Copyright Remains Key to the Digital Music Business. Digital Market

Digital Music Report 2007 Page 02 Digital Music In 2007 – A Brave New World

However, there is correctly a certain amount However, actions against individual ?Digital music expands worldwide of nervousness around. This is sensible; there is uploaders are onerous and expensive and certainly no room for complacency. We are we shouldn’t have to be taking them. That job Consumers Shape The all troubled by the research that suggests the should not be ours – it should be done by the number of new tracks purchased per MP3 gatekeepers of the web, the Internet Service player is low, and yet at the same time digital Providers (ISPs), who unquestionably have Future Of Recorded Music music is hitting new milestones. It has helped the technical means to deal with copyright the singles business to its best year ever, infringement, if only they would take revived genres like classical and is responsibility for doing so. regenerating formats like music video. It is spreading internationally. New markets like At one time you were considered a new China, that have been historically closed media philistine if you wanted to regulate the Digital Market to legitimate business by ruinous levels of internet. But then Google promised the piracy, are offering the prospect “ofMus aic is not only Chinese government that censorship was the most popular “leap to digital”. consumer product possible. Then Google blacklisted BMW in the in the industrialised world. It is a key Overview In 2006 internet world for anti-social behaviour. It 6 driver of the digital The record industry today has evolved into a The chief winners in the rise of digitaleconomy music.” seems policing is acceptable for all sorts of digital thinking, digitally literate business. are consumers. They have effectively been things but not intellectual property! given access to 24-hour music stores and In 2006, we saw internet advertising revenues services with unlimited shelf space. They can With cooperation from ISPs, we could make increaseConsu tomer the stages Shape where the they Futur wille shortly buy or consume music in new ways and huge strides in tackling content piracy overtakefor Rec radioord advertisinged Music revenues. We saw formats – an iTunes download, a video on globally. Disconnection of service for serious Online Services newspaper headlines talking about the four YouTube, a ringtone or a subscription library. infringers should become the speeding fine lap-top home. In 2006, we learned that some To cap it all, Time magazine crowned the or the parking ticket of ISP networks. We need of the online business will be about micro internet user as their person of 2006. government help to make it clear that ISPs Across The World transactions where a million dollars of must face up to their responsibilities and cut revenue can be the result of 57 million We are still in a period of innovation and off copyright infringing users. To be fair, at the transactions! And, most of all, we learned that experimentation. Some believe the end of 2006 the UK government signalled this is a market that is evolving not only on a subscription model won’t work and others that it may be prepared to play a facilitating daily basis but with regular revolution in the believe it is the industry’s brightest hope for role in this and set a deadline of December market to add spice to the evolution. the future. However, the subscription model 2007 for tangible progress. Digital Diversifies Frequent surprises in the market are also cannot be properly tested whilst there are matched by an air of expectation, and in interoperability issues to resolve. What does John Kennedy wish for 2007? He 2007 that has borne fruit with the iPhone, hopes politicians who talk about the Consumer Buying Habits which should herald a shake up of the The market remains a challenge. Other importance of the Knowledge Economy mobile music market. This is a market where industries are struggling with the same come up with actions to match their words. the learning curve changes direction on a problems we have had to live with. The film For an internet lifetime we have heard that regular basis! industry is increasingly suffering from online the Knowledge Economy is the future. With piracy, and the newspaper industry is facing manufacturing economies lost to many The pace of transformation in our industry is a slump in sales triggered at least partly by governments, there is an acknowledgement breathtaking, but at the moment the holy behaviour on the internet. that in the future we are going to be more Music On Mobile grail is evading us. I would like to be reliant on the creative industries for announcing that a fall in CD sales is being As an industry, we enforce our rights employment, tax revenues, overseas compensated for by an equal or greater decisively, and this will continue. In 2006, earnings and general economic growth. Grows In Popularity increase in online and mobile revenues. But we had significant legal victories, led by a The rhetoric is wonderful but is simply not that is not yet happening on a global basis. US$115 million settlement against Kazaa. matched by deeds. Let’s hope that will We were told we could never track down change in 2007. The music industry is still an The digital music business continues to grow. such offenders on the internet. We were told exciting, innovative and vibrant industry, but Trade revenues in 2006 doubled to about they would hide in places where we could there are no easy wins and everyone US$2 billion – around 10 per cent of our sales. not find them! involved knows that in 2007 we must all Emerging Business Models By 2010 we expect at least one quarter of all strive even harder for that holy grail that I music sales worldwide to be digital. We have taken some 30,000 actions referred to earlier. against illegal file-sharers globally and, as Some commentators have expressed the research in this report shows, these To end on a high note however. Doug Morris, concern about the pace of annual growth. actions clearly work. Illegal file-sharing in as CEO of Universal Music, the largest Yet we never claimed it would double every Europe was contained last year against a recording company, has announced that he year and the rate of growth that we are 30 per cent increase in broadband expects 2007 to be Universal’s most seeing today would be considered household penetration. successful financial year ever. That’s an wonderful for many businesses. encouraging signal to send to the gloom merchants and a motivational message for Portable Players Drive his employees and his competitors! Music Demand Page 03 Record Companies Boost Consumer Choice Copyright, Music And The Education Challenge

Awareness Grows On Virus And Spyware Risks Containing Piracy

Consumers are changing the ways they discover, access and listen; copyright remains key to the digital music business. Digital Market

New digital delivery channels are driving and mastertones remain the main digital music consumption to its highest-ever levels music formats, but other formats, such as Overview In 2006 as consumers demand access to music in mobile downloads, digital albums, music more ways than ever. videos and ringback tones all saw healthy growth. Digital music has empowered the music fan. The popularity of single track buying, the The number of tracks available online growth of mobile music and the rising doubled to reach over four million on Online Services demand for music video on the internet leading services in the last year. exemplify this. The past year has also seen a greatest challenge is the widespread surge in user-generated content on social unauthorised availability of its product for free. There are 498 online music services Across The World networking sites such as MySpace, Bebo and Digital piracy and the devaluation of music available in over 40 countries, offering YouTube – a new way for record companies content is a real threat to the emerging digital consumers a wide variety of choice and to legitimately bring their music to the public if music business. great value. they can successfully control widespread copyright infringement, and a great This report outlines the ways in which the Portable music players are helping opportunity for independent labels to recording industry is responding to the drive digital music consumption. Digital Diversifies showcase their talent. consumer and building a digital business. It Portable player sales totalled around 120 also identifies the problems faced and where million in 2006, an increase of 43 per cent on Digital music is still in an early phase of the music sector needs action by government the previous year (Understanding and development. In 2006 record companies Solutions). Portable player owners are more Consumer Buying Habits and by industry partners to tackle piracy and explored new and different revenue prevent the undermining of its intellectual likely to buy music legally than general streams. Examples of these included property rights. internet users; but the amount of purchased advertising-supported online services and music stored on devices is still low. shared revenues from the sale of portable Highlights Of 2006 digital devices. Record companies are New revenue streams and business continuing to focus on what they do best – models emerge. Social networking Music On Mobile Record companies’ digital music sales discovering, marketing and licensing great are estimated to have nearly doubled sites exploded in popularity while music – using all the digital tools at their in value in 2006, reaching a trade value of advertising-supported models such as disposal to help them compete for a share of approximately US$2 billion. The split between video licensing on Yahoo! Music and MSN Grows In Popularity the market. Digital is also opening up online and mobile remains fairly equal, but emerged as a potentially exciting revenue potential in countries blighted by physical varies substantially across markets. Digital stream for record companies. piracy. International teams at record sales are estimated to have grown from 5.5 companies are extending digital operations per cent in 2005 to around 10 per cent of Lawsuits are having an impact. into China, India, Russia and Eastern Europe. industry sales for the full year 2006. Recent research from anylists Jupiter shows that illegal file-sharing in Europe has Emerging Business Models However, digital music has not yet achieved Single track downloads are estimated been contained in the last year, in the context its holy grail: growth has not offset the fall in to have totaled 795 million in 2006, up of a 30 per cent increase in broadband CD sales. The recording industry’s single 89 per cent on 2005. Single track downloads household penetration.

Global Digital Music Market In Figures (millions) “As we continue our transformation from a ‘songs-and- “As we continue our transformation from a ‘songs-and- records’ company into one that delivers a wide variety records’ company into one that delivers a wide variety 2005 2006 Change of rich, music-based content on multiple platforms, our of rich, music-based content on multiple platforms, our experience has shown that the key to harnessing the experience has shown that the key to harnessing the Broadband lines 209 280 34% vast digital opportunity is ensuring innovation remains Portable Pvaslayt digital oppoersrtunity is ensDruringive innovation remains Song catalogue online 2 4 100% our guiding principle. We always work towards our guiding principle. We always work towards establishing strategic partnerships, pioneering new establishing strategic partnerships, pioneering new Single tracks downloaded 420 795 89% products and exciting user experiences within a Music Demproducandts and exciting user experiences within a Subscription service users 2.8 3.5 25% framework that recognises the needs of consumers framework that recognises the needs of consumers alongside the rights of copyright holders, and we alongside the rights of copyright holders, and we Mobile subscriptions 1,817 2,017 11% believe that is the best way to ensure that legitimate believe that is the best way to ensure that legitimate 3G mobile subscriptions 90 137 52% music services are first-choice for fans.” music services are first-choice for fans.” Patrick Vien, Chairman and CEO, Patrick Vien, Chairman and CEO, Portable player sales 84 120 43% Warner Music International Record ComWarner Musipanic International es Boost Sources: IFPI, PWC, M:Metrics, Understanding & Solutions Consumer Choice Digital Music Report 2007 Page 04 “We are encouraged by the growth of “We are encouraged by the growth of online and mobile music sales, as well online and mobile music sales, as well as by our success in developing a variety as by our success in developing a variety of new business models, including ad of new business models, including ad supported video distribution on the Copyright,supp Muorted vidsiceo dist Andribution on the internet. As our physical revenues internet. As our physical revenues continue to decline, we need to The Educatcontiionnue to d eclChine, wallee need tonge proactively continue to build digital proactively continue to build digital growth and identify new digital growth and identify new digital opportunities that further extend the opportunities that further extend the reach of our artists.” reach of our artists.” Thomas Hesse, President, Global Digital Thomas Hesse, President, Global Digital Business, SONY BMG Music Entertainment AwarenesBusins ess,Gro SONYws BMG Mus Onic Enter tainment Virus And Spyware Risks “2006 was an enormous year for Universal Music internationally “2006 was an enormous year for Universal Music internationally and, therefore, the industry. We saw huge growth in all our digital and, therefore, the industry. We saw huge growth in all our digital businesses, spurred by a wide range of partnerships. Universal businesses, spurred by a wide range of partnerships. Universal Music will also continue to deliver when it comes to signing and Music will also continue to deliver when it comes to signing and breaking the best artists. Just as importantly, don’t forget theCo ntainingbreaking Pir the bacyest artists. Just as importantly, don’t forget the consumers. Ignore them at your peril, as the future of music lies consumers. Ignore them at your peril, as the future of music lies in their hands!” in their hands!” Lucian Grainge, Chairman and Chief Executive, Lucian Grainge, Chairman and Chief Executive, Universal Music Group International Universal Music Group International

“In this internet age, the consumer is using music Progress Aga“In this interninset agte, the consumer is using music content more than ever before – whether that's content more than ever before – whether that's playlisting, podcasting, personalising, sharing, Pirate Operplayliatisting, podonscasting, personalising, sharing, downloading or just simply enjoying it. The digital downloading or just simply enjoying it. The digital revolution has caused a complete change to the revolution has caused a complete change to the culture, operations and attitude of music companies culture, operations and attitude of music companies everywhere. It hasn't been easy, and we must certaIinlntery net Pieverracywhere.y It– has n't been easy, and we must certainly continue to fight piracy in all its forms. But there can be continue to fight piracy in all its forms. But there can be no doubt that with even greater commitment to no doubt that with even greater commitment to innovation, and a true focus on the consumer, digiTtalhe Call Toinno vatioISPsn, and a true focus on the consumer, digital distribution is becoming the best thing that ever distribution is becoming the best thing that ever happened to the music business and the music fan.” happened to the music business and the music fan.” Eric Nicoli, CEO EMI Group DRM PromoteEric Nicoli, sCEO Cons EMI Group umer

“We see the trend in the player market moving away from singlFlexe ibility “AWe seend the tren Pd irotn the plaectsyer market moving Con away ftentrom single purpose devices towards multipurpose, and more importantly, purpose devices towards multipurpose, and more importantly, connected devices. This trend will enable hundreds of millions of connected devices. This trend will enable hundreds of millions of people to have their music collections with them, as well as to people to have their music collections with them, as well as to download and enjoy digital music on their mobile device. Nokia’s download and enjoy digital music on their mobile device. Nokia’s leadership in this area means we can offer a compelling mobile leadership in this area means we can offer a compelling mobile music experience combining devices, content and connectivity.” music experience combining devices, content and connectivity.” Ed Averdieck, Managing Director, Nokia Music Service Ed Averdieck, Managing Director, Nokia Music Service

“The success of eMusic in Europe “The success of eMusic in Europe and around the world shows that and around the world shows that consumers are eager for a digital consumers are eager for a digital music service that focuses on music service that focuses on music beyond the commercial music beyond the commercial mainstream. By offering customers mainstream. By offering customers well-priced, expertly curated well-priced, expertly curated adventurous music that they can adventurous music that they can own in the universally compatible own in the universally compatible MP3 format, we’ve shown you can MP3 format, we’ve shown you can sell a lot of it. This combination has sell a lot of it. This combination has helped eMusic become the world’s helped eMusic become the world’s number two digital music service number two digital music service and sell more than 100 million and sell more than 100 million downloads in three years.” downloads in three years.” David Pakman, President and CEO, David Pakman, President and CEO, eMusic eMusic

“It’s hard enough for artists and “It’s hard enough for artists and labels to handle traditional labels to handle traditional distribution without support. Add distribution without support. Add more than 10 times the content more than 10 times the content online, hundreds of digital music online, hundreds of digital music services, a dozen different business services, a dozen different business models, complex accounting models, complex accounting systems, new ways of marketing systems, new ways of marketing and promotion and you realise and promotion and you realise quickly that you need more quickly that you need more sophisticated and skilled partners sophisticated and skilled partners on your team.” on your team.” Scott Cohen, Founder, The Orchard Scott Cohen, Founder, The Orchard

