Business Matters: BPI's Q1 Numbers Suggest Subscription Services Aren't Hurting Purchases in U.K.
Business Matters: BPI's Q1 Numbers Suggest Subscription Services Aren't Hurting Purchases in U.K.

BPI Numbers Harm Subscription Service Cannibalization Theory
Today there's even less evidence that subscription services cannibalize music purchases. Growth in digital revenue in the U.K. in the first quarter exceeded the loss of physical revenue, according to statistics released Thursday by the BPI. These trends are similar to the gains made in U.S. recorded music sales since Spotify launched here in July. In other words, growth in free and paid subscription services has not coincided with any apparent decline in purchases.

Digital Revenue Outstrips Physical in U.K. For First Time

U.K. digital revenue grew £16.5 million to £86.5 million, an increase of 23.6%. At the same time, physical revenue declined £12.3 million to £69.3 million, a drop of 15.1%. The net improvement was £4.2 million, or £16.5 million minus £12.3 million.

The launch of Spotify's "freemium" business model -- free, ad-supported access and paid subscriptions -- and its continued rise in Europe has created consternation throughout the music industry. Many artists, managers and onlookers have complained of subscription service's royalties and potential damage to CD and download purchases. In spite of some anecdotes that say otherwise, there has been no clear evidence that freemium models have cannibalized purchases, however.

If subscription services like Spotify are hurting music sales, there might be evidence in the trend in digital downloads. Subscription revenue grew 93% to nearly £9 million from about £4.7 million -- an increase of £4.3 million. Record labels' take of advertising revenue from subscription services grew 20% to £3.4 million from £2.8 million. (Note that paid subscription generated 164% more revenue than advertising from non-paying listeners. It's the reason why labels are so concerned with subscription service's conversion rates.)

But digital downloads grew as well. Digital album sales rose 22.7% to £35.9 million from £29.3 million -- an increase of £6.6 million. All other digital revenue (a la carte downloads as well as ringtones, music video and miscellaneous items) increased 15% to £5 million to £38.2 million.

In fact, there appears to be some correlation between the subscriptions and purchases. The two segments with the highest growth rates are digital albums (22.7%) and subscription revenue (93%). Perhaps subscription services are not as good for track sales as digital album sales -- tracks grew at a slower pace -- but all three digital segments showed year-over-year growth.

The U.K. has been home to Spotify's controversial freemium service model since early 2009 (the paid service launched in late 2008). Competing service Deezer, which offers free Internet radio but requires payments for on-demand access, launched there in October. Ad-supported Internet radio services We7 and Last.fm also operate in the market.

If access models such as Spotify and Deezer were replacing purchasing, the BPI's numbers would likely reflect this substitution. However, purchases were roughly even from the first quarter of 2011 to the first quarter of 2012. Subscription and advertising revenue grew about £4.9 million. Take out that access model-related revenue and you're left with revenue from purchases (both physical and digital) being down less than 1% -- effectively even with the prior-year quarter. The last number may be off slightly because the BPI did not provide me with information on track sales for the first quarter of 2011. In any case, the most likely conclusion seems clear: access-related revenue grew while overall purchases remained steady. ( BPI press release)

Slacker Connects With Roku
Slacker Radio is now available on Roku set-top boxes. Roku connects televisions to the Internet and allows owners to access a wide range of video and music services. Both free and paying Slacker listeners will be able to use the Roku app, but the app does not support Slacker's $10-per-month on-demand service. Other music services available at Roku include Pandora (both free and paying listeners), Rdio, Mog, Live365, SHOUTcast Radio and TuneIn Radio.

Like Pandora, Slacker is expanding the ways its listeners can enjoy the service. Slacker is available on mobile apps (including iOS, Android, BlackBerry) and web browsers in addition to Ford vehicles with SYNC AppLink. The company has also expanded its programming -- personalized and programmed channels -- to include ESPN Radio and ABC News. ( Slacker Press release)

Apple Purchases Digital Music Editing Software Maker Redmatica
Apple has reportedly acquired Italian company Redmatica, the maker of digital music editing software. News of the deal was first disclosed by Italian blog Fanpage and was picked up in the U.S. by TechCrunch and then a host of other blogs. It does not appear any media outlets have confirmed the news independently of Fanpage's report.

This could be a case of Apple acquiring talent: Fanpage notes that Redmatica had revenues under €100,000 a year. Apple often buys software companies to integrate their products into Apple's larger product strategy. Cloud-based music service Lala.com was acquired in December 2009 and iTunes Match was released about two years later. Apple's popular GarageBand software was the result of the company's acquisition of Emagic in 2002. Its acquisition of Nothing Real brought the Shake compositing software to Mac for the first time. ( TechCrunch)