This Decade of
Digital Music
An embattled recording industry faces the numbers: downloads are tanking, streaming shows promise.
Can technology still save us?
Panic at the digital disco. The most worrying thing about the latest figures released by music industry body the RIAA isn’t the fact that U.S. revenues were down 4.9% in the first half of this year. Instead, it’s the fact that within those stats there was an unwelcome tipping point: an 11.8% drop in sales of music downloads, suggesting that the format is already past its peak, without having ever become the savior from piracy that the industry was hoping for a decade ago.
The past ten years certainly were a Decade of Digital Music, with Apple having launched its iTunes Music Store in April of 2003. They unveiled an accessible mainstream digital music store that aimed to make buying legal downloads as appealing as online piracy, with the shockwaves from filesharing service Napster and its successors still fresh in the industry’s mind. The plan was: Apple’s new store, along with its (by then) third-generation iPod player and its charismatic chief executive Steve Jobs, would spur the music industry’s return to growth.
And did it? No, as figures from global music body the IFPI show. In 2003, worldwide recorded music revenues were $22.54bn, but in 2013 they were $15.03bn. The decade turned out to be less the tale of Apple saving the music industry, and more the tale of an already-bruised industry losing another third of its value. Sales of downloads never did make up for the inexorable decline in sales of CDs, and as the decade wore on, it became clear that downloads weren’t a savior; they were a stabilizing, transitionary technology on the way to the next big disruption: streaming music.
Failure of a Savior
By many standards, the last decade of digital music was a big success. The IFPI’s figures for 2003 don’t record any digital music revenues, but by 2013 that part of the market was worth $5.9bn—a figure that included streaming as well as downloads. Considering the disarray the music industry had been thrown into at the turn of the century, it was impressive growth. The problem was that in a period when digital music revenues went from zero to $5.9bn, physical music sales dropped from $22.1bn to $7.7bn.
There are plenty of individual theories about why digital’s rise couldn’t make up for physical’s (and specifically CD’s) decline. Apple’s unbundling of the album, allowing fans to cherry-pick individual tracks, was one factor. It was a good thing for fans—particularly in countries without thriving singles markets before 2003—but it had an unsurprising impact on overall sales.
There’s an argument that rightsholders—labels and publishers—weren’t bold enough in their digital decisions. For example, even Apple couldn’t persuade a single major label to sell downloads without digital rights management (DRM) built in until 2007 (when EMI broke ranks) and then 2009 (when its rivals followed suit). Even when the latter happened, the negotiations saw Apple agreeing to abandon its single 99-cent price for songs, in favor of a system that would allow labels to put the price up to $1.29 for the most popular tracks.
As for Piracy? Napster in its original, unlicensed form may have shut down in 2001, but it was no coincidence that the same year saw the launch of three successors: Kazaa (which would shut down in 2005), LimeWire (2011) and The Pirate Bay (which remains afloat today, despite the best efforts of the music and film industries). Yet as the decade wore on, smarter minds in the music industry were more willing to acknowledge—if not always publicly—that seeing every illegal download as a lost sale was questionable logic. Even so, free and illegal remained a competitor to paid and legal digital music.
Competition from other forms of entertainment also played a part: music was competing for people’s time and money with rapidly-growing markets like DVDs and games, and with apps too once Apple and Google launched their app stores in 2008. Take games for example: research firm Statista claims global games industry revenues grew from $23.3bn in 2003 to $87.8bn in 2014, although the caveat to this seemingly-neat mirror of music’s decline is that the games figures include hardware—consoles and handhelds—whereas music industry figures don’t include sales of headphones, stereos or MP3 players.
Enter Streaming
But if you want to know why music downloads couldn’t reverse the recorded music industry’s decline, you have to look at the emergence of streaming. The idea of access over ownership—music streaming from the cloud rather than stored and played from your own device—pre-dates the iTunes Store. British internet radio service Last.fm was founded in 2002, while its U.S. equivalent Pandora made its debut in 2004. Myspace’s peak was between 2005 and 2008, while YouTube launched in 2005, SoundCloud and Deezer in 2007, then Spotify and Grooveshark (in its streaming incarnation) in 2008.
