Tom Silverman's Industry Predictions: Slow Growth Through 2019, Streaming Dominance

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Music executive Tom Silverman attends Summer Madness at The McKittrick Hotel on July 16, 2014 in New York City.  

The future record business could be huge. Despite the potential, revenue growth is going to be modest in the next five years, says music industry veteran Tom Silverman, founder of Tommy Boy Records and executive director of New Music Seminar. He does not warn that downloads and CDs will fall off the proverbial cliff. He does not expect an explosion of streaming revenues. Instead, he sees a steady transition to new business models over the next five years.

Two years ago, Silverman talked about "the $100 billion music business" that's waiting for labels and digital service providers. It would require "an organized effort" to realize the potential revenue awaiting in an estimated 2 billion smartphones and a growing fleet of connected automobiles.

That $100-billion number was as much a challenge as a prediction. Silverman had expected both digital and physical sales to fall and access-based services to take a greater role. He was optimistic that consumers had started to pay for on-demand services like Spotify and Muve Music. He looked at SiriusXM's 23 million subscribers -- that number has since grown to over 27 million -- and saw evidence that consumers would pay to access music.

His latest projections show Silverman doesn't believe the industry is close to that $100 billion. "We will need a billion subscribers to get there," he says.

Instead, Silverman has issued a more conservative forecast, calling for modest growth over the next 5 years. He believes total recorded music revenues will grow from $4.60 billion this year to $5.53 billion in 2019, representing a 4.7-percent compound annual growth rate (CAGR).

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Unsurprisingly, the forecast calls for streaming to become the dominant revenue generator for the music business. In whatever form, streaming services are expected to generate trade revenues of $20.3 billion this year and $3.96 billion in 2019. Their share of total revenue would increase from 44.1 percent this year to 71.6 percent in 2019.

Subscription services are expected to be the biggest source of digital revenue and the single largest revenue stream. Silverman sees subscription revenue growing from $668.5 million this year to $1.56 billion in 2019. Its share of total revenue would increase from 14.5 percent to 28.2 percent.

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The often-overlooked revenue from SoundExchange -- where Silverman sits on the board of directors -- is expected to be the second-largest source of recorded music revenue in five years. Silverman forecasts CAGR of 12.7 percent. That would send SoundExchange revenue from $853.4 million this year -- $184.9 million more than subscription trade revenue -- to $1.38 billion in 2019.

Ad-supported digital revenue will also cross the $1 billion mark by 2019, says Silverman. Revenue from services like YouTube are expected to grow from $504 million this year to $1.02 billion in 2019, representing a CAGR of 50.7 percent.

For evidence of the changing record business, look no further than Silverman's forecasts for download and physical revenue. He believes download sales will fall from $1.37 billion this year to $764.1 million in 2019. Physical sales will fall from $1.03 billion to $637.8 million. Neither format is expected to fall off the proverbial cliff. Silverman thinks these formats will be sustained by album buyers willing to buy a premium for a special version or expanded product. The one catch could be a downturn in retail interest. "As soon as we say there are no returns [on CDs], mass merchants may bow out, and we'll take a big drop in units but per-unit price will go up," says Silverman.

A few things are not built into Silverman's models. One is a change in copyright law that forces terrestrial radio stations to pay performance royalties to record labels. This performance right could be passed into law by 2019 but the conservative approach is not to expect any revenues by 2019. Another is a change in Internet radio royalties that would drastically change the amounts services like Pandora pay to labels and artists. New rates will be set in December for 2016 through 2020. Until then, Silverman's SoundExchange forecasts are appropriate extensions of current trends.

Nor is a massive shift in streaming popularity built into Silverman's model. A few weeks ago, Silverman told the International Business Times he thought Apple would successfully leverage its hardware-software-payments ecosystem to launch its upcoming streaming service. "It will be 20 times as big as Spotify within the first month it launches," he said. Although his forecasts call for subscription revenues to grow at a CAGR of 23.5 over the next 5 years, his model does not include unprecedented success by Apple.

Is this expected growth enough? Silverman thinks the numbers should be better. He still believes the record business can become the $100-billion industry he talked about 2 years ago. "The US should have a 'man on the moon' effort to get to 100 million music subscribers by 2024. We are not trying hard enough," he says.