Digital Music Sales Overtook Physical in 2015, IFPI Says, Seeking Policy Changes
The global music market achieved a “key milestone” in 2015 as digital became the “primary revenue stream” for recorded music, overtaking sales of physical formats for the first time, said the International Federation of the Phonographic Industry in its annual state of the industry report, as it sought copyright-policy changes. By the end of 2015, digital sales generated 45 percent of total revenue, vs. 39 percent for physical formats, said the report released Tuesday. RIAA recently reported that in 2015, for the first year ever, streaming was the largest component of music revenue, slightly higher than downloads (see 1603220061), and said tech companies aren't paying their share of royalties.
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Digital sales in 2015 rose 10.2 percent globally to $6.7 billion, “helping to offset the falling sales of CDs and leading to the industry’s first measurable year-on-year growth in 20 years,” IFPI said. Total industry sales jumped 3.2 percent to $15 billion, it said. “The increase was primarily driven by a sharp rise in streaming revenues which more than offset declining downloads and physical formats.” Sales from all streams, including those from “premium” and ad-supported services, were up 45.2 percent, IFPI said. Streaming is close to overtaking downloads to become the industry’s leading generator of digital revenue, IFPI said.
IFPI hailed that “positive trend” in total sales, which, coming as it did after many years of declines, “reflects the transformation of record companies to meet changing consumer behaviour, proactive licensing of new services, continued investment in talent and innovation in bringing artists to a global audience.” IFPI sees that “streaming revolution” as having “engaged consumers, including many who were previously outside the licensed music environment,” the report said in a carefully worded reference to consumers who used to download their music illegally. IFPI didn't comment beyond the report.
But there's a "fundamental weakness underlying this recovery,” IFPI said. Though music is being consumed “at record levels across the world,” that “surging volume of consumption is not returning a fair remuneration to artists and producers,” it said. The result is a “market distortion” IFPI calls the “value gap,” brought about by online services that “circumvent the normal rules of music licensing and use copyrighted music content to build their business without fairly remunerating rights holders,” it said. “Payments to artists and producers are miniscule compared to the massive consumption on these services.”
Change is needed legislatively, because the “‘safe harbour’ regime designed for the early days of the Internet should no longer be used to exempt user upload services that distribute music online from the normal conditions of music licensing,” said IFPI CEO Frances Moore in a commentary in the report. “Labels should be able to operate in a fair functioning market place, not with one hand tied behind their back when they are negotiating licences for music.” It’s “encouraging” to see policymakers responding to IFPI’s initiatives to close the value gap, she said. “The European Commission has identified the problem and acknowledged that a legislative fix is needed. The US Copyright Office has launched a study into safe harbours to determine whether they are fit for purpose. These initiatives will be our industry’s priority focus over the next year.”
Statistics from RIAA and IFPI, which has U.S. members including Sony Music Entertainment, Universal Music Group and Warner Music Group according to its website and also RIAA, come as copyright interests including RIAA told the Copyright Office the Digital Millennium Copyright Act is hurting their interests, in the CO's ongoing DMCA Section 512 review. Advertising-supported websites hosting on-demand music aren't paying their fair share of royalties, said the groups in past CO filings (see 1604040051) and experts in interviews Tuesday. Because of DMCA's safe harbor, copyright owners may not have enough leverage to demand the compensation they think they're due from major websites like Google that feature user-generated clips, experts said.
To RIAA CEO Cary Sherman, IFPI's report "is more clear evidence that music creators are not being fairly compensated by the largest on-demand music service in the world," he said in a statement. "A fresh look at the DMCA and the safe harbors that YouTube and other tech companies take advantage of is urgently needed. It’s time to update an antiquated and dysfunctional law so that creators, tech companies, and fans can all benefit." Google, owner of YouTube, didn't comment.
The music industry and tech interests have valid points on DMCA Section 512, said Vice President Daniel Castro of the Information Technology and Innovation Foundation, a think tank that has received financial support from both sides. "A lot of people do get music from these user-generated content platforms, and it’s very fair that the [music] industry looks at it and says, 'Where our are customers coming from, and are we monetizing it appropriately?'" That DMCA wasn't written for such licensing deals "is absolutely true," he said. To ITIF, a solution is to stop requiring performing rights organizations to license some content, said Castro.
Increasing payments for user-generated music that can be consumed on demand a la tunes associated online with a cat video on YouTube could backfire, said Wilkinson Barker terrestrial-radio lawyer David Oxenford. "If you force them to pay a lot, what you’re going to have is they will de-emphasize music." That risks "ticking off" consumers if such music is "less accessible on services like YouTube," said Oxenford. "Give it time" is his advice to the music industry, because digital music consumption is booming and can expand still more: "That music is going to explode as more and more people move to the digital platforms.”
To Digital Music Association General Counsel Gregory Barnes, copyright interests' "criticisms appear to be misplaced. ... It should come as no surprise that some revenue streams provided by digital music services will generate a greater return on investment than other sources." Total revenue from digital music services is "growing the pie for recording artists and record labels," said Barnes, citing RIAA data: Subscription, ad-supported on-demand, and distribution streaming revenue from SoundExchange but not other performing rights organizations grew 29 percent in 2015 to $2.4 billion. Even just looking at on-demand ad-supported music services, annual revenue rose about 75 percent 2013 to 2015 to $385 million, according to RIAA statistics, Barnes said. DiMA members include Amazon, Apple, Microsoft, Pandora and YouTube, its website said.
On DiMA citing increasing digital music sales, RIAA said such growth came as music listening grew on ad-supported on-demand platforms such as YouTube. Such services have "exploded, with more than 100 million users on just YouTube" in the U.S., while music-industry revenue from those services was "a mere $385 million, less than 6% of total U.S. music industry revenues in 2015," a RIAA spokeswoman emailed us. "Revenues from paid subscription services have increased by 88% during the past two years, with nearly 11 million subscriptions contributing $1.2 billion in revenues in 2015. How is it fair that when compared to other streaming platforms, the largest music streaming service in the world pays the least amount in revenues to music creators? Even more reason why this ‘value grab’ needs to be fixed.”
A Computer & Communications Industry Association copyright expert sees buyers' remorse, with the music industry wanting more in rights fees than it negotiated with websites. "These rates are set in the marketplace," and "they did a deal," said CCIA Vice President-Law and Policy Matt Schruers, copyright expert. "People are unhappy about the terms." He doesn't truck with "this notion" of underpaying, given deals can be renegotiated, Schruers said. "The 'value gap' narrative that we’re hearing results from the fact that the [music] industry itself did not get out in front of the digital revolution, they had to depend on technology platforms to do it for them." CCIA members include Amazon, Dish Network, Google, Netflix, Pandora, Samsung and Sprint, its website said.