“If we in the EU are going to turn Europe into the “If we in the EU are going to turn Europe into the leading knowledge-based economy and society, leading knowledge-based economy and society, then we have to ensure that our young people are then we have to ensure that our young people are both technologically savvy and aware of the basic both technologically savvy and aware of the basic tenets of intellectual property which protects tenets of intellectual property which protects creative content.” creative content.” Erika Mann, MEP and Chair of the European Erika Mann, MEP and Chair of the European Internet Foundation Internet Foundation

The digital music sector is expanding internationally, but individual markets are developing in different ways. Online Services

Digital music sales are estimated to have Cingular announced its mobile music Europe is, however, very well provided with almost doubled in value worldwide in 2006, strategy in November 2006 and became the online digital services, with a more diverse mix Across The World reaching an estimated trade value of around first US operator to provide a mobile platform of retailers than in the US. According to IFPI’s US$2 billion. Digital channels accounted for to online music services such as Napster, tracker, there are currently 320 online music an estimated ten per cent of music sales for eMusic and Yahoo! Music. It will also be the services in Europe and 20 available in more the full year 2006, up from 5.5 per cent in 2005. operator carrying the iPhone when it goes than one market. The global split between online and mobile live in June 2007 in the US. sales remained fairly equal worldwide, but There were 53 million single track downloads in Digital Diversifies varies substantially across markets. Digital Diversity In Europe the UK in 2006, double the number in 2005. Digital album sales have reached 2.2 million Key Year For Mobile Music In The US European markets account for around 20 per since the Official Chart Company (OCC) Consumer Buying Habits cent of global digital sales. Despite strong started tracking the figure in April 2006. The UK Single track downloads in the US totalled 582 growth in most countries, digital sales in has also the highest proportion of regular million in 2006, up 65 per cent compared to Europe remain concentrated in the top online buyers in Europe, currently at eight per 2005 (Nielsen SoundScan). Digital albums markets – UK, France, Germany, Italy and cent of internet users, up from four per cent in now account for six per cent of all album Spain. Overall, digital channels accounted 2005 (Jupiter Research). sales in the US and grew faster than single for six per cent of total music sales in Europe in the first half of 2006, lower than the Music On Mobile tracks in 2006, although from a small base. Mobile operator ‘3’ leads the mobile music estimated global average. market in the UK, with a 70 per cent share of 3G iTunes, the leader in online downloads, has subscriptions and 75 per cent of all mobile sold over two billion tracks since its launch in Less developed promotion and marketing of music sales (‘3’). ‘3’ makes up about 25 per Grows In Popularity April 2003 and more than one billion in 2006 digital music services and lower broadband cent of all chart-eligible download sales in the alone. In November 2006 it expanded its penetration in the smaller markets are factors UK. The company upgraded its MusicStore in operations in the US to include a mini-store in the slower development of the online October 2006 to include faster searches and dedicated to Latin music and entertainment music market in some parts of Europe. over 500,000 tracks available to download to including music, videos, television shows, However markets such as the UK have seen PCs or mobile phones. 3MusicStore is powered audiobooks and podcasts. strong growth. by Groove Mobile and 24/7 MusicShop. Emerging Business Models

2006 was a key year for mobile music in The mobile music market in Europe is The German digital market is estimated to the US and this continued in 2007 with the developing steadily. The cost of data-transfers have seen modest growth in 2006. Single track much-anticipated Apple’s iPhone. Sprint is high compared to Asia and third downloads are believed to have reached 24 launched the first full track download-to- generation ‘3G’ technology is not million, up from 19 million in 2005. Widespread mobile service at the end of 2005 and has widespread across the region. This is availability of unauthorised music in the form of sold over ten million tracks in since. Verizon contributing to the slower development of P2P file-sharing, stream ripping and CD burning followed suit, launching a service in the advanced mobile music services in some are clear obstacles to growth of legitimate beginning of 2006. Mastertones are still the European markets. music services. Consumer reluctance to make Portable Players Drive main mobile music format in the US, but online payments via credit card and the lack ringback tones and single track sales of interoperability are also having an impact. are growing. Music Demand

US Digital Music Market (millions) European Digital Music Market (millions)

2005 2006 Change 2005 2006 Change Broadband lines 43 57 31% Broadband lines 68 94 39% Record Companies Boost Single tracks downloaded 353 582 65% Single tracks downloaded 62 111 80% Album downloads 16 33 101% Mobile subscriptions 622 656 5% Consumer Choice Mobile subscriptions 174 194 11% 3G mobile subscriptions 6 27 440%

3G mobile subscriptions 3 15 448% Sources: IFPI, Nielsen SoundScan International, PWC, M:Metrics Sources: IFPI, Nielsen SoundScan, PWC, M:Metrics Copyright, Music And The Education Challenge Page 05

Awareness Grows On Virus And Spyware Risks Containing Piracy

Progress Against Pirate Operations Internet Piracy – The Call To ISPs DRM Promotes Consumer Flexibility And Protects Content In France, iTunes is the leading online service, Asia Leads In Mobile Music followed by Virgin Mega and Fnac, although Spotlight: Korea’s MelOn mobile sales dominate the market. New Consumers in Asia have taken to mobile music South Korean SK Telcom’s MelOn was one launches of subscription music services took in their millions in 2006, supported by the of the first services to embrace the place in 2006. eMusic launched in ongoing roll out of 3G networks and rich media concept of ubiquitous music use, offering September and Fnac extended its service in content such as full audio and video tracks over 800,000 tracks any time and November to include a subscription option delivered wirelessly to handsets. Asia accounts anywhere for consumers to enjoy on the (FnacMusic Illimité), offering a catalogue of for 25 per cent of global digital sales, led by PC, mobile phone or MP3 player. For a one million tracks costing 29.99 per month at Japan, South Korea, China and Indonesia. monthly flat rate of around US$5 SK the end of the year. Telecom customers can stream and Mobile music accounts for an overwhelming download music online or via mobile, as In the mobile music sector, in December 2006 90 per cent of Japan’s digital sales and growth well as reproduce their songs without Musiwave and French mobile operator SFR in the sector remained strong in 2006, pointing limitations, as long as the monthly announced quicker download times for to a mature but not yet saturated market. subscription is maintained. All tracks are over-the-air downloads, as well as enhanced Japan has an advanced ‘mobile culture’ protected by digital rights management. dual-delivery options, a simpler purchasing with high penetration of advanced phones interface, better streaming and previewing. and 3G. SK Telecom has over 20 million subscribers Full-track prices also dropped to 20.99 from and music has become its biggest 21.99. SFR reported sales volumes of 300,000 Mastertones are still the most popular mobile grossing data service. As of early June tracks per month at the end of 2006, a music format in Japan, but record companies 2006, MelOn had nearly 4.5 million users, number the company hopes to boost to are creating new multimedia packages for with 15 per cent of those on a flat-rate one million. consumers. Full track downloads grew strongly subscription. According to SK Telecom, the in 2006 and already represent over a third of site ranked first among South Korean paid Mobile music also accounts for the majority mobile music revenues (RIAJ). NTT DoCoMo, music sites in terms of revenue. of digital sales in Italy and Spain. Advanced the biggest mobile operator in Japan, began “As we continue our transformation from a ‘songs-and- “As we continue our transformation from a ‘songs-and- music handsets are noticeably more popular selling full track downloads to mobile in June records’ company into one that delivers a wide variety records’ company into one that delivers a wide variety in Italy than in the rest of Europe. Italy is the 2006, following KDDI and Sofbank. Full length Mobile music has also attracted fans in India, of rich, music-based content on multiple platforms, our of rich, music-based content on multiple platforms, our third biggest mobile music market in Europe video downloads to mobile also showed which is one of the fastest growing wireless experience has shown that the key to harnessing the experience has shown that the key to harnessing the after the UK and France, but has the biggest potential in 2006, with sales predicted to rise services market in the world. Some 55 million vast digital opportunity is ensuring innovation remains vast digital opportunity is ensuring innovation remains single track download market in Europe, due further in 2007 as device capabilities continue handsets were sold in 2006, up 71 per cent from our guiding principle. We always work towards our guiding principle. We always work towards to higher 3G penetration, operator marketing to improve. 2005 (Consumer Electronics Association). establishing strategic partnerships, pioneering new establishing strategic partnerships, pioneering new and Italian consumers’ enthusiasm for Soundbuzz launched India’s first full song and products and exciting user experiences within a products and exciting user experiences within a entertainment on mobile phones. Rampant Online music sales in Japan more than video mobile download service in May 2006. framework that recognises the needs of consumers framework that recognises the needs of consumers piracy in Spain has limited the growth of the doubled to an estimated 22 million in 2006, The Indian industry has grown since then to digital business there. alongside the rights of copyright holders, and we alongside the rights of copyright holders, and we after iTunes Japan launched in August 2005. 10,000 over-the-air full song downloads believe that is the best way to ensure that legitimate believe that is the best way to ensure that legitimate Other key players include LabelGate-backed per day across all mobile carriers, according music services are first-choice for fans.” music services are first-choice for fans.” services Mora, HMV, Listen and Napster – the to Soundbuzz. first online subscription service to launch in Patrick Vien, Chairman and CEO, Patrick Vien, Chairman and CEO, Japan (October 2006). Warner Music International Warner Music International

Digital Sales Value By Format “We are encouraged by the growth of “We are encouraged by the growth of 100 online and mobile music sales, as well online and mobile music sales, as well 100 90 5% 10% 39% 21% 11% 14% 13% 16% as by our success in developing a variety as by our success in developing a variety 20% 32% 90 80 4% 5% 17% 41% 39% of new business models, including ad of new business models, including ad 20% 10% 32% 80 70 4% 25% 17% 41% 70 supported video distribution on the supported video distribution on the 60 20% 35% 25% 60 internet. As our physical revenues internet. As our physical revenues 50 26% 20% 50 40 38% 39% 35% continue to decline, we need to continue to decline, we need to 15% 26% 40 30 proactively continue to build digital proactively continue to build digital 38% 39% 30 20 20% 8% 15% 4% growth and identify new digital growth and identify new digital 14% 13% 20 10 8% 20% 4% 10 opportunities that further extend the opportunities that further extend the 0 14% 13% UK GERMANY FRANCE ITALY SPAIN 0 reach of our artists.” reach of our artists.” ONLINE SINGLE ONLINE ALBUM MASTER RINGTONE MOBILE SINGLE UK GERMANY FRANCE ITALY SPAIN Thomas Hesse, President, Global Digital Thomas Hesse, President, Global Digital ONLINE SINGLE ONLINE ALBUM MASTERTONE MOBILE SINGLE OTHER Business, SONY BMG Music Entertainment Business, SONY BMG Music Entertainment Source: IFPI, first half 2006

Digital Music Report 2007 Page 06 1800 1200 “2006 was an enormous year for Universal Music internationally “2006 was an enormous year for Universal Music internationally 926 1600 1556 and, therefore, the industry. We saw huge growth in all our digital and, therefore, the industry. We saw huge growth in all our digital 1000 1400 1400 businesses, spurred by a wide range of partnerships. Universal businesses, spurred by a wide range of partnerships. Universal Music will also continue to deliver when it comes to signing and Music will also continue to deliver when it comes to signing and 1200 1177 800 304 423 breaking the best artists. Just as importantly, don’t forget the breaking the best artists. Just as importantly, don’t forget the 1000 964 600 consumers. Ignore them at your peril, as the future of music lies consumers. Ignore them at your peril, as the future of music lies 800 821 721 720 in their hands!” in their hands!” 600 400 Lucian Grainge, Chairman and Chief Executive, Lucian Grainge, Chairman and Chief Executive, 400 Universal Music Group International Universal Music Group International 200 200

0 0 2000 2001 2002 2003 2004 2005 2006 EST 2000 2001 2002 2003 2004 2005 2006 EST PHYSICAL DIGITAL TOTAL UNITS “In this internet age, the consumer is using music “In this internet age, the consumer is using music content more than ever before – whether that's content more than ever before – whether that's playlisting, podcasting, personalising, sharing, playlisting, podcasting, personalising, sharing,

100 90 downloading or just simply enjoying it. The digital downloading or just simply enjoying it. The digital 90 90 revolution has caused a complete change to the revolution has caused a complete change to the 87% 80 80% 78% 75% 80 80 80% 70 culture, operations and attitude of music companies culture, operations and attitude of music companies 75% 71% 70% 70 71% 64% 70 60 everywhere. It hasn't been easy, and we must certainly everywhere. It hasn't been easy, and we must certainly 59% 60 60 55% 50 continue to fight piracy in all its forms. But there can be continue to fight piracy in all its forms. But there can be 52% 50 50 40 no doubt that with even greater commitment to no doubt that with even greater commitment to 40 40 innovation, and a true focus on the consumer, digital innovation, and a true focus on the consumer, digital 30 30 30 distribution is becoming the best thing that ever distribution is becoming the best thing that ever 20 20 20 happened to the music business and the music fan.” happened to the music business and the music fan.” 10 10 10 Eric Nicoli, CEO EMI Group Eric Nicoli, CEO EMI Group 0 0 SPAINKOREA FRANCE UK US GERMANY KOREASPAIN UK GERMANY ITALY FRANCE US 0

100 88% “We see the trend in the player market moving away from single “We see the trend in the player market moving away from single 90 purpose devices towards multipurpose, and more importantly, purpose devices towards multipurpose, and more importantly, 80 connected devices. This trend will enable hundreds of millions of connected devices. This trend will enable hundreds of millions of 70 people to have their music collections with them, as well as to people to have their music collections with them, as well as to 60 download and enjoy digital music on their mobile device. Nokia’s download and enjoy digital music on their mobile device. Nokia’s 53% 50 leadership in this area means we can offer a compelling mobile leadership in this area means we can offer a compelling mobile 40 music experience combining devices, content and connectivity.” music experience combining devices, content and connectivity.” 30 Ed Averdieck, Managing Director, Nokia Music Service Ed Averdieck, Managing Director, Nokia Music Service 20 24% 10 14% 0 11% 9% 9% 8% 8% SOUTH JAPAN ITALY UK SPAIN AUSTRALIA GERMANY FRANCE US “We need to legitimise consumer behaviour without “We need to legitimise consumer behaviour without KOREA asking them to change their usage habits. Advertising asking them to change their usage habits. Advertising 20 funded services offer such a solution. But to succeed funded services offer such a solution. But to succeed 18 18% they need support from content owners, advertisers they need support from content owners, advertisers 16 and the financial community, as well as a critical mass and the financial community, as well as a critical mass 14 13% 13% of users. SpiralFrog was set up from the start to address of users. SpiralFrog was set up from the start to address 12 12% 11% these criteria.” these criteria.” 10 Robin Kent, CEO, SpiralFrog Robin Kent, CEO, SpiralFrog 8 7% 6