These services had varying business models, target markets and features, from the personal radio channels of Last.fm and Pandora to the tens of millions of songs available on demand from Spotify and Deezer—and the largest catalogue of all, from studio tracks to covers, live versions and mash-ups, on YouTube. It was the latter class of services, rather than iTunes, that represented the closest legal successors to the original Napster’s anything-you-want-for-free appeal to music fans. But it was also their emergence that put the final nail in the hope that buying music downloads would become truly mainstream behaviour.
Even iTunes took time to get going, launching in a single country (the U.S.) for Mac computers only in April 2003, before expanding to PCs that October. It expanded to the U.K., France and Germany in June 2004 and other European countries that October, but Latin America would have to wait until 2011, while big markets like Russia, Turkey and India were added in late 2012. iTunes was hardly a niche, but it was something used most by music fans—the kind of people who’d previously bought lots of CDs. Yet it was exactly these early adopters who were also first to see the appeal of streaming services, while YouTube (globally) and Pandora (in the U.S.) started to attract large mainstream audiences.
Apple’s iTunes, which was big enough to symbolize the entire downloads market in Western countries at least, grew rapidly over the decade, from 25m downloads in 2003 to 175m in 2004, through to the 5bn annual downloads it averaged between 2010 and 2013. In February of 2013 Apple announced that it had sold more than 25 billion songs from the iTunes Store.
But against that backdrop of steadily-falling CD sales, it wasn’t enough to stabilize music industry revenues, let alone return them to growth. When Spotify secured the necessary licensing deals to launch its $9.99-a-month on-demand service in Europe in 2008, it was a clear sign that the major labels were now placing their long-term bets on streaming, not downloads, to revive their industry. And, after lucrative acquisitions of Last.fm, YouTube and Myspace without a payoff to music rightsholders, also a sign of their desire to take ownership stakes in any company likely to deliver that revival.
State of the Stream
How is streaming doing? It was the silver lining in the RIAA’s latest figures, with U.S. income from streaming up 27.6% to $859m in the first half of 2014, when an average of 7.8m Americans were paying for streaming subscriptions. In that six-month period, streaming accounted for 27% of the U.S. industry’s revenues, poised to overtake physical sales (28%) in the second half of the year. Although that’s more about the continuing decline of CD as a format than it is about streaming’s growth: the U.S. industry added $186m more streaming revenue in the first half of 2014, but lost $276.8m of physical sales.
Streaming’s success varies considerably by region, too. In Japan, one of the world’s biggest music markets, it’s still negligible. In Germany, where the CD remains strong, it accounted for less than 5% of recorded music revenues in 2013. Streaming took a 10% share in the U.K. that year, 12% in the U.S., 29.2% in the Netherlands and 43% in France. But it’s Spotify’s heartland of Scandinavia where streaming is already not just popular, but the dominant way for recorded music to make money: 65.3% of industry revenues in Norway last year, and 70% in Sweden.
The latter two countries are the subject of intense interest from the music industry, because streaming is driving overall growth. Recorded music revenues in Sweden grew by 13.8% in 2012, and another 5% in 2013, while Norway saw rises of 7% in 2012 and 11% in 2013. In Scandinavia, streaming has reversed the last decade of music industry decline, with Sweden in particular having nearly been written off as a lost cause in the mid-2000s, when The Pirate Bay was riding high and downloads were struggling to take off as a legal alternative.
Can the same thing happen elsewhere in the world? That, in a nutshell, is the music industry’s defining question in 2014, and it’s a highly sensitive one. Sweden never had a thriving downloads market for streaming to cannibalize, but countries like the U.K. and U.S. are different beasts. Spotify and its rivals have traditionally tried to deflect questions about cannibalizing downloads, but their appeal to the digitally-savvy early adopters who were the biggest spenders on iTunes and other download stores is hardly a surprise. Streaming’s challenge, globally, is to dispel industry concerns about the recent decline in downloads by proving it can reach out to an even more mainstream audience and ultimately persuade them to pay for subscriptions.
