Booming music trend good for artists and investors

  in Investing Updates / Analysis

Apr 22, 2016

A renaissance for royalties?

It’s been a long time coming, but digital and streaming music sales finally sped past physical sales last year to become the single-largest source of revenue in the recorded music business.

Digital sales now make up 45 percent of sales, leapfrogging physical sales at 39 percent, according to industry trade association IFPI. Digital sales actually grew more than 10 percent, pulling in $6.7 billion globally. Streaming services powered the bulk of that growth, skyrocketing more than 45 percent over the year before, generating $2.9 billion in revenue.

In fact, that growth has been not only enough to compensate for slowing physical sales and even digital downloads, but strong enough to drive overall revenues up 3.4 percent, marking the first sizable year-over-year growth in the industry in nearly 20 years. Digital revenues now make up “more than half the recorded music market in 19 markets,” according to IFPI.

But despite all this good news of music consumption, this silver cloud features a lead lining: a “value gap,” IFPI officials point to that “deprives artists and labels of a fair return for their work.”

IFPI Chief Executive Frances Moore addressed this disparity in a release touting last year’s revenue numbers.

“This should be great news for music creators, investors and consumers,” Moore explained. “But there is good reason why the celebrations are muted: it is simply that the revenues, vital in funding future investment, are not being fairly returned to rights holders. The message is clear and it comes from a united music community: the value gap is the biggest constraint to revenue growth for artists, record labels and all music rights holders. Change is needed—and it is to policymakers that the music sector looks to effect change.”

This value gap, as explained by IFPI, allows streaming music services to skirt the long-standing rules of music licensing. In short, the association argues, “User upload services claim they do not need to negotiate licenses for the music available on their platforms, or conclude licenses at artificially low rates, claiming protection from so-called ‘safe harbor’ rules…introduced in the early days of the internet and established in both U.S. and European legislation.”

The worst offenders exploiting this loophole, according to IFPI and others, are sites such as YouTube and Daily Motion, which shelled out only $641 million in royalty fees in 2014. Streaming services, such as Spotify and Apple Music on the other hand, paid out $1.6 billion that same year.

But Paul Levinson, professor of communication and media studies at Fordham University — who also happens to have more than 100 songwriting credits to his name — doesn’t think this gap will last forever. And there’s little doubt in his mind these safe harbors will be eliminated altogether in the near future.

“In the short run, some people may lose money. In the long run, just about everyone with talent will gain,” Levison argued. “If you're a good songwriter, you want as many people as possible to record your songs. Digital media make that much more likely, since many more people, including potential recording artists, will hear your songs. Performers are more likely to get more live engagements for the same reasons—more people will hear their recordings, including booking agents.”

At the end of the day, the furor over the digital music explosion could be a lot of sound and fury signifying…not much. At least according to Levinson.

"The digital revolution doesn’t mean that sales of music has bottomed out, but rather that music is being disseminated in a new way which is faster, more multi-dimensional with videos, and able to reach many more people," Levinson explained. "In the long run, this increase in satisfied audience will result in more not less income and other success for recording artists and songwriters."

And investors.