4 3% 2 “Music subscription services have experienced tremendous growth, “Music subscription services have experienced tremendous growth, 0 UK FRANCE US GERMANY SPAIN ITALY JAPAN but are constrained by closed hardware and the absence of a but are constrained by closed hardware and the absence of a healthy compatible device market. Over the next few years, healthy compatible device market. Over the next few years, 50% 49% subscription services will go from a very small market in portable subscription services will go from a very small market in portable 60 devices to having the ability to attach to hundreds of millions of devices to having the ability to attach to hundreds of millions of 42% 90 cell phones. 2007 will mark the beginning of this transformation.” cell phones. 2007 will mark the beginning of this transformation.” 50 50% 49% 80 Chris Gorog, CEO, Napster Chris Gorog, CEO, Napster 42% 40 70 60 30 22% 50 “The success of eMusic in Europe “The success of eMusic in Europe 22% 20 40 and around the world shows that and around the world shows that 30 consumers are eager for a digital consumers are eager for a digital 10 music service that focuses on music service that focuses on 20 music beyond the commercial music beyond the commercial 0 PORTABLE PLAYER BRAODBAND CHEAPER THAN CDS VOUCHER 10 mainstream. By offering customers mainstream. By offering customers PORTABLE PLAYER BROADBAND CHEAPER THAN CDS VOUCHER 0 well-priced, expertly curated well-priced, expertly curated adventurous music that they can adventurous music that they can own in the universally compatible own in the universally compatible MP3 format, we’ve shown you can MP3 format, we’ve shown you can sell a lot of it. This combination has sell a lot of it. This combination has helped eMusic become the world’s helped eMusic become the world’s 62% number two digital music service number two digital music service 62% FINDING MUSIC WANTED and sell more than 100 million and sell more than 100 million FINDING MUSIC WANTED downloads in three years.” downloads in three years.” 58% 58% David Pakman, President and CEO, David Pakman, President and CEO, VARIETY OF CHOICE VARIETY OF CHOICE eMusic eMusic 39% 39%

PRICE OF MUSIC PRICE OF MUSIC 23% “Zune is delivering innovative “Zune is delivering innovative 23% ways for consumers to ways for consumers to GETTING MUSIC FOR FREE discover new music and discover new music and 22% GETTING MUSIC FOR FREE 0 5 10 15 20 25 30 35 40 45c 50onnect 55 wi 60th oth 65ers through connect with others through LISTENING TO SONG CLIPS BEFORE PURCHASE 22% social experiences enabled social experiences enabled 0 10 20 30 40 50 60 70 80 LISTENING TO SONG CLIPS BEFORE PURCHASE by its wireless sharing by its wireless sharing capabilities. Innovation is capabilities. Innovation is key – whether it’s how we work key – whether it’s how we work with artists, new technology with artists, new technology PERCENTAGE OF HOUSEHOLD WITH BROADBAND 35 32% 45 features or giving consumers features or giving consumers 40% PERCENTAGE OF BROADBAND USERS ENGAGED IN FREQUENT ILLEGAL FILE-SHARING 40 the all-you-can-eat ZunePass the all-you-can-eat ZunePass 30 subscription, we are focused subscription, we are focused 31% 35 25 23% on changing the game.” on changing the game.” 21% 30 20 18% 18% Bryan Lee, Corporate Vice Bryan Lee, Corporate Vice 17% 21% 25 15.4% 16% President of Entertainment President of Entertainment 18% 18% 15 13% 20 15% 14% Business, Microsoft Business, Microsoft 12% 17% 15 10 5% 7% 10 5 5

0 0 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 “It’s hard enough for artists and “It’s hard enough for artists and labels to handle traditional labels to handle traditional

BROADBAND HOUSEHOLD PENETRATION distribution without support. Add distribution without support. Add

INTERNET USERS REGULARLY FILE-SHARING 40% more than 10 times the content more than 10 times the content UNAUTHORISED MUSIC online, hundreds of digital music online, hundreds of digital music 31% services, a dozen different business services, a dozen different business models, complex accounting models, complex accounting 21% systems, new ways of marketing systems, new ways of marketing 18% 18% and promotion and you realise and promotion and you realise 15% 15% 14% quickly that you need more quickly that you need more 12% sophisticated and skilled partners sophisticated and skilled partners on your team.” on your team.” 7% Scott Cohen, Founder, The Orchard Scott Cohen, Founder, The Orchard

2002 2003 2004 2005 2006

“We are encouraged by the growth of “We are encouraged by the growth of online and mobile music sales, as well online and mobile music sales, as well as by our success in developing a variety as by our success in developing a variety of new business models, including ad of new business models, including ad supported video distribution on the supported video distribution on the internet. As our physical revenues internet. As our physical revenues continue to decline, we need to continue to decline, we need to proactively continue to build digital proactively continue to build digital growth and identify new digital growth and identify new digital opportunities that further extend the opportunities that further extend the reach of our artists.” reach of our artists.” Thomas Hesse, President, Global Digital Thomas Hesse, President, Global Digital Business, SONY BMG Music Entertainment Business, SONY BMG Music Entertainment

South Korea stands out as an extraordinary Mobile operators are the key to the digital rights management systems used by mobile digital music market, the second largest in Asia market in South Korea, offering integrated operators are limiting consumers’ ability to and the only one where digital sales have online and mobile services such as MelOn (SK transfer music. “In this internet age, the consumer is using music “In this internet age, the consumer is using music overtaken physical sales of music. Digital music Telecom), Dosirak (KT Freetel) and MusicOn represented 57 per cent of South Korea’s music (LG Telecom). In May 2006 Warner Music Korea Australia saw strong growth in digital sales in content more than ever before – whether that's content more than ever before – whether that's market in the first half of 2006. announced a new joint venture with mobile 2006, although from a small base, following the playlisting, podcasting, personalising, sharing, playlisting, podcasting, personalising, sharing, operator SK Telecom, an example of the launch of iTunes in August 2005. Online and downloading or just simply enjoying it. The digital downloading or just simply enjoying it. The digital South Korea has seen exploding demand growing importance of mobile phones for mobile sales are equally split in Australia. iTunes for advanced mobile handsets. Mobile buying, storing and listening to music. also launched its 22nd Music Store in New revolution has caused a complete change to the revolution has caused a complete change to the carriers estimate sales of ten million music Zealand in December 2006 with two million culture, operations and attitude of music companies culture, operations and attitude of music companies player-equipped phones in 2006. Streaming is There are also constraining factors in South tracks including a range of local acts. everywhere. It hasn't been easy, and we must certainly everywhere. It hasn't been easy, and we must certainly the most popular digital music format in South Korea. For example, the proprietary digital Korea, closely followed by full track downloads. Latin America Shows Promise continue to fight piracy in all its forms. But there can be continue to fight piracy in all its forms. But there can be no doubt that with even greater commitment to no doubt that with even greater commitment to The Latin American digital market is still in its China: The Leap To Digital? infancy, limited by low broadband innovation, and a true focus on the consumer, digital innovation, and a true focus on the consumer, digital penetration, resistance to online credit card distribution is becoming the best thing that ever distribution is becoming the best thing that ever China has a small digital music business Record companies in China say Baidu has use and high levels of piracy. However, several happened to the music business and the music fan.” happened to the music business and the music fan.” but, with over 430 million mobile subscribers, been the biggest stumbling block to markets are showing promising progress. fast-growing broadband and potentially persuading consumers to pay for licensed Broadband and mobile penetration is rising Eric Nicoli, CEO EMI Group Eric Nicoli, CEO EMI Group massive consumer demand, the country music downloads. fast in Brazil, Argentina and Mexico and has the potential to throw off historically marketing of legal online services has ruinous levels of physical music piracy and In South Korea and Taiwan, the closure of intensified alongside a campaign for make the “leap to digital”. infringing peer-to-peer services Soribada, combating digital piracy. Kuro and Ezpeer by court judgments or “We see the trend in the player market moving away from single “We see the trend in the player market moving away from single Whether China does succeed in settlements has benefited the In Mexico, online downloads topped nine purpose devices towards multipurpose, and more importantly, purpose devices towards multipurpose, and more importantly, harnessing digital channels for a new legitimate market. million units up to the third quarter of 2006 – 15 connected devices. This trend will enable hundreds of millions of connected devices. This trend will enable hundreds of millions of vibrant legitimate music market very much times the volume registered during the same depends on how seriously a commitment Despite the setback, record companies are period in 2005. In spite of this growth, digital people to have their music collections with them, as well as to people to have their music collections with them, as well as to the country and its key operators will make working hard to develop a digital business in sales remain concentrated in mastertones and download and enjoy digital music on their mobile device. Nokia’s download and enjoy digital music on their mobile device. Nokia’s to protecting and enforcing intellectual China, partly modelled on digital success in pre-loaded music to mobiles – growing leadership in this area means we can offer a compelling mobile leadership in this area means we can offer a compelling mobile property rights. The recording industry South Korea. There is clear evidence that revenue streams for record companies in the music experience combining devices, content and connectivity.” music experience combining devices, content and connectivity.” Chinese consumers are prepared to pay for supports the US Government’s moves to absence of fast 3G networks or high Ed Averdieck, Managing Director, Nokia Music Service Ed Averdieck, Managing Director, Nokia Music Service raise the pressure on China, if necessary via music via digital channels, particularly via penetration of MP3 capable phones. the WTO, to ensure effective enforcement of mobile platforms. intellectual property rights. In Brazil, two major legal sites were launched in The CEO of China Mobile, the country’s mid-2006 (Terra and UOL) adding on to the In late 2006, the legitimate online music dominant mobile operator, said that a single more established iMusica. There are now 20 sector in China suffered a setback when a song was downloaded 15 million times on his websites offering legal downloads in the “We need to legitimise consumer behaviour without “We need to legitimise consumer behaviour without Beijing court failed to rule against the network over six months, a rate 15 times country. More than 90 per cent of all digital biggest unlicensed free music service, higher than a typical best-selling CD. sales are made as mobile downloads, the asking them to change their usage habits. Advertising asking them to change their usage habits. Advertising Baidu – which is also China’s biggest majority of them mastertones. funded services offer such a solution. But to succeed funded services offer such a solution. But to succeed internet search engine. IFPI is appealing A handful of online music sites are licensed they need support from content owners, advertisers they need support from content owners, advertisers against that judgment, which is out of step by major and independent record Argentina is also showing a steady growth in with court rulings against similar so-called companies, including QQ, Top100.cn digital sales, which quadrupled in the year to and the financial community, as well as a critical mass and the financial community, as well as a critical mass “deep link” music sites in China and and Aigomusic.com. July 2006. Some 80 per cent of all digital sales of users. SpiralFrog was set up from the start to address of users. SpiralFrog was set up from the start to address across the world. are currently made as mobile downloads. these criteria.” these criteria.” Robin Kent, CEO, SpiralFrog Robin Kent, CEO, SpiralFrog

Page 07

Today there are some 500 legitimate online music services in over 40 countries. Digital Diversifies Consumer Buying Habits Argentina Napster Musicload MSN Music Onetplejer Homedownloads 10musica Puretracks Napster Napster* Soho iTunes Farolatino* SympaticoMSN One4Music OCN Music Store MSN Music Ubbimusica* Telus Saturn OnGen Portugal Musicbrigade Zapmusic Yahoo! Music Rakuten Music eMusic* Poplife Greece Download iTunes Skivhugget Australia China eMusic* Yahoo! Music SAPO Telia BigPondMusic 9sky Go mp3 Music On Mobile ChannelGo* A8* iTunes Luxembourg Russia Switzerland ChaosMusic AigoMusic mpGreek Connect AudioFind* Connect iTunes QQ Musicnow* eMusic* Fidel* Ex Libris JB Hi-Fi Top100* Tellas Music Free Record Shop mp3.ru* i-m Music Download Grows In Popularity MP3.com.au Virgin Mega iTunes Soundkey* iTunes Optus Zoo Music Denmark TuneTribe* Yanga* MSN Music NineMSN Bilka Hong Kong Zakachay* One2Joy Sanity.com.au Box Eolasia Malaysia Soundbuzz CDON iMusic Soundbuzz Singapore Taiwan Elgiganten* Moov Pacific Internet Ezpeer+* Austria eMusic* NWTmusic Mexico Singnet KKBox AonMusicDownload iTunes O8Media Beon Soundbuzz Yahoo! Music* Emerging Business Models Chello Music Zone Jubii Soundbuzz Tarabu Starhub Connect MSN Music Turkey eMusic* MTV Iceland Netherlands Slovenia MUZI iTunes Musikhylden Tonlist Connect eMusic* Powerclub* MSN Music TDC Online Countdownload Zabavaj Music Networld* Urban Payload India Download.nl UK Musikladen CrimsonBay eMusic* South Africa 7Digital Media Preiser* Finland India Times Freedownloadshop MSN Music Bleep Biisi Soundbuzz iTunes Musica Connect Belgium CDON MusicMinutes SAMP3 eMusic* Belgacom eMusic* Ireland MusicStore FOPP* Belgian Music Online IltaSanomat Musiikki Connect Planet South Korea HMV Digital Connect iTunes easyMusic Tiscali Bugs iTunes Portable Players Drive eMusic* Lataamo Musiikki eMusic* ToostMusic Cyworld Ministry of Sound* Free Record Shop Pepsi MaxMusic Eircom TuneTribe Dosirak MSN Music iTunes MSN Music iTunes JukeOn Napster MSN Music NetAntilla Wippit New Zealand Maxmp3 Tesco Music Demand TuneTribe* PHNet Amplifier MelOn Tiscali Pop City Italy CokeTunes MTV TuneTribe Brazil Azzura Music Digirama Mukebox Virgin Digital Americanas.com France CD Rai iTunes* MusicOn Wippit Antena 1 Connect eMusic* Muz Brazil Telecom E-Compil iTunes Norway Oimusic USA BrTurbo eMusic* Libero iMusic CDON Tubemusic Connect iMusica FnacMusic Messaggerie Digitali Dagbladet Wavaa eMusic Record Companies Boost MSN Music iTunes MSN Music iTunes iTunes Oi Magasin U MTV IT Moox Spain Zune Market Place* Som Livre MSN Music Net Music MSN Music Carrefour MusicMatch Sonora* MTV MediaWorld MusicOnline eMusic* Napster Consumer Choice Submarino Starzik* Radio Deejay* P4 iTunes Puretracks UOL Megastore* Tiscali RossoAlice Prefueled Magnatune Rhapsody Yahoo! Music Virgin Mega Tiscali SOL MSN Music Soundbuzz* Wanadoo Unitedmusic the24 MTV Digital* Bulgaria Vitaminic TV2 MU4US Univision* M.Dir Germany Terra Pix Box* Urge* Music.gbg AOL Music Japan Philippines Wanadoo Jukebox Wal-Mart Connect Excite Music Store Fliptunes* Yahoo! Music Copyright, Music And Canada eMusic* HMV Digital* Sweden Archambault Freenet goo Music Store Poland Ahlens Bonfire@Futureshop iTunes iTunes eMusic* Bengans Connect* Media Online LISMO* iPlay CDON iTunes Medion Moocs Melo eMusic* The Education Challenge MuchMusic* MSN Music Mora mp3.pl Gunvor

