Music industry in line with online

It took the big music companies a while, but after years of hoping the internet would go away, executives have at last got with it.

The song by Macklemore, above, and Ryan Lewis, Can't Hold Us, was the top streamed track on Spotify for the week ending June 2. MTV via AP Photo

"The internet will kill off the music industry" has been a popular refrain among executives and artists ever since illegal downloads and file-sharing sites started pulling the plug on revenues at the turn of the millennium.

The music market has shrunk to half its size since 1999 but is starting to see light at the end of the tunnel. Last year, it managed to stabilise itself, recording its first, albeit modest, growth since 1999 - by 0.3 per cent to US$16.5 billion, according to the International Federation of the Phonographic Industry, which represents the interests of the recording industry worldwide.

The industry has finally realised it has been fighting a losing battle against the Web and that the key to its survival lies in embracing it.

For years, the prime focus of music executives when it came to the internet was on waging copyright lawsuits. It has taken them a decade to abandon their preconception that buyers will always want to own their music, preferably in physical form such as CDs and vinyl.

But the Zeitgeist has changed. In this age of social media, sharing content is starting to override owning it, at least for young people.

Other sectors such as film-making and the media should pay close attention. The music industry was the first to feel the full force of the digital revolution. Maybe, just maybe, it is solving the dilemma of how to make money from it.

Physical formats such as CDs still account for 58 per cent of the global market and are still declining but digital music sales offset the drop last year, expanding by 9 per cent.

A third of sales now come from digital music, mainly thanks to Apple's iTunes download business, but also due to fast-growing streaming sites such as Spotify, Pandora, Deezer and Juke.

Streaming is like a digital jukebox allowing people to listen to music without owning it. For example, Sweden's Spotify, a leading player in the market, makes its money from adverts piped in after every few songs for users of its limited free service, and from subscription income from its premium service, which does not have adverts and allows unlimited listening to its library of songs.

The streaming sites pay the music labels a fee for every streamed song and the labels also get a share of advertising revenues.

"We expect enormous growth rates in streaming, especially among younger consumers," says Frank Briegmann, the president for central Europe at music label Universal Music Group, the largest of the three biggest music labels ahead of Sony Music and Warner Music Group.

"We have integrated digital processes into our business structure pretty well and found payment models for our music," he says.

"We were told for years that music in the internet had to be free, that pay models were uncool and didn't work anyway,and that no one needed labels anymore. That has been shown to be simply wrong."

At present, streaming is still dwarfed by downloads in most markets. Worldwide, streaming makes up just 13 per cent of digital sales.

In Sweden streaming already accounts for 91 per cent of digital music income and helped to drive a 13.8 per cent rise in the overall music market last year.

There is huge scope for growth in major markets such as Germany, where vinyl and CDs still account for 75 per cent of music sales. Streaming, in fact, is shaping up to be the biggest revolution in the music industry since Apple rolled out iTunes in 2001.

"Spotify shows how consumers can be brought to spend money in the internet," says Thomas Hesse, a management board member at the German media giant Bertelsmann. "The service suits their requirements and offers them clear added value."

There are signs streaming is leading to a decline in illegal music downloading. Research carried out by the Ipsos MMI institute in Norway recorded an 82.5 per cent drop in music piracy in the past four years.

"If you do it right you can get people to pay for music," says Stefan Zilch, the head of Spotify's Germany business.

After initial hesitation, the three big music labels jumped on board, acquiring a total of 18 per cent in Spotify. Goldman Sachs, Fidelity Investments and Coca Cola also have large stakes, undeterred by the fact that the company is still loss-making.

The technology giants Apple, Google and Amazon have realised the potential and are trying to get in on the act, exploring ways to make streaming profitable.

So far, so good. But it's not all a bed of roses. It is worth taking a look at how much the artists actually earn from streaming.

Last year, Zoe Keating, a US composer and cellist, said she had received the grand total of US$281.87 after her songs were streamed 72,800 times on Spotify. Damon Krukowski, a former member of the American indie band Galaxie 500, calculated the group got a royalty of $0.004611 for every time their song Tugboat was played.

In July, Thom Yorke, the lead singer of English rock band Radiohead, and Nigel Godrich, Radiohead's producer, withdrew some of their albums from Spotify in protest at the poor remuneration.

"New artists you discover on #Spotify will not get paid. Meanwhile shareholders will be rolling in it," Yorke said on Twitter.

The royalties for streaming songs are so low even thousands of streams earn artists the equivalent of just a few CD sales or downloads.

"It's bad for new music," wrote Mr Godrich, adding an album such as the English supergroup Pink Floyd's 1973 hit Dark Side of The Moon could not have recouped its production costs if it had been funded by streaming rather than record sales, because of the advanced, costly recording techniques used to create it.

Spotify retorted it had already paid out $500 million to rights-holders so far and would be paying out another $500m by the end of this year.

"We had exactly the same discussion with other top musicians like Coldplay, Adele, Red Hot Chili Peppers," says Mr Zilch.

"They all took their music off Spotify. And now they're back again. It's not just about money. It's also about piracy and advertising impact."

There was no evidence that streaming cannibalised sales of CDs or downloads, Mr Zilch adds. Instead, it reduced piracy, he says.

An added advantage, he says, is that streaming helps new artists find audiences, through listeners sharing their playlists on Facebook.

That, argues Elisa Bray, the rock music editor of Britain's The Independent newspaper, is a key benefit of streaming sites.

"Spotify is essential to new acts wanting to build a fanbase," she wrote recently.

"When I was in a band back in the late 1990s - very much pre-Myspace and Spotify - the only people who could listen to our music were our friends and our families.

"What we'd have given to have our music heard by more people."

Meanwhile, the technology is evolving fast. One day in the not-too-distant future, streaming sites are set to offer software that detects how fast a jogger is running and lay on the right music to match their speed.

Presumably something by Run DMC.