Telling the Full Story
The other defining question for the music industry concerns streaming’s impact on musicians and songwriters, some of whom have protested publicly about the paltry amounts they earn from streams of their work. At an average of between $0.006 and $0.0084 per stream, Spotify plays mount up for the likes of Calvin Harris with his billion-plus streams, but there is real concern over whether emerging and/or niche artists can survive on their streaming revenues.
A concern fed by the nagging sense among many musicians that whenever there has been a major format change for recorded music — from vinyl to CD, and from CD to downloads in particular — it is artists that have often suffered from contractual practices best described as unfair (and at worst, actively fraudulent, as a number of artists lawsuits against their labels over payments from sales of downloads and ringtones have sought to prove). Streaming’s challenge in the next decade is not just to make up for the decline of CD and download sales, but to convince artists that they will be fairly compensated along the way.
But this leads to another important point about the last decade of digital music, in relation to artists. The figures published by bodies like the IFPI and RIAA don’t tell the whole story, because they focus on recorded music. Consider live concerts, for starters: British collecting society PRS for Music once ran calculations on how much Brits spent on music in 2011, and came up with £1.1bn on recorded music, but £1.6bn on live music that year.
There’s also a more granular level, though: the emergence of new income streams for artists like direct-to-fan sales through websites like Bandcamp, as well as crowdfunding campaigns through services like Kickstarter, Pledge Music, Patreon and Indiegogo. Bandcamp, for example, launched in 2008 and reached $70m in payouts to artists by June 2014. That’s small beans compared to iTunes, yet for individual artists, the gap can be much closer.
Cellist Zoe Keating, often cited as a role model for anyone considering the direct-to-fan route, made just over $38k from iTunes in 2013, but nearly $26,000 from her Bandcamp page. Kickstarter, meanwhile, has paid out more than $112.6m to successful music crowdfunding campaigns since 2009. High-profile projects like Amanda Palmer’s $1.2m raised for a new album in 2012 tend to get the headlines, but the nearly 13,000 artists who’ve raised between $1k and $10k on Kickstarter show its value just as much.
The last decade has also seen: OK Go fund their career through a succession of partnerships with brands to experiment with new technology; Pixies sell out two nights at the 2,600-capacity Troxy venue in London with the £30 tickets sold directly to fans rather than through middlemen; Trey Songz launch a mobile fanclub that was generating $54,000 a month in in-app purchases at its peak; Nine Inch Nails give an album away for free while selling out of 2,500 $300 “Ultra-Deluxe Limited Edition Packages” in less than two days; indie label Ghostly International build a platform called Drip.fm to help its peers run their own subscription services; and Jack Conte found a crowdfunding service (Patreon) where every time he releases a new video, he earns more than $5,300 from nearly 1,400 fans who’ve committed to support him.
And these are just a few examples of artists finding new paths, with more to watch every week: Thom Yorke distributing his new album as a BitTorrent bundle with a $6 “pay-gate” is the recent hot topic within the industry, hot on the heels of U2's (admittedly controversial and likely unrepeatable) iTunes giveaway. Even added together, these kinds of activities are small in the bigger picture of music industry revenues shown by figures published by the IFPI, RIAA and other bodies. But they show a more complex truth about what the last decade of digital music has set up: potential for artists to survive and thrive on a patchwork of income fueled by adroit use of technology and strong connections with their fans.
Streaming services have taken a few small steps towards that role, but they have more work to do. If they manage it, they can prove that the last decade of digital music was not just about falling CD sales and not-rising-enough download sales. It was about laying the groundwork for what comes next: a music industry that makes digital advantageous for fans and artists of all sizes.
Follow Stuart Dredge on Twitter @stuartdredge
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