EU on edge of big bang in digital music sales

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EU on edge of big bang in digital music sales19.09.2006 – 17:16 CET | By Andrew Rettman
EUOBSERVER / FOCUS – Something shocking is happening in the EU music industry – sales of songs downloaded from the internet are growing at over 100 percent a year. From a blip in 2004 when Europeans downloaded just €21 million worth of music, a multi-billion euro market is being born and changing the landscape for good.

Standing at €279 million a year today, the sector will pass the €1 billion mark in 2008 and hit €3.9 billion in 2011, US analyst Forrester Research predicts. The more cautious music industry trade body, the International Federation of the Phonographic Industry (IFPI) forecasts sales of over €2.5 billion by 2010.

Putting things into perspective, this means one out of every three songs bought in the EU five years from now would come via the web. Digital music barely exists in China, India, Latin America or Africa, but the US has paved the way. In the US, 99 percent of all music singles sales and 9 percent of all music sales were digital last year.

Inside the EU, Italy, the UK, Germany and France are driving change. Italians download 76 percent of all singles and 4 percent of all music. The UK, Germany and France – the EU's biggest music markets – are hitting singles rates of up to 45 percent and overall rates of up to 3 percent, with the rest of western Europe not far behind.

Digital music has not made a big splash in the new member states, where few homes have broadband internet and lower wages make digital music players – MP3 devices, 3G mobile phones – harder to get. But with buoyant economies and big injections of EU aid, digital market-watchers like Forrester foresee “major growth” in this region as well.

The record labels pocket the most cash from the digital sector – for every euro spent to download a track, the record labels take over €0.60, tax and banking costs eat €0.25, the artists get around €0.10 and just two or three cents go to the new publishers, such as Apple or Vodafone.

The record labels and artists do not automatically stand to get richer, as digital sales cannibalise sales of CDs. But the potential income from online music sales tells just part of the story.

In 20 out of the 25 EU member states, the law assumes that technology such as blank CDs, MP3 players or memory sticks will be used by consumers to make private copies of digital songs. The rights holders then skim a “private copy levy” from the price of every blank CD or MP3 player sold.

The levy rates vary from country to country, with typical CD levies between €0.18 and €0.50 and MP3 levies on basic players between €20 and €32. The software industry trade body, the BSA, suggests levies on CDs and MP3 players alone came to more than €550 million in the EU last year.

Making a killing
Meanwhile, digital music equipment makers are making a killing of their own. Last year, Europeans forked out €2.5 billion on MP3 players. The market leader, US firm Apple, sold 22.5 million iPod units globally in 2005 and saw a 384 percent hike in profits, with CEO Steve Jubb calling it “the best year in Apple's history.”

This year Apple had already sold 16.6 million iPods by the end of July. Before the launch of the iPod in 2001, Apple shares traded below $0.15 each. Today they change hands for over $0.70 per share.

Digital-music phones – already big in Spain, Italy and France – are also forecast to take off in the rest of Europe after 2008. Leading maker Nokia, from Finland, sold 10 million music-phones in 2004, 40 million in 2005 and is heading for 80 million this year.

The typical EU downloader is a 16 to 34-year old man in northwest Europe who likes browsing a wide variety of music online but mostly buys mainstream hits by UK and US artists such as James Blunt or Kanye West. He still purchases new CDs out of nostalgia and most of his digital collection is uploaded from his old CD library.

The typical way he buys digital songs is by paying €0.99 per track on Apple's iTunes website – which controls 70 percent of the market – or one of its competitors such as Sony Connect, MSN Music or MTV Digital Downloads with traditional retailers such as Tesco, Mediamarkt and Fnac also getting in on the act.

The digital cornucopia
But digital technology is spawning new business models almost daily. Subscription-based services such as EMusic, Napster and Rhapsody allow people to listen to their whole catalogues of songs for a monthly fee which also lets them download a set number of full songs to their MP3 player.

iMesh charges a monthly subscription for letting groups of people use its software to swap songs they already own, with part of the subscription fee going to the music rights holders. SpiralFrog gives music for free but forces people to watch adverts which generate income for the website and record labels.

Twelve months from now, all this will probably be old hat. The Newscorp-owned website MySpace – where people go to socialise online – announced in September that by 2007 it will allow unknown and major artists to sell songs directly to fans for about €0.45 per shot.

MySpace already has 3 million mostly unknown bands promoting themselves in the cliquey virtual state, which numbers 106 million people and is growing by more than 500,000 new users each week.

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