2015 was a landmark year for the music business.
- Global music revenues up 3.2%, the first increase in well over a decade.
- Digital sales surpassed physical sales for the first time in history.
- Streaming now accounts for 43% of digital music revenue.
- 900 million people used ad-support user upload services to access music.
Source: IFPI Global Music Report 2016
All of this is good news, but is not cause for complacency. The industry has a long way to go to repair the damage that has been done over the past 15 years.
The value gap
In her editorial in the 2016 IFPI Global Music Report, Frances Moore, CEO of IFPI, highlights the value gap in music. She defines the value gap as follows:
“The value gap is about the gross mismatch between music being enjoyed by consumers and the revenues being returned to the music community.” — Frances Moore, CEO of IFPI
On the surface, this definition makes a lot of sense. A vast number of people enjoy music every day, but don’t pay anything to do so. It’s probably safe to say that people listen to music because they enjoy doing so, so they are extracting more value than they are contributing back.
The thing is, the value being referred to by Moore is economic value. And the economic value of something is determined by what the consumer is willing and able to pay for it. And if we’ve learned anything from the years of decline in the industry — when it comes to music, the answer to that for many consumers is zero.
You could proffer that the success of paid streaming services like Spotify show that there is a cohort of people who are willing and able to pay for music. But I’d argue that those who pay for Spotify Premium don’t do so for the music (you can access the same music on Spotify Free), they do so for the features and convenience — like the ability to play any track ad-free on a mobile device and save tracks to listen offline.
Here’s to the policy makers
The most bewildering point from Moore’s editorial is the notion that the solution to the value gap is to convince the policy makers to change legislation. Are we really going to go and make the same mistakes all over again? Now that we’ve finally started to embrace innovation and technology, we’re going to go back and rely on the European Commission and US Copyright Office to eradicate the “safe harbour” regime? Oh yeah, because legislation and legal enforcement worked so well last time around.
The nature of ad-supported services is that it takes a lot more consumption to generate the same level of revenues as a paid-for service. If we force the issue and these services have to adopt the traditional royalty model it will likely be unsustainable for them to continue to be ad-supported. The reason 900 million people use the likes of YouTube to listen to music is because it is free — both in terms of cost and friction. No payment required, no user account required. Just click and listen. If we take that away, we are essentially driving these consumers back to piracy.
Even if legislation was the solution, I think it’s very unrealistic to expect that this change would come about quickly.
“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.” — Frances Moore, CEO of IFPI
The problem is that “acknowledgement” and “launched a study” indicates that neither organisation are anywhere close to formalising anything on this. So while the industry is busy focusing on legislation that may be years away, we’re likely to see everything around it evolve and change even further. The industry simply can’t afford to drop the ball again.
The “real” value gap
There is a value gap in the music business — but we’re looking for it in the wrong place. The crux of the problem is that we keep focusing on the general music consumer — basically everyone who listens to music. This includes casual listeners, fans, super fans and everyone in between. The products in today’s market are targeted at everyone, when the majority of revenue in the industry comes from a much smaller segment of the market — fans.
A Nielsen report in 2013 found that 40% of music consumers can be categorised as fans, and these fans account for 75% of all spend in the industry. The same report concluded that the industry is missing out on up to $2.6 billion a year in the United States alone by not servicing this segment of the market with the products they desire. A perhaps even more staggering insight is that a subgroup of fans, aficionados, make up 14% of music consumer population but account for a whopping 34% of spend. Mark Mulligan of MIDiA Research believes the percentage of total spend by super fans to be as high as 61%.
The real value gap in the music industry is caused by the fact that we’re constantly chasing the wrong money by catering for the general music consumer, when we should be focusing on fans.
Fans are still willing to pay for music — the success of services like Bandcamp, Patreon and PledgeMusic are evidence enough of that. But the missing link for fans is in modern digital offerings that provide a deeper connection to the artist, a higher level of engagement and more unique products that offer an experience that is unique to each fan. That is the real value gap in music, and the sooner we shift to focus on fans, the sooner we’ll see serious growth in music again.