MUSIC REPORT 04 the DIGITAL MARKET TAKES SHAPE in 2005 04 Digital Music Expands Worldwide

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MUSIC REPORT 04 the DIGITAL MARKET TAKES SHAPE in 2005 04 Digital Music Expands Worldwide IFPI:06 DIGITAL MUSIC REPORT 04 THE DIGITAL MARKET TAKES SHAPE IN 2005 04 Digital music expands worldwide 07 GETTING MUSIC TO CONSUMERS IN MORE WAYS 07 Distribution channels diversify 07 Video boosts digital music 08 The record company investment 09 The marketing opportunity 09 Digital-only labels emerge 09 The new digital intermediaries 10 MOBILE MUSIC SHOWS ITS POTENTIAL 10 Mobile music spreads globally 11 From ringtones to ‘real music’ 11 Music drives 3G 12 The handset market 12 The future of mobile music 14 IN THE PIPELINE: LEGITIMATE P2P, DIGITAL RADIO & PODCASTING 14 Legitimate P2P 14 Digital Radio 14 Podcasting 15 MUSIC CONSUMPTION IS CHANGING 15 New IFPI research spotlights the consumer 15 Digital music versus the CD 15 The power of portability 16 CONFRONTING THE CHALLENGES 16 Internet piracy: the biggest obstacle 16 Digital stream ripping: the next big challenge 17 The call to ISPs 18 COURTS IMPROVE THE LANDSCAPE 18 Courts rule against illegal P2P 18 Shutting down ‘piracy havens’ 20 CONTAINING ILLEGAL FILE-SHARING 20 Deterrence: legal actions against file-sharers 20 Education 21 Is the fight against piracy working? 21 Changing attitudes 22 DRM & INTEROPERABILITY: THE KEYS TO FUTURE GROWTH 22 The challenge for DRM 22 Interoperability: a key priority 23 WHAT DIGITAL MUSIC OFFERS THE CONSUMER DIGITAL MUSIC REPORT 2006 PAGE 02 MUSIC – A KEY DRIVER OF THE DIGITAL ECONOMY A new wave of digital commerce, from mobile to broadband, is rolling out worldwide – and music is driving it. At the same time the industry is helping “Music is not only the most transform the experience of the music fan. In 2005 the number of legitimate music popular consumer product download sites reached 335, up from 50 two years ago. In just two years the volume in the industrialised world. of music made available online by record It is a key driver of the digital companies has increased more than six-fold to over two million songs. Digital music, no economy.” longer the preserve of a small core of large markets, is spreading internationally. And it Digital Rights Management (DRM) is a is a reflection of the potential growth in fundamental, yet sometimes misunderstood consumer demand that even today, less element of the digital music business. DRM than 5% of European internet users regularly is an essential tool for all industries trading in John Kennedy, Chairman & CEO, IFPI buy music online. intellectual property in the digital era – from music to movies, games and TV. It helps get Two years ago, few could have predicted This is a success story, but one that cannot music to consumers in new and flexible ways the extraordinary growth we have seen in be taken for granted. Key challenges confront and to recompense the many different rights the digital music business. Some 420 million the digital music industry at the start of 2006 owners involved. Technology companies single tracks were downloaded in 2005, up and even threaten to hold back its growth. need to support DRM, making their devices more than twenty times on two years ago. We are meeting these challenges. interoperable. Governments also have a And that excludes the entire business of key role to play by supporting DRM in music on mobile phones, a market which Above all, we must protect our product. In managing the delivery and protecting the is not far behind music downloads in value. an industry dependent on intellectual property, value of digital music. Together in 2005, these two new distribution licensing your product is worthless if you channels took record company revenues cannot also protect it. The music industry has We need cooperation from our partners too. from digital sales to an estimated now taken some 20,000 legal actions against Internet Service Providers are becoming the $US 1.1 billion globally, tripling in value illegal file-sharers in 17 countries, and these new retailers and distributors of the digital compared to 2004. And there will be actions will be stepped up in the next year. market.They are making revenues from further significant growth in 2006. The strategy will not eradicate the problem, digital music, but not taking enough but it is containing it. Consumer research in responsibility for protecting our copyrights. But, impressive as they are, these statistics this report shows that every second person This must change. They must take their share only hint at the real underlying value of the who cut back on illegally file-sharing has done of responsibility in stopping infringements of digital music revolution. Music is today so out of concern for the legal consequences. the copyrighted content. In the physical world, making an enormous contribution to the no respectable music store or distributor would development of the world’s digital economy. The same research raises other important stock pirated product on its shelves or allow For example, in 2005 consumers bought questions. No one underestimates