There’s a big difference between seeing trends in a market and correctly predicting their timing and financial impact. Analysts and music industry executives have long seen the potential of the subscription model. But the hard part is correctly predicting revenue and revenue growth.
A new report by ABI Research says the global music subscription market will grow by 31% per year, from 29 million subscribers in 2013 to 191 million in 2018, while revenue will grow 21%, from $5 billion to roughly $13 billion.
ABI’s forecast probably won’t be far off, as the subscription market is much more predictable than it used to be. But for a variety of reasons, market research companies have frequently overestimated the size of the digital music market and its various components. In 2006, iSuppli predicted the global digital music market would grow to $15 billion, or 44% of total sales, in 2010. The actual trade value in 2010 was $4.8 billion, or 28.2% of sales, according to IFPI. Three years later, Global Insights forecast the market would be worth $13.7 billion in 2014. Since the actual trade value of digital music was $5.8 billion in 2012, reaching $13.7 billion by 2014 is a stretch.
The music subscription market has been especially difficult for forecasters. Take Jupiter Media Matrix’s 2002 forecast that the U.S. digital music market would grow from almost nothing in 2001 to $1.6 billion in 2006. Subscriptions were to account for $1 billion, or about 63%.
Forrester’s topline estimate wasn’t far off. Total U.S. digital revenue in 2006 was $1.9 billion, according to the RIAA, about $300 million more than Forrester’s target. But subscriptions accounted for just $206 million, or 7%, of that total. Assuming music publishers get 12.5% of revenue, the total value was $235 million, or 76.5%, less than Jupiter’s forecast.
The cause of Jupiter’s errant forecast is a common one: A new service arrives unexpectedly and sets the market on a new course.
Launched in 2003, iTunes helped make the download, not the subscription, the dominant revenue source of the last decade. In 2005, track and album downloads accounted for 45.6% of recorded-music digital revenue while mobile downloads — ringtones, et al. — accounted for 38.5% of revenue. Downloads’ peak share of digital revenue was 72.9% in 2011.
Years ago, subscription services appeared to have more potential. In 2005, when Rhapsody and Napster were the leading services, subscriptions accounted for 13.6% of U.S. digital recorded-music revenue. However, subscriptions fell to a 6.7% share in 2010.
For the same reason, the trend in Internet radio was equally difficult to predict. A 2004 Forrester report said Internet radio would reach 30% of U.S. homes by 2010 due to major portals — AOL, Yahoo and MSN — and the streaming services of broadcast radio. But it was Pandora, launched in 2005, that was most responsible for getting Internet radio into tens of millions of American households.
Digital forecasts should be easier to make now that the download is waning in influence. But one never knows. Apple’s entrance into Internet radio could upset expectations. A new subscription service or business model could radically speed consumer adoption.