The IFPI’s annual Digital Music Report was recently released. Here are three key highlights:

1. Global digital music sales rose to $5.2 billion (or 3.6 billion downloads) while total number of paying music subscribers grew to an estimated 13.8 million.
2. Growth rates within countries naturally varied but France saw the greatest growth rate in digital singles, album, and subscription sales (23 percent, 71 percent, and 90 percent respectively).
3. Digital sales accounted for more than 50 percent of music sales in both the U.S. and South Korea while subscription accounted for 84 percent of digital revenues in Sweden.

You can read the full report here.

Consider this: If Billboard had calculated album sales in 2011 as it will in 2012, no album would have sold more than 1 million copies. In fact, the music industry would have been declared DOA.

Billboard announced last week that it will change the way it calculates album sales for its charts, including the popular Billboard 200. Under the new formula, albums selling below $3.49 will not be counted as sales but instead “freebies.” The implications of this change become immediately apparent when one considers Lady Gaga’s 2011 “Born This Way” album. When it debuted, “Born This Way” sold roughly 1.1 million copies. However, more than 440,000 of those copies were sold at a promotional price of $0.99 by Amazon.com. Thus, Lady Gaga’s sales under Billboard’s new formula reach little more than 660,000 copies.

But why is this important? Well, I see three primary implications of this decision for the future of the music industry. First, album sales in 2012 will appear to be particularly dismal and will lead many to incorrectly assume the music industry is in continued decline. Second, a sale is a sale. In a post-Napster environment, getting fans to simply pay something for music is a win. And third, Billboard’s charts will fail to reflect listenership in the growing on-demand music subscription arena.

Those are three very serious implications which will impact and shape our discussion of the music business in 2012. The music industry is and will continue to recover. However, the rate of that recovery is largely dependent on the attitudes and beliefs of those closely involved. If the discussion is focused on further declines in album sales, the industry may miss the incredible opportunity for growth in the digital space (remember, digital album sales increased by 20 percent last year!) and instead attempt to impede the building of much needed new revenue sources for artists in a misguided attempt to “save” album sales.

What Billboard may not realize, is that this new formula makes their charts virtually useless as the music industry increasingly moves to the digital space. Again, listenership in the on-demand music subscription arena is not incorporated (a fast growing distribution model, one which is expected to grow at an increasing rate in 2012) and albums sold on Amazon for $2.99 (a common promotional price) will be excluded. These are major online retailers of music (and hardly an exhaustive list). The exclusion of these “sales” skews the charts and provides inaccurate data.

The fallout from these changes obviously remains to be seen. But I am greatly disturbed by Billboard’s choice to measure album in sales as if the year is 1995.

-Bryce McLaughlin

Source: LA Times

There is a lot of negative discussion regarding revenue streams for artists from emerging services such as Spotify and MOG. (Pandora and other internet radio sites have thus far avoided the lynching mob because these services pay the statutory rate set by Congress and so any cries for higher rates would be almost certainly futile.) Many have called for higher rates or the elimination entirely of these new music subscription services. Artists, including the Black Eyed Peas and Coldplay, have even begun to withhold new albums from release on these platforms after specifically citing the low royalty rates. But are music subscription services really the problem?

There have been many great articles written about the future of music subscription services (read about why Spotify will never be profitable here and why Spotify will most likely be profitable at some point here) but there are two key points that I believe have been missing from the discussion thus far: the power of record labels and the basics of supply and demand.

Let’s begin with the major record labels, which control nearly all of the music subscription services’ catalog when combined together. These labels have agreements with each of these music subscription services which provide them with a staggering amount of power. For the purposes of this discussion, the most important aspects of these agreements are the non-disclosure agreements which provide the labels the right to terminate the agreement (pull their catalog) should any details be disclosed by the music subscription services. This means we cannot know for sure how much Spotify, MOG, and others are paying the major labels and can only rely on rates reported by artists. But the labels are paid the royalties and then distribute them to the artists, so we are ultimately kept from seeing the big picture. How much are the majors passing on to artists? Is it fifty percent or five percent of royalties? This is critical information necessary for evaluating the revenue potential of these newly emerging services and yet it is not available to us (leaving me very suspicious).

