does not benefit from the DMCA. YouTube, on the other hand, is the epitome of a DMCA beneficiary. How do they compare?

Spotify paid music creators $18 per user in 2014, the last year of available data; by contrast it is estimated that YouTube delivered less than $1 per user to music creators in 2015.

And the disparity in value is only getting worse. Consider that in the last year alone, the volume of video streaming has increased by 102%, but revenues from these song plays only went up 17%.

Or the fact that revenues from the retail sale of vinyl recordings surpass those from on-demand, ad-supported video streaming.

These facts are important, because they illustrate some of the real-world impacts of the DMCA on creators, unlike the rosy abstractions others rely upon when debating the effectiveness of the DMCA. These numbers also explain why the entire music community has come together in an unprecedented way to highlight the very real threat to our creative future.

We get the “$1 trillion” success of some technology giants who are now among the most valuable companies in the world, and we applaud it. But even though music and recording artists have made a significant contribution to that success, the American music community has not shared in it.

Since the DMCA was enacted, the formerly $14 billion music business is now half the size it once was, and the cultural and economic toll to that downsizing has been real: thousands of lost jobs, artists dropped from rosters, and fewer working musicians.

Of course, the plight of the music business cannot be attributed solely to piracy or the failure of the DMCA to do anything to control it.

Neither should the success of the technology industry be viewed as dependent on a DMCA frozen in time.

In fact, the DMCA is an issue of concern only to a subset of tech companies whose business model is to monetize other people’s content. The vast majority of DMCA takedown notices are sent to a very small handful of companies, some of them hugely successful.

Regardless, we have no desire to withdraw from these companies the significant protections of the DMCA. This is not the zero-sum game that some make it out to be. An effective notice and takedown system would benefit us all.

We acknowledge this isn’t an easy problem to fix, but that’s why we need to work together to figure out how to improve the system for everyone. Legislation is an obvious route, but much progress has also been made based on voluntary measures developed out of constructive dialogue among stakeholders. We all thrive on innovation and creativity (musicians happen to be the most followed or liked profiles on many of these platforms). Surely we can engage in good-faith discussions to come up with a system that works for tech and creators alike.

It’s time to update the DMCA.

Cary Sherman, Chairman & CEO, RIAA

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#musicfuels (.com)

We are excited to officially launch a new microsite, musicfuels.com. We all know that music dominates social media, right? But when you start to break it down and look at the most followed accounts on Twitter, Facebook and Instagram on a daily basis — with their tens of millions of followers — the dominance of music and musicians is truly startling.

Our new site is updated daily. The technological tool behind musicfuels.com checks the top accounts of those three social media platforms and updates the follower numbers. It’s designed to be a living, breathing dynamic resource for everyone who cares about music. And each day, you’ll find that the overwhelming majority of most followed accounts are those of artists.

It’s probably obvious why we chose the term #musicfuels. Music — and the record labels that help musicians find and grow their audience — is the fuel for so much of online conversation and pop culture. We’ve often said how musicians drive social media (see here, here, and here for examples). That fact is especially true during music awards shows. For example, this year’s Grammys in February saw more than 13 million tweets about the broadcast during monitoring hours, according to Nielsen. And August’s MTV VMA Awards logged more than 21 million tweets. In fact, according to Nielsen Social, the VMAs was the most tweeted-about non-sporting event in the nearly four years it’s been keeping track of social media.

Music also plays a defining role in our culture. Just look at some of the most popular or buzzed about TV shows — HBO’s upcoming ‘Vinyl’ set to premiere in January 2016, FOX’s always hot ‘Empire,’ ABC’s ‘Nashville’ continues to impress in the ratings, and NBC’s ‘The Voice’ are just a few music-focused shows that viewers tune into time and time again, creating plenty of fodder for the social media ‘water cooler.’

There are many reasons WHY musicians are often the most popular figures on social media. It’s partly because music speaks to us in a personal, evocative and human way, more so than any other art form. It is that connection to the music — and the performer giving it life — that draws fans in. The research firm MusicWatch recently confirmed this, finding that connecting through music and artists had the highest importance to users’ social media experience. Clearly, artists are tastemakers and cultural drivers.

#Musicfuels many things in our society. Our new site is one way to demonstrate that. We hope you like it as much as we do. Check it out, tell your friends, and of course, keep on following your favorite artists!

Cary Sherman
Chairman & CEO, RIAA

Next Story — A Deeper Dive Into Music Royalties and What’s At Stake for Every Music Fan
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A Deeper Dive Into Music Royalties and What’s At Stake for Every Music Fan

“The Royalty Crisis is Over!” So said Tim Westergren, co-founder of Pandora, in 2009. Why was he so happy? Because Pandora’s royalties (payments to artists and record labels) had been cut far below market value as the result of a special interest bill in Congress.

The idea was to give Pandora time to grow. And it has. More than 80 million monthly users and an IPO since that agreement. Since then artists and labels have received only around $5 per user for an entire year from Pandora. Clearly only one side got the benefit of that bargain.

Now that Pandora is a successful, public company surely it should pay market rates, right? Instead, Pandora is seeking to extend below market rates for another five years.

And it isn’t just Pandora. Earlier in 2009, the National Association of Broadcasters (NAB) had similarly declared that new rates “ensur[ed] the continued viability of Internet streaming for America’s radio stations.” (While AM/FM Radio stations pay nothing to artists and record companies when they play music “over the air,” they do pay royalties when they stream music on the Internet.)

