Analysis: What IFPI & RIAA Numbers Reveal
Excerpted from Billboard Business News Report by Glenn Peoples
Recently released numbers from IFPI and RIAA show continued losses in physical formats, varying success in mobile, and slowing digital growth as markets mature. Fueled by a large drop in CD sales and lower wholesale values, North America led the four global territories (Europe, Asia, and Latin America are the others) in total trade revenue decline.
North America had a total of $4.98 billion in recorded music trade revenue in 2008. That represented a drop of 18.6%. Trade revenue from physical - nearly all of it from CD sales - dropped 31.2%. The drop in trade revenue from physical formats is much larger than the drop in unit sales. Europe, whose digital market is less mature than the US market, experienced a 36.1% increase in digital trade revenues while physical format revenues dropped only 11.3%. Globally, physical revenue dropped 15.4% and digital revenue climbed 24.1%.
A physical trade revenue drop of 31.2% in North America comes with several implications. First, the loss of physical format revenue was greater than the decline in unit sales. According to Nielsen Soundscan, US CD unit sales dropped 19.7% in 2008. The RIAA has put the decline in retail value of US physical shipments at 28%. The numbers show evidence of downward pressure on retail and wholesale prices that is compounding losses from format substitution. Consumers are switching from CDs, which offer the highest per-unit trade revenue, for digital albums and track downloads. The number of unique transactions is greater but the resulting revenue is lower.
Second, digital revenue growth is coming almost entirely from digital downloads. Mobile revenue has dropped slightly; and ad-based services are providing little revenue at this early stage. Some mobile bright spots have been overshadowed by drops in areas. According to the RIAA, a 36% increase in mobile downloads and an 18% rise in ring-back tones was more than offset by a 17% decrease in ringtones.
Overall, there was a 6.5% decrease in mobile unit shipments (downloads) and 7.3% decline in mobile's retail value. Another part of digital revenue is subscription services. Mobile subscriptions continue to mirror PC-based subscriptions in their limited popularity. The RIAA put the value of US subscription revenue at $188.2 million, a 6.5% decline from 2007.
Digital has the opportunity to offer better margins than physical formats. Even though less trade revenue is being collected, improved margins from digital sales offer hope for a soft landing as total revenue bottoms out. There are still burdensome costs to bringing music to market, but losing CD sales for digital sales means eliminating the high cost of in-store marketing as well as the obvious costs of manufacturing, storing, and distributing physical product. As the size of the record industry continues to contract, it adjusts to the realities of lower revenues and more efficient digital distribution.