* 2006 launches

** This listing is not exhaustive and for illustrative purposes only. See www.pro-music.org Awareness Grows On Digital Music Report 2007 Page 08 Virus And Spyware Risks Containing Piracy

Progress Against Pirate Operations Internet Piracy – The Call To ISPs DRM Promotes Consumer Flexibility And Protects Content Digital Music In 2007 – A Brave New World Consumers Shape The Future Of Recorded Music Digital Market Overview In 2006 Online Services Across The World “As we continue our transformation from a ‘songs-and- “As we continue our transformation from a ‘songs-and- records’ company into one that delivers a wide variety records’ company into one that delivers a wide variety of rich, music-based content on multiple platforms, our of rich, music-based content on multiple platforms, our experience has shown that the key to harnessing the experience has shown that the key to harnessing the vast digital opportunity is ensuring innovation remains vast digital opportunity is ensuring innovation remains our guiding principle. We always work towards our guiding principle. WeD alwaysigi work taltowards Diversifies establishing strategic partnerships, pioneering new establishing strategic partnerships, pioneering new products and exciting user experiences within a products and exciting user experiences within a framework that recognises the needs of consumers framework that recognisesCo the neednsums of consumers er Buying Habits alongside the rights of copyright holders, and we alongside the rights of copyright holders, and we believe that is the best way to ensure that legitimate believe that is the best way to ensure that legitimate music services are first-choice for fans.” music services are first-choice for fans.” Patrick Vien, Chairman and CEO, Patrick Vien, Chairman and CEO, Music fans have embraced digital singles and videos. Warner Music International Warner Music InternationalMusic On Mobile Single Track Downloads Beck personally shot a video for every Move Ahead one of the 15 tracks on his latest album ‘The Information’ and describes the video “We are encouraged by the growth of “We are encouraged by the growth of Many consumers have discovered the collection as “a visual version of the album online and mobile music sales, as well online and mobileGr musicows sales, as well In Popularity benefits of the digitally unbundled album. for the internet”. This has taken global singles sales volumes as by our success in developing a variety as by our success in developing a variety to an expected all-time high in 2006. Overall Good Charlotte plan to film two sets of of new business models, including ad of new business models, including ad single sales in physical and digital formats videos to coincide with their 2007 album reached over 900 million units in 2006 – with release: one for TV and a set of supported video distribution on the supported video distribution on the digital accounting for over 80 per cent of that “underground” shorts for mobiles and internet. As our physical revenues internet. As our phyEsicalmerg revenues ing Business Models figure (IFPI). In the US, Canada and South web-based services like YouTube. Korea digital sales completely replaced the continue to decline, we need to continue to decline, we need to physical singles market. Rock band ‘OK Go’ scored the biggest hit proactively continue to build digital proactively continue to build digital of their career with the video ‘Here It Goes Popularity Of Music Video Grows OK Go – Here It Goes Again Again’. The video was viewed by over one growth and identify new digital growth and identify new digital some 65,000 new video uploads per day from million people on YouTube in the first six days. opportunities that further extend the opportunities that further extend the Although DVD music video sales peaked in individual users to add to an existing As of November 2006 the video had been 2004, the format is now beginning to see the catalogue of well over ten million. Each day viewed nine million times, becoming the reach of our artists.” reach of our artists.” positive impact of digital delivery. Music video some 100 million videos are streamed to over eighth most viewed video on YouTube. Thomas Hesse, President, Global Digital Thomas Hesse, President, Global Digital accounted for three per cent of total digital six million viewers – nearly half of all the videos Portable Players Drive revenues in the first half of 2006. From January streamed on the web. Hard-Fi cut an exclusive made-for-mobile Business, SONY BMG Music Entertainment Business, SONY BMG Music Entertainment 2007 video downloads will count towards the edit of their video for the single ‘Cash singles charts in the UK – an indication of the With music video at the forefront of Machine’ for UK mobile music store ‘3’. Music Demand commercial impact music video now has. YouTube’s service, first Warner and then Music video is also helping fuel the growth of other record companies have embarked on advertising-supported business models. a series of licensing deals with the service, Music Video – A Digital Hit “2006 was an enormous year for Universal Music internationally “2006 was an enormous year for Universal Music internationally although there are still some concerns over and, therefore, the industry. We saw huge growth in all our digital and, therefore, the industry. We saw huge growth in all our digital UK mobile operator Music video has taken off in particular as copyright issues. ‘3’ first launched its businesses, spurred by a wide range of partnerships. Universal businesses, spurred by a wide range of partnerships. Universal value-added content on platforms such Record Companies Boost music video jukebox Music will also continue to deliver when it comes to signing and Music will also continue to deliver when it comes to signing and as Yahoo!, YouTube and MTV. For example, Music Videos: New Channels service in 2004, Yahoo! shares its advertising revenues Encourage Innovation breaking the best artists. Just as importantly, don’t forget the breaking the best artists. Just as importantly, don’t forget the offering consumers a with some record companies on a consumers. Ignore them at your peril, as the future of music lies consumers. Ignore them at your peril, as the future of music lies selection of the latest Consumer Choice per-stream basis. Music video looks set to thrive over the next in their hands!” in their hands!” few years – something that is driving a music videos to enjoy on the move. ‘3’ has Lucian Grainge, Chairman and Chief Executive, Lucian Grainge, Chairman and Chief Executive, YouTube, a largely unknown start-up in late creative resurgence in the format. sold over 25 million music videos to date, 2005, became the largest video sharing site Universal Music Group International Universal Music Group International making up almost half of its total music on the web by mid-2006. YouTube receives revenues. Combined audio and video sales on the ‘3’ network now surpass one Copyright, Music And million units per month. The company claims second place in the UK digital “In this internet age, the consumer is using music “In this internet age, the consumer is using music music market, behind iTunes, with a 20 content more than ever before – whether that's content more thanT evheer befo Edure – whecatther thation's Challenge per cent share. playlisting, podcasting, personalising, sharing, playlisting, podcasting, personalising, sharing, Buyer behaviour reported by ‘3’ on its downloading or just simply enjoying it. The digital downloading or just simply enjoying it. The digital network offers some insights into how mobile music creates new opportunities revolution has caused a complete change to the revolution has caused a complete change to the for record companies. Music sales peak culture, operations and attitude of music companies culture, operations and attitude of music companies at around 10 p.m. and many customers everywhere. It hasn't been easy, and we must certainly everywhere. It hasn't been easy, and we must certainly buy tracks while travelling on public continue to fight piracy in all its forms. But there can be continue to fight piracy in all its forms. But there can be transport. This represents a brand new Awareness Grows On sales window for music. One in three of no doubt that with even greater commitment to no doubt that with even greater commitment to ‘3’s sales are from customers between the innovation, and a true focus on the consumer, digital innovation, and a true focus on the consumer, digital ages of 18 and 24, demonstrating that Virus And Spyware Risks young people will buy music, if it is distribution is becoming the best thing that ever distribution is becoming the best thing that ever presented to them in the right way. happened to the music business and the music fan.” happened to the music business and the music fan.” Eric Nicoli, CEO EMI Group Eric Nicoli, CEO EMI Group Containing Piracy Page 09 “We see the trend in the player market moving away from single “We see the trend in the player market moving away from single purpose devices towards multipurpose, and more importantly, purpose devices towards multipurpose, and more importantly, connected devices. This trend will enable hundreds of millions of connected devices. This trend will enable hundreds of millions of people to have their music collections with them, as well as to people to have their music collections with them, as well as to download and enjoy digital music on their mobile device. Nokia’s download and enjoy digital music on their mobile device. Nokia’s leadership in this area means we can offer a compelling mobile leadership in this area means we can offer a compelling mobile music experience combining devices, content and connectivity.” music experience combPriningogre devices, constents andAga connectivitinsy.” t Ed Averdieck, Managing Director, Nokia Music Service Ed Averdieck, ManagPingira Directoter, Nokia Oper Music Service ations

“We need to legitimise consumer behaviour without “We need to legitimise consumer behaviour without asking them to change their usage habits. Advertising asking them to change their usage habits. Advertising funded services offer such a solution. But to succeed funded services offeInterr such a sonetlution. But Pi to succeedrac y – they need support from content owners, advertisers they need support from content owners, advertisers and the financial community, as well as a critical mass and the financial coTmhemunity, Call as well as a To critical ISPs mass of users. SpiralFrog was set up from the start to address of users. SpiralFrog was set up from the start to address these criteria.” these criteria.” Robin Kent, CEO, SpiralFrog Robin Kent, CEO, SpiralDRMFrog Promotes Consumer “Music subscription services have experienced tremendous growth, “Music subscription services have experienced tremendous growth, but are constrained by closed hardware and the absence of a but are constrained byF closedlex hardwareibi andlit the yabsence A ofnd a Protects Content healthy compatible device market. Over the next few years, healthy compatible device market. Over the next few years, subscription services will go from a very small market in portable subscription services will go from a very small market in portable devices to having the ability to attach to hundreds of millions of devices to having the ability to attach to hundreds of millions of cell phones. 2007 will mark the beginning of this transformation.” cell phones. 2007 will mark the beginning of this transformation.” Chris Gorog, CEO, Napster Chris Gorog, CEO, Napster

100 Consumer Buying Habits 90 100 5% 39% 20% 10% 32% 21% 11% 14% 13% 16% 90 80 4% 5% 17% 41% 39% 20% 10% 32% 80 70 4% 25% 17% 41% 70 60 20% 35% 25% 60 50 26% 20% 50 Music On Mobile 40 38% 39% 35% 15% 26% 40 30 38% 39% 30 20 20% 8% 15% Grows In Popularity 4% 14% 13% 20 10 8% 20% 4% 10 0 14% 13% UK GERMANY FRANCE ITALY SPAIN 0 ONLINE SINGLE ONLINE ALBUM MobileMASTER RINGTONE musicMOBILE SINGLE is helped byUK impulseGERMANY buyingFRANCE andITALY a well-establishedSPAIN payment infrastructure. ONLINE SINGLE ONLINE ALBUM MASTERTONE MOBILE SINGLE OTHER Emerging Business Models High Demand For Music For all the popularity of music-capable 3G Sees Limited Growth On The Move mobile phones, the digital market is a long way from a single all-function portable Third generation mobile technology (3G) is 1800 1200 device. New research from IFPI/M-Lab(1) in crucial for the development of advanced Ringtones were the first mass926 market mobile 1600 1556 music product to offer phone personalisation November 2006 shows that less than 10 per music-to-mobile services such as full track and 1000 1400 1400 to music fans. Consumers are now moving cent of portable player owners in Europe use video download services. It allows for fast away from traditional ringtones to their mobile phones as their main portable downloads of full tracks to mobile as well as 1200 1177 800 mastertones/real304 423 or true tones – ringtones music player. video services and streaming. While Portable Players Drive penetration in Asia is already high, levels in 1000 964that feature the original sound recording – and full track downloads to mobile.600 The move to convergence was boosted in Europe and in the US are lagging behind. 800 821 721 720 early 2007 as Apple annouced the launch of Music Demand 600 Research carried out by UK mobile400 operator the much anticipated iPhone. It will be Establishing New Music Formats: available exclusively through the operator Ringback Tones 400 ‘3’ in September 2006 shows that consumers want to own music on the spot.200 Some 76 per Cingular in the US by June 2007, and then 200 cent of respondents aged between 16 and rolled out to Europe and Asia Ringback tones exemplify the varied new uses of music via digital channels. Ringback 0 24 said that when they heard0 a track they 2000 2001 2002 2003lik 2004ed they w 2005anted t 2006o own EST it straight away. In October2000 2006, Nokia2001 launched2 0its02 2003tones are 2songs004 a caller 20 hears05 while 20 06waiting EST PHYSICAL DIGITAL TOTAL UNITS for their call to be picked up. They have Record Companies Boost dedicated music brand XpressMusic Mobile music benefits from the fact that featuring the new Nokia 5300. The handset proved very successful, now accounting for mobile music services have payments can store 1,500 tracks, supports all major approximately three per cent of global digital music formats (MP3, AAC and WMA), and has sales. This share rises to a much higher level Consumer Choice integrated with consumers’ mobile bills. This helps particularly among the younger dedicated music buttons and FM radio. Nokia in markets like China. Consumers in Europe 100 demographic, where credit card ownership will90 launch a music store to tie-in with its have not adopted the format as readily, but sales in the US are growing strongly. 90 90 is limited. massive global handset distribution, aiming to 87% 80 be the market80% leader78% in digital music 80 80 80% 75% 70 Ringback tones are also promoting new Music75% Phones Catching On distribution ‘within five years’. 71% 70% 70 71% music in64% a new way. Universal’s new signing 70 60 Copyright, Music And 59% 60 The handset revolution has played an Sony Ericsson also expanded its Walkman ‘Samsons’, for example, has become the 60 55% 50 important role in developing the mobile52% biggest act in Indonesia following sales of 50 music phone line, launching the W830i with a 50 music market, with audio/video-supported storage40 capacity of up to 1,000 songs, an over two million ringback tones. 40 The Education Challenge handsets becoming the norm. Leading advanced Walkman 2.0 music player, music 40 30 30 handset manufacturer, Nokia, sold 80 million recognition function, FM radio and enhanced 30 20 20 music phones in 2006, double the number in audio quality. 20 2005. Meanwhile, Sony Ericsson is reportedly 10 10 selling over one million Walkman phones 1 Sample 2,249 portable player owners in the UK (iPod owners only), Germany and France. 10 0 per month. 0 SPAINKOREA FRANCE UK US GERMANY KOREASPAIN UK GERMANY ITALY FRANCE US 0 3G Penetration (% mobile subscribers) Urban Music Popular on Mobile 100 Awareness Grows On 88% Fans of urban music in particular appear 90 to be driving mastertone sales in the US. 80 Virus And Spyware Risks Almost half of US rapper T-Pain’s ‘Rapper 70 Ternt Singa’ sales came through mastertones, as did 38 per cent of 60 Cassidy’s ‘I’m a Hustla’and 31 per cent of 53% 50 Bow Wow’s ‘Wanted’ revenues. Rock and 40 pop acts, by contrast, seem to generate 30 more digital sales through online Containing Piracy channels. 20 24% 10 14% 0 11% 9% 9% 8% 8% SOUTH JAPAN ITALY UK SPAIN AUSTRALIA GERMANY FRANCE US KOREA

