A simple truth that took industry a decade to discover

by Tadeusz Kluk-Murdzenski
Research and Analysis Lead

With ACTA, SOPA, PIPA and surrounding controversies, the entertainment industry has drawn a lot of attention recently, though not necessarily the sort of attention they wanted. In all the noise, some fairly interesting information has escaped the attention it deserves. At the end of January, IFPI published a Digital Music Report 2012.

The report, of course, is skewed by the viewpoint which IFPI is paid to represent. However, if we assume the data is true, then it paints a very interesting situation. So what do the numbers tell?

Digital music revenues to record companies grew by 8% globally in 2011 to an estimated US$5.2 billion. This compares to growth of 5% in 2010. At the start of 2011, the largest international digital services were present in 23 countries. One year later they are present in 58 countries. Poland has seen a part of that wave, when iTunes officially opened last fall. Estimated, global digital album volume sales growth in 2011 was 23%. Recording industry worldwide draws 32% of its revenues from digital sales, second only to Games industry with 42%. Interestingly, this revenue slice is 52% in the USA, and in China, portrayed as cabable of pirating not just music but anything, trains and tanks included, this revenue slice is a record 71%!

The explosive growth in a time of strife, recession and trouble can only mean one thing: what the customers really wanted, was not to get things for free – they wanted convenience. And the industry focused on manufacturing and moving physical goods failed to notice, or simply didn’t want to notice. The numbers tell us the legitimate services that offer the same level of convenience that piracy offers are expanding rapidly, and with that expansion comes healthy revenue stream from customers who simply didn’t have any legitimate alternatives before. Moreover, in territories especially exposed to IP infringements, it is the digital economy where revenues seem safest.

All this suggests that the continuing hardships of all IP-dependent industries, stem from a single problem – the problem these industries have transitioning from XXth century “SKU moving” culture to customer-centric, excellence of service economy. The industry is still desperately fighting to cripple and restrict, but the silent embracing of the new economy is now gaining pace. iTunes took 5 years to sell first 2 billion songs, then 2 more years to add another 4 billion, then just a little over a year to hit the 10 billion songs sold mark, at the start of 2011.

I think we can safely say, there is no turning back in the entertainment industry. The IFPI report hits an alarmist tone when discussing downloads of digital books and publications. Unsurprisingly, the revenue slice derived from digital sales, according to the same report, is only 4% for that industry. Publishers and printed publication retailers seem to be the next group who will either rethink how they do business, or follow Borders and other defunct companies from the sector.