Six "Actually"s: What the Music Business Really Looks Like Right Now

When you hear a song in Starbucks, or switch on the radio feature in an app, what are you actually paying for? And where does the money end up?

At its Worldwide Developers Conference (WWDC), held in the early hours of Tuesday Beijing time, Apple unveiled its streaming music service, Apple Music. For US$9.99 a month, users can stream millions of songs on Apple devices.

Apple Music is seen as Apple's attempt to reinvent itself in response to the huge changes the music industry has gone through in recent years. Twelve years ago Apple launched iTunes, which, together with the iPod, permanently changed how people listen to and buy music. Twelve years on, music sales on iTunes have fallen for the first time, the iPod Classic has been discontinued, and Apple's digital music business has to change.

Today's digital music market is far more complicated than the one Apple entered 12 years ago. The relationships among musicians, distribution platforms, the major record labels and digital music services, and their attitudes toward one another, shift more than ever. The major labels complain that streaming services are "thieves" and "misers," yet they collect most of the money those platforms make. Digital platforms give musicians more chances to show their work, but they cannot make them richer.

How has the digital music market as a whole changed? A report published in April this year by the International Federation of the Phonographic Industry (IFPI) gives a fairly clear picture.

Music sales are actually falling

You could already see this in 2013, when HMV, the veteran British music retailer, collapsed. Founded in 1921, HMV once ran more than 300 record stores around the world and employed more than 4,000 people. As late as 2009 its revenue reached 1.9 billion pounds. But as music sales fell and digital music ate into sales of physical records, HMV found it ever harder to survive. On January 14, 2013, it finally filed for administration.

In a shrinking music market, digital music has been the bright spot. According to the same IFPI report, digital music revenue rose from US$4.4 billion in 2009 to US$6.9 billion, and in 2014 digital music's market share finally drew level with that of physical recordings.

Within digital music, iTunes, once the industry's great hope, has done reasonably well. Horace Dediu, founder of the well-known Apple analysis firm Asymco, calculates that media of all kinds on iTunes, including film, TV and music, make up two-thirds of iTunes' total revenue, and that this revenue came to about US$16 billion over the past five years. It grew from more than US$2 billion in 2008 to more than US$5 billion in 2012, a compound annual growth rate of about 28%.

Streaming drives music's growth, true, but it actually still isn't making money

The IFPI report notes that in 2009, streaming subscription revenue and advertising revenue were each only about US$200 million. By 2014, subscription revenue had grown at an average of 46% a year to more than US$1.6 billion, and advertising revenue had passed US$600 million, growing about 30% a year.

Streaming's main innovation has been to change how recorded music is paid for and how people listen to it. Flat-rate subscriptions, such as Spotify's US$9.99 a month, have already dealt a heavy blow to iTunes and to the traditional record industry's way of selling music.

Streaming services like Spotify are adding users fast. By 2014 Spotify had 60 million free users and 15 million paying users, and both numbers are still climbing.

Yet profit remains streaming's big problem. In 2014 Spotify took in 1.08 billion euros and lost 162 million euros. The main cause of the loss is the royalties Spotify must pay record labels: in 2014 it paid the major labels as much as 882 million euros.

Streaming, led by Spotify, is already a force to be reckoned with. But unless it learns to make money, its future will stay dim.

Musicians' average income has actually shrunk

As music sales fall, so does what musicians earn from records. They sell fewer records, and digital music also gives them a smaller cut.

According to research by informationisbeautiful.net, an album a musician releases independently earns them US$12. On iTunes, the same album must sell at the US$9.99 price iTunes sets, of which the musician keeps just US$5.99, less than 60% of what they made before.

Worse, if the artist has signed to a record label and releases the album on iTunes, the poor musician gets only US$2.30 of that US$9.99.

Streaming is not much better. Spotify pays artists between US$0.0011 and US$0.007 per play, less than one cent. Google Play Store pays more, between US$0.0073 and US$0.0179. Even TIDAL, the streaming service founded by Jay Z that promises musicians more money, pays only US$0.007 to US$0.043.

In another, more direct survey of musicians' income, Future of Music found that from 2007 to 2012, 16% of respondents said their income from recordings had risen, while 22% said it had fallen.

The major labels, supposedly in trouble, are actually doing fine

From fiscal 2013 to fiscal 2015, Sony Music's revenue grew from US$3.4 billion to US$4.2 billion, and its profit from US$290 million to US$469 million.

Warner Music tells the same story. Over the past three years its revenue rose from US$2.78 billion to US$3.03 billion. Revenue from physical records fell from US$970 million to US$820 million, but digital sales more than made up the difference: Warner's digital music sales were US$870 million in 2012 and US$1.103 billion in 2014.

The last of the big three, Universal Music, is no different. From 2013 to 2015 its revenue hovered around 4.5 billion euros and its net profit around 500 million euros, with no dramatic change. Whatever else you say about Universal Music, the claim that it is on the brink of collapse does not stand up to the evidence.

