In this blog the early music industry in Australia was analysed in great detail (The Early Record Industry in Australia – part 1, part 2, part 3, part 4, part 5 and part 6). In a four part series on the Australian music business I would like to highlight the recent economic situation of the Australian music industry. In the first part of this series the charts of the Australian Recording Industry Association (ARIA) are analysed to understand the consumers’ taste downunder especially in respect to the Australian national repertoire. In the second part the question is answered, which labels benefit from the chart successes of international and domestic artists. In a third part the development of the recorded music sales in Australia from 2000 to 2011 is analysed to give an explanation for the ups and downs in the observed period. In the fourth and last part of the series the economic role of collecting societies in Australia is highlighted especially from the licensing income’s perspective.
In the following the Australian recorded music market is analysed in detail to answer the question why the market was hit by the recession not earlier than 2006.
The Australian recorded music market (physical and digital) was the seventh largest worldwide in 2011 according to the recent IFPI-report (2012: 20). The market valuation is thus higher than that of the Italian, Spanish and Brasilian market, although Australia has a much smaller population (22 million inhabitants) than the countries mentioned.
The Australian Recording Industry Association (ARIA), whose member labels cover almost 95 percent of the market reported wholesale sales of sound recordings and music videos for the full year 2011 of AUD 382.7m (EUR 300.7m). This is a loss in revenue of about 40.9 percent compared to 2001, when sales peaked at AUD 647.6m. However, the revenue even decreased by 55.0 percent if we adjust for inflation (basis: 2011). In the following the characteristics of the Australian recorded music market will be highlighted by selected figures.
The Australian market for physical and digital music sales
From an overall perspective the Australian recorded music market was also affected by a recession as almost all other national markets (figure 1). However, the sales did not substantially decline until 2003. After a sales decrease of about 8.5% from 2001 to 2002, the revenue (adjusted for inflation) nearly peaked on a historical high in 2003. Since 2004, however, the annual sales decrease accelerated from 2004 to 2008: 2003/04: ‑8.1 percent; 2004/05: ‑15.1 percent; 2005/06: ‑6.3 percent; 2006/07: ‑11.4 percent; 2007/08: -11.8 percent. The market shrank again but modestly by -3.1 percent from 2008 to 2009. In 2010, however, the overall sales tremendously dropped by 16.2 percent. In 2011, the decline slowed down and the recorded music sales decreased only by 3.6 percent. In 2011, the nominal value of recorded music sales were only 3/5 compared to 2001. If we consider inflation too, the revenue from music products in Australia has been more than halved compared to the historic high in 2001.
However, the sales figures before and after 2005 are not directly comparable since value figures have been calculated after the application of any volume or other rebates since 2005. Thus, statistical analysis is only valid for the last 5 years. However, in this period the wholesale value of recorded music sales decreased of about 39.0 percent adjusted for inflation.
The sales slump of CD sales
The main reason for the overall decline of recorded music sales unsurprisinly lies in the CD market segment. Though CD sales accounted for 58.2 percent of the overall revenue from recorded music in 201, the CD sales on a value as well as unit basis have been dramatically decreased in the last 5 years (figure 2).
After CD singles as well as album sales had peaked in 2001, the singles sales slumped of 47.0 percent until 2004, whereas the album sales decreased by a lesser of 18.0 percent in the same period. The massive decline from 2004 to 2005 (singles: ‑25.6 percent; albums: ‑15.0 percent) can partly be explained by the adjustment in sales statistics. However, the statistical effect cannot be calculated with any precesion since exact data is not available. However, from 2005 onwards the CD sales dramatically slipped into economic irrelevance (‑99.4 percent to AUD 151,000 in 2011). The wholesale value of CD album sales also declined, but compared to the singles sales ‘only’ by 57.9 percent. Compared to the historic peak in 2001, the CD single market virtually disappeared in 2011 and the CD album market was less than a third of the market volume of 2001 (-70.6 percent).
Can music file sharing be blamed for the sales slump?
