Music Industry Posts First Profit Since 1999

Music Key
Music Key

The recording industry has taken a beating for more than a decade as it struggled to come up with a way to maintain its substantial profits in the face of Internet sharing programs like Napster and others. For years the industry wailed about and railed against piracy and illegal downloads and all the rest. Then came iTunes from Apple Inc. (NASDAQ: AAPL).

That didn't turn things back around, but it did get a large number of people paying for music again, mainly because Apple sold tunes one at a time at a low price instead of via an overpriced CD that probably only contained one song the consumer wanted anyway. But the CD was how the music business wanted to play the game, and it has paid the price ever since. Until now.

According to the latest report from the International Federation of the Phonographic Industry (IFPI), the music industry turned a small - 0.3% - profit last year. Total revenue came in at $16.5 billion, less than half the $38 billion the industry enjoyed in 1999, so it is not exactly time to party like it's 1999, but it is a start.

The IFPI makes the salient point:

Licensed music services are demonstrably meeting consumers' needs. New consumer research published today by Ipsos MediaCT, covering nine markets in four continents, shows that 62 per cent of internet users have used a licensed music service in the last six months.

Licensed subscription services include those offered by Pandora Media Inc. (NYSE: P), Spotify, Rhapsody and others. It does not include music locker services such as those offered by Apple, Inc. (NASDAQ: AMZN) or Google Inc. (NASDAQ: GOOG), but those digital services have contributed also to the music industry's 2012 profit.

CD sales continue to decline, down 5% to $9.4 billion last year, while all digital revenues were up 9% to $5.6 billion. Subscribers to licensed services rose by 44% in 2012 to 20 million and accounted for 10% of all digital revenues. The iTunes model still brings in the bulk of the revenue.

But Google is currently negotiating licensing fees for a subscription streaming service similar to Spotify's and, if it is successful, another big, well-heeled player will join the subscription ranks.

But the industry still has a blind spot. The IFPI claims, "The flow of new music springs from investment by record companies." No. The music industry still does not get it. The relative ease of recording and promoting your own music in the digital age is what is driving the music business.

If the record companies survive at all, it will be due to artists like Adele, who sold 8.3 million units of her album "21" last year on top of 18.1 million units sold in 2011. Those numbers are huge, even by 1999 standards, but there is only one Adele. Record companies cannot count on blockbusters like her coming along very often. Far more likely is someone like PSY and "Gangnam Style," an artist who goes viral on YouTube and other Internet outlets.

Still, 2012's small profit may shut the music industry up about piracy and make it more amenable to joining the digital revolution that has almost passed it by.

Filed under: 24/7 Wall St. Wire, Consumer Electronics, Consumer Goods, Research Tagged: AAPL, AMZN, GOOG, P