Music

Streaming is the most important driver of recorded music revenues, and Blockchain has the potential to disrupt the market sooner or later.

Segment definition

The music market is defined as all commercial activities surrounding the distribution and marketing of music and music artists.

Musical content is distributed either physically or electronically. Electronic distribution is split between downloads and streaming services, whilst physical distribution includes vinyl and CDs. Revenues from radio broadcasting are excluded in this regard.

In the live music category, all revenues from live events (e.g. festivals, concerts) are included. The relevant revenue originates from ticket sales as well as sponsorship. Not taken into account is merchandise sold.

Internet radio and related businesses are not part of this chapter, unless they fall under the category streaming.

Retail values are used as the quantifier for all revenue numbers, thus the numbers are higher than the trade or complete sale values indicated.

84% of Swiss teenagers use YouTube to stream music and video content

Business innovation

The signs are there that the record label model will shift to more independent formats. The traditional record label’s focus on established cash generating artists poses a challenging entry barrier for upcoming artists. Today, artists have the ability to conduct personal marketing and distribution through social media and music streaming platforms. Streaming platforms therefore have taken over the most important role in recorded music marketing and promotion. At the same time, there is a noticeable move towards new music formats that use blockchain technology, mostly due to the value gap. These new formats incorporate basic metadata to identify writers, performers, owners, producers, etc., of the music. Another innovation is the use of cryptocurrency for payment purposes. Altogether, this metadata-enriched format facilitates the traceability of music rights, ownership, copyrights, and usage rights. With it, artists, songwriters, producers, performers, and record labels have the ability to assign rights and monitor usage in realtime. Payments in cryptocurrency ensure fair and fast payment for all parties involved with the music. Platforms built on blockchain combine peer-to-peer sharing, decentralised crowdfunding, and the removal of intermediaries such as record labels and centralised platforms. For example, SingularDTV provides this type of decentralised entertainment ecosystem. It enables musicians and consumers to share intellectual property and revenue streams through tokenisation and represents a direct distribution link between creators and fans. When considering blockchain and decentralisation in light of all the technological innovations that have changed the music industry in recent times, it becomes clear that this could be one of the biggest disruptions the market has ever experienced.

“The current recorded music business model is based on a complex and slow value creation chain. Blockchain and smart contracts could disrupt the model heavily.”

Andreas Ryser, CEO / President, Mouthwatering Records / IndieSuisse

The opportunities in the music business outside the recorded music segment will become more and more important as well. The shift to live music as one of the revenue pillars in the industry has already happened. Ever more progressive digital experiences and innovative business models are gaining ground. For instance, music will play a vital role in the Virtual Reality and Augmented Reality industry.

The Swiss music market

Market Overview

After facing years of challenging trends, the Swiss music market recovered in the past year. Streaming is rapidly becoming the largest market segment. The total revenue generated by the recorded music market amounted to CHF 182 million. The year-on-year 2.0 percent growth rate supports this premise. Although the streaming segment is growing rapidly, the Download and CD/LP sales categories continue to shrink.

Revenues from streaming grew by roughly 50 per cent and now constitute some 70 per cent of the overall digital music market. The 16.6 per cent revenue decline in the Download segment represents a continuation of the trend. Nevertheless, the overall digital business grew by approximately 11.2 per cent compared to 2016 and today accounts for almost two-thirds of the total music record market.

"The difference with streaming is the fact that, compared to before, other market players benefit. In contrast to the times of downloads, the international top stars are the big beneficiaries, whilst the Swiss industry has problems holding market shares globally.”

Lorenz Haas, Managing Director, IFPI Switzerland

The physical distribution channel’s contribution to the overall recorded music market also shrank in 2017 at a double-digit pace and today accounts for only about 35 per cent of the overall market. In this context, the decline in CD revenues follows the expected trend of the past few years, yet the segment remains important considering the still considerable size of the market. A general shift from physical to digital distribution is of course inevitable. Vinyl-related revenues show a different trend than the norm for the segment. They grew by a noteworthy 10 per cent but are still under the 5 per cent threshold in terms of the total recorded music market. An increase in turnover was last witnessed in 1991 (!). All things considered, vinyl sales will most probably never become more than a niche market.

