Business Matters: IFPI's Annual Report to Bring 'Cannibalization' Into Focus

When the International Federation of the Phonographic Industry releases its twin annual economic reports on the state of the global music business in the coming days, they likely will unleash a debate that's been steadily heating up regarding the dreaded "C' word -- cannibalization.

The question, in a nutshell, is whether streaming services, which offer unlimited access to millions of tracks, leads listeners to cut down on download and CD purchases.

It's not a new conflict, but fresh numbers from the IFPI on global music revenues for 2013 will add new oxygen to the flames. In countries where sales of downloads and CDs declined, some will say streaming was the cause. In markets where sales increased, others will argue that streaming actually helped sales.

The IFPI, which is scheduled to release its digital report on March 18 and its overall recorded music sales later in the month, is expected to show recorded music revenue growth in the U.K., Norway, Sweden, Denmark, Germany and France. (The U.S. market, which saw download sales decline in 2013, is too close for an early estimate.) Among the countries expected to show an overall decline are Japan, Spain and Canada.

Of all the countries, Canada's music sales trend is particularly puzzling. At first glance, Canada appears to support the anti-streaming argument. Canada, which does not have Spotify or Pandora, reported an increase in digital music sales, with digital album downloads up almost 9% and digital tracks up nearly 2% in 2013, according to preliminary figures. (Those increases, however, weren't enough to counter a 15% drop in unit sales of CDs, likely leading to an overall decline in total music sales in Canada.)

One could conclude that the absence of on-demand streaming music in Canada may have helped digital sales. But wait! There's more.

A deeper look at Canada's digital sales shows a different picture. Downloads take a worrying dive in September, starting with a 5% drop the third week of September and continuing its descent through the end of the year, hitting a nadir the last week of December with a 22% drop in weekly sales, according to Nielsen Soundscan. The decline has continued unabated through late February.

What happened? A number of theories abound, but three that can immediately be ruled out are Pandora, Spotify and iTunes Radio, none of which were available last year in Canada.

So why did sales nosedive? One explanation for the decline is that spending on mobile apps, which more than doubled in 2013 to hit $16 billion in worldwide revenue via Android and Apple app stores according to data firm App Annie, has displaced music downloads. (Apple coincidentally released its iOS 7 update for iPads and iPhones in September, around the time music downloads softened.) Below is a breakdown of spending categories for iTunes, compiled by Mark Mulligan of MIDiA Consulting.

Mulligan, in his blog post, concludes, "If music industry concerns about download cannibalization should be addressed anywhere it is first and foremost at apps."

A second plausible explanation is games. September marked the launch of "Grand Theft Auto V," which quickly rang up $1 billion in sales in just three days. This was followed in November by "Call of Duty: Ghosts," a title that generated $1 billion in a single day. November also saw the launch of the Xbox One, priced at $500 apiece, and the PlayStation 4, which starts at $400 each. In other words, the game sector had a series of mega-launches that soaked up billions of discretionary dollars, largely among males aged 18 years to 34 years, the demographic that also tends to buy more digital music.

It's possible that cannibalization has indeed affected digital music sales, in Canada and elsewhere, but not by streaming music, at least not in Canada. Rather, consumer dollars and time may have been diverted elsewere, toward apps and games.

In some ways, it's tempting to answer the cannibalization question by saying, "Who cares?"

In a panel at South By Southwest this week entitled "Why Only Obsessing About Sales is Holding You Back," Nielsen released a survey showing that 68% of U.S. consumers streamed music in 2013 and that music listening via streaming services jumped 40% last year. Nielsen also shared a case study around Lorde's "Royals" suggesting that promotions on streaming services and radio helped drive awareness of the song. Below is a slide from the presentation:

Many have claimed credit for Lorde's success with "Royals." This chart shows a more complex interplay between streaming, social activity, radio spins, television appearances and sales, all rising and falling in tandem. What it doesn't show, however, is evidence that sales were displaced by streams.

To know for sure how sales were affected by streams, scientists would want to conduct an experiment with a control group, an alternate universe where the exact same circumstances existed, except without streaming. Until quantum physics gives us access to alternate realties, however, we rely instead on the closest thing -- Canada.