Having long played second fiddle to the United Kingdom, Germany now ranks as the largest music market in Europe, according to international music trade body IFPI.
The reversal was announced last week with the publication of IFPI's annual "Recording Industry in Numbers" report, which saw Germany climb above the U.K. to No. 3 in the world rankings.
At the heart of the change lies two subtly contrasting music markets at different stages of physical sales, online penetration, music retail and performance rights collection. Both, however, tend to follow larger global trends in relation to dwindling physical returns and a growing appetite for digital.
Billboard.biz took a look at the comparative strengths and weaknesses of each market and asked U.K. and German music execs to help explain the shift.
Demand For Physical
Trade revenue generated by recorded music sales in the United Kingdom totaled $1.38 billion in 2010, a whopping 11% drop from the previous year. At the heart of that slide was a dramatic fall in physical format sales, which slumped from $1.14 billion in 2009 to $920 million, accounting for 67% of its recorded music sales. In contrast, recorded music sales in Germany totaled $1.41 billion, with physical sales accounting for 81% of all recorded music purchased in Germany in 2010, totaling $1.14 billion.
"Resilience in the physical sector is one key reason why Germany has overtaken the U.K. to become the third largest music market in the world [behind the United States and Japan]," the IFPI report states, citing the country's strong retail landscape -- a verdict supported by German industry execs.
"Over the past few years, we have repeatedly tried to generate impetus for the physical market without merely lowering prices," says Frank Briegmann, president of Universal Music Germany. Briegmann points to the popularity of deluxe packages and the stripped-down "Pur edition" CD albums, which features simplified packaging and is traditionally released several months after the initial street dates, as driving consumer demand for physical.
However, given the year-on-year worldwide slump in physical sales, it seems highly likely that Germany will also continue to suffer declining year-on-year returns in that sector, while the U.K.'s more developed digital market leaves it well positioned to regain the world No. 3 spot if current consumer trends continue.
Special-edition CD albums are also popular in the U.K., but to a lesser extent. However, the entertainment market has been particularly hard hit in recent years following the closure of retailers Zavvi, Woolworths and Borders. Earlier this year, HMV, the U.K.'s leading high street entertainment retailer, announced it was closing roughly 40 stores, blaming "challenging trading conditions;" and more recently reports surfaced that the company may have to sell off some of its assets.
Digital Market Penetration
A major contributor to the decline in physical sales in the U.K. has been the industry's success in driving digital revenue, particularly in album sales, which climbed from 16.1 million units in 2009 to 21 million last year and accounted for 17.5% of all album sales, compared to 12.5% in 2009. Digital accounted for 25% and $347 million of trade revenue in the U.K. in 2010, according to IFPI. In Germany digital sales totaled only $178 million.
"The UK's recorded music is at a different stage of the transition to digital music [compared to Germany]," says Adam Liversage, BPI director of communications. Liversage points to a 19.6% rise in digital income in 2010, compared to only 13% in Germany during the same period, as a positive indicator for the long term health of the U.K. music biz.
iTunes is the dominant digital player in both markets, but the U.K. boasts a stronger subscription sector led by services like Spotify and We7; the subscription market by comparison in Germany is relatively small. On-going licensing negotiations between ad-supported subscription services and German authors' collecting society GEMA has also restricted the growth of its digital market.
"By the same token, digital business is not being neglected," says Dieter Gorny, CEO of the German Federal Music Industry Association (BVMI). "The German market now has over 40 legal downloading platforms and registered an increase in digital business in 2010." Beyond iTunes, Musicload, AOL, Musik, Saturn, Vodafone, Media Markt, Nokia Music Store and Amazon are among the leading digital platforms currently available in Germany.
Increased demand for local repertoire has also helped drive physical sales in Germany, says Bernard Hocke, general manager of Hamburg-based independent record company Edel. That view is shared by Briegmann, who says Universal Music Germany has "steadily intensified our commitment to the national sector and to our local artists."
He identifies strong sales from German acts Rosenstolz, Ich + Ich, Tokio Hotel, Rammstein, Lena, Unheilig as helping to boost both physical demand and total revenue from recorded music. Edgar Berger, CEO of Sony Music Entertainment GSA, says veteran domestic acts the Scorpions, Andrea Berg and Peter Maffay all experienced robust sales in 2010, backed by "a tight network of retailers."
IFPI states that approximately 50% of the national Top 100 best-selling albums and 44% of the top selling singles in Germany last year were domestic repertoire. Comparative figures for the U.K. were not available, but according to statistics from British labels trade body the BPI, 42.3% of singles sales and 48.8% of album sales in the 2009 calendar year were from U.K. acts.
The U.K.'s standing as the continued market leader in the field of performing rights was confirmed by the IFPI, who reported it generating $111 million in rights revenue in 2010, representing 8% of total recorded music sales. Germany also performed strongly in this sector, pulling in $91 million in rights revenue last year, up from $76.8 million in 2009, and representing 6% of total sales.
Fran Nevrkla, chairman and CEO of U.K. music licensing organization PPL credits the U.K.'s strong position to "the excellence and quality of U.K. music" combined with the company's focus on implementing more efficient licensing systems. According to PPL figures, the organization collected £32m ($51.6 million) in international royalties in 2010, up from £21.6 million in 2009 (about $34 million). It attributed over 20% of company turnover to royalties collected from overseas markets.
A Look Ahead
Despite its fall in the world rankings, the U.K.'s strong performance in generating and collecting rights revenue, combined with its steadily growing market for digital, arguably leaves it in a stronger position than Germany for the coming years.
When it comes to per capita consumption of recorded music, "the U.K. still massively outguns Germany," Liversage notes with confidence. In 2010, album sales in the U.K., which has a population of 62.3 million, totaled 120.8 million across physical and digital formats, according to IFPI. That represents 1.93 albums per capita. Total album sales in Germany, meanwhile, which has a population of 82.3 million, stood at 109.3 million, equal to 1.32 albums per capita.
Perhaps the most telling indicator of both markets' future lies in the upper reaches of the Billboard 200. Currently occupying the No. 3 position, Adele's sophomore album "21" (XL) highlights the fact that the U.K. remains the world's second most-important source for artists and repertoire -- a European dominance that seems unlikely to change any time soon.
In 2011, the comparative resilience of the physical format has remained key to each market's fortunes. But that is almost certain not to be the case in five year's time when a more advanced digital market will, no doubt, decide who ranks as Europe's biggest music market.