The strong Swiss live music segment generated revenues of CHF 576 million during the past year. Even though Switzerland has one of the highest live music event per capita densities in the world, the market is now showing signs of stagnation and saturation. Gross revenue has levelled out and the utilisation rate of a number of events is declining. The year-on-year growth rate of around 1.1 per cent was attributable to the good weather conditions for outdoor events and is therefore part of a cyclical fluctuation rather than the start of a new trend in the segment. The roughly unchanged number of major live event visitors (5 million), combined with stable ticket prices, led to the stagnating numbers.

Even though the overall number of visitors and events declined, the Hallenstadion in Zurich, as one of the most prominent examples, put on a solid performance with revenues of CHF 20 million, a profit of CHF 750,000, and increasing reserves for maintenance and repairs. Overall the Hallenstadion is still the most successful event hall in the world in its category. All developments considered, however, the current state of the Swiss music market calls for new strategies and business models.

“One of the biggest challenges for the industry is to push efficiency in the planning and advertising of events. This may be facilitated by means of data analysis.”

Stefan Breitenmoser, Managing Director, SMPA

Due to these developments, the industry is looking for ways to optimise revenue generation. The secondary ticket market (“scalping”) for instance is hurting the live music segment. Therefore, a joint effort by search engine providers, consumer organisations and the State Secretariat for Economic Affairs (SECO) was launched to change the status quo. Another threatening development can be found in regulatory changes. New regulations concerning volume control, sponsoring/advertisement of tobacco or security service requirements pose potential problems for the segment.

Key players

Key players in the recorded music market are united in industry organisations like IFPI Switzerland or IndieSuisse. The former includes the subsidiaries of the globally preeminent labels Universal, Sony and Warner. The latter encompasses a wide variety of Swiss indie music labels.

Today, there are over a dozen streaming services available in Switzerland. Leading the field in terms of subscribers is Spotify, where around 20 per cent of the Swiss population have a subscription. Big players like Apple Music and Spotify by now have dedicated strategies and offerings for the Swiss market. Services like Qobuz and Tidal focus squarely on the artist’s stake in the equation and aim to provide high-quality sound content to consumers. With the launch of YouTube Music, it is clear that there are still new competitors entering the market. In this specific case, the entry into the Swiss market still lies ahead. Google and Apple – with offerings like iTunes, Apple Music, Google Play Music and YouTube Music – have positioned themselves next to Spotify as key players in the market.

In the live music segment, an array of festival and concert organisers make up the field. Most of the relevant indoor and outdoor festival and concert management companies, including market leader Live Nation and Eventim subsidiaries as well as renowned festivals like Paléo, Montreux Jazz and Openair Frauenfeld, are members of the Swiss Music Promoters Association (SMPA).

Principal drivers

Digitalisation & streaming drives growth

The most influential driver of the changes in the music business and related revenues is and will remains digitalisation. Especially the shift to music on the go, and therefore streaming, is being supported by the continued expansion of Internet and smartphone penetration. In Europe, the Internet footprint is expected to broaden at a single-digit rate, whereas smartphone penetration is projected to increase by more than 10 percentage points, from 60 to at least 70%, by 2022. Even though Switzerland has far higher penetration in both fields, mobile technologies are still being discovered, especially by the upper-age group. Over 45 per cent of Swiss households have highspeed Internet, and 89 per cent of all Swiss people are in one way or another active online. This vast coverage of highspeed connections, combined with ever-cheaper storage capacity, opens the door for high resolution audio formats. Data compression is starting to lose its relevance. Hence the advent of lossless codecs like FLAC (Microsoft) and Apple’s ALCA (Apple Lossless Compression Algorithm, which became open source and licence-free in 2011). FLAC is open-source, royalty-free, supports album art and metadata tags, and has been around long enough to run stably across platforms. This development encourages audiophiles to move from a physical data medium to digital formats. A further development tapping into the shift to mobile and convenience is voice control. Warner Music’s John Rees is equally enthused, but injects a note of caution: “Voice control will bring a major shift in consumer behaviour this year; we’re already seeing it and it’s got potential to transform how people interact with music. Frictionless access to music via voice is an overwhelmingly positive development, but as the user interface gets replaced by AI, ensuring that the depth of listening experience and artist discovery are not sacrificed are fresh challenges to overcome.”