20 Sources: M:Metrics, IFPI (Korea, Japan, Australia) 18 18% Progress Against 16 Digital Music Report 2007 Page 10

14 13% 13% Pirate Operations 12 12% 11% 10

8 7% 6

4 3% Internet Piracy – 2

0 UK FRANCE US GERMANY SPAIN ITALY JAPAN The Call To ISPs

50% 49% 60 42% 90 50 50% 49% 80 42% 40 DRM Promotes Consumer 70 60 30 22% 50 Flexibility And Protects Content 22% 20 40 30 10 20 0 PORTABLE PLAYER BRAODBAND CHEAPER THAN CDS VOUCHER 10 PORTABLE PLAYER BROADBAND CHEAPER THAN CDS VOUCHER 0

62% 62% FINDING MUSIC WANTED

FINDING MUSIC WANTED 58% 58%

VARIETY OF CHOICE VARIETY OF CHOICE 39% 39%

PRICE OF MUSIC PRICE OF MUSIC 23% 23% GETTING MUSIC FOR FREE 22% GETTING MUSIC FOR FREE 0 5 10 15 20 25 30 35 40 45 50 55 60 65 LISTENING TO SONG CLIPS BEFORE PURCHASE 22%

0 10 20 30 40 50 60 70 80 LISTENING TO SONG CLIPS BEFORE PURCHASE

PERCENTAGE OF HOUSEHOLD WITH BROADBAND 35 32% 45 40% PERCENTAGE OF BROADBAND USERS ENGAGED 40 30 IN FREQUENT ILLEGAL FILE-SHARING

31% 35 25 23% 21% 30 20 18% 18% 17% 21% 25 15.4% 16% 18% 18% 15 13% 20 15% 14% 12% 17% 15 10 5% 7% 10 5 5

0 0 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006

BROADBAND HOUSEHOLD PENETRATION

INTERNET USERS REGULARLY FILE-SHARING 40% UNAUTHORISED MUSIC

31%

21% 18% 18% 15% 15% 14% 12%

2002 2003 2004 2005 2006 “As we continue our transformation from a ‘songs-and- “As we continue our transformation from a ‘songs-and- records’ company into one that delivers a wide variety records’ company into one that delivers a wide variety of rich, music-based content on multiple platforms, our of rich, music-based content on multiple platforms, our experience has shown that the key to harnessing the experience has shown that the key to harnessing the vast digital opportunity is ensuring innovation remains vast digital opportunity is ensuring innovation remains our guiding principle. We always work towards our guiding principle. We always work towards establishing strategic partnerships, pioneering new establishing strategic partnerships, pioneering new products and exciting user experiences within a products and exciting user experiences within a framework that recognises the needs of consumers framework that recognises the needs of consumers alongside the rights of copyright holders, and we alongside the rights of copyright holders, and we believe that is the best way to ensure that legitimate believe that is the best way to ensure that legitimate music services are first-choice for fans.” music services are first-choice for fans.” Patrick Vien, Chairman and CEO, Patrick Vien, Chairman and CEO, Warner Music International Warner Music International

“We are encouraged by the growth of “We are encouraged by the growth of online and mobile music sales, as well online and mobile music sales, as well as by our success in developing a variety as by our success in developing a variety of new business models, including ad of new business models, including ad supported video distribution on the supported video distribution on the internet. As our physical revenues internet. As our physical revenues continue to decline, we need to continue to decline, we need to proactively continue to build digital proactively continue to build digital Most popular music phones in 2006. growth and identify new digital growth and identify new digital opportunities that further extend the opportunities that further extend the reach of our artists.” reach of our artists.” Thomas Hesse, President, Global Digital Thomas Hesse, President, Global Digital Business, SONY BMG Music Entertainment Business, SONY BMG Music Entertainment

MP3 player – 3G MP3 player – MP3 player – MP3 ringtones stores up to 20 songs plays MP3, AAC & plays MP3, AAC & Realplayer – WAV files M4A files Video capture & Video player – download and play playback “In this internet age, the consumer is using music “In this internet age, the consumer is using music stores up to one hour music & video files Video capture & Video capture & of footage playback playback VGA Camera content more than ever before – whether that's content more than ever before – whether that's MP3 player – playlisting, podcasting, personalising, sharing, playlisting, podcasting, personalising, sharing, 1.3 Megapixel plays MP3 & AAC files VGA Camera 1.3 Megapixel camera Bluetooth camera – stores up to downloading or just simply enjoying it. The digital downloading or just simply enjoying it. The digital E-mail 1,000 photos Video capture & Bluetooth Bluetooth revolution has caused a complete change to the revolution has caused a complete change to the playback – up to one 5MB internal memory Bluetooth hour per clip E-mail E-mail culture, operations and attitude of music companies culture, operations and attitude of music companies everywhere. It hasn't been easy, and we must certainly everywhere. It hasn't been easy, and we must certainly E-mail 1.3 Megapixel camera 5MB internal memory 32MB internal memory plus up to 512MB plus up to 512MB Multi continue to fight piracy in all its forms. But there can be continue to fight piracy in all its forms. But there can be 96MB internal memory Bluetooth removable memory slot Media Card no doubt that with even greater commitment to no doubt that with even greater commitment to E-mail innovation, and a true focus on the consumer, digital innovation, and a true focus on the consumer, digital 10MB internal memory distribution is becoming the best thing that ever distribution is becoming the best thing that ever plus removable 63MB happened to the music business and the music fan.” happened to the music business and the music fan.” Multi Media Card Eric Nicoli, CEO EMI Group Eric Nicoli, CEO EMI Group Source: M:Metrics

Page 11 “We need to legitimise consumer behaviour without “We need to legitimise consumer behaviour without asking them to change their usage habits. Advertising asking them to change their usage habits. Advertising funded services offer such a solution. But to succeed funded services offer such a solution. But to succeed they need support from content owners, advertisers they need support from content owners, advertisers and the financial community, as well as a critical mass and the financial community, as well as a critical mass of users. SpiralFrog was set up from the start to address of users. SpiralFrog was set up from the start to address these criteria.” these criteria.” Robin Kent, CEO, SpiralFrog Robin Kent, CEO, SpiralFrog

“We are encouraged by the growth of Consum“We are encouerrage Buyd by theing growth ofHa bits online and mobile music sales, as well online and mobile music sales, as well as by our success in developing a variety as by our success in developing a variety of new business models, including ad of new business models, including ad supported video distribution on the Musicsupp ortOned vid eoMo distributiobiln one th e internet. As our physical revenues internet. As our physical revenues continue to decline, we need to Growscontinue In to d eclPoine, pulwe needari to ty proactively continue to build digital proactively continue to build digital growth and identify new digital growth and identify new digital opportunities that further extend the opportunities that further extend the reach of our artists.” reach of our artists.” Thomas Hesse, President, Global Digital EmergThomasing Hesse, PrBuesidentsin, Globaless Digital Mo dels Business, SONY BMG Music Entertainment Business, SONY BMG Music Entertainment

“2006 was an enormous year for Universal Music internationally “2006 was an enormous year for Universal Music internationally 2006 saw the development of a competitive digital music and, therefore, the industry. We saw huge growth in all our digital and, therefore, the industry. We saw huge growth in all our digital market with a mixture of different business models. businesses, spurred by a wide range of partnerships. Universal Portbusinablesses,e spurred Play by a widerse range of Dr partneiverships. Un iversal Music will also continue to deliver when it comes to signing and Music will also continue to deliver when it comes to signing and Social Networks: Licensing And breaking the best artists. Just as importantly, don’t forget the breaking the best artists. Just as importantly, don’t forget the Partnerships Develop consumers. Ignore them at your peril, as the future of music lies Musicconsu merDems. Ignore themand at your peril, as the future of music lies Social networks and user generated in their hands!” in their hands!” content made a major impact on digital Lucian Grainge, Chairman and Chief Executive, Lucian Grainge, Chairman and Chief Executive, entertainment in 2006 and represent an Universal Music Group International Universal Music Group International opportunity despite copyright concerns. Social networks have been around for several Record Companies Boost years, but really came to worldwide attention with the growth of MySpace, famously acquired by News Corporation. “In this internet age, the consumer is using music Consum“In this interneret ag Choe, the conicesumer is using music User generated content is booming through content more than ever before – whether that's content more than ever before – whether that's networks such as MySpace, Bebo and playlisting, podcasting, personalising, sharing, playlisting, podcasting, personalising, sharing, YouTube. The latter has declared an ambition downloading or just simply enjoying it. The digital downloading or just simply enjoying it. The digital to host every single music video ever made on its site and was acquired by Google in late revolution has caused a complete change to the revolution has caused a complete change to the 2006. Other social networks have exploded in Advertising-Supported Services Set In the UK, Yahoo! Music offers over 6,500 culture, operations and attitude of music companies Copyrigculture, operaht,tions Mu and attitudsice of And music com panies particular markets – Orkut in Brazil and India, To Make An Impact In 2007 free videos. QQ in China, muvee in Singapore, Mixi in everywhere. It hasn't been easy, and we must certainly everywhere. It hasn't been easy, and we must certainly Japan and Cyworld in South Korea. Advertising-supported services created a Other services offering ad-supported legal continue to fight piracy in all its forms. But there can be The Educontinue catto fight pirionacy in allCh its forms.alle But thngeere can be MySpace launched a Japanese version in buzz in 2006 and became a new revenue downloads of audio and video content no doubt that with even greater commitment to no doubt that with even greater commitment to partnership with telecoms group SoftBank in stream for record companies, as advertisers are expected in 2007. One of the most November 2006. continue to divert their budgets from high-profile, Spiralfrog, signed deals with innovation, and a true focus on the consumer, digital innovation, and a true focus on the consumer, digital conventional TV, radio and print to the Universal Music Group, KOCH Records and distribution is becoming the best thing that ever distribution is becoming the best thing that ever Social networking sites are potentially a great internet. The internet accounted for six per EMI Music Publishing. happened to the music business and the music fan.” happened to the music business and the music fan.” opportunity for the music industry. These sites cent of global advertising spend in 2006 reach a huge community of music fans, offer (Zenith Optimedia). Internet advertising is Another ad-supported service, Qtrax, is set to Eric Nicoli, CEO EMI Group Eric Nicoli, CEO EMI Group new ways of marketing music and selling forecast by Forrester Research to overtake launch in 2007 and offers ‘tethered tracks, albums and videos. They also can help traditional radio advertising in 2010. Music is downloads’ in the proprietary ‘mpq’ format Awareness Grows On the industry discover new artists. Some bands playing a key role in this change. that can only be played a limited number of have even begun holding ‘virtual only’ times. Qtrax offers click-to-buy purchasing or a concerts; Ben Folds launched his album In the US, Napster’s ad-supported service flat monthly fee to upgrade to a premium “We see the trend in the player market moving away from single Virus“We An see the dtren dS in tpywhe player marareket moving Ri awasksy from single ‘supersunnyspeedgraphic, the LP!’ by ‘Napster Free Player’ allows users to stream subscription service that provides unlimited purpose devices towards multipurpose, and more importantly, purpose devices towards multipurpose, and more importantly, throwing a virtual launch party on 3D virtual songs from its catalogue of two million tracks downloads in the Windows Media format. connected devices. This trend will enable hundreds of millions of connected devices. This trend will enable hundreds of millions of world “Second Life” in October 2006, while for free up to three times, before being Damon Albarn’s new project “The Good, The directed to a purchase or asked to subscribe Ad-supported services are also expanding people to have their music collections with them, as well as to people to have their music collections with them, as well as to Bad and The Queen” threw an exclusive to a Napster paying service. Yahoo! Music via mobile platforms. In April 2006, EMI download and enjoy digital music on their mobile device. Nokia’s download and enjoy digital music on their mobile device. Nokia’s MySpace gig in December 2006. partnered with EMI in December 2006 and partnered with Rhythm New Media, a US leadership in this area means we can offer a compelling mobile Contaleadershiniip in thisng area mPireans weacy can offer a compelling mobile offers an ad-supported music video service to mobile advertising company, to trial an music experience combining devices, content and connectivity.” music experience combining devices, content and connectivity.” Several record companies have licensed European customers. The service allows for ad-supported mobile video service in the US. YouTube on the basis of identifying free access to videos while supported by The service offers free mobile video with Ed Averdieck, Managing Director, Nokia Music Service Ed Averdieck, Managing Director, Nokia Music Service copyrighted works posted by users as well as targeted advertising. TV-style ads embedded in a highly providing content. Yet at the same time social targeted fashion. networking sites raise important copyright concerns. Their technological innovations should never become an excuse for them to “We need to legitimise consumer behaviour without “We need to legitimise consumer behaviour without practice massive copyright infringement. These networks must respect copyrighted asking them to change their usage habits. Advertising Progreasking tshems toAga change thinseir usagte habits. Advertising content and ensure there are filtering tools in funded services offer such a solution. But to succeed funded services offer such a solution. But to succeed place for that. Record companies are looking they need support from content owners, advertisers they need support from content owners, advertisers to embrace social networking sites, but this Pirate Operations should not be at the expense of and the financial community, as well as a critical mass and the financial community, as well as a critical mass compromising their copyright and that of of users. SpiralFrog was set up from the start to address of users. SpiralFrog was set up from the start to address artists and songwriters. these criteria.” these criteria.” Robin Kent, CEO, SpiralFrog InterRobinnet Kent, Pi CEO,rac SpiralFrogy – Digital Music Report 2007 Page 12

“Music subscription services have experienced tremendous growth, The Call“Music subscri ptioTon se rvicISPses have experienced tremendous growth, but are constrained by closed hardware and the absence of a but are constrained by closed hardware and the absence of a healthy compatible device market. Over the next few years, healthy compatible device market. Over the next few years, subscription services will go from a very small market in portable subscription services will go from a very small market in portable devices to having the ability to attach to hundreds of millions of devices to having the ability to attach to hundreds of millions of cell phones. 2007 will mark the beginning of this transformation.” DRMcell Pro phones. 200mote7 will mark the begs innConsing of this transformumeration.” Chris Gorog, CEO, Napster FlexChribiis Gorolitg, CEOy , NAapsndter Protects Content

