The music market comprises recorded music and live music. Recorded music has two distribution channels: physical and digital. Physical covers all retail or online sales of singles, CDs and music videos in hard copy. Recorded music does not include subscription fees or advertising revenues generated by Internet radio services, when these are not part of a music streaming service. Recorded music does not include music publishing. Digital covers any music distributed digitally to mobile devices and computers via download or streaming.
Live music consists of concerts and festivals, including spending both on tickets and sponsorships but not merchandise.
All music purchasing is measured at retail value, which is substantially higher than wholesale or trade values often reported.
The Swiss Music Market
Flat revenues characterize the Swiss Music market. However, the details are more dynamic. The live music sector remains stable due to a saturated market, but recorded music’s digital and physical channels are in flux. The physical channel continues to struggle with its rapid decline, while the digital channel has taken the lead. The latter’s growth in streaming revenues have almost compensated the physical channel’s losses. Net, the result is a somewhat-misleading stagnation.
There is also flux within digital. Downloading music is losing importance in contrast to streaming. Listeners who prefer hard copies or digital copies are disappearing. (Yes, there is a so-called ‘vinyl trend’ of buying old-fashioned turntable records, but this will not outgrow its current niche-status.) Younger listeners are less willing to pay to own music physically or to have it downloaded on their computer. To them, owning does not offer added value to streaming.
Buying criteria for recorded music have changed. Sound quality is no longer a differentiator. Most listeners are just as satisfied with streaming as they are with digital downloads or hard copies. Mobility is more important than ever. Listeners want music everywhere and anywhere, which favours digital in general, especially streaming.
Therefore, we expect physical distribution to continue its decline. Downloading, too. We expect download revenues to be even smaller than physical in 2020. Streaming cannibalizes downloading revenues. While the number of paying users and users in general shrinks, streaming models are emerging to be the core revenue driver in Music. The big question is whether streaming’s growth will compensate the decline in other parts of Music and produce growth for the music industry overall.
The digital channel offers many ways to personalize music. Listeners can for example create personal playlists according to their preferences and behaviour, enjoy recommended songs, and even adjust the tempo of songs (to match the pace of jogging, for example). This supports individualistic, mobile and flexible consumer behaviour across platforms, thus they correspond well with current expectations towards modern technology based solutions.
Nevertheless, for some music fans, downloading a full album still is an important part of the music experience. These tend to be the small fraction of listeners who possess large, sophisticated digital music libraries. For this highly enthusiastic minority, a switch to streaming does not come easily. Because of this, we assume the decline of downloads will eventually even out and revenues will stabilize in in the long run.
Switzerland’s excellent mobile-broadband network is ideal for streaming. This, plus the deep penetration of smartphones, consumers’ purchasing power and willingness to pay, will drive streaming ever higher. Switzerland’s ratio of paying (to non-paying) users for streaming services like Spotify still lags those of other countries. This ratio is the key to sustainable revenue growth, so Switzerland has upside potential here.
Rivalry between Spotify and Apple Music in digital distribution is Music’s dominant theme. The June 2015 introduction of Apple Music changed the music streaming landscape. Within a year, Apple Music had signed up 15 million paying subscribers around the world. Even though it is thinkable that Apple Music is depleting growth from other market participants, considering Spotify’s growth rate and the overall market potential, this scenario is rather unlikely. Although a small number of them might have switched from other providers, most of the 15 million were new users that previously were either unaware of streaming or unwilling to pay for a subscription. Gaining new subscribers is definitely a success factor, and retaining them is at least as important. Apple Music faces trouble with its monthly churn of 6.4%, compared to Spotify’s 2.2%. And Spotify is not the only competitor, other rivals are keen to capture market share, too. According to market researcher Ipsos, 57 per cent of internet users in 2015 accessed music or music videos on internet video sites such as YouTube. In comparison, the study shows 38 per cent for music streaming sites such as Spotify and 26 per cent for download services like iTunes. Further worth mentioning is that more than a quarter of internet users (27%) listen to music on YouTube without watching the video.
