Tuesday, September 09, 2014

Confused by music streaming? So is the record industry

In my post Classical music sales - separating fact from fiction I made the appeal that "there is a shortage of objective data on this subject... if the professional analysts know better please tell me, and I will publish corrections". Dave MacDonald, whose activities include the excellent SoundNotion.tv, responded to my appeal with some very illuminating inside information which highlights how fact has become inextricably fused with fiction in the music industry. Below is my further commentary prompted by Dave's input, and, once again, expert corrections are welcome.

My earlier post attempted to identify how important music streaming by services such as Spotify is in relation to sales of albums in conventional CD/download formats. Nielsen SoundScan reported 118 billion music tracks accessed by paid-for streaming in the US in 2013, and I applied the download average of ten tracks per album to convert this to an equivalent of 12 billion albums accessed by streaming in the US. This compares with 289 million purchased in CD/download format in the same year, so, by this measure, streaming is far more important than CD/download sales. My logic and maths were correct, but Dave has pointed out that this is not how the record industry sees things.

The problem is that the legacy unit of the album - 70 minutes of music - is now redundant. Because first downloading and then streaming made music available in tracks, not albums. So, in our financially driven world, the album unit of 70 minutes of music/average ten tracks has been converted for sales reporting purposes into an album unit measured not by tracks, but by royalty revenue. This new unit of measurement is the streamed equivalent album (SEA). Nielsen compiles its SoundScan data for record companies and tacitly acknowledges the significantly (shockingly?) lower royalty rate on streamed music by applying in 2013 the formula of 2000 streamed tracks generate the same royalties as one CD/downloaded album. (The number of tracks in an SEA decreases to 1500 in 2014, presumably to reflect marginally increased royalty payments). If a conversion of ten tracks per album is applied, for all music genres the consumption of streamed music in 2013 was, measured in royalty equivalent revenue, 59 million albums.

Let's try to summarise this conflicting and confusing data. In 2013 sales of CD/downloads in the US was 289 million units. This compares with 12 billion streamed albums if streamed tracks are converted into the legacy unit of ten track albums, or 59 million streamed albums if converted into royalty equivalent albums (SEA). Or in simple terms, when measured by album units, streaming is infinitely more important than CD/downloads; but when measured by royalty revenue, streaming is considerably less important than CD sales on their own (165 million units), yet alone CDs plus downloads (289 million). This surprising finding that in royalty terms the CD/download format is still the dominant for all genres should be read in conjunction with the fact that classical music takes a significantly lower share in digital formats; which means that in royalty generation - ie money - terms the CD is still by far the dominant player in the classical music industry.

If you are still confused, you are not the only one. But what this discussion does highlight is that any attempt to compare the consumption of streamed music with purchases of CD/downloads is meaningless. Because streamed music and collected music - CD/downloads - are different commodities serving different markets and meeting different needs. There are very important lessons to be learnt from this conclusion. First, despite received wisdom in the music industry, streamed music is not a replacement for collected formats - it is a complement. The low level of royalties on streamed music reflects, in part, financial opportunism on the part of the music industry; but it is also an admission that streamed music has considerably less impact and longevity than a purchased album. Secondly, again despite received wisdom, CDs are still the most important classical music format in fiscal (SEA) terms. Thirdly, every classical musician should be alarmed at the admission that streamed music generates a fraction (0.5% in 2013) of the royalties generated by an equivalent CD/download. Fourthly, at a time when financial pressures dominate the classical music agenda, record companies, orchestras and opera house should reflect on the vastly different royalties generated by streaming and CD/downloads before jumping on the streaming bandwagon and helping to kill collected music formats.

Finally, anyone suffering from digital fixation should take on board Dave MacDonald's revelation that vinyl sales increased by the same percentage (40%) in the first half of 2014 as streaming. Which means vinyl presses are currently at maximum capacity to keep up with demand; however, nobody is setting up new presses because it is uncertain how long the vinyl trend will last. Which at least gives me an excuse to reprise that header photo from my 2007 post Move over iPhone - here comes vinyl. Thanks go to Dave MacDonald for providing light rather than heat. As I said in my previous post, I am just a retired guy with an insomniac cat living in rural Norfolk; if the professionals know better please tell me, and I will publish corrections.

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