The Australian music industry association ARIA explained the downturn by the unauthorised copying and communication of music by CD burning and music file sharing. In 2003, ARIA commissioned Quantum Research with a representative study (based on 1,001 telephone interviews) entitled “Understanding CD Burning and Internet File Sharing and its Impact on the Australian Music Industry” . According to this study 21 percent of the general Australian population have used file sharing services at least once; 11 percent have used these services in the last month. Among the subgroup of file sharers a net decrease of 12 percent in the CD purchasing behavior as a direct consequence of the file sharing use was reported. This decrease in sales is greatest in the under 18 age group.
However, these findings cannot be confirmed by ARIA’s unit sales statistics. In contrast to Quantum results, the unit sales of CD singles increased of about 11.4 percent and of CD albums of about 13.1 percent between 2000 and 2001. In 2002, the unit sales of CD singles increased by 8.3 percent and of CD albums by 5.5 percent. In 2003, however, the CD album unit sales increased once again by 7.9 percent. Unlike CD albums the unit sales of CD singles continued to decline by 16.1 percent in 2003.
In the following years CD album unit sales stabilised on a high level. From 2003 to 2004 the sales modestly decreased by 4.8 percent and a further 4.3 percent in the next year. In 2006, however, the unit sales of CD albums even increased by 7.9 percent (+ 3.6m units). In this year more CD albums were sold than in 2001. The dramatic slump in unit sales in the album segment occurred not until 2007. From 2006 to 2007 the sales figures showed a decrease of 11.6 percent and a further drop of 12.2 percent for 2008. In 2009, more CD albums were purchased than in the previous year (+2.3 percent). It is striking that the most serious decline in CD album sales was measured in 2010. Within a year the market volume decreased by 6.4m units (-16.2 percent) – the highest loss ever. Again in 2011 the market shrank by further 2.9m units and by 8.7 percent.
The CD singles segment developed totally different. After a slight fall between 2003 and 2004 of 1.9%, the CD singles market (on a unit basis) was literally demolished: ‑20.4 percent (2005); ‑41.4 percent (2006); ‑42.3 percent (2007); ‑47.4 percent (2008); ‑61.0 percent (2009); and -92.8 percent (2010). Whereas in 2001 more than 12.4m copies were sold, in 2011 the CD singles segment was more or less inexistent with 46.000 copies sold.
These figures indicate that file sharing is not the (main) cause for the recession in the recorded music market. If this would be true, the CD album sales would have to decline earlier than 2006. Napster boomed also in Australia in 2001 and it is evident that the followers – KaZaa, Limewire and others – had been heavily used before 2006. However, the unit sales of CD albums show a relatively stable development until 2006. Actually in 2006 more CD albums were sold that in 2001. The unit sales dramatically dropped since then.
If we compare unit sales and revenue figures it becomes evident that the wholesale price of a CD album decreased by 33.9 percent on average from 2000 and 2009. In the same period the nominal revenue from CD album sales declined by 39.7 percent. Thus, price cuts accounted for the bigger part of the sales decline in the album market. Only 5 to 6 percent of the decline cannot be explained by price reductions. In the following years the transformation from a physical to a digital market proceeded and, thus, the drop in CD album sales accelerated. It is, therefore, just a question of time, when the digital sales outperform the physical ones (see figure 3 and 4)
The dramatic slump in CD singles sales cannot be supported by the ‘file sharing hypothesis’ either. The annihilation of the CD single started not earlier than in 2005 and accelerated afterwards. File sharing systems were then long been introduced.
Instead another hypothesis should be taken into consideration. As I pointed out in my article “The recession in the music industry” we are faced with a change from an album-based to a track-based music consumption behaviour. The development of the Australian market of recorded music therefore is a good example. Whereas the physical album sales showed a downward trend in the last five years and the digital album sales only grow moderately, the single track download numbers have been exploding since 2005, when they were published the first time by ARIA (figure 5). However, the boom of the digital music market, which is mainly driven by the sales of single tracks, cannot compensate for the loss in the physical market segment (figure 6).