the piracy to take place in a corner of its shop over 60 million portable digital music players challenge of persuading a young generation or warehouse. (worth an estimated $US 9 billion), paid over of music fans to pay for music that they have $US 75 billion in broadband subscriptions become used to acquiring for free. The digital music business is at a pivotal and purchased $US 50 billion worth of mobile moment at the start of 2006. Consumers data services. Nokia, the world’s largest The legitimate digital music business has for are increasingly turning to legitimate ways of mobile handset manufacturer, sold over years cried out for clearer legal ground rules. downloading music, the legal environment 40 million music-capable phones alone. On this front, 2005 saw a big leap forward. for our business is improving and record Four courts in three continents, from the US companies are licensing music prolifically The message is clear: a new wave of digital to Australia, delivered judgements against and diversely. commerce, from mobile to broadband, is unauthorised P2P services that will help rolling out across the world. It is generating transform the landscape in which the nascent The challenges ahead are clear, though. billions of dollars in revenues and creating digital business is growing. We need greater support in the fight against millions of jobs. And it is being driven, to a digital piracy; more recognition of the role of large extent, by music – by the people who Hearts and minds are critical in this process, DRM; more cooperation from ISPs; and more create music, who produce it and who too. In 2005 the music industry launched respect for the intellectual property on which invest in it. four separate global education campaigns, we and many other industries depend. The often sponsored by national governments. record industry now looks squarely at our The music industry is delivering on its pledge They are aimed at specific audiences that partners in the marketplace, as well as to to license music ubiquitously: as much music, shape attitudes to music on the internet – governments, to help achieve these aims. in as many ways, to as many consumers via parents, business leaders, legitimate as many formats and distribution channels as computer users and, last but not least, possible – as long as it is licensed and paid for. copyright offenders themselves. PAGE 03 THE DIGITAL MARKET TAKES SHAPE IN 2005 Option 1 Option 2 The legitimate digital music business has caught the imaginationOption 3 of Option 4 consumers,sales have increased steadily and new service launchesLegitimate service s icon options have accelerated. 2005 was a landmark year for digital music, The mobile phone became a DIGITAL MUSIC EXPANDS when online and mobile music distribution portable music device. Specially WORLDWIDE emerged as the industry’s fastest growing Option 1 designed musicOption 2 phones were released Option 1 Option 2 delivery channels. Digital sales in 2005 by the major handset makers as dozens The digital music business spread internationally accounted for approximately 6% of global Option 3 of 3G musicOption 4 services were launched, in 2005 led by the US, with Europe and Asia music sales based on the first six months Legitimmate akingservices icon optio mobilens downloads widely available showing strong growth. of the year. outside Asia. Single track downloads in theOption 3 US more Option 4 2005 witnessed key milestones in the The world’s first publicly available than doubled in 2005 to 353 million (Nielsen Mobile icon options development of the market: Option 1 legalOption 2peer-to-peer (P2P) service SoundScan), with a weekly sales average of Option 1 Option 2 iMesh launched in beta phase, with a 7 million tracks. Digital album downloads grew Digital is the fastest-growing full launch expected early in 2006. Many to 16 million, or 2.6% of the album market, up Option 3 Option 4 Option 3 Option 4 delivery channel for music. Mobileother icon options P2P providers are now looking to go from 1% in 2004. Option 1 Option 2 Record company revenues reached an Legitilegitimatemate services icon options following legal decisions against estimated $US 1.1 billion in 2005, three Grokster in the US and Kazaa in Australia. Another important development in the US Option 3 times the valueOption 4 in 2004 ($US 380 million), Meanwhile, the legal environment for digital was the launch of portable subscription Legitiwithmate service s theicon optio nssplit roughly 60:40 between online music improved very significantly in 2005, services such as Napster To Go, Rhapsody Option 1 Option 2 and mobile music. Digital sales have gone Option 1 with decisionsOption 2 against file-sharing services To Go and Yahoo Music Unlimited.Option 1 These Option 2 from practically zero to 6% of the recording Grokster (US) and Kazaa (Australia), as allow customers to listen to entire music industry’s global worldwide revenues well as similar judgements over Kuro service libraries directly on their portable Option 3 Option 4 Option 3 Option 4 Option 1 Option 2 within the last two years.
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