What can the music industry save?

Apple, Spotify, Deezer: How streaming services are saving the music industry

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The music industry won't forget 2014 anytime soon. Sales fell like a nosedive; worldwide they had halved compared to the year 2000. The low point was reached. Many experts have already swept away the once glamorous industry. But she did not give in and actually got the corner in the following years. How was the music industry able to free itself from the economic crisis of existence? And how did she get in there in the first place? After all, everyone listens to music.

Digitization and especially MP3 are changing the music business

The answer is simple and complicated at the same time. You have a lot to do with technology and data. The first turning point hit the music industry at the turn of the millennium: the invention of the MP3 music file format. Until then, consumers were used to playing their music physically on vinyl or CD. MP3 made it possible for them to collect and play music digitally, i.e. without physical sound carriers, on their computers. Music in MP3 format was offered for free download on the Internet. Illegal, but hardly preventable. The record companies lost a lot of money.

The success of YouTube fueled the free mentality. On the digital video platform, users could stream music and music videos legally and free of charge. People got used to not paying any more money for music. As a result, the worldwide annual turnover of the music industry decreased from 38.6 billion dollars at the turn of the millennium to 14.3 billion dollars by 2014. It was the low point.

Streaming services helped the music industry get on its feet

How did major labels like Universal, BMG or Sony Music manage to find their way out of the commercial crisis into which they had gotten through digitization?

The labels embraced digitization in two ways. First, they embraced Apple's iTunes Store. Apple had managed to get music users from illegal platforms into its player (iPod) and digital store system through a good user experience and prices that were perceived as fair.

“There was of course a temporary 'dependence' on the labels and their digital distributors on iTunes - that lasted for a few years. Then Spotify came along and everything was different. You have to imagine it this way: iTunes as the diesel that ran reliably, Spotify was then the electric car that everyone wanted, ”says Ralph Böge, Managing Director of the digital distributor Paradise Entertainment & Distribution.

After iTunes came streaming services such as Spotify, Apple Music and Deezer. They signed license agreements with the labels and regularly earn money when their artists' music is played on the music platforms. However, they did not completely renounce the physical sound carrier business.

The concept worked. The music industry will generate 19.4 billion dollars worldwide this year, which is almost five billion dollars more than five years ago. This is proven by the figures from IFPI, the representative of the major record labels worldwide. Almost half of this turnover was generated through streaming services, with a 33 percent growth in paid subscriptions for services such as Apple Music, Spotify or Tidal.

The curated playlist from Spotify or Apple Music is the record store of the digital age

“Today, labels have to fight to get their artists on the playlists curated by Spotify or Apple Music. Regardless of whether it is an indie or major label, ”says Marit Posch from the Monkeytown Records label in Berlin. “In the digital age, playlists are like the new record store through which listeners and subscribers rummage. If you like a track, you drag it to your private playlist and then ensure decent play rates. This is how the labels and the artists earn money. "

Your colleague Böge, however, doubts the fundamental influence of the playlists. “The curated playlists of the streaming services have a certain power. Our customers really want to get up there. But power is only relative because there isn't just one playlist, but many competing and alternating offers. But it is also true that currently more than 50 percent of our marketing is placed in the area of ​​playlists. "

The music industry has not yet found its way back to its old form, up to $ 38.6 billion in sales in 2000, just under $ 20 billion. In addition, not every country is keeping pace with the pace at which the world is adapting to digitalization in the music sector.

Germany is one of the worst performers. Frank Briegmann, President of Universal Music Group International for Central Europe and Deutsche Grammophon, said at an event that his label in Germany made more than 60 percent of its sales with CDs in 2016. At the same time, Universal would have earned 80 percent of revenue from streaming services in Sweden in the same year.

There are two reasons why the German market is so conservative: there is the “German fear” of adapting to new things and formats and the “greed is cool” mentality, ”says digital salesman Böge. “To such customers, the individual CD seems cheaper and more promising than a subscription to a streaming service. This is an actual situation, but I am optimistic that this will change in the near future, as the process is also underway. Once all German listeners have got used to the streaming services, they will stick with them and we will have a very constant and reliable market. "

The follow-up question is whether the rate of buying CDs and streaming varies from genre to genre. Böge affirms this. “On the one hand, the physical products are so strong in Germany because rappers, for example, bring boxes with CDs and other merchandising onto the market that drive the statistics up. But they are often returned after a year, so the real sales figures do not reflect reality, ”says Böge. “In addition, Schlager is a popular genre in Germany, and this target group buys CDs. We also have this Alprock phenomenon, where people buy a sound carrier or merch after an Andreas Gebalier concert. The physical market still works there - because this target group will soon discover the Internet and stream music. "

His colleague Posch is not so sure about this assessment. “It is really difficult to say which genres are particularly strong in streaming and which are still selling a lot of physical products. A lot depends on the individual artist, ”says the music manager. “For example, we only look after artists who make electronic music, and that's also difficult to differentiate: Projects like Moderat, e.g. almost 50% still sell physical products, even CDs; We only publish other projects digitally from the start ”.

It is clear, however, that Germany is slowly approaching the international standard, as the figures from the Federal Association of the Music Industry (BVMI) prove. On the one hand, the German music industry grew by 7.9 percent compared to the previous year in the first half of 2019 and took in 783.2 million euros. 66 percent of this income was generated through digital channels and 34 through physical products such as CDs or vinyl records.

“The physical products are collapsing in sales. The music downloads are also going down. It's moving more and more towards streaming only, we notice that too. The labels are looking at how they can participate in this trend. This development expands and accelerates, ”says Posch from his own experience.

But does that mean that there will soon only be streaming offers and hardly any physical products? “Nobody knows exactly where the journey will go in the next few years. Most players in the music market try to adapt to the new changes almost daily, ”says Posch.

Böge, on the other hand, sees a clear trend. “Streaming services, the music business in general, are very attractive to investors because they can be monetized very easily. There are numerous sources of revenue: streaming fees, secondary exploitation, the collected data that can be resold. Real money can be made here in the future. This means that sales in the music industry will increase significantly in the coming years ”, says Böge.

The BVMI's chairman, Florian Drücke, describes this trend as something that supports the state. “Streaming is now also developing the leverage effect in Germany. With a digital share of two thirds, the industry shows how far it is on the way to the digital turnaround ”. The reasons for the good growth rates in Germany are above all the attractive subscription models for streaming services and the widespread use of smartphones.