Revenue Up, Piracy Down: Has the Music Industry Finally Turned a Corner?

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Close up of earbuds

Fourteen years after Napster upended the music industry’s financial model, it may finally be time for record labels to start singing a happier tune. Sales are up, piracy is down, and new revenue streams may help the industry finally claw its way back to economic prosperity.

Global recorded music revenues in 2012 increased for the first time since 1999, up 0.3% to $16.5 billion, according to a report by International Federation of the Phonographic Industry. Leading the recovery with 9% growth to $5.6 billion total were digital sales, which include direct sales on platforms like iTunes and revenue generated from streaming services like Spotify.

The industry still has a long way to go to return to the boom-times of the ‘90s, when total revenues were close to $30 billion. But there are signs that listening habits have shifted enough for the industry to begin envisioning a more stable future, even if it’s unlikely to be as lucrative as the past.

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Piracy, for instance, continued to decline in 2012, according to a survey by the NPD Group. About one in ten American Internet users downloaded music through a peer-to-peer network in 2012 — think bitTorrent or the now-defunct LimeWire — compared to one in five when the phenomenon peaked in 2005.

To eradicate the last of the pirates, the industry is placing its hopes in the newly launched Copyright Alert System. Developed in concert with the big Internet Service Providers, the new system allows copyright holders to flag an IP address that’s illegally downloading content. The Internet user then faces an incremental series of punishments from the ISP, ranging from educational videos about copyright law to a throttled Internet connection. That’s a lot less harsh — but, the industry hopes, more effective — than the multi-million-dollar lawsuits the Recording Industry Association of America regularly doled out post-Napster in a failed attempt at deterrence.

The main reason piracy is already falling out of vogue, however, has little to do with users becoming more aware of the law or fearing punishment. Forty percent of respondents to the NPD survey who decreased their illegal file-sharing said they did so because of access to legal streaming services like Pandora and Spotify, which are easier to use and don’t present the threat of spyware or viruses.

At the same time, streaming is slowly but surely gaining financial importance for the industry. According to the IFPI report, there are currently about 20 million paying subscribers to music streaming services worldwide, and the dollars they generate account for about 10% of all digital music revenue. (That’s still a small sum compared to digital downloads, which topped 4.5 billion total units last year, amounting to more than two thirds of total digital revenue.)

“To what extent can the industry keep paid digital revenues up—the iTunes method of buying a track, buying an album?” asks Russ Crupnick, senior vice president of industry analysis at NPD. “That’s going to be very important in the next three to five years.”

So far, digital sales and digital streaming have coexisted peacefully. Even as Spotify grew to 20 million worldwide users in 2012 and Pandora reached 60 million users in the U.S., total music purchases increased in the U.S. year-over-year. But the streaming sector is poised to get a lot more crowded in 2013—Beats Audio, the company behind the popular Dr. Dre headphones, has a streaming service in the works, and both Apple and Google are rumored to have designs on the space.

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Might mass adoption of streaming services undermine the digital in-roads the industry has spent a decade building? It’s the musicians themselves that stand to lose the most from further disruption. While artists earn between 7 and 10 cents for a song downloaded on iTunes, a Spotify stream is worth only a fraction of a penny, according to The New York Times. “That’s one of the things that’s going to be a problem in the future, if more people don’t feel the need to own everything,” says E. Michael Harrington, a music business professor and member of the Future of Music Coalition Advisory Board. “People 40 and over might kind of want both…but a lot of people are just satisfied to say ‘I can access it.’”

To keep overall industry revenue from slipping again as streaming becomes more popular, it will be critical for freemium services to convince more users to shell out cash for extra features. Spotify currently converts 20% of its free users to premium subscribers, according to the report.

The industry’s financial recovery will probably continue, Harrington says, but there are still many questions about the digital future. Pandora, for instance, is lobbying the government for the ability to lower its royalty rates, while many in the industry (and in Congress) believe terrestrial radio stations should have to pay royalties to performers. These are thorny issues the industry will have to address soon because there’s no going back to the days of $15 CDs after consumers have gotten a taste of all music, anywhere, on any device. “People are too used to it now,” he says. “It’s sustainable because it has to be.”