Music's digital mixed tape

I was forwarded this piece on the state of the recorded music industry in the past 24 hours and was inspired by the big claim it made.

"Music industry can see the light after least negative sales since 2004."

Least negative?

Well – I guess that's a positive. Although, I'm not so sure.

So I thought I'd have a dig around and see how the recorded music industry in Australia is fairing according to industry body ARIA. It publishes yearly wholesale figures generally a few months after the conclusion of each calendar year. Since 2005 the revenue figures have decreased every year except one (in 2009 the industry grew about 7 per cent) and unfortunately, 2011 was another year of lower revenue for the industry.

The recorded music industry in Australia has been punished since 2005 in a revenue sense. In 2005 it saw revenue of $528 million. In 2011 it saw revenue of $383 million. It has lost 28 per cent of its value over that 6 year period. Despite all the bluster about digital channels, these channels are proving inadequate at plugging the losses they create… the loss of physical sales volume and revenue is simply not being replaced with revenue from digital channels.

Combine these numbers with the serious lack of revenue the industry makes from radio airplay and it's difficult to see how the local recording industry can continue without some serious downsizing.

Let's look at 2011 a bit closer (you can view the full ARIA report here).

– physical CD album sales down 11.9 per cent (down $28.9 million year-on-year)
– digital album sales up 45.3 per cent (up $14.4 million year-on-year)
– net album sales down $14.5 million year-on-year

Combined, album sales account for a large chunk of industry revenue – close to $269 million – or 70 per cent of the entire market (which includes everything from vinyl to CD singles, DVDs, digital singles etc. So … whilst digital singles might be strong in a volume sense (which it is, there were 68.5 million digital singles purchased in 2011, compared with 49.2 million in 2010) … in a revenue sense it only accounts for $68.5 million of revenue, which works out at 20.7 per cent of the total market.

There's the problem – digital singles are inflating the impact of digital on record sales. They account for 70 per cent of unit volume but only 20.7 per cent of revenue.

The real battleground is the album battleground and that is a tough battle right now. The reality of these 2011 numbers is that album sales were down – album sales that really represent the strength of the recorded music industry – from 26.8 million albums sold in 2010 to 25.3 million albums sold in 2011. Net revenue loss is over $14 million from 2010 to 2011.

That drop is not insignificant – 1.5 million less albums sold in 2011 to 2010. That's 4,109 less albums sold EVERY SINGLE DAY in 2011 compared to the previous year. No amount of individual digital single sales can assist here.

In 2012 the challenge for the industry is significant – maintain album sales and continue to grow digital single sales. One part of this should take care of itself – digital single sales have risen every year for the past 6 and grew at over 40 per cent in 2011. Assuming 40 per cent growth again in 2012 digital single sales will account for 111 million in 2012 – up $32 million year-on-year. Not bad.

Album sales are not so clear cut. Assume physical album sales drop 12 per cent in 2012 (this is hard to model as you never know what albums will do, but is possible without an Adele 12x Platinum release to really supercharge sales). This 12 per cent drop would take sales to $195.9 million. Digital album sales would need to generate 73 million in revenue in 2012 to just match the reduction in physical album revenue, which would require a 59 per cent year-on-year increase. Ambitious but not impossible.

This illustrates the challenge facing albums – a 59 per cent growth in one format just to plug the hole created by a 12 per cent drop in another format. This is a huge challenge and poses a load of questions that 2012 is set to answer. One … what happens when digital growth slows (like it has in many other markets such as the UK and US)? What happens if physical album sales decrease faster than they have been previously? And lastly, what impact will subscription services have on album sales. There are over 25 million albums sold in Australia per year, can this level be sustained when entire albums will be available on demand?

Whilst digital has made music more accessible in the short term, in Australia I am not so sure it has benefited many in the long term. You could argue it's made one retailer very rich and powerful (Apple – who sell the majority of digital singles and albums), closed many others (physical retailers) and overall eroded significant value out of the recorded music industry (hard to argue for a positive around a $140 million drop in revenues over the past 6 years).

Honestly, I feel for the challenge facing the recorded music industry. They are fighting a bloody, brutal fight. They are constantly mocked by the digital community for missing the boat and they don't seem to be getting much help at all from anyone – government or otherwise – to protect their IP. It sees other industries that rely on its content making significantly more revenue (FM radio) or significantly higher valuations (streaming on-demand services). I can't help thinking that 2012 is a really important year for the recorded music industry and those who support it. Recorded music needs a win.

Ben Shepherd is the Commercial Director at Sound Alliance. This post originally appeared on his blog, Talking Digital, and has been republished with permission.