The next missing piece of the discussion is supply and demand. So many of us discuss the ways in which the Internet has changed the music business, for both better and worse. Yet in our discussion we often forget to consider a fundamental part of any business: supply and demand. The majors (and many others) are desperately hoping to return to the high margins of the late 1990s (when CDs cost $12.99+), but this will never happen because consumer willingness to pay has drastically changed. So long as the majors hold prices higher than the equilibrium point, consumers will seek substitutes (i.e. alternative ways of downloading music). While this is painful to realize (because it means revenue cannot be as high as it once was, at least with the same business models), it is important to understand before we can truly turn around the business.

I truly believe the Internet provides an incredible opportunity. It was recently reported that Warner Music Group posted a $205 million loss for 2011. It is a disturbing piece of news. Yet, WMG could turn its business around if it accepted and competed at the market set price using, among other strategies, economies of scale to lower costs. Honestly, it seems to be a simple solution: use music subscription services and pay-per-download services to distribute music more cheaply (the marginal cost per unit is virtually zero) and leverage the Internet for interactive and more narrowly targeted marketing campaigns (cutting big marketing budgets in the process). This would result in lower costs and increased sale volume, helping WMG to turn itself around.

So while everyone screams at the music subscription services and cries foul, the point is being missed. Fans are now king, willingness to pay has decreased, and labels must now compete at market set prices. Music subscription services are a part of the solution, don’t let the labels silently lead you to believe otherwise. They are only acting out of self interest.

There is a lot we can say about the current shift towards digital distribution. It is providing new revenue sources to musicians. It is democratizing distribution. It is introducing music fans to new and old artists in a social way we have not seen since the 1970s. Still, digital distribution has left us without. We no longer hold an album. We hold a device. We no longer drop the needle on to the record and let it spin. We tap on a piece of glass. For all that is good about our distribution methods, we have still lost something.

Hifidelics hopes to change this and put the music back in our hands, literally. The new project fromPlugola, Inc. provides independent musicians with a crowdfunding platform from which to release vinyl records, preferably ones featuring crowdsourced artwork from fans. The site has only recently launched but Erik Peterson, the President of Plugola, has reported their preparing the first projects.

It is a truly exciting new resource for musicians, one which carves out a niche that I believe is entirely separate from Kickstarter and similar sites. Hifidelics goes beyond merely providing a platform for crowdfunding and provides musicians a means to produce and distribute the vinyl records. Actually, the only thing Hifidelics doesn’t help with is the actual recording of the music (though it may at some later time, perhaps even pioneering a new record label model).

In short, Hifidelics is a great new project for independent musicians, one which leverages the digital space to connect fans, fund artist projects, and produce a tangible record which fans can enjoy. Take a look at the project here and learn more about Plugola over here.

-Bryce McLaughlin

It was announced on Monday that Switzerland will continue to allow downloading for personal use, effectively legalizing illegal downloading of protected creative content within its borders. This is an unfortunate decision on behalf of the Swiss government, which claims file sharing does not adversely impact national cultural production and entertainment spending (both claims originate from a government sponsored study).

Perhaps even worse than the announcement from Switzerland is an apparent trend emerging among some European countries (Sweden has recently discussed legalizing downloading for personal use as well). As we noted in our post “The Inadequacies of Deterrence”, differential association is the leading factor in an individual’s propensity to engage in illegal file sharing. By legalizing downloading – even if just for personal use – governments are effectively telling citizens it is perfectly fine to steal and infringe upon the rights of content creators, both domestic and abroad.

While the policy adopted by Switzerland is certainly popular among many groups, it is ultimately a shortsighted policy which threatens to severely diminish our global cultural production. While Switzerland may be correct in stating its own cultural production is left unaffected by its new policy, foreign cultural production is not. And of course Switzerland will be unaffected. The country constitutes but a fraction of the global music business (in some segments, such as sale of singles, it accounts for less than 0.2 percent of global share). It is the domestic (otherwise illegal) downloading of music produced abroad that will cause the greatest harm.

Illegal file sharing is a complex problem, but it is easy to understand the answer is not giving up. It is truly unfortunate Switzerland has chosen to pursue an isolationist and self-interested anti-piracy policy. It is an affront to the rights of artists everywhere and a threat to our global cultural production over the years to come.

Sources: Switzerland Announcement | Stats and other Information

-Bryce McLaughlin