Actually, more music is being consumed than ever, just in a different way

Overall music sales have fallen, but that does not mean the music industry is in decline. Wherever you go in the world, you can see more and more people listening to music and paying for it. What has changed is how they consume it. They no longer just sit alone at home with headphones on. Live music, such as concerts and festivals, is playing an ever larger part in people's lives.

In 2014, 32 million people attended at least one music festival in the United States. That is more than the population of Texas and only slightly less than that of California, the most populous state. In the UK, figures from the Association of Independent Festivals (AIF) show that from 2008 to 2014, a total of 635,000 people went to festivals, each spending more than 300 pounds on average.

In China, there were at most four or five music festivals in the whole country in 2007. By 2014 there may have been 200, under brands including Midi, Strawberry, West Lake, Hot Wave and Evergrande.

Crowds are growing too. Shen Lihui, head of Modern Sky (the company behind the Strawberry Music Festival), gave these figures in an interview with Xinhua. The first Strawberry festival, in 2009, drew 20,000 people over three days, about 7,000 a day. In 2014, a single Strawberry festival held simultaneously in Beijing and Shanghai drew 260,000 people over three days, nearly 90,000 a day. At 480 yuan for a three-day pass, that one festival may have taken in more than 40 million yuan.

These numbers show that music festivals are already a lucrative business. They also spill money into the cities that host them.

Forbes estimates that last year's Electric Daisy Carnival in New York brought the city US$34 million. That includes US$2 million spent on lodging, US$6.5 million on food and drink, US$2.5 million on entertainment and US$1.5 million on transport, plus more than US$18 million in revenue for the organizers.

The same holds in the UK. Between 2010 and 2014, independent festivals took in 1 billion pounds, of which more than 80 million pounds was spent by festivalgoers along the supply chain, including at local businesses.

The growing popularity of live music is also changing how musicians earn a living. Paul McCartney of the Beatles made US$47 million in 2013, most of it from touring, reportedly US$4 million per show.

On the Forbes list of the world's highest-paid musicians of 2014, Dr. Dre came first with US$300 million, because he sold Beats, the company he founded, to Apple. Second was Beyonce with US$115 million, most of it from her Mrs. Carter Show tour. Third were the Eagles, whose US$100 million came almost entirely from their History of the Eagles tour.

Below these stars at the top of the pyramid, a Future of Music survey of 5,371 musicians found that recordings account for only 6% of most musicians' income. Most musicians in fact earn money in many other ways, including live performance, teaching, production work, merchandise, advertising and sponsorship.

Future of Music's conclusion: musicians' income comes from so many sources that the best way to learn how they make money is to ask them in person, though sometimes even they can't work it out.

So who is actually making money? Rights companies, of all things

The rise of music festivals will be the biggest challenge yet for traditional record labels and music companies. The reason is simple: the companies behind these festivals are changing how people consume music, and that will hit hard the labels that live off traditional recorded music.

That is also why festival companies are becoming more and more active across the music business. Revenue at Live Nation, the American company that is one of the world's largest live-event and ticketing businesses, has grown for five straight years, from US$5.06 billion in 2010 to US$6.87 billion in 2014.

The rise of live music does not mean recorded music has no future. Selling recorded music simply needs a different approach, the one Bertelsmann Music Group (BMG) has taken.

BMG was once one of the world's five major record companies, alongside Sony Music, Warner Music, Universal Music and EMI. In 2008 its parent, Bertelsmann, sold all of BMG to Sony Music. Bertelsmann then used the BMG name to set up a new rights management company. All it does is buy music rights and collect fees from those who use the music: McDonald's playing background music, TV commercials, films, TV dramas, talent shows and so on.

This simple model let BMG shed a record label's heaviest burden, managing artists. It saved the huge cost of looking after artists and turned its attention to managing salespeople and IT staff and finding new ways to bundle and sell its catalog.

BMG is now the world's fourth-largest music rights management company, controlling 2 million songs, including work by the Backstreet Boys, Bruno Mars, John Legend, Elvis Presley, ABBA, Whitney Houston, Celine Dion, the Black Eyed Peas and Beyonce.

And BMG keeps expanding. Last September it paid 6 million pounds for the independent label Infectious. In November it announced the purchase of the independent label Union Square and of another independent rock label, Vagrant Records. It also struck a deal with Jujiang Entertainment, home to well-known names such as Yu Quan, Hao Yun, Huang Jianxiang, Li Xiang and Li Chen, to exclusively manage the recording and songwriting rights of the company and its artists. In May this year, BMG announced the purchase of the metal label Rise Records. BMG shows no sign of slowing its buying of music rights.

Once BMG dropped artist management, someone had to pick up the work, and some internet companies have stepped in. A website called CD Baby now helps artists release albums. Musicians just prepare their audio files and cover art and take a few simple steps online following CD Baby's process, and their music goes out to more than 20 platforms, including Apple iTunes, Spotify, Google Music Store and Amazon MP3, and starts earning money.