Price cuts and changing consumer behaviour are most likely responsible for the sales slump in the Australian recorded music market. This hypothesis is also supported by a music file sharing study conducted by Jordie McKenzie (2009). The economist of the University of Sydney highlights for the period from November 2007 to February 2008 that there was no statistically significant impact of music file sharing over Limewire on physical and digital single track sales (using chart success as an instrument variable) in Australia. However, he identified two different groups of mobile and online music users. Whereas one group consists of younger, computer savvy music consumers with a low disponible income, the other group is represented by the older traditional type of music consumer with a relatively high income. This might also be a good explanation for the relatively stable development of the albums market, which strongly relies on the traditional music consumer type in contrast to the singles market, which is driven be the younger generation. However, since the consumption behaviour of the older generation is changing too and since a younger generation of music lovers start to dominate the music market, the traditional record business will become less important and the CD will be a relict of a former era (see “The CD is Dead! Long Live the Music Download?”).
The Digital Music Market in Australia
In order to get a better insight of the changes of the Australian recorded music market, the development of the digital music market is further investigated. Since 2005, when ARIA reported digital music sales the first time, the digital segment has not only been grown rapidly but has changed structurally. In total, digital music sales increased nearly fifteen times from AUD 9.4m to AUD 140.5m (adjusted for inflation) from 2005 to 2011. Digital music sales accounted for 36.7 percent of the total revenue in 2011 – with an upward trend (figure 7).
The digital formats, however, show a very different development. Whereas ringtones dominated the digital music market with a share of 47 percent in 2005, their economic relevance has diminished until 2011. After an increase of 176 percent the ringtones market was saturated and the revenue peak at AUD 10.3m in 2006. In the following five years the ringtones revenue decreased by 90.0 percent to AUD 3.7m in 2011. In 2011, the market share of ringtones in the digital segment was just 3 percent.
In contrast, the wholesale value of single track downloads has increased from AUD 2.9m in 2005 (adjusted for inflation) to AUD 79.6m in 2011. However, we can observe falling growth rates already from 2007 on. The single track downloads still dominate the digital market with a market share of 56 percent. Digital album sales also gained relevance. Whereas they accounted for only 12 percent of the revenues from digital sales in 2005, their market share increased to 33 percent in 2011. The growth rates of digital album sales are even more impressive (figure 8). However, in the last two years the growth in digital album sales slowed down, whereas the growth rates for single track sales remained more or less stable.
However, the category ‘digital other’ is full of surprises too. This category includes sales of digital music video, mobile ringback tunes, music streams, ad-supported income, unearned advances and one-off payments. It is remarkable that this undifferentiated category has been grown twelve times (adjusted for inflation) from AUD 912,000 to AUD 11.2m in 2005 to 2011. Since no detailed data is available for this category, we have to speculate on the causes for such a dramatic growth. In fact, the growth rate of 116.5 percent between 2008 and 2009 was impressingly high, but in 2010 the revenue decreased by 12.2 percent and further 4.2 percent in the next year. If we consider these figures, it is very plausible that the increase in revenue was mainly driven by music streaming. If this is true, we can observe a trend away from music downloading to streaming – with serious economic implications. Whereas the average price for a single track download was stable – thank’s to iTunes – of about AUD 1.00, and for a digital album of about AUD 10.00, the unit value in the category ‘digital other’ dramatically declined from AUD 1.53 (due to ringback tunes) in 2005 to just AUD 0.05 in 2011. If this (assumed) trend to music streaming is sustainable, we will observe further sales declines for the Australian recorded music market in the next few years.
References:
Australian Recording Industry Association (ARIA), Sales Statistics 2002 to 2011.
McKenzie, Jordi, 2009, “Illegal Music Downloading and Its Impact on Legitimate Sales: Australian Empirical Evidence.” Australian Economic Papers, vol. 48, no. 4, pp 296-307, December 2009.
International Federation of the Phonographic Industry (IFPI), 2012, Recording Industry in Numbers 2011. London.
Quantum Market Research, 2003, Understanding CD Burning and Internet File Sharing and its Impact on the Australian Music Industry. Study commissioned by the Australian Recording Industry Association (ARIA).
Tschmuck, Peter, 2009a, “The CD is Dead! Long Live the Music Download?”, Music Business Research Blog.
Tschmuck, Peter, 2009b, “The Recession in the Music Industry – a Cause Analysis”, Music Business Research Blog.
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