There are a number of stories within the RIAA's release on Thursday of mid-year numbers for the U.S. recording industry. The industry as a whole was down about 5 percent. Within that slight decline are gains, losses, subplots and trends that deserve more analysis. Let's take a look.
1. Streaming gains are offsetting download losses. For the record business to successfully tread water, new revenues from access models need to match -- or exceed -- declines in spending on digital tracks and albums. Album sales are another matter (see No. 2 below) but digital revenues in the first half of the year fell just 0.5 percent. If not for the $15.5 million decline in ringtones and ringbacks, digital revenues would have actually grown slightly.
2. Falling CD revenues have become less of a problem (but they're still a problem). Yes, you can expect CD revenues to decline about 20 percent a year, but that annual deficit has become more manageable because the dollar amount of the decline has shrunk considerably over the years. 20 percent of $1 billion is far less than 20 percent of $5 billion.
The mid-year deficit from CD revenues, 23.7 percent, amounted to just $168.5 million in retail value lost. The problem is there's no other revenue stream -- at least the ones tracked by the RIAA -- to compensate for the CD's decline. The vinyl LP sales gain (42.8 percent) had a diminutive dollar value of $43.7 million. Synchronization revenues (more on those below) aren't bridging the gap, either. With digital revenue struggling to break even, something is needed to offset CD declines. This may be happening -- the RIAA does not track labels' revenues from sponsorships, merchandise or other aspects of today's multi-rights contracts -- but we're not seeing it.
3. The paid music subscription business is smaller than you might think. There were 7.8 million subscribers to on-demand subscription services at the end of June. (That figure includes services with direct licenses such as Spotify and excludes subscribers to statutory license services like Pandora.) In a country with about 314 million people, music subscription services have a 2.5-percent share of the population.
Other types of subscription services reach far more people. At the end of June, Netflix's 35.1 million subscribers equaled 11.1 percent of the U.S. population while Sirius XM's 26.3 million subscribers amounted to 8.3 percent of people in the U.S. Hulu, an online video streaming service with a freemium business model, reached 6 million subscribers in April. American consumers have clearly embraced paid access models, but they clearly haven't warmed to paid, on-demand music yet.
4. Advertising is key to today's digital music business. Ad-supported streaming generates more revenue than paid streaming by a 57-to-43 margin. Revenues from ad-supported, on-demand streaming and non-interactive Internet radio services (royalties from which are distributed by SoundExchange) were $165 million and $323 million, respectively. Paid subscription revenue was $371 million. Another way to think of this: people who don't pay to access digital music are more valuable than people who do pay to access digital music.
The ratio is actually slightly better for paid streaming because SoundExchange distributions include paid subscription revenue from listeners of Pandora's ad-free, paid subscription service, Pandora One. If those royalties were reclassified and grouped with paid subscriptions, the latter group would have more than a 43-percent share of streaming revenues. Unfortunately, the amount of royalties generated from Pandora One is unknown.
5. Synchronization revenue isn't as good as you think. Sync revenue declined 10 percent to $88 million in the first half of 2014, after falling 0.5 percent in 2013. It's still a small part of the recorded music business, accounting for 3 percent of total revenues in both the first half of 2014 and calendar year 2013.
The actual sync market may be better off than RIAA numbers indicate though, because of growth in syncs from production houses and non-RIAA members. But over the last few years, the growth seems to have come from the high and low ends of prices while the middle class has fallen. These mid-year numbers suggest that trend may be continuing.