The business of digital music in 2014 – reasons to be cheerful?

The past decade has undoubtedly been a torrid time for the recording industry: year-on-year declining revenues forced consolidation, and five majors became four and, most recently, three.¹ Where, previously, the sale of records was seen almost as a licence to print money, it has come to be regarded by many as an inherently risky business, with fickle consumers finding themselves in an environment that can facilitate access to recorded music at almost zero cost and, in the case of illegal services, with impunity.

Yet at the beginning of 2014 – an entire decade since the launch of the iTunes store – there are finally signs of growth.² Rather than being the scourge of the industry, digital is set to become the mainstay of the business for the foreseeable future. We therefore look at some reasons to be cheerful as the digital music industry enters adolescence.

1 Proliferation of digital music services

In the beginning and for a long time thereafter, iTunes was the only show in town. Now there is a whole host of digital music services available, offering access to music in a variety of different ways. According to the BPI’s Digital Music Nation Report 2013, there are now 71 legal digital music services in the UK.³ Aside from the well-established download services, there are a selection of on-demand subscription streaming services such as Spotify, Deezer and Rdio. And with the proliferation of 4G connectivity and increased smartphone penetration, it is becoming commonplace to “hard bundle” subscriptions to these types of services with mobile data tariffs, resulting in an increased subscriber numbers, and ultimately more income for content owners. In the UK, for example, there have been well-marketed bundling partnerships between EE and Deezer, and between Vodafone and Spotify.

In addition to on-demand subscription streaming services, online radio services continue to attract listeners who are content with music chosen for them, such as via iTunes Radio, Pandora and Mixcloud. From the perspective of the music services themselves, these types of offering have a crucial additional benefit, as in many cases they can be licensed collectively through societies such as PPL in the UK,⁴ resulting in a much less complex and time-consuming route to market.

So there are certainly more services available, and at the same time these services are generating more income than ever before. There have been a number of recent reports from digital music services hailing the increased royalties paid through to content owners. For example, TuneCore posted a 19% year-on-year increase in royalty payments for 2013, and Spotify was reportedly set to hit $500 million in royalty payments in 2013.⁵

2 Legal environment

After a great deal of lobbying on the part of rights-holders, the UK Digital Economy Act (DEA) was finally passed in 2010, but its implementation was held up by BT and TalkTalk’s judicial review. By 2012, however, BT and TalkTalk were nearing the last throw of the dice in their legal challenge to the DEA,⁶ and at the time of writing the way now seems clear for practical implementation of the online copyright infringement provisions of the DEA.

In other countries, there have been some very positive signs of reductions in online copyright infringement. According to the IFPI Digital Music Report 2012, the French “three strikes” authority, Hadopi, has so far sent over 700,000 copyright infringement notices, resulting in a 26% overall reduction in unauthorised peer-to-peer (P2P) network activity since October 2010. Hadopi-commissioned research found in May 2011 that, among people who received a notice or knew someone who had, 50% stopped their illegal activity and a further 22% reduced their illegal consumption. In South Korea, “graduated response” legislation was introduced in July 2009, since when 100,000 notices have been sent to ISPs requiring them to tell infringers to stop breaking the law.⁷ In April 2011 another law was introduced requiring cyberlockers and P2P services to register with the government and to implement filtering measures. According to the South Korean government, 70% of infringers stop on receipt of a first notice and 70% of the remaining infringers stop after a second notice. After three notices are ignored, the Ministry of Culture, Sports and Tourism issues a series of “correction orders”, after which very little infringing behaviour persists. Most recently, the Norwegian government is set to present its new anti-piracy plan in January 2014, in response to failed attempts by rights-holders to require ISPs to block access to the Pirate Bay in 2009.⁸

These examples demonstrate that the tide is beginning turn against online copyright infringement, which is undoubtedly a positive sign for the entire digital music industry.

3 Availability of better tools to market and promote music effectively

As technologies continue to move apace, the free-sharing nature of the internet that was once its biggest downside for content owners is fast becoming the biggest tool to success. “Big data” is a phrase that you are likely to hear more of in 2014, as artists and labels gather more information than ever before about their fans and potential fans. With digital music services tracking every single download and stream, a picture can be rapidly built up of fan demographics, tastes and habits. While there may be issues relating to the control of and ability to share such data, it remains the case that such technology can operate to reduce some of the “finger in the air” elements of marketing and promotion. For example, SongKick, a London-based service, lets fans enter credit-card details and pledge to buy a concert ticket for their favourite band if they will perform in their town. These guaranteed ticket sales mean smaller artists can do shows in venues that would otherwise be too risky.

As a further example of the diversification of online offerings, Spotify has recently launched new functionality for artists and managers to allow acts to promote and sell merchandise through a Topspin account.⁹ Labels are also building on their capabilities to allow for exploitation of ancillary rights, such as merchandising, live tickets and fan clubs, and it is now possible to find many examples of labels creating and administering artist websites and offering exclusive content directly to fans.

4 Transparency

A common concern of artists has been a perceived lack of transparency around the exploitation of music digitally and the resulting royalties due to them. But more than ever before, the digital environment facilitates the tracking of every use of a recording, including via user-generated content. For example, digital fingerprinting technology such as Audible Magic enables the identification of music with a very small margin of error. YouTube’s own content identification system allows content owners to track and, if they so wish, to monetise their content as it appears on the YouTube platform.¹⁰ The practical effect for labels has been that content is more often than not claimed and monetised, rather than being blocked and taken off the service.

At the same time, major labels have been attempting to settle disputes with their artists about digital royalties. There has been a succession of lawsuits in the US over the payment of digital royalties – Eminem being the most famous case from back in 2009 – but more recently the US rock band Counting Crows brought an action against Universal Music Group, claiming an increased royalty for download income.¹¹ The digital-royalties class action brought against Sony Music Entertainment was finally settled in 2012 with a settlement pot of $8 million,¹² and Warner Music Group has recently filed a settlement offer for a similar digital royalties suit with a settlement pot of $11.5 million. Under the Warner settlement, artists on “pre-digital” contracts are also being offered increased royalty rates on digital sales.¹³ For those artists who signed agreements before the advent of digital, these types of settlement are welcome in an age where digital exploitation begins to generate the lion’s share of income.

Genuine reasons to be cheerful?

While all these reasons should provide a certain degree of cheer to the music business (both labels and artists), the naysayers still have plenty of ammunition to shoot down even the most eternal of optimists. Spotify, the number-one music subscription streaming service, has yet to turn a profit, and a recent study by Alvarez & Marsal has concluded that UK music streaming services must halve their subscription prices in order to optimise income.¹⁴ Newer services such as Bloom.fm are continuing a “race to the bottom” by offering music at an almost negligible price point.¹⁵On top of this, it is always possible to find strong voices of concern from high-profile artists such as Thom Yorke about the negative impact of digital music services.¹⁶

Yet although it is probably true that halcyon days of the record business are well behind us, there are plenty of positive signs to take into the next decade of digital music exploitation. And for a large portion of those involved in the music industry, the latest developments can be counted as good reasons to be cheerful at the start of 2014.

Luke Anthony

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The business of digital music in 2014 – reasons to be cheerful?

1 Proliferation of digital music services

2 Legal environment

3 Availability of better tools to market and promote music effectively

4 Transparency

Genuine reasons to be cheerful?

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