Switzerland’s live music segment faced flat demand. Although numbers of visitors, events and tickets sold increased, revenues at large shows were stagnant. There are two main revenue pillars. First, the Swiss festivals can rely on a growing number of visitors. Second, related revenues at festivals for food and beverages rise simultaneously. As seen in last years, the Swiss live music segment was struggling with a saturated market.
Numbers of festivals are assumed to stabilise in future. Most traditional music festivals are well established, with clear market positions. The few, very big festivals cover the breadth of music styles. Smaller, new festivals might be able to position themselves in specific niches, but this will not have a big impact on overall revenues in live music.
Secondary ticket services/resellers are raising their prices globally, which is raising revenues across the board, also in Switzerland. This is complicated by personalisation of tickets, but still, the reselling market offers potential. In Switzerland, it has been helped by the government, which recently rejected a proposal to regulate the secondary ticket market.
Overall, the music industry managed to adapt to the digital age and seems to have emerged even stronger. This presents itself in digital revenues growing and overtaking physical revenues for the first time. At the same time, the rise in music consumption via streaming and its revenue growth is not distributed evenly to musicians and their record labels. This so called “value gap” – a market distortion, withholds musicians and labels of their fair share of return and creates displeasure among artists. Musicians feel under-rewarded, and they are trying to redress this.
On the other hand, there are activities and developments that aim at strengthening the position of artists and labels. One example is Kobalt, software that registers every single instance a song is streamed or played in a digital channel. This can sum up to 700’000 individual revenue streams for a single song. Another is Sony Music Entertainment’s rollout of an online portal that handles the mass of streaming revenue data. It allows analysis of sales, streaming and royalties for every musician. “The Open Music Initiative” (OMI) also is working towards more transparency for copyright holders as well, which should ultimately result in fair and rapid rewarding for artists, songwriters, and everyone involved in the creation of music.
At the same time, Spotify – the biggest player in streaming – has yet to deliver profit. There is still no proof that subscription-based streaming is a viable business model. So there is still much to be resolved in the streaming business to ensure the sustainability of the revenue growths.
The change within the music industry advances at a fast pace. The importance of distribution channels is fundamentally changing with music streaming becoming the pillar of revenues. Nonetheless, the Swiss music industry at large reveals flat growth. Regarding the transition to streaming, we expect a fast paced development with the number of users almost doubling from 2015 until 2020. Apparently, even though streaming revenues are growing steadily, the decline in physical is compensated only scantily.
As the numbers of 2015 indicate once more, the physical music distribution is facing difficult times. The lost appreciation of physical media in future generations poses an existential threat to this industry. We expect the market volume to fall by 30 million from currently still almost 80 million to roughly 50 million in 2020. There is hope though, that a minority of music enthusiasts, vinyl lovers and retro fans will persist and ensure a minimum of revenues.
Given the stagnating live music sector and the collapsing physical music market in combination with an ongoing cannibalisation effect between music streaming and downloading within the digital distribution channel, we expect and overall flat growth for the Swiss music market.
Thanks to increased mobility, more smartphone usage and excellent mobile network infrastructure in Switzerland, music consumption is changing: it is moving away from physical media and stationary consumption toward consumption irrespective of location, media, device and platform. For the Swiss market, this forebodes increased demand for streaming services and offers that succeed at overcoming platform barriers.
One year after the entry of Apple Music into streaming, competition with Spotify is fiercer than ever. With regard to the Swiss market, it will be especially interesting to see how Apple and Spotify try to increase and retain their paying users. Thanks to the deep pockets of Apple, one answer might be to make an acquisition – Apple is reportedly in talks to acquire Tidal. Given the former’s user base of 15 million and the latter’s 3 million, one might question Apple’s interest, but there are two diamonds in the rough: Tidal offers exclusive content, thanks to Jay Z’s name and connections; and the technology underlying Tidal’s lossless streaming might interest Apple.