“What reassures me for the future is to see the “What reassures me for the future is to see the strength, calm and determination with which strength, calm and determination with which the labels and record companies are dealing the labels and record companies are dealing with the issues they’re facing. New economic with the issues they’re facing. New economic models are developed, contracts are models are developed, contracts are adapted, while commercial and marketing adapted, while commercial and marketing operations are transformed. What energy!” operations are transformed. What energy!” Gilles Bressand, CEO, XIII Bis Records Gilles Bressand, CEO, XIII Bis Records “As we continue our transformation from a ‘songs-and- “As we continue our transformation from a ‘songs-and- records’ company into one that delivers a wide variety records’ company into one that delivers a wide variety of rich, music-based content on multiple platforms, our of rich, music-based content on multiple platforms, our experience has shown that the key to harnessing the experience has shown that the key to harnessing the vast digital opportunity is ensuring innovation remains vast digital opportunity is ensuring innovation remains our guiding principle. We always work towards our guiding principle. We always work towards establishing strategic partnerships, pioneering new establishing strategic partnerships, pioneering new products and exciting user experiences within a products and exciting user experiences within a framework that recognises the needs of consumers framework that recognises the needs of consumers alongside the rights of copyright holders,“As and we we con tinue our transformation from a ‘songs-and- alongside the rights of copyright holders,“As and we conwe tinue our transformation from a ‘songs-and- believe that is the best way to ensure thartecor legids’timat come pany into one that delivers a wide variety believe that is the best way to ensure tharecordt legits’ima companyte into one that delivers a wide variety music services are first-choice for fans.”o f rich, music-based content on multiple platforms, our music services are first-choice for fans.”of rich, music-based content on multiple platforms, our Patrick Vien, Chairman and CEO, experience has shown that the key to harnessing the Patrick Vien, Chairman and CEO, experience has shown that the key to harnessing the Warner Music International vast digital opportunity is ensuring innovation remains Warner Music International vast digital opportunity is ensuring innovation remains our guiding principle. We always work towards our guiding principle. We always work towards establishing strategic partnerships, pioneering new establishing strategic partnerships, pioneering new “We are encouraged by the groproductswth ofand exciting user experiences within a “We are encouraged by the prgrooducwthts a ofnd exciting user experiences within a framework that recognises the needs of consumers framework that recognises the needs of consumers online and mobile music sales,alongs as idewell the rights of copyright holders, and we online and mobile music sales,alongs aside well the rights of copyright holders, and we as by our success in developingbelieve a var thatiety is the best way to ensure that legitimate as by our success in developingbelieve a th vaat rietyis the be st way to ensure that legitimate of new business models, inclumudingsic serv adice s are first-choice for fans.” of new business models, includingmusic serv adice s are first-choice for fans.” Patrick Vien, Chairman and CEO, Patrick Vien, Chairman and CEO, supported video distribution oWnarn theer M usic International supported video distributionW onarn ther Meusi c International internet. As our physical revenues internet. As our physical revenues continue to decline, we need to continue to decline, we need to proactively continue to build “digitaWe arel encouraged by the growth of proactively continue to build“ Wedig italare encouraged by the growth of growth and identify new digitalonli ne and mobile music sales, as well growth and identify new digitaonll ine and mobile music sales, as well opportunities that further extendas by th oure success in developing a variety opportunities that further extaends by th oure success in developing a variety reach of our artists.” of new business models, including ad reach of our artists.” of new business models, including ad Thomas Hesse, President, Glosuppbal Diortgitaled vide o distribution on the Thomas Hesse, President, Glsuppobal ortDigitaled vid eo distribution on the Business, SONY BMG Music Enterintertainenmentt. As our physical revenues Business, SONY BMG Music Einterntertainenmet. As ntour physical revenues continue to decline, we need to continue to decline, we need to proactively continue to build digital proactively continue to build digital growth and identify new digital growth and identify new digital “2006 was an enormous year for Uonivppoersrtual Munitiesics in thatternat fuionrthallery ext end the “2006 was an enormous year for oUpnivpoersalrtun Musiitiesc thainternt fuatirthonaerl lyext end the and, therefore, the industry. We sawre achhuge of gr ourowth art in ists.”all our digital and, therefore, the industry. We sawreac huhge of gro ourwth artists in all .”our digital businesses, spurred by a wide range of partnerships. Universal businesses, spurred by a wide range of partnerships. Universal Music will also continue to deliver Twhehomasn it comes Hesse, to sPrignesiingden andt, Global Digital Music will also continue to deliverT homaswhen it com Hesse,es to Pr sigesidningent and, Gl obal Digital breaking the best artists. Just as impoBusrtantiness,ly, SONYdon’t forg BMGet the Mus ic Entertainment breaking the best artists. Just as impoBusinrtaess,ntly, SONY don’t fBMGorget Musthe ic Entertainment consumers. Ignore them at your peril, as the future of music lies consumers. Ignore them at your peril, as the future of music lies in their hands!” in their hands!” Lucian Grainge, Chairman and Chief Executive, Lucian Grainge, Chairman and Chief Executive, Universal Music Group International“2006 was an enormous year for Universal Music internatUnivionersalally Music Group Internation“2006al was an enormous year for Universal Music internationally and, therefore, the industry. We saw huge growth in all our digital and, therefore, the industry. We saw huge growth in all our digital businesses, spurred by a wide range of partnerships. Universal businesses, spurred by a wide range of partnerships. Universal Music will also continue to deliver when it comes to signing and Music will also continue to deliver when it comes to signing and “In this internet age, the conbsumerreaking is the usin besgt m artiusists.c Just as importantly, don’t forget“In the this internet age, the conbsumereakingr iths eu singbest ar musitists.c Ju st as importantly, don’t forget the content more than ever beforeconsu – whemersther. Ignore that' thsem at your peril, as the future of mucsiconte liesnt more than ever befoconsure – merwhes.the Ignrore that them's at your peril, as the future of music lies playlisting, podcasting, personin thaliseir hingands, s!”haring, playlisting, podcasting, personalin their ishanding,s!” sharing, Lucian Grainge, Chairman and Chief Executive, Lucian Grainge, Chairman and Chief Executive, downloading or just simply enjUnivoyingersal M itusi. Thec G drouigiptal Inter national downloading or just simply Uenivnjoyersaling Musi it. Tche Grou digp italInter national revolution has caused a complete change to the revolution has caused a complete change to the culture, operations and attitude of music companies culture, operations and attitude of music companies everywhere. It hasn't been easy, and we must certainly everywhere. It hasn't been easy, and we must certainly continue to fight piracy in all“ itsIn fothisrms. intern Butet ther age,e c thean be con sumer is using musicontic nue to fight piracy in all“In its t hisforms. intern Butet th ageree, cathen con be sumer is using music no doubt that with even greaterconte commnt moreitme thntan to e ver before – whether that'sn o doubt that with even greaterconte commitment more thannt t oev er before – whether that's innovation, and a true focus ponlayl theist consing, podumercasting,, digital person alising, sharingin, novation, and a true focusplayli on thesting, cons podumercasting,, digital personal ising, sharing, distribution is becoming the dbestownloa thingding tha tor e verjust simply enjoying it. The digidtalistrib ution is becoming thed bestown loadithingng that or eve justr simply enjoying it. The digital happened to the music businerevosslut andion the has mu causicsed fan.” a complete change to thhappe ened to the music businrevolutioess andn thhase m cauusisedc fan.” a complete change to the Eric Nicoli, CEO EMI Group culture, operations and attitude of music compEricanie Nics oli, CEO EMI Group culture, operations and attitude of music companies everywhere. It hasn't been easy, and we must certainly everywhere. It hasn't been easy, and we must certainly continue to fight piracy in all its forms. But there can be continue to fight piracy in all its forms. But there can be no doubt that with even greater commitment to no doubt that with even greater commitment to “We see the trend in the player mainnrkeovat movintion,g a andway froa truem singl foce us on the consumer, “dWeigi seetal the trend in the player marinnoketvatio movingn, andaway a from true si nglefocus on the consumer, digital purpose devices towards multipurpose, and more importantly, purpose devices towards multipurpose, and more importantly, connected devices. This trend willd enaistribuble hutionndr iseds bec of millomingions o thef best thing that everco nnected devices. This trend widistribll enableuti honundr iseds be ofcomi millingons t ofhe best thing that ever people to have their music collectihonsapp witenedh them to, aths ew ellm usias toc business and the musicpe foplean.” to have their music collechtioappns wieneth tdhem to ,t ahes w musell asic to b usiness and the music fan.” download and enjoy digital musicE onric the Nicolir mobi, CileEO de EvicMIe. Gro Nokiupa’s download and enjoy digital musiEcric on Nictheiroli, mobi CEOle d EMIevice Group. Nokia’s leadership in this area means we can offer a compelling mobile leadership in this area means we can offer a compelling mobile music experience combining devices, content and connectivity.” music experience combining devices, content and connectivity.” Ed Averdieck, Managing Director, Nokia Music Service Ed Averdieck, Managing Director, Nokia Music Service “We see the trend in the player market moving away from single “We see the trend in the player market moving away from single purpose devices towards multipurpose, and more importantly, purpose devices towards multipurpose, and more importantly, connected devices. This trend will enable hundreds of millions of connected devices. This trend will enable hundreds of millions of people to have their music collections with them, as well as to people to have their music collections with them, as well as to “We need to legitimise consumerdownlo behavad andiour en witjoyhou digitt al music on their mobile devic“e.We Noki neea’sd to legitimise consumdowner bloadehav andiour enjo withouty digita l music on their mobile device. Nokia’s asking them to change their usaleadege habrshipits. in tAdvhis areertaisi mngean s we can offer a compellingaski mobngile them to change their uleadesagersh habitip ins. this Adv areerta isimeansng we can offer a compelling mobile funded services offer such a solutmusiion.c exper But toienc suec cceeombdinin g devices, content and connefundedctivity.” services offer such a somusilution.c experie But tonce succeed combining devices, content and connectivity.” they need support from contenEtd o Awneverdieckrs, ad, Mveranatisgingers Director, Nokia Music Service they need support from contentEd Avownerdiecers,k, adv Managertiseingrs Director, Nokia Music Service and the financial community, as well as a critical mass and the financial community, as well as a critical mass of users. SpiralFrog was set up from the start to address of users. SpiralFrog was set up from the start to address these criteria.” these criteria.” Robin Kent, CEO, SpiralFrog “We need to legitimise consumer behaviour withouRobint Kent, CEO, SpiralFrog “We need to legitimise consumer behaviour without asking them to change their usage habits. Advertising asking them to change their usage habits. Advertising funded services offer such a solution. But to succeed funded services offer such a solution. But to succeed they need support from content owners, advertisers they need support from content owners, advertisers Record Company ‘Direct-To- “Music subscription services have experienced tremendous growth, “Music subscription services have experienced tremendous growth, Consumer’ Channels Emerge but are constrained by closed hardwarande a thnde the finan absencialce co of ma munity, as well as a critical bmutass are constrained by closed hardwareand thande ftheinan abcialsence co ofm amun ity, as well as a critical mass healthy compatible device market. Overof user the s.next Spiral few yeaFrors,g w as set up from the start to addrheaesslthy compatible device market.o Ovef userr thes. next Spiral fewFro yearsg wa, s set up from the start to address Record companies have also rolled out their own video and music-streaming services to subscription services will go from a vethesry smae cllrit mareriaket.” in portable subscription services will go from a tvehesry smalle criteria.” market in portable consumers. Sony BMG announced Musicbox devices to having the ability to attacRoh tobin hundreds Kent, ofCEO mil,lio Spiralns of Frog devices to having the ability to attachRobin to hund Kerednt, sCEO, of mi lSpirallions ofFrog Video, featuring free content from its roster of cell phones. 2007 will mark the beginning of this transformation.” cell phones. 2007 will mark the beginning of this transformation.” artists. Visitors can view full length videos, Chris Gorog, CEO, Napster Chris Gorog, CEO, Napster share streams with friends or embed content in their own websites. Universal partnered with video delivery platform WWEBNET to launch Some services are expanding their offers to “Music subscription services have experienced tremendous growth, “Music subscription services have experienced tremendous growth, MusiVidz, offering a broadcast network mobile platforms as well. Napster partnered but are constrained by closed hardware and the absence of a but are constrained by closed hardware and the absence of a featuring videos from a wide range of with Japanese mobile operator NTT DoCoMo “The success of eMusic in Europe healthy compatible device market. Over the next few years,“ The success of eMusic in Europe healthy compatible device market. Over the next few years, Universal artists. and plans to expand its mobile offer in Europe and around the world shows that subscription services will go from a very small market in portabandle a round the world shows that subscription services will go from a very small market in portable in partnership with O2. consumers are eager for a digital devices to having the ability to attach to hundreds of millionscons of umers are eager for a digital devices to having the ability to attach to hundreds of millions of Both services will ultimately offer artist music service that focuses on cell phones. 2007 will mark the beginning of this transformamtiousicn.” service that focuses on cell phones. 2007 will mark the beginning of this transformation.” interviews, live performances and ‘behind- Subscription services are seeing modest music beyond the commercial music beyond the commercial the-scenes’ footage. The launches indicate market growth. Portable or ‘To Go’ versions of mainstream. By offering customers Chris Gorog, CEO, Napster mainstream. By offering customers Chris Gorog, CEO, Napster early developments in direct-to-consumer subscriptions have suffered significantly from well-priced, expertly curated well-priced, expertly curated initiatives by music companies. lack of compatibility with the dominant adventurous music that they can adventurous music that they can portable music player, the iPod. Subscription Services Wait For own in the universally compatible own in the universally compatible Wireless And Interoperability Subscription services also appear not yet to MP3 format, we’ve shown you can “The success of eMusic in Europe MP3 format, we’ve shown you can “The success of eMusic in Europe have met consumers’ demand to ‘own’ their sell a lot of it. This combination has and around the world shows that sell a lot of it. This combination has and around the world shows that Music subscription services such as music, with most services offering unlimited helped eMusic become the world’s consumers are eager for a digital helped eMusic become the world’s consumers are eager for a digital Rhapsody, Napster and eMusic now reach music only as long as the subscription is live. number two digital music service music service that focuses on number two digital music service music service that focuses on 3.5 million consumers worldwide, growing by and sell more than 100 million music beyond the commercial and sell more than 100 million music beyond the commercial 25 per cent in the last year, with the majority of Launched in Europe in September 2006, downloads in three years.” mainstream. By offering customers downloads in three years.” mainstream. By offering customers subscribers located in the US. Music eMusic is a subscription based service that David Pakman, President and CEO, well-priced, expertly curated David Pakman, President and CEO, well-priced, expertly curated subscription services accounted for seven per seeks to address this by allowing an allocation eMusic adventurous music that they can eMusic adventurous music that they can cent of digital revenues in the first half of 2006. of permanent downloads in an unprotected own in the universally compatible own in the universally compatible iPod compatible format for 29.99 per month. Subscriptions offer enormous customer value MP3 format, we’ve shown you can MP3 format, we’ve shown you can Its catalogue is composed of over two million sell a lot of it. This combination has sell a lot of it. This combination has and work exceptionally well with wireless songs from independent record companies. “Zune is delivering innovative “Zune is delivering innovative home entertainment systems such as the eMusic announced that it had achieved ways for consumers to helped eMusic become the world’s ways for consumers to helped eMusic become the world’s Sonos Zone Player – a wireless system that some 20,000 subscriptions during its first two discover new music and number two digital music service discover new music and number two digital music service and sell more than 100 million and sell more than 100 million allows music to be played in every room of months in Europe and has reported a global connect with others through connect with others through the house regardless of where the music user base of 220,000. downloads in three years.” downloads in three years.” collection is stored. social experiences enabled David Pakman, President and CEO, social experiences enabled David Pakman, President and CEO, by its wireless sharing eMusic by its wireless sharing eMusic capabilities. Innovation is capabilities. Innovation is Social Networking – A New Tool For A&R? key – whether it’s how we work key – whether it’s how we work with artists, new technology “Zune is delivering innovative with artists, new technology “Zune is delivering innovative Darcus Beese, A&R executive at Island Beese adds that he has seen promising ways for consumers to ways for consumers to Records, says social networking sites are acts on social networking sites, but when features or giving consumers features or giving consumers impacting the way he does his job, but that he follows this up by going to their gigs the all-you-can-eat ZunePass discover new music and the all-you-can-eat ZunePass discover new music and they sit alongside rather than replace they often fall short of what their internet subscription, we are focused connect with others through subscription, we are focused connect with others through traditional ways of discovering and clips promise: “That’s the sleight of hand on changing the game.” social experiences enabled on changing the game.” social experiences enabled marketing artists. Artists like Arctic Monkeys that is MySpace. It can be a barometer or by its wireless sharing by its wireless sharing and Lily Allen have gained popularity a red herring.” Bryan Lee, Corporate Vice Bryan Lee, Corporate Vice through social networking sites, albeit as part President of Entertainment capabilities. Innovation is President of Entertainment capabilities. Innovation is Social networking sites are impacting on of marketing campaigns that also involve “The main benefit of these sites is the Business, Microsoft key – whether it’s how we work Business, Microsoft key – whether it’s how we work record company artist and repertoire (A&R) mainstream media. immediacy with which they let consumers with artists, new technology with artists, new technology work and marketing but are not a panacea. discover music. Someone just has to mention features or giving consumers features or giving consumers Rather they are being used by record He argues that social networking sites are an artist’s name and you can type it into your companies in conjunction with more also “just another tool” to be used to bring computer and go straight to the music. You the all-you-can-eat ZunePass the all-you-can-eat ZunePass traditional practices like promotion, public new acts to the public, asserting that don’t have to wait for the gig or go down to subscription, we are focused subscription, we are focused relations and plugging. someone with the talent and charisma of Lily the shops to get the CD.” on changing the game.” on changing the game.” Allen would have come to prominence “It’s hard enough for artists and “It’s hard enough for artists and whether MySpace had existed or not. labels to handle traditional Bryan Lee, Corporate Vice labels to handle traditional Bryan Lee, Corporate Vice distribution without support. Add President of Entertainment distribution without support. Add President of Entertainment more than 10 times the content Business, Microsoft more than 10 times the content Business, Microsoft Page 13 online, hundreds of digital music online, hundreds of digital music services, a dozen different business services, a dozen different business models, complex accounting models, complex accounting systems, new ways of marketing systems, new ways of marketing and promotion and you realise and promotion and you realise quickly that you need more “It’s hard enough for artists and quickly that you need more “It’s hard enough for artists and sophisticated and skilled partners labels to handle traditional sophisticated and skilled partners labels to handle traditional on your team.” distribution without support. Add on your team.” distribution without support. Add Scott Cohen, Founder, The Orchard more than 10 times the content Scott Cohen, Founder, The Orchard more than 10 times the content online, hundreds of digital music online, hundreds of digital music services, a dozen different business services, a dozen different business models, complex accounting models, complex accounting systems, new ways of marketing systems, new ways of marketing “The past year has seen iTunes forgeand st prronomotiog marn aketind yngou realise “The past year has seen iTunes foranged pstroromotionng mar andket youing re alise partnerships with major brands, suchquic askly Stathatrbuc you needks in morethe US partnerships with major brands, suchquickly as that Starbu you needcks in mo there US and Coke in the UK and Germany,s aophndist witicahted the and add skitiilleond ofpa rtners and Coke in the UK and Germany,sophisticate and with tdhe and add skilleitiond p ofart ners blockbuster movies and TV shows,o An pyourple tea is contm.” inuing to raise blockbuster movies and TV showson, A yopurple team is co.” ntinuing to raise Scott Cohen, Founder, The Orchard Scott Cohen, Founder, The Orchard the profile of legal downloading and the value proposition of the profile of legal downloading and the value proposition of the iTunes Store worldwide.” the iTunes Store worldwide.” Eddy Cue, Apple’s vice-president of iTunes Eddy Cue, Apple’s vice-president of iTunes

