The Tables Have Turned: Artists - Not Record Labels - Cashing In On Digital Revolution

Tables Have Turned ’Äì Artists ’Äì Not Record Labels ’Äì Cashing In On Digital Revolution

Ahead Of World Music Day, IBISWorld Reports On Downloads,

Digital Music And The Changing Face Of The Music Industry

Los Angeles (June, 19 2008) ’Äì According to IBISWorld, Inc., (www.ibisworld.com), one of the nation’Äôs most respected independent publishers of business intelligence research, while many recording artists are embracing the digital revolution that is sweeping the music industry, their record labels are looking at tough times ahead with poor profits and no sure strategy to counter the rising popularity of downloads and ring-tones over the humble CD.

’ÄúWhile consumers are slowly shifting from piracy to making legitimate music purchases online,’Äù IBISWorld Senior Analyst Mr. George Van Horn, ’ÄúDigital downloads are still robbing the music industry of valuable revenue.’Äù

’ÄúThe tables, or should I say ’Äòturn-tables’Äô have changed, on a global scale, with digital music sales now generating around $2 billion in revenue, with tracks available through 500 online services located in 40 countries, representing around 10 percent of the total global music market,’Äù said Mr. Van Horn. ’ÄúAnd we expect that will rise to 25 percent market share within three years.’Äù

One of the major trends in the industry over the next five years will be growth in legitimate downloads outpacing growth of the illegal variety.

’ÄúWe expect illegal downloads will reach a tipping point, beyond which, further growth will be difficult. Around the world in 2006, an estimated five billion songs, equating to 38,000 years in music were swapped on peer-to-peer websites, while 509 million were purchased online,’Äù said Mr. Van Horn. ’ÄúAnd while the piracy numbers are overwhelming, it points to the fact that some users are gorging on illegal music rather than listening to it. As online music becomes more readily available, and more affordable, we’Äôll see an increasing number of music fans indulging in legitimate downloading, attracted by a legal, quality, guaranteed product.’Äù

’ÄúThere is always a price people will be willing to pay to access something legally, even when a free illegal option is available. In addition, ongoing prosecution of illegal sites is slowly turning the tide and driving more listeners towards legal downloads,’Äù said Mr. Van Horn. ’ÄúAs the industry evolves, it is record labels that are out of step with the latest technology trends and it’Äôs hurting their bottom line in a major way.’Äù

’ÄúHaving initially fought downloading, rather than looking at ways of legally exploiting and profiting from it, record labels are now finding themselves playing catch up,’Äù said Mr. Van Horn.

Digital Technology Helped Artist Go Straight To Market With Their Music

’ÄúMany artists however, have embraced the new digital environment and are successfully promoting their work online, reaching new and potentially lucrative audiences,’Äù he said. ’ÄúDigital technology makes it easier for artists to dispense with record labels and publishers, to retain the rights to their own music, and distribute it themselves, and this is particularly true for unsigned and alternative acts ’Äì the very acts that come out of nowhere,’Äù added Mr. Van Horn. ’ÄúThe fact that performers make most of their money from merchandise sales and touring, rather than solely CD sales, also helps protect them somewhat, compared to the record companies which are suffering some serious losses.’Äù

’ÄúAmerica’Äôs music industry is entering a particularly challenging phase, with revenue contracting by 4.6 percent this year to $3.67 billion as the sector struggles to adapt to the new digital marketplace,’Äù said Mr. Van Horn. IBISWorld believes digitally transferring music online presents both positive and negative possibilities for the industry. One the one hand, despite falling revenue from CD and online sales in recent years, overall demand for music may actually increase as more fans access music by artists they were previously unaware of ’Äì creating opportunities and possibly increasing the value of assets held by the industry.

But Mr. Van Horn warned that as more bands and singers attempt to operate independently of record companies, performance royalties would increasingly find their way directly to the artists, rather than their publishers.

’ÄúThe larger players are suffering, as new artists are less inclined to seek a recording deal, but merely a distribution deal, by which the label will assist in getting the music to be heard,’Äù said Mr. Van Horn. ’ÄúAnd since illegal downloads are not publicized, a new challenge for record companies lies in identifying which music is popular, discouraging companies from investing too heavily in music as a promotional tool.’Äù

While revenues have been negatively affected by the loss of royalties from physical recordings, such as CDs and DVDs, and as a result of CD piracy, digital downloads and file sharing; major players are benefiting from additional sources of income via the digital exploitation of music in the form or mobile phone ring-tones.

The American mobile ring-tone market has grown to around 30 percent of the total of U.S.'s digital music sales. Currently digital sales represent around 18 percent of the U.S. market (10 percent worldwide), with IBISWorld predicting this to grow beyond 30 percent within five years.

’ÄúIn fact, by 2013, ring-tone licensing could be one of the industry’Äôs largest revenue streams, as CD sales plummet and downloading revenue remains below that which CDs once achieved,’Äù said Mr. Van Horn. ’ÄúWe expect music publishers will gain an increasing proportion of their revenue from new opportunities, many of which will be linked to mobile phones.’Äù

But still, the industry’Äôs financial future looks bleak. ’ÄúPotential growth markets are continually usurped by free services, diminishing the industry's means of generating future income.

’ÄúOne notable example is the industry’Äôs earlier expectation of deriving royalty income from streaming music online, however, websites such as MySpace allow bands to maintain their own sites and stream a selection of music with no need to pay royalties to anyone,’Äù explained Mr. Van Horn.

Though the record industry is working around the clock to devise strategies to claw back some of its lost revenue, IBISWorld believes many of its plans to counter the digital format are destined to fail.

’ÄúIdeas either mooted or trialed by the industry have included attaching ring-tones to CDs, and offering ad-based services, where songs are downloaded from official label sites with pre or post-track advertising and other online marketing tools,’Äù said Mr. Van Horn. ’ÄúAttaching ring-tones hasn’Äôt halted the decline in CD sales and ad-based services will struggle to succeed since people will still be able to download music illegally, and without charge, without ads.’Äù

Mobility is another challenge for record companies, as concepts such as streaming songs from websites, with ads on the page, ignore the fact that today’Äôs consumers want their music to be portable ’Äì they want it on their iPod.

Social networking sites such as Facebook may offer an opportunity for record labels, although they will struggle to provide substantial revenue. So-called ’Äò360 deals’Äô, such as Madonna’Äôs groundbreaking arrangement with LiveNation ’Äì enabling labels to take a cut of revenue from all activities, including performance and merchandise in return for greater support and development ’Äì may become more common, but will only really succeed for partnerships with really big-name stars.