Record companies have transformed their business models for the digital age.

Building a digital industry

Record companies have transformed their business models for the digital age. They have licensed around 500 diverse digital music services around the world, making up to 37 million tracks available to be listened to at anytime, anywhere and on any device.

Digital retailers are continuing their rapid global expansion. At the start of 2011, the major international services were present in 23 countries. Two years later, they are in more than 150 countries worldwide. Globalisation is opening up new markets, with record companies now able to reach consumers in territories where there was previously little retailing infrastructure.

Digital music is fuelling innovation as retailers upgrade their services and add new features and functionality to ensure they offer a better user experience than their unlicensed alternatives. Research from Ipsos MediaCT shows that satisfaction levels with these services is high internationally. 77 per cent of the users of licensed services rate them as excellent, very good or fairly good. In more developed digital markets, satisfaction levels are even higher – 82 per cent in the US and 80 per cent in Sweden.

See below some case studies showing how record companies have adapted their skills to the digital world

“Pirate services are clunky and old fashioned compared to the legal services available. The pirate option just cannot offer that complete consumer experience.”

Rob Wells, president, global digital business, Universal Music Group (UMG)

The digital music sector is a diverse landscape of different revenue streams and access channels.

Download stores

The digital download model remains a key revenue stream, however. Downloads still account for a substantial two-thirds of digital revenues (67 per cent) and are helping to propel digital growth in certain developing markets such as South Africa, Hong Kong, Philippines and Slovakia. Downloads have seen a slight decline in overall value globally, although digital album sales remain on an upward curve as consumers still show strong demand for owning the album format. Revenues from downloads globally fell slightly by 1.7 per cent in value, the decline being offset by increases in streaming and subscription revenue to generate overall digital revenue growth in the majority of markets.

Subscription services

Subscription services, part of an increasingly diverse mix of industry revenue streams, are going from strength to strength. Revenues from music subscription services - including free-to-consumer and paid-for tiers - grew by 51 per cent in 2013, exceeding US$1 billion for the first time and growing consistently across all major markets.

Global brands such as Deezer and Spotify are reaping the benefits of geographical expansion, while regional services such as Rdio, KKBOX and WiMP continue to attract new users. New entrants including Beats Music and YouTube launched, or announced plans to launch, subscription services in early 2014. The subscription model is leading to more payment for music by consumers, many of whom appear to be shifting from pirate services to a licensed music environment that pays artists and rights holders. The number of paying subscribers to subscription services rose to 28 million in 2013, up 40 per cent on 2012 and up from only eight million in 2010.

Music video

Consumers are increasingly engaging with music video online, with services such as VEVO and YouTube attracting huge global audiences. Music fans can watch the videos for free, with revenues being generated by advertising.

Research in the UK found that music videos were the second most viewed form of content online, behind only news events, in 2012 (Digital Entertainment Survey). Advertising revenues around premium content are higher than for UGC content, making music an important element in online video services’ strategies.

The most watched online music video is PSY’s Gangnam Style, which has been watched more than one billion times on YouTube alone.

“Monetising our video catalogue is a major area of focus. Some advertising-supported video streaming services are performing well and demonstrating significant growth rates, improving revenues and a more compelling customer experience.”

Ole Obermann, executive vice president, digital partner development, Sony Music Entertainment

The next-generation radio experience

A large number of consumers engage with music through radio services. Internet radio services, such as iHeartRadio, Last.fm, Pandora and Slacker create automatic, customised playlists for listeners from a single reference point – an artist, genre, decade or theme. The ability to skip to the next song adds to the customisation, while many services also rely on professional curators.

According to research by NPD Group in the US, more than half of 13-25 year olds listen to free online radio, with the strongest growth in usage among teens. “Lean-back consumers”, those not actively looking for particular tracks, remain a largely untapped user base and present a massive opportunity for the industry.