For years the record industry has hoped revenues will bottom out and growth will return to beleaguered record labels. According to a new PricewaterhouseCoopers report, the low mark will come in 2013. However, the report has enough flaws to temper any excitement for an upcoming recovery.

PWC’s “Global Entertainment and Media Outlook: 2010-2014” predicts North American digital revenues will outstrip physical in 2011 and total revenues will grow by 0.2% in 2013 – the first positive growth in over a decade – and 1.9% in 2014.

The report predicts a physical decline at a 14.5% compounded annual growth rate (CAGR) through 2014 and a digital increase at 9.6% CAGR over the same time period. PWC believes digital growth will be driven primarily by download sales and streaming services. In all, 2013 revenue is expected to be $6.97 billion -- $2.6 billion for physical and $4.37 billion for digital.

Since its last report, PWC has toned down its digital expectations and raised its physical estimate. In its 2009 report, the company estimated 2013 digital revenues at $5.08 billion and pegged physical revenue at $2.11 billion. Last year, its 2013 revenue estimate was $7.188 billion, or about $200 million higher than its latest estimate.

And for the second straight year, PWC pointed out that interest in music is not abating, it’s actually increasing. But interest in music is almost irrelevant in this context. The record industry’s fortunes lay in consumers’ willingness to pay for copies and services, not their general interest in music. Given the incredible number of ways a person can now listen to music for free or near free, that gap between interest and willingness to pay is the biggest hurdle in record labels’ quest to grow digital revenues. So beware of PWC’s prognosis. Here's why:

- First, PWC is overly optimistic on digital download sales, the factor PWC believes will be the principal driver in North America. The problem is that single track sales do not currently “continue to expand at double-digit rates,” as PWC claims. In reality, track sales have flattened out – both units and revenue. Track unit sales finished 2009 up 12% year over year but by the end of the year growth was almost save the positive impact of higher prices. Digital albums are up 14% year to date, according to SoundScan, but their value is far outstripped by that of single tracks. So, PWC’s forecast of “continued double-digit increases in overall Internet downloads” for 2010 and beyond is questionable.

- Digital growth will be dependent upon services and partnerships that have yet to materialize. Built into PWC’s black box of a forecast is an assumption that labels will be able to create effective partnerships and that those partnerships will feature services desired by mainstream music consumers. Such partnerships will probably focus on on-demand subscription services. However, this is an immature market that will take many years to grow once a highly engaging product finally appears on these shores.

- Next, PWC seems to be very certain about two aspects of graduated response: that such a system will be widely implemented in the U.S in the next three years and that it will actually have a positive impact on recorded music revenues. It may be right. Early results from South Korea and Sweden, two countries that implemented graduated response in 2009, appear to be positive. Yet in spite of those encouraging results, it is far too early to say whether or not graduated response could produce sustainable results in the U.S. To date, battles against digital piracy have produced far more legal victories than practical ones. So, in this case it’s best to err on the side of both caution and history and assume graduated response will not have much impact in the next three or four years.

- PWC didn’t even mention the growth of performance revenue from online video sites and video sites. U.S. digital performance revenues paid from SoundExchange alone were $155 million in 2009, up 56% from 2008. In addition, improved monetization at the likes of YouTube and Vevo is a source of growth, too. It’s a small number but it cannot be overlooked.

- Lastly, more broadband may not equal more revenue. Growth in broadband penetration may expand the market for digital music, as PWC points out, but that is not necessarily a positive. To date, broadband penetration has only hurt recorded music revenues. The Internet has reduced the barriers to entry and customer captivity upon which record labels long thrived. With broadband comes greater choice for low-cost options to purchasing copies – and lower revenue as a result.

In addition, PWC does not help its credibility by calling Lala a Canadian company (it was based in California before being purchased by Apple). Nor is its report helped by PWC’s reference to Pandora and Slacker as examples of “on-demand” streaming services – both are squarely in the non-interactive streaming camp and a world away from on-demand both in terms of functionality and licensing costs.

PWC’s forecast for physical revenues are more believable – they follow an established trend of roughly 13% to 16% annual declines. PWC believes there is a core group of CD buyers that will help slow annual declines and keep the format afloat. Such a prediction depends on retail’s involvement in the format, but it’s a possible scenario.