“The challenge with voice assistants will be that we are able to influence what is played after a generally formulated voice command. As a label, of course, we want our artists to be played as much as possible.”

Ivo Sacchi, Managing Director, Universal Music Switzerland

Blockchain has the potential to disrupt the recorded music market

A further global trend impacting Switzerland is decentralisation and regionalisation. Consumers today expect an increasingly customised offering, combined with total availability of regional and global content. Streaming providers are eager to deliver the most comprehensive content in a micro-targeted, tailor-made fashion. The music formats of tomorrow also tap into the need for decentralised, lean markets that provide fair revenue distribution and low transaction costs. The success of these new models will partially depend on the acceptance of cryptocurrencies and on the reliability of technologies like blockchain and hence smart contracts. These developments are coupled with advances in data science and machine learning. An even higher degree of personalisation can be achieved through (Big) data analysis algorithms. Streaming offerings adapted to the consumer’s pulse or geographic location are already in development.

Stable outlook for the Swiss music market

With the digitalisation of the music industry, the consumer moved closer to the artist and recording studio. Interaction, feedback and rating are a few of the possibilities to be leveraged for gauging fan loyalty and promoting scores. In general, the strong purchasing power and positive economic development in Switzerland will further fuel the need for entertainment and cultural offerings in the music realm. New innovative live music formats like films and video games during concerts or interactive live performances will stay in demand, even though some regulatory challenges need to be mastered. It seems like an old truth that live music will always be appealing to the consumer.

Market growth

Streaming subscription services such as Spotify and Apple Music lead the growth in the market, with sales climbing 63 per cent to USD 4.09 billion worldwide. Streaming services now account for almost two-thirds of the industry’s revenue. Sales of CDs and other physical formats are second at 17 per cent. The music industry is confident that this growth will continue. Amazon’s Pandora and Alphabet’s YouTube are both entering the global market with paid services. Streaming is rescuing record labels hard hit by the years-long drop in CD sales while online sales of songs and albums (e.g. iTunes) failed to stop the decline to any substantial degree. Now the music business has demonstrated its fastest growth in 23 years. U.S. recorded music sales for instance climbed 17 per cent to USD 8.7 billion last year. The global music industry's performance in 2017 continued the trends of the past several years. The gap between the performance of record sales and streaming revenues is continuing to widen. The global recorded music market expanded last year by 8.1 per cent and now totals USD 17.3 billion. This is a huge improvement from just a few years ago, but the business is still below its 1999 peak – and it will take time before it reaches that high. But positive indicators can be seen throughout the market. Examples of this are Spotify Technology SA, owner of the world’s largest paid music service, which successfully listed its shares on the New York Stock Exchange in April 2018; or the revenue potential originating from premium offerings due to the introduction of high-resolution audio formats. These favourable developments in digital distribution are reflected in the CAGR of 5.6% we project through 2022 in Switzerland. The live music market in Switzerland is set to continue its stagnation at a CAGR of 0.8% for the next five years. The overall increase in revenues of 1.0% is only being held back by the 8.1 per cent decline in physical distribution.

Comparison to Western Europe

The European market for recorded music grew by 4.6 per cent in 2017 compared to the previous year’s 3.0 per cent gain. Digital revenue continued to perform strongly, growing by 19.7 per cent and accounting for 43 per cent of the market. Total streaming was up 33.2 per cent, with revenues from paid subscription audio streams accounting for 70 per cent of total digital revenues. The region’s largest markets, Germany, UK and France, all saw growth in streaming revenues. Physical revenues declined by 9.8 per cent, whilst revenue from digital downloads fell 19.8 per cent. The European institutions have recognised the value gap as a market distortion that needs a legislative fix and, this year, are negotiating provisions that could bring about a narrowing of the gap. Switzerland is expected to follow these regulatory changes. Like in Switzerland, the European live music market is stagnating at a similar pace.