Streaming revenue rose by more than 60% last year

The once-ailing music industry has hit a “historical tipping point”, recording its second year of growth and revenues of $15.7bn (£12.2bn) in 2016, according to a report.

An in-depth look into the health of the music industry by the International Federation of the Phonographic Industry (IFPI) has shown that in 2016 there was 5.9% growth, mainly attributed to the mass adoption of streaming across the world.

It is a vastly different story from the previous 15 years, where record labels saw a decline of 40% in revenue as piracy took its toll, physical sales declined and record shops went out of business.

In its early years, streaming was derided by many musicians and observers as the final nail in the industry’s coffin. However, with 112 million paying subscribers to services such as Spotify, Apple Music and Tidal, which ensured growth in streaming revenue went up by more than 60% last year, it has now been hailed as the saviour of music.

Executives in the industry said a “spirit of optimism” had emerged, as they witnessed the rapid increase in people willing to pay for streaming services, which cost an average of £9.99 a month.

“We got here through years of hard work,” said Michael Nash, executive vice president of digital strategy at Universal records, who said the music industry was still going through a “historical transformation”.

“The only reason we saw growth in the past two years, after some 15 years of substantial decline, is that music has been one of the fastest adapting sectors in the digital world.”

Frances Moore, chief executive of IFPI, said that their reversal of fortunes “hasn’t happened by chance; as an industry we’ve had huge innovation and investment to make it happen.” Moore said that while last year record labels and musicians were still adapting to the new ways of consuming music, they were now the ones driving the growth in digital, and said the streaming sector had “limitless potential”.

The most popular artists of 2016 were Drake, David Bowie, Coldplay and Adele, while Beyonce’s lemonade was the top album of last year and Drake’s One Dance was the biggest digital single.

Dennis Kooker, an executive at Sony, attributed much of the growth in streaming to increased competition, with Apple Music and Tidal both emerging as major forces in the streaming realm, alongside Spotify, over the past year.

“I think we will look back at 2016 as a tipping point for the industry,” he said.

Kooker added that even though streaming services have enabled artists to easily put their music out without the backing of a record label, he belived labels still played a vital role in the industry.

“Ultimately now the job of the record labels is to cut through the amount of competition we see for consumer attention.”

Stu Bergen, a CEO at Warner Music, remained cautious but encouraged. “Remember, we’re only two years into our recovery,” he said. “We must remain alert, resourceful and ambitious. We’re no longer running up a down escalator, but that doesn’t mean we can relax.

“We’re still in the early, vulnerable stages of our transformation.”

Despite being the biggest new player in the music industry, Spotify has operated at a loss for the past decade, reporting a $195.5m operating loss in 2015, though some are predicting that will soon change.

But while revenue made from physical formats declined by another 7.6% last year, physical sales still make up the majority of revenue in some of the biggest markets, including France, Germany and Japan, where 70% of profits are still from CD and record sales.

The biggest demise was from digital download revenue, which fell by more than 20%, affirming the belief of many industry observers that it will cease to exist as a format in the next few years.

The note of caution from music executives mainly originated in the continued problem of the “value gap” generated by platforms such as YouTube, which have 900 million users worldwide but host millions of unlicensed videos and pay a fraction of the royalties record labels believe they are due.

While Spotify contributes an average of $20 per user to the music industry, YouTube returns less than $1. It meant that YouTube, and other user upload video services, contributed just $553m in revenue in 2016, compared to the $3.9bn contributed by Spotify – despite the streaming service having a quarter fewer users.

Nash said: “The scope of this inequality casts a shadow across the whole landscape that cannot be ignored. The longer it is permitted, the greater the threat to the music ecosystem. The value gap must not be permitted to derail our mission, we’ve worked too hard.”

EU legislation is currently being tabled over greater transparency and accountability for royalties from digital services, and there are also moves to tackle it in the USA.

They also acknowledged that streaming had given rise to a new type of piracy – stream ripping. The IFPI report showed that 46% of 16-24 year olds had illegally ripped songs from YouTube or streaming sites.

Sony, Warner and Universal were still divided on their marketing strategies using streaming. Last year, Universal announced they would be ending exclusive album distribution deals with streaming services, a move thought to be prompted by Frank Ocean independently releasing his album Blonde through Apple, just two days after he contractually released his visual album Endless through Universal imprint Def Jam.

Nash said Universal’s current position was now to aim for the “broadest possible market” for their releases, rather than working with just one platform, a change of tune from last year when they had made several elusive streaming deals.

Kooker, however, said that Sony would consider it for certain artists when it was “what’s best for an individual release”. Bergen was clear that Warner, who have cut the fewest of such deals, intended to keep it that way, saying: “We’ve been fairly clear all along that exclusive deals are not in the bests interests of growing the entire sector.”