“The past year has seen iTunes forge strong marketing “The past year has seen iTunes forge strong marketing partnerships with major brands, such as Starbucks in the US partnerships with major brands, such as Starbucks in the US “If we in the EU are going toa ndtur Cokn Euroe in thepe UK into and th Germe any, and with the addition“If of we in the EU are going toand tu Cokrn Eeurop in the eU Kin atond theGerman y, and with the addition of leading knowledge-basedblo ecckbuonostermy mo andvies soandcie TVty, show s, Apple is continuing tole raiadinse g knowledge-basedblo ecckbusonotermy mo andvies a sondcie TV shty,ows , Apple is continuing to raise then we have to ensure thatthe our profil yoeung of leg peal downlopleoading are and the value proposititonhen of we have to ensure thatthe ou prorfile youn of legg alp eopldowneloa adinreg and the value proposition of both technologically savvythe and iTunes awa Storere woforld thewide ba.”sic both technologically savvythe an iTudnes a wareStore wor of ldwtheide bas.” ic tenets of intellectual propeEddyrty wh Cueich, Ap prople’stect vice-prs esident of iTunes tenets of intellectual propEddyerty Cuewhich, Ap plepr’sote vice-pcts resident of iTunes creative content.” creative content.” Erika Mann, MEP and Chair of the European Erika Mann, MEP and Chair of the European Internet Foundation “If we in the EU are going to turn Europe intoI ntethe rnet Foundation “If we in the EU are going to turn Europe into the leading knowledge-based economy and society, leading knowledge-based economy and society, then we have to ensure that our young people are then we have to ensure that our young people are both technologically savvy and aware of the basic both technologically savvy and aware of the basic “What reassures me for ttheneets fu oftur inte ellis tectualo see prtheope rty which protect“sWha t reassures me forten thetse futur of intellece is totual see prop the erty which protects strength, calm and determcreatinativeion con wittenht.” which strength, calm and determinatiocreative conn tenwitht.” which the labels and record comErikapani Mann,es areMEP deandali Chngair of the Europeant he labels and record comErikapan Mann,ies MEP are anddea Chlinairg of the European with the issues they’re facing.Internet Ne Fouwndati econonomic with the issues they’re faciInternetng. NeFounwdat econionomic models are developed, contracts are models are developed, contracts are adapted, while commercial and marketing adapted, while commercial and marketing operations are transform“Whated. What reass enuresergy me!” for the future is to soeperate theion s are transfor“med.Wha tW reassureshat energy me!” for the future is to see the Gilles Bressand, CEO, XIIIstreng Bis Recth, cordsalm and determination withGilles which Bressan d, CEO, XIIIstren Bisgth Re, cordscalm and determination with which the labels and record companies are dealing the labels and record companies are dealing with the issues they’re facing. New economic with the issues they’re facing. New economic models are developed, contracts are models are developed, contracts are adapted, while commercial and marketing adapted, while commercial and marketing operations are transformed. What energy!” operations are transformed. What energy!” Gilles Bressand, CEO, XIII Bis Records Gilles Bressand, CEO, XIII Bis Records “As we continue our transformation from a ‘songs-and- “As we continue our transformation from a ‘songs-and- records’ company into one that delivers a wide variety records’ company into one that delivers a wide variety of rich, music-based content on multiple platforms, our of rich, music-based content on multiple platforms, our experience has shown that the key to harnessing the experience has shown that the key to harnessing the vast digital opportunity is ensuring innovation remains vast digital opportunity is ensuring innovation remains our guiding principle. We always work towards our guiding principle. We always work towards establishing strategic partnerships, pioneering new establishing strategic partnerships, pioneering new products and exciting user experiences within a products and exciting user experiences within a framework that recognises the needs of consumers framework that recognises the needs of consumers alongside the rights of copyright holders, and we alongside the rights of copyright holders, and we believe that is the best way to ensure that legitimate believe that is the best way to ensure that legitimate music services are first-choice for fans.” music services are first-choice for fans.” Patrick Vien, Chairman and CEO, Patrick Vien, Chairman and CEO, Warner Music International Warner Music International

“In this internet age, the consumer is using music “In this internet age, the consumer is using music content more than ever before – whether that's content more than ever before – whether that's playlisting, podcasting, personalising, sharing, playlisting, podcasting, personalising, sharing, downloading or just simply enjoyingD it. Tigihe digitaltal Music Ind own2007loading or – just simply enjoying it. The digital revolution has caused a complete change to the revolution has caused a complete change to the culture, operations and attitude of music companies culture, operations and attitude of music companies everywhere. It hasn't been easy, andA we mustBra certaveinly New Woeverrldywhere. It hasn't been easy, and we must certainly continue to fight piracy in all its forms. But there can be continue to fight piracy in all its forms. But there can be no doubt that with even greater commitment to no doubt that with even greater commitment to innovation, and a true focus on the consumer, digital innovation, and a true focus on the consumer, digital distribution is becoming the best thingCo that ensumver ers Shapedistribution Th is beecomi ng the best thing that ever happened to the music business and the music fan.” happened to the music business and the music fan.” Eric Nicoli, CEO EMI Group Future Of RecordEric Nicedoli, CEO Mu EMI Groupsic

90 100 5% 39% 20% 10% 32% 21% 11% 14% 13% 16% 90 Online Services 80 4% 5% 17% 41% 39% 20% 10% 32% 80 70 4% 25% 17% 41% 70 60 20% “We need to legitimise consumer behavAiourcross without The World“We need to legitimise consumer behaviour without 35% 25% 60 50 26% asking them to change their usage habits. Advertising asking them to change their usage habits. Advertising 20% 50 40 38% 39% 35% funded services offer such a solution. But to succeed funded services offer such a solution. But to succeed 15% 26% 40 30 they need support from content owners, advertisers they need support from content owners, advertisers 38% 39% 30 20 20% 8% 15% 4% and the financial community, as well as a critical mass and the financial community, as well as a critical mass 14% 13% 20 10 8% Digital Diversifies 20% of users. SpiralFrog was set up from the start to address of users. SpiralFrog was set up from the start to address 4% 10 0 14% 13% UK GERMANY FRANCE ITALY SPAIN 0 these criteria.” these criteria.” ONLINE SINGLE ONLINE ALBUM MASTER RINGTONE MOBILE SINGLE UK GERMANY FRANCE ITALY SPAIN Robin Kent, CEO, SpiralFrog Consumer BuyingRobin Ke nt,Ha CEO,bits SpiralFrog ONLINE SINGLE ONLINE ALBUM MASTERTONE MOBILE SINGLE OTHER

