Digital Music Just Outsold Physical Music for the First Time

April 12, 2016, 8:31 PM UTC
Photograph by Thomas Trutschel Photothek via Getty Images

Subscription streaming services helped to lift the music industry to its first significant year of growth in nearly two decades, according to an industry trade group.

Global music sales rose 3.2% last year as digital music revenue surpassed those from all physical music formats for the first time, the Switzerland-based International Federation of the Phonographic Industry (IFPI) said in its annual state-of-the-industry analysis.

But that good news was tempered by the assertion that music consumption on free, legal online sources is growing just as quickly. The resulting “value gap” means that artists and labels are unable to get a fair return on their work and investment, the report says, threatening long-term growth.

The bump in global music sales stems largely from a 45% increase in streaming revenue, which has grown roughly four-fold since 2010 and now accounts for some $2.9 billion, or nearly half of all digital music revenue. Digital revenues—which include sales from streaming services like Spotify and Apple’s (AAPL) Apple Music as well as downloads and other digital formats—now make up 45% of the total revenue pie, eclipsing the 39% of sales via physical music formats like CDs.

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The overall 3.2% revenue growth marks a reversal of sorts for an industry that has spent the past two decades struggling to adapt to a digital landscape that has been unkind to physical record sales as well as music licensing and copyrights. The IFPI report warns that so-called “safe harbor” rules that let some major digital services skirt many music licensing regulations continue to threaten the industry even as global revenue numbers suggest that labels and distributors are finally figuring out how to thrive in a new digital environment.

In terms of data, the IFPI points to the more than 900 million listeners who generate $634 million in advertising-supported revenues from sites like Alphabet’s (GOOGL) YouTube, which rely largely on user-uploaded content rather than clips licensed from a record company. Though $634 million may sound like a large number, it accounts for only 4% of global music revenue. Meanwhile, just 68 million paying subscribers to streaming services (up from 41 million in 2014, by the way) generated roughly $2 billion in revenues in 2015.

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In other words, subscription music subscribers, although a fraction of overall listeners, generate roughly three times more revenue than those listening via free sites. Naturally, the music industry would very much prefer it if those 900 million listeners streaming music from YouTube and other “safe harbor” sites would kindly come over to a paid platform. Instead, the number of streams on ad-supported, free sites doubled last year in the U.S. and more-than doubled in the U.K.

“Exploding music consumption is not enough,” IFPI CEO Frances Moore wrote in a statement accompanying the report. “Value returned to the music community is vital too if we are to fund future innovation and creativity.”

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