The big players of streaming have not deployed fully in Switzerland. To now, they have not used their entire marketing arsenal. In other countries, for example, Spotify and Apple Music promote their subscriptions with discounts for students. In Switzerland, these are not yet available. However, both offer special rates for Swiss families. Spotify is still pursuing the freemium model, whereas Apple offers a 3-month trial period, after which users have to pay. Depending on the growth in coming months, various changes to these pricing plans seem likely, including the introduction of paywalls for specific content. Particularly popular musicians, albums or songs would be restricted only to paying users. Introduction of a paywall could increase the ratio of paying users. Still, it is difficult to imagine that users will subscribe to several services, just to listen to a musician who is exclusive to a particular platform.
YouTube illustrates the blur. It has introduced a specific music app, targeted at the expectations of online audio consumers. Meanwhile, classic audio streaming services include videos. In short: streaming platforms are becoming integrated entertainment platforms. Most of them already include radio, either as a proprietary offering or in cooperation with existing broadcasters. Spotify includes video spots, and so will YouTube’s soon-to-be-launched Music Key service. By integration of social media, music consumption will become more interactive.
Even though music streaming and its growing revenues spark hopes of a soaring music industry, some obstacles still must be sorted out. Musicians are unhappy with their share of streaming revenues, which also are increasingly difficult to measure. Their value gap must be addressed, to ensure success of streaming and Music in general.
YouTube’s latest move shows how the competitive landscape in Music is changing. To keep its crown in Internet video, YouTube launched ‘YouTube red’ for $9.99/month (although not yet in Switzerland), which allows users to hear audio but not see video, while doing something else on their smartphone. Storing videos for later offline-viewing is also possible. Then YouTube introduced distinctive apps for specific large, growing niches – Music, YouTube Kids and YouTube gaming. The choice of niches is based on large, growing audiences behind them. Again, this speaks for how much potential is perceived to lie in music streaming. Furthermore, this case serves as prime example on how borders between music and video streaming get more and more blurry. While YouTube is moving into audio, Apple and Spotify are moving into video. Gradually, we believe the line between audio and video will disappear. All these developments seen in the light of limited user attention will result in increasingly hard competition in the entire streaming industry.
There is innovation in other areas of Music – for example in music production. Tools like Splice or Gobbler facilitate collaboration between producers and songwriters, and thus foster creativity. Hardware innovations open new possibilities for live performances. Technology to create music is ever more easily available to anyone. This, plus social media, has lowered entry barriers into Music. One of today’s major stars, Justin Bieber, got his start on YouTube.
Another trend in Music is the increasing importance of data analytics. Taking the growing user number of streaming services into account it is no surprise that the analysis of the resulting usage data becomes equally more important. The vast amount of data on digital music consumption allows distributors to customize the listening according to personal preferences, location, activity and situation.
So-called streamripping is another innovation. These apps convert music or video streams into digital files that are then saveable on digital devices. Songs can be saved locally, and are available without internet connection. Streamripping is the digital equivalent of cassette recorder. Similarly, these streamripping apps are not covered by the obligation to pay remuneration. At the same time, demand for streamripping will be limited, in that many subscriptions now include unlimited data transfer: with unlimited data, streamripping becomes unnecessary.
Comparison to Western Europe
Switzerland’s Music segment, like that of Western Europe, is rather stagnant overall. Unlike Western Europe, streaming in Switzerland is still in early days. It is still far away in terms of revenue generated. Still, the streaming share of the digital distribution channel is growing at a fast pace, and given Switzerland’s ideal conditions for it, streaming’s growth and market share will likely match and surpass those of other regions in short order. Assuming linear growth, streaming will overtake downloading as the biggest revenue source in the digital channel within a few years. Thanks to the large potential lying in streaming, the recorded music channel is expected to grow overall.
Live music in Western Europe as well as in Switzerland is a saturated, mature market. Revenues are anticipated to remain stable.