So, if they had it so good on royalties just a few years ago, why are the biggest corporate AM/FM broadcast giants seeking a 80 percent cut from the rates they hailed a few years ago?

It’s a Streaming World

The way consumers find and listen to music has fundamentally changed in recent years. Consumers are moving to streaming models and away from purchasing music. Physical sales have plummeted nearly 33% the last six years and, after years of music fans downloading tracks, digital downloads have dropped as well:

But people are still listening — probably more than ever. They have simply shifted in droves to streaming services like Pandora.

As a result, streaming is becoming the economic heartbeat of the music business — artists depend on streaming royalties more and more for their livelihood, and record companies depend on it to fund their work finding new talent, helping them develop their style and sound, and spreading the word about new acts. Streaming royalties have nearly tripled in the last three years, and everyone expects the growth to continue:

We Have To Get This Right

Fair pay for streaming services like Pandora and iHeartRadio is critical for music to continue to be a vibrant part of our culture, for artists to be able to earn a fair living, and for record companies to carry out their mission nurturing that craft. If we don’t get this right, everyone who cares about music will miss out.

So, how do we decide what’s fair? It’s complicated.

Congress has established a board of judges (the “CRB”) that hears evidence from music services and music creators about what fair market value is. This economic evidence includes benchmarks and other real world measures.

Once the market rate is set, services like Pandora and iHeartRadio, including the smallest start-up, can stream all of the music in the world without asking anyone for permission. Labels and artists can’t negotiate in the marketplace. This ease of licensing is a boon to these services. If you don’t believe that, ask them if they want to replace this system with free market negotiations.

Gaming the System

Sadly, proposals by Pandora and the NAB would decimate music’s value. Under the guise of working with this system to establish rates that have a basis in reality, they are trying to game the system.

The NAB and iHeartRadio are already the biggest freeloaders in radio, paying nothing to performers and labels for AM/FM airplay. Now, they are asking the royalty judges for a jaw-dropping 80% cut in what they currently pay for Internet radio. 80%!

Just this year, NAB Member Clear Channel trumpeted its now 60 million (!) online users and exclaimed that this metric demonstrates “Accelerated Growth, Engagement and Strong Brand Awareness.” So the better these stations do, the less they should pay?

Thanks to the political deal it cut the last time, Pandora already pays 40% below market value for music. Now they want to dig even deeper into music creators’ pockets despite a growing business earning more than $1 billion a year in revenue.

It’s not respecting music to make more and more money from using it and ask to pay less and less for it.

In the end, everyone who loves music would lose. Lower pay for music means fewer artists signed and less music being made for fans. Demanding rate cuts of $500 million or $800 million below market value is no way to encourage the creation of great music or foster a fair music economy where everyone can thrive. These companies pay a lot of lip service to the idea that they care about music and support artists. But when push comes to shove, it’s clear where they really stand — for themselves and nobody else.

Music creators aren’t asking for any special deals. We don’t want subsidies, handouts, special treatment, or favors from the radio companies, from Congress, or the courts.

We want one thing — fair market value for our work.

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Next Story — The Grokster Decision
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The Grokster Decision

10 years and Counting


The past week has had no shortage of newsworthy developments in the digital music industry. Apple is finalizing terms for the launch of its new streaming service Apple Music. And Google announced that it’s adding a free streaming radio service to its own music offerings. But this week is also noteworthy for what happened 10 years ago — the Supreme Court’s unanimous ruling (MGM vs Grokster, June 27, 2005) that companies which actively help users steal music via their sites can be held responsible for copyright theft.

The music industry has evolved so much in the past 10 years that it’s easy to forget how important this ruling was to that transformation. Prior to the “Grokster” decision, legal digital music services were just a tiny part of the market. In the last full year before the Grokster decision (2004), digital music accounted for only 1.5% of music industry revenue.

The iTunes music store was in its infancy. In fact, about a month after the Grokster decision, Apple announced it had sold its 500 millionth song in its 2 year history around the world. For comparison, it’s sold over 25 billion songs since then, and in the US alone more than 500 million digital songs are now sold about every 3 months.

And streaming music was hardly a blip on the radar back then. Internet radio companies were fledgling services with little revenue. Subscription services, which focused on downloads to devices rather than live streaming, were about 1% of the market. In 2014, streaming services accounted for 27% of the US recorded music market, with almost 8 million paid subscriptions, and have been growing rapidly. Overall, digital music comprised 66% of all US recorded music revenue last year.

These changes did not happen overnight. With the rules more firmly laid out by the Grokster decision, unauthorized services like iMesh, BearShare, eDonkey, WinMX, Kazaa, and many others shut down or went legal, finally giving legal services a chance to flourish. Entrepreneurs and investors brought new services to market and consumers suddenly had a variety of legal options. Where there were just a handful of services (of limited variety) available in 2005, there are now dozens of services and platforms offering bigger libraries and a myriad of features to suit every taste.

The Grokster decision paved the way for these developments. It provided the beginnings of a fair playing field for digital services and music companies. We are still in the early stages of an evolving marketplace for music with many challenges ahead, but it’s still worth taking a moment to remember the Supreme Court’s important milestone.

By:

Steven Marks, RIAA Chief, Digital Business & General Counsel
Joshua Friedlander, RIAA VP Strategic Data Analysis

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