Music online

1 Overview

We define online music as digital music purchased and delivered via internet channels and consumed on digital devices.

There are three ways of obtaining music online, other than streaming radio to the PC.

1. Buying tracks to download to a PC hard-drive or other device, and/or to burn to CD.

2. Purchasing tracks, ringtones or videos via a mobile network.

3. Swapping or downloading tracks for free using peer-to-peer (P2P) sites such as BitTorrent.

This profile concentrates on the first two cases, where music is paid for and delivered digitally, mostly over broadband. There are more details about number 3 in the Filesharing profile.

Music is the media type that has been quickest to take the benefits - and suffer the problems – of digital distribution. At the end of 2005, digital sales accounted for approximately 6% of global sales. By the end of 2008, digital represented 20% of music industry revenues, and this grew to 27% over the next year. At the end of 2009, the music industry’’s global revenues from digital channels were worth an estimated $4.2 billion, up 12% from 2008. In many markets, sales of physical singles are a thing of the past. Digital is not just confined to single downloads, although they remain by far the best seller. Digital album sales improved during 2009 and 2010 thanks partially to the launch of deluxe digital format iTunes LP. This has boosted the demand for digital albums to the extent they now account for 65 to 70% of a major album release. Britain’’s Got Talent finalist Susan Boyle’’s album I dreamed a Dream became the fastest selling debut album of all time, selling more than six million digital copies worldwide. The long-awaited release of the Beatles catalogue on iTunes in late 2010 also brought a boost to album sales.

Apple’’s iTunes Music Store (iTMS) was the first legal provider in this market, and continues to dominate, especially in the US where it accounts for 28% of the overall music market ahead of Walmart, Best Buy and Amazon. It is designed to work with the market-leading iPod music player as well as the iPhone and iPad. A large number of other providers offer legal online music, with a range of different pricing plans. In 2003 there were less than 50 licensed digital music services but now there are more than 400 with the number of tracks available online having risen from one to 11 million during that time. Most now provide music without DRM, or restrictions on how the music can be stored and copied. Social networking sites such as MySpace and Facebook provide an easy way for musicians to showcase work – often via a hyperlink to videos on YouTube -- or for friends to swap playlists.

But whilst digital is taking a larger slice of the market, the size of the overall music pie continues to shrink. The overall music market was worth around $18.5 billion at the end of 2008, down from $19.3 billion at the end of 2007. In contrast, total music industry sales for the year 2000, the highpoint of CD sales, were $36.9 billion. In 2009 global music sales overall declined by 12%, the 10th year in a row of decline.

Consumers are substituting traditional CD purchases with digital downloads. Sales of CDs, the mainstay of the record industry for 20 years, are declining rapidly. During 2007, CD sales were down by 19% in the US and in the UK by around 11%. The trend still continues and in 2009 the international CD market was down by 12.7% on 2008 with sales worth $1.6 bn less. However the growth of digital sales has slowed with digital downloads growing in value by $400 m in 2009 or 9.2%.

One notable exception to this trend was the UK in 2009 with record labels reporting a rise in income from music sales from £916 million in 2008 to £919 million. Income from digital sales was up 54% to £154 million while CD sales were down 6% to £740 million. The main reason the growth in digital sales has not nearly made up for the slump in CD sales elsewhere is piracy, and a major campaign to combat piracy in the UK from 2009, including a number of high-profile court cases, may well have been behind the rapid growth in legal digital sales.

Even before the launch of filesharing site Napster in 1999, CD piracy was becoming a major concern for the music business. This form of illegal copying continues to this day. But it is the successors of Napster (now relaunched as a legal site) that are costing the record industry money. Music industry body the IFPI estimates that 95% of digital music downloads are illegal, located via Torrent sites that act as directories for free music. Whilst the exact proportion is difficult to establish, there is no doubt that more music is copied illegally than is legally purchased. This has led some in the industry to claim that whilst more music is being played than before, the revenue generated is at its lowest for many years. But a range of new partnerships between the music industry and ISPs, mobile operators, handset vendors and others are producing business models which aim to extract $1 each out of a million customers rather than $10 each from a thousand. In 2009 revenues from “streaming” services supported either by advertising or subscription was worth $800 million, according to IFPI

Key issues in brief:

• Two years ago the concern was that despite increasing competition, iTunes continued to dominate the market. Since then however the growth of strong competitors and new business have made for a more competitive market where iTunes is still the largest but not now so dominant player. This is particularly true in large developing markets like China and India where other business models are more appropriate for low-income subscribers.

• Downloads have became significant for music companies. Music industry body IFPI estimates that downloads accounted for 27% of total revenues in 2009, up from 20% during 2008, and 15% in 2007.

• Regulating illegal filesharing. Although there have been high profile actions against file sharing sites such as Pirate Bay, a large number of people are still copying and swapping music illegally. However there have been a series of initiatives by governments and ISPs which are starting to have an effect on rampant piracy.

• Pricing. The majority of digital music income until 2008/09 was from the purchase of single tracks on a pay-as-you-go basis. Customers are tending to buy single tracks more than whole albums, which is easy to do with digital music compared to CDs. This is reducing overall revenue. Subscription services are available but do not have the traction of the single-track purchase model.

• Free legal sites. Advertising-supported streaming sites such as Spotify and Last.fm offer a legal way to listen to music online. These services depend on a continuous Internet connection, which is becoming more common both in the fixed and mobile spaces. Business models which can be profitable for the music industry are being developed..

• Rights management. The period 2008 to 2010 has seen an accelerating move towards DRM-free music. iTunes started selling music with digital rights management in April 2009.

• The growth of apps. The popularity of the iPhone and more recently the iPAD as well as Google’’s Android has seen a flood of applications hit the market during the past two years. In the two years to 2009 5 bn Apple apps were downloaded compared to 10 bn songs downloaded from the iStore in seven years. Now music apps are becoming mainstream and are seen as a good way to combat piracy.

• Section 2.4 contains the latest information on Apple'’s iTunes service, streaming services from MySpace, Spotify and Last.fm and download stores like Amazon. It also includes analysis of the impact of P2P on legal music sales. Section 3.1 contains the market estimate for online music at the end of 2007, based on Point Topic'’s '‘bottom up'’ methodology. Section 6.1 lists the current position of some of the leading online music providers, with an outline of pricing and usage where available.