Turning up the volume on profits from digital music

Is this a brave new dawn for the music industry in the digital era, or just another false one? New research predicts digital revenues will soar to $20bn over the next four years, and experts believe it will follow a "cultural shift" in how music is consumed in the internet era.

Research group Ovum yesterday released its forecasts for the music industry, predicting global digital revenues would soar from the $7.5bn recorded last year.

Yet the growth will no longer be just from those who want to download-to-own, but from streaming services such as Spotify and We7, which is backed by Peter Gabriel, as consumers realise that they can have access to millions of songs online a month for the same price as a CD.

Mark Little, analyst at Ovum, said: "There is a change in consumer behaviour towards access rather than ownership, and a series of new services have sprung up to support that. This behavioural shift is also being backed up by the major players in the industry."

About 29 per cent of the labels' revenues come from digital music, up from 25 per cent in 2009, music body IFPI said, and they are increasingly realising the value of the streaming services. Paul Smernicki, director of digital at Universal Music, said: "We are reaching a point that there are enough good digital services out there that the industry can be confident of that level of growth."

Ovum reports that download-to-own growth in the US had fallen to just 3 per cent last year, and predicts that the trend will cross the Atlantic before long.

Mr Smernicki added: "The idea of a music service that isn't purchase-to-own is a relatively new one for UK consumers. Yet for those doubting the potential of a subscription service should look at the TV industry 15 years ago, when pay TV was much smaller. Like that, people are beginning to understand and change. It is a cultural shift; though there is still a way to go." The economics of such services are finally making sense, say analysts.

The big players are certainly targeting streaming. Sony launched Music Unlimited last month in the US, which features 6 million tracks from Universal, EMI, Warner and of course Sony Music. Google is preparing to launch its own music service, while some experts have predicted Apple will launch a streaming service at some stage this year.

There are more than 60 digital services operating in the UK. "Five years ago there were only a few and they didn't work that well," Mr Smernicki said. "Now there are services regardless of the music you're into or the price you can pay and they are available on more devices. These services are now better than the illegal ones."

There has been a growth in "freemium" sites, which offer an ad-supported, free streaming model, alongside a premium, paid-for service. While Spotify has gained some traction, many UK consumers will not have heard of services such as Deezer and Mog. "They will need some time to bed in," Mr Smernicki said, "but these brands are becoming more established."

Laurence Egglesfield, technology, media and telecoms consultant at KPMG, said: "This highlights an interesting shift that digital media is going from download to streaming... Streaming is the future; consumers are ready for subscription-based service."

While customers are beginning to come around to the idea that they will not own their own music, but it will be in "the cloud," the devices, especially mobile phones, have also reached a stage where they can support these services on the go.

Analysts said streamed music services offered natural "bundling opportunities" with telecoms companies and internet service providers. Spotify did a deal with mobile operator 3 UK at the end of 2009 to launch a Spotify mobile and has tied up with Telia in its home market.

Mr Little, of Ovum, said the move to subscription services meant music was entering telecoms territory "where the development and bundling of services is second nature, and where the quality of the network connection will become ever more important for delivering music."

Several companies have tried and failed, however. BSkyB set up Sky Songs in 2009 but was forced to shut it a year later after it did not attract enough customers. Nokia also failed with its "Comes With Music service".

Mr Little said telecoms companies must ensure they tie up with existing brands, and ensure they are part of a customer's mobile and living room music systems by working with platforms and hardware makers.

Mr Smernicki agreed. "Deals with third parties, especially internet service providers, will move it on even further."

Yet the spectre of piracy still looms large. IFPI chief executive Frances Moore said digital piracy remained "the biggest threat" to the future of creative industries. In some countries as much as 95 per cent of downloading is illegal, while in the UK it is closer to 70 per cent. "Piracy will obviously not disappear, despite the growth of these services," said Mr Little. "We aren't at the tipping point. There is still too much free music, both illegal and legal, to fully maximise digital revenues for the labels."

Yet it seems that the music industry can look forward with more confidence than before: "The enthusiasm for music in the UK is not diminishing. The new services and the shift in cultural understanding means that this is a good news story for the industry," said Mr Smernicki.

Top streaming services

Spotify

Daniel Ek and Martin Lorentzon set up Spotify – a combination of spot and identify – in April 2006, and it has become one of the best-known of the music start-ups. The group has its headquarters in London and has hit 10 million registered users. Of those, 750,000 have signed up to the premium subscription service. It has 250 employees and a catalogue of 10 million tracks.

We7

Rock musician Peter Gabriel teamed up with Steve Purdham and John Taysom to launch We7 in 2007. Yesterday, it launched a mobile radio app allowing users to create their own stations that work anywhere. It has three million monthly users in the UK, with seven million songs available.

Last.fm

The music recommendation site was founded in the UK in 2002 and bought by CBS Interactive for £140m in 2007.

Grooveshark

Launched in 2007, the internet radio service was set up by three University of Florida students. It does not provide statistics on its site, but is believed to stream 60 million songs a month to 400,000 users.

Mog

The music and blog site was set up in the US in 2005 and has grown to a catalogue of more than 10 million songs. Producer Rick Rubin is on the board of the site, which saw 23.7 million unique users worldwide in May 2010.

Deezer

Deezer was set up in 2007 in Paris and has four million registered users with seven million songs available. It introduced monthly fees in December 2009.