Music Performance Rights Become Key Asset in Economic Slowdown

As revenue from digital downloads, which analysts had hoped would help revitalize a music industry hobbled by years of flagging CD sales, continued to disappoint in 2010, income from performing-right royalties have become increasingly important to songwriter/artists around the world. While the annual “Recording Industry in Numbers” report issued recently by the UK-based International Federation of the Phonographic Industry (IFPI) shows a continuing slide in music sales, performing-right revenues, which showed pockets of resilience during 2010, play a much greater role in the marketplace, with increased emphasis on enforcement and more diligent methods of collections.

For 2010, global music sales fell 8.4 percent to $17.38 billion, led by the ongoing decline in physical media, which dropped another 14.2 percent in 2010, according to IFPI. After peaking at just over 706 million units in 2000, CD sales have since plummeted more than 50 percent.

The double-digit CD fall-off was only marginally offset by single-digit download sales, which rose a mere 5.1 percent worldwide last year, or nearly 4 percent lower than in 2009 and well off the 34 percent gains recorded just four years earlier. In the U.S., digital revenues remained nearly flat (1.2 percent) year to year, says IFPI.

Things weren’t much better at the music box office. For 2010, concert-ticket sales were off 15 percent from the previous year, from around 45 million in 2009 to 38 million last year according to figures compiled by trade magazine and online concert resource Pollstar.

There were however, encouraging signs that performance-rights revenues could buck the trend. Citing greater strength in areas like cable, satellite audio and new media, for its 2010 fiscal year BMI reported$917 million in revenues, up 1.3 percent from the prior year. Total distributions to BMI’s stable of songwriters, composers and music publishers reached $789 million. Over the last five years, BMI’s royalty distributions have increased by more than $116 million or 17%.

Separately, IFPI reported that collections by global music-licensing firms increased 50 percent over the last five years, from $1.2 billion in 2006 to $1.8 billion last year. (IFPI’s figures are based on collections on behalf of performers and producers only.)

Piracy Still Impacting Revenues
Industry groups like IFPI blame illegal downloading for the continued slide in global music sales, led by such notorious BitTorrent and file-hosting sites as isoHunt, Pirate Bay, RapidShare and MegaUpload. Despite strong demand for new music on a global level, the persistence of piracy means that major record companies “are operating at only a fraction of their potential,” notes IFPI chief executive Frances Moore. “Determined action by governments and intermediaries to tackle this problem could create a framework for increased growth, more investment in artists and greater consumer choice."

Even when users aren’t downloading scot-free, however, they still have plenty of ways to listen for next to nothing. For example, first-time subscribers to DRM-based download service Rhapsody who elect to cancel their membership receive a generous counteroffer: just $4.99 a month for unlimited streaming to up to three different authorized PCs. And while emerging “cloud-based” providers like Spotify and Vodafone offer a premium paid-for option, listeners can also elect to stream for free through a separate ad-supported tier.

Still, with an estimated global subscriber base of over 10 million, services like Rhapsody and Spotify are key to the future growth of the music industry, say experts. Cited in the IFPI report, NPD Group, a provider of consumer- and retail-market research, suggests that “entertainment companies in the US are slowly moving toward a subscription and micro-payment model, whether for digital books, game add-ons, or home video” and that “the explosion in connected or smart devices in the home and mobile space has already begun to redefine the platforms for digital music.” Going forward, IFPI believes that cloud-based programs will lead to a much more competitive marketplace as “a new generation of licensed services [give] access to music across many platforms and devices.”

Such permutations represent both a blessing and a curse for the major labels. Despite the potential to attract millions of newcomers, “all-you-can-eat” subscription services allow users to have unfettered access to music they’ve already purchased — hardly the big revenue generator the industry has been hoping for. The same holds true for so-called “digital lockers” such as Amazon’s Cloud Drive, an online music-backup service debuted last month that allows Amazon customers to store music “in the cloud" with the ability to access personal libraries from any location and on any computer. Having ceded the CD-buying market (or what’s left of it) to iTunes, Amazon sees its locker concept as a way to seriously compete against Apple’s online behemoth in the digital-music sweeps. While “effectively an alternative way to build an ecosystem that ties customers in,” says Mark Mulligan, digital-media analyst for Forrester Research, it remains to be seen how and when the majors will be able to cash in on these types of service offerings.

The continued pullback in global music sales highlights the growing importance of revenue generated by performance royalties, according to IFPI. This includes music used in commercial environments such as stores, restaurants and nightclubs, in addition to radio and television broadcasts.

“Performance-rights collections represent a significant income stream for record companies and artists,” says IFPI. “Businesses that use recorded music to attract and retain customers, drive productivity and motivate employees increasingly pay a fair price for doing so wherever they are located.” Greater enforcement of licensing arrangements, as well as improved productivity by music-licensing companies, has helped keep collections strong in recent years. However, continued vigilance is required in order to ensure ongoing compliance, says the organization.