“Music subscription services have experienced tremendous growth, “Music subscription services have experienced tremendous growth, but are constrained by closed hardware and the absence of a but are constrained by closed hardware and the absence of a 1800 1200 Music On Mobile healthy compatible device market. Over the next few years, healthy compatible device market. Over the next few years, 926 1600 1556 subscription services will go from a very small market in portable subscription services will go from a very small market in portable 1000 1400 1400 devices to having the ability to attach to hundredsGr of miowsllions of In Populdarievices toty having the ability to attach to hundreds of millions of 1200 1177 800 cell phones. 2007 will mark the beginning of this transformation.” cell phones. 2007 will mark the beginning of this transformation.” 304 423 Chris Gorog, CEO, Napster Chris Gorog, CEO, Napster 1000 964 600 800 821 721 720 600 400 Emerging Business Models 400 “The success of eMusic in Europe “The success of eMusic in Europe 200 200 and around the world shows that and around the world shows that consumers are eager for a digital consumers are eager for a digital 0 0 2000 2001 2002 2003 2004 2005 2006 EST 2000 2001 2002 2003 2004 2005 2006 EST music service that focuses on music service that focuses on PHYSICAL DIGITAL TOTAL UNITS music beyond the commercial music beyond the commercial mainstream. By offering customers mainstream. By offering customers well-priced, expertly curated well-priced, expertly curated adventurous music that they can adventurous music that they can own in the universally compatible Portable Playersown in Drthe universallyive comp atible 100 90 90 MP3 format, we’ve shown you can MP3 format, we’ve shown you can 90 87% 80 sell a lot of it. This combination has sell a lot of it. This combination has 80% 78% 80 80 80% 75% helped eMusic become the world’s Music Demandhelped eMusic become the world’s 70 75% 71% 70% 70 71% 64% 70 number two digital music service number two digital music service 60 59% and sell more than 100 million and sell more than 100 million 60 60 55% 50 52% downloads in three years.” downloads in three years.” 50 50 40 David Pakman, President and CEO, David Pakman, President and CEO, 40 The increasing popularity of portable digital music players is 40 eMusic eMusic 30 30 driving interest in music services. 30 Record Companies Boost 20 20 The global portable digital player market Separate research by Jupiter shows that iPod 20 10 “Zune is delivering innovative “Zune is delivering innovative 10 grew sharply to an estimated 120 million owners are three times more likely than 10 Consumer Choice 0 units sold in 2006 with a 75:25 split between general internet users to be regular0 paying ways for consumers to ways for consumers to SPAINKOREA FRANCE UK US GERMANY KOREASPAIN UK GERMANY ITALY FRANCE US 0 flash-based and hard drive players music downloaders. Sixteen per cent of discover new music and discover new music and (Understanding & Solutions). This has had a internet users that own an iPod in Europe connect with others through connect with others through mixed impact on digital music sales. Portable download music legally on a monthly basis, 100 social experiences enabled social experiences enabled player owners are more likely to buy music compared to five per cent of internet88% users (2) by its wireless sharing by its wireless sharing legally than general internet users; but the that don’t own a portable player . This 90 Copyright, Music And amount of purchased music stored on indicates that portable ownership is driving 80 capabilities. Innovation is capabilities. Innovation is devices is still low. interest in legal music buying, although 70 key – whether it’s how we work key – whether it’s how we work research suggests volumes of new tracks with artists, new technology The Education Chwith artists,alle new techngenology New research by IFPI/M-Lab carried out in are low. 60 November 2006 in the UK, Germany and 53% 50 features or giving consumers features or giving consumers France(1) shows that portability is a key driver of New Players Launch In 2006 40 the all-you-can-eat ZunePass the all-you-can-eat ZunePass growing demand for recorded music: subscription, we are focused subscription, we are focused A number of new music players launched in 30 Two in five (39%) European portable player 2006, notably Microsoft’s portable music 20 on changing the game.” on changing the game.” owners have bought music online at least device, Zune, in the US in November. 24% 10 Bryan Lee, Corporate Vice Bryan Lee, Corporate Vice once – in the UK that figure is 58 per cent. Zune is a hard drive player with a built-in FM 14% 0 President of Entertainment President of Entertainment tuner and Wi-Fi networking. The Wi-Fi feature 11% 9% 9% 8% 8% Business, Microsoft Awareness GroBwsusiness, MicrosoftOn About half (47%) of those portable allows limited sharing of songs, recordings, player owners who bought music online playlists and pictures. Tracks receivedSOUTH fromJAPAN ITALY UK SPAIN AUSTRALIA GERMANY FRANCE US KOREA said they now buy music only, or mostly, in another person’s Zune can be played for up to digital format. Virus And Spyware Risks 20 three days, or three plays. This is the first use of wireless music-sharing from a music portable 18 18% One in seven (14%) portable player owners device. Microsoft expects to sell one million 16use paid music downloads as their main units of the Zune by the end of June 2007. “It’s hard enough for artists and “It’s hard enough for artists and source of music – roughly in proportion to 14 Universal Music struck a revenue share deal labels to handle traditional labels to handle traditional those who use P2P13% network1s3% and free 12 12% with Microsoft whereby Universal receives a fee distribution without support. Add distribution without support. Add websites (13%). However a greater volume of 11% for every Zune sold. Containing Piracy 10music on portable players is obtained from more than 10 times the content more than 10 times the content 1 Sample 2,249 portable player owners in the UK (iPod online, hundreds of digital music online, hundreds of digital music P2P8 and free sources than is purchased on legal sites and the frequency of purchase on owners7% only), Germany and France. services, a dozen different business services, a dozen different business 6 2 Jupiter Research, September 2006. UK, Germany, legal sites is still low. France, Italy, Sweden, Spain. models, complex accounting models, complex accounting 4 3% systems, new ways of marketing systems, new ways of marketing 2 and promotion and you realise and promotion and you realise 0 Drivers to Online Music Buying quickly that you need more quickly that you need more UK FRANCE US GERMANY SPAIN ITALY JAPAN sophisticated and skilled partners sophisticated and skilled partners on your team.” on your team.” 50% 49% Progress Against 60 Scott Cohen, Founder, The Orchard Scott Cohen, Founder, The Orchard 42% 90 50 50% 49% Pirate Operations 80 42% 40 70 “The past year has seen iTunes forge strong marketing “The past year has seen iTunes forge strong marketing 60 30 partnerships with major brands, such as Starbucks in the US partnerships with major brands, such as Starbucks in the US 22% 50 22% and Coke in the UK and Germany, and with the addition of and Coke in the UK and Germany, and with the addition of 20 40 blockbuster movies and TV shows, Apple isI contnterinuing to netraise Piracy blo–ckbus ter movies and TV shows, Apple is continuing to raise 30 the profile of legal downloading and the value proposition of the profile of legal downloading and the value proposition of 10 20 the iTunes Store worldwide.” The Call To ISPsthe iTunes Store worldwide.” 0 Eddy Cue, Apple’s vice-president of iTunes Eddy Cue, Apple’s vice-president of iTunes PORTABLE PLAYER BRAODBAND CHEAPER THAN CDS VOUCHER 10 PORTABLE PLAYER BROADBAND CHEAPER THAN CDS VOUCHER 0 Source: IFPI/M-Lab Survey, Nov 2006.“What made you start buying music online?” Base: all who buy online. “If we in the EU are going to turn Europe into the “If we in the EU are going to turn Europe into the leading knowledge-based econoDmy RMand socie Proty, motes leConsading knowumerledge-based economy and society, Digital Music Report 2007 Page 14 62% then we have to ensure that our young people are then we have to ensure that our young people are 62% both technologically savvy and awaFlexre of theibi basiclit y And Pborotth tecectshnologica lConly savvy antentd aware of the basic FINDING MUSIC WANTED

FINDING MUSIC WANTED tenets of intellectual property which protects tenets of intellectual property which protects 58% 58% creative content.” creative content.” VARIETY OF CHOICE VARIETY OF CHOICE 39% Erika Mann, MEP and Chair of the European Erika Mann, MEP and Chair of the European 39% Internet Foundation Internet Foundation PRICE OF MUSIC PRICE OF MUSIC 23% 23% GETTING MUSIC FOR FREE 22% GETTING MUSIC FOR FREE 0 5 10“What 15 20 reass 25 30ures 35 me 40 for 45 th 50e fu 55tur 60e i 65s to see the “What reassures me for the future is to see the LISTENING TO SONG CLIPS BEFORE PURCHASE 22% strength, calm and determination with which strength, calm and determination with which 0 10 20 30 40 50 60 70 80 LISTENING TO SONG CLIPS BEFORE PURCHASE the labels and record companies are dealing the labels and record companies are dealing with the issues they’re facing. New economic with the issues they’re facing. New economic models are developed, contracts are models are developed, contracts are PERCENTAGE OF HOUSEHOLD WITH BROADBAND 35 32% 45 40% PERCENTAGE OF BROADBAND USERS ENGAGED 40 adapted, while commercial and marketing adapted, while commercial and marketing 30 IN FREQUENT ILLEGAL FILE-SHARING

31% 35 operations are transformed. What energy!” operations are transformed. What energy!” 25 23% 21% 30 Gilles Bressand, CEO, XIII Bis Records Gilles Bressand, CEO, XIII Bis Records 20 18% 18% 17% 21% 25 15.4% 16% 18% 18% 15 13% 20 15% 14% 12% 17% 15 10 5% 7% 10 5 5

0 0 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006

BROADBAND HOUSEHOLD PENETRATION

INTERNET USERS REGULARLY FILE-SHARING 40% UNAUTHORISED MUSIC

31%

21% 18% 18% 15% 15% 14% 12%

2002 2003 2004 2005 2006 Digital Music In 2007 – A Brave New World Consumers Shape The Future Of Recorded Music

100

90 100 5% 39% 20% 10% 32% 21% 11% 14% 13% 16% 90 80 4% 41% 5% 17% 10% 39% 80 70 20% 32% Digital Market 4% 25% 17% 41% 70 60 20% 35% 25% 60 50 26% 20% 50 Overview In 2006 40 38% 39% 35% 15% 26% 40 30 38% 39% 30 20 20% 8% 15% 4% 14% 13% 20 10 8% 20% 4% 10 0 14% 13% UK GERMANY FRANCE ITALY SPAIN 0 Online Services ONLINE SINGLE ONLINE ALBUM MASTER RINGTONE MOBILE SINGLE UK GERMANY FRANCE ITALY SPAIN ONLINE SINGLE ONLINE ALBUM MASTERTONE MOBILE SINGLE OTHER Across The World

1800 1200 926 1600 1556 Digital Diversifies 1000 1400 1400

1200 1177 800 304 423 Consumer Buying Habits 1000 964 600 800 821 721 720 600 400

400 200 200 Music On Mobile

0 0 2000 2001 2002 2003 2004 2005 2006 EST 2000 2001 2002 2003 2004 2005 2006 EST PHYSICAL DIGITAL TOTAL UNITS Grows In Popularity

100 90 90 90 Emerging Business Models 87% 80 80% 78% 75% 80 80 80% 70 75% 71% 70% 70 71% 64% 70 60 59% 60 60 55% 50 52% 50 50 40 40 40 30 30 30 20 20 20 Portable Players Drive 10 10 10 0 0 SPAINKOREA FRANCE UK US GERMANY KOREASPAIN UK GERMANY ITALY FRANCE US 0 Music Demand

100 88% 90 80 Record Companies Boost 70 60 53% 50 Consumer Choice 40 30 20 Record companies24% are digitising catalogues 10and offering 14% 0 Copyright, Music And 11% music in a variety of formats9% and9% channels.8% 8% UnlikeSOUTH traditional JAPAN music outlets,ITALY digitalU musicK SPAIN AUSTRALIA GERMANY FRANCE US insisted on keeping single tracks at a uniform KOREA Record Companies Invest In stores offer 24-hour shopping and unlimited Digitising Catalogues price point. Meanwhile other major record The Education Challenge 20 shelf space. The number of tracks available in companies and the majority of independent the largest digital stores doubled from two Record companies have made good labels are undertaking similar initiatives. 18 18% million in 2005 to four million in 2006. This progress extending digital catalogues well 16 compares to a maximum of 150,000 CD titles beyond what is available in the physical Olivier Robert-Murphy, VP Strategic Marketing, 14 physically available in the largest specialist world. This is critical as consumers rate ‘more Universal Music Group International said: “It’s 13% 13% 12 12% music stores and far fewer in non-traditional choice available’ as a major reason for easy for our consumers online to find and 11% stores such as supermarkets. increasing their purchase of music through download current artists and current hits, but 10 digital channels in the future (IFPI/M-Lab through this deep catalogue reissue 8 The importance of greater choice for Research, November 2006). programme we are now able to respond to Awareness Grows On 7% 6 consumers is borne out by research. A and quantify the appetite for more eclectic, Nielsen/Net Ratings UK survey of internet Universal Music, for example, announced in diverse recordings from the past. It is clear that 4 3% music users revealed that consumers rate the February 2006 the first step in its plan to this is a ‘tail’ worth chasing.” Virus And Spyware Risks 2 best attributes of digital music as being able make 10,000 older, out of print European 0 to “find the music they wanted” and “variety albums available for download over the Digital-Only Album UK FRANCE US GERMANY SPAIN ITALY JAPAN of choice” – way above other attributes. next few years, with the release of 300 albums. Releases Increase 50% By October, online music fans had 49% downloaded more than 250,000 tracks Digital-only releases are rising sharply, 60 The ‘Long Tail’ from this selection. The second phase of the contributing to a larger share of all releases. In Containing Piracy The ‘Long Tail’, a term coined by Chris 42% initiative was rolled out in November, adding the US90 there were over 13,000 new digital-only 50 50% 49% album releases in the first half of 2006, Anderson, Wired Magazine editor-in-chief, a further 700 albums. 80 42% argues that products with a low sales accounting for as much as 36 per cent of 40 volume can collectively make up a market In another catalogue push Universal all new70 album releases in the period. This share that rivals or exceeds that of the announced wholesale price reductions on compares60 with 16,580 new digital-only 30 bestsellers and blockbusters – if the store or 1,500 digitally-delivered titles in Europe, releases in the entire year of 2005 distribution channel is large enough. dropping 22%album retail prices from £7.99 to (Nielsen50 SoundScan). 22% 20 The ‘Long Tail’ illustrates the opportunities £5.49. The company says this should 40 the internet has created in distribution encourage greater album sales and more In the UK, the industry released over 37,000 30 10 and sales. price differentiation – although iTunes has still albums in 2006 (BPI), 30 per cent of these Progress Against releases20 where digital bundles, underlining 0 the power of digital delivery to expand the PORTABLE PLAYER BRAODBAND CHEAPER THAN CDS VOUCHER 10 PORTABLE PLAYER BROADBAND CHEAPER THAN CDS VOUCHER output of music. Pirate Operations 0 Record Companies Transform As Consumers Ask For More Top Five Attributes of Internet High profile album releases are now often accompanied by hundreds of digital formats Internet Piracy – 62% and products including the album itself, 62% digital singles, exclusive digital tracks, digital FINDING MUSIC WANTED ‘bundles’, artwork, videos and a whole range FINDING MUSIC WANTED The Call To ISPs 58% 58% of music products created for mobile phones.

VARIETY OF CHOICE VARIETY OF CHOICE While music products diversify, the business of 39% getting it to the consumer is becoming more 39% holistic, with digital marketing and distribution PRICE OF MUSIC PRICE OF MUSIC strategies developed right from the start of a 23% campaign. It is not unusual for a record DRM Promotes Consumer 23% GETTING MUSIC FOR FREE company to offer an artist’s fan base wireless 22% GETTING MUSIC FOR FREE full song and video downloads to go with personalisation tools such as ringtones 0 5 10 15 20 25 30 35 40 45 50 55 60 65 Flexibility And Protects Content LISTENING TO SONG CLIPS BEFORE PURCHASE 22% and wallpapers.

0 10 20 30 40 50 60 70 80 LISTENING TO SONG CLIPS BEFORE PURCHASE

Source: Nielsen/NetRatings Music 2006: Online vs Offline Consumption

PERCENTAGE OF HOUSEHOLD WITH BROADBAND 35 32% 45 Page 15 40% PERCENTAGE OF BROADBAND USERS ENGAGED 40 30 IN FREQUENT ILLEGAL FILE-SHARING

31% 35 25 23% 21% 30 20 18% 18% 17% 21% 25 15.4% 16% 18% 18% 15 13% 20 15% 14% 12% 17% 15 10 5% 7% 10 5 5

0 0 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006

BROADBAND HOUSEHOLD PENETRATION

INTERNET USERS REGULARLY FILE-SHARING 40% UNAUTHORISED MUSIC

31%

21% 18% 18% 15% 15% 14% 12%

“In this internet age, the consumer is using music “In this internet age, the consumer is using music content more than ever before – whether that's content more than ever before – whether that's playlisting, podcasting, personalising, sharing, playlisting, podcasting, personalising, sharing, downloading or just simply enjoying it. The digital downloading or just simply enjoying it. The digital revolution has caused a complete change to the revolution has caused a complete change to the culture, operations and attitude of music companies culture, operations and attitude of music companies everywhere. It hasn't been easy, and we must certainly everywhere. It hasn't been easy, and we must certainly continue to fight piracy in all its forms. But there can be continue to fight piracy in all its forms. But there can be no doubt that with even greater commitment to no doubt that with even greater commitment to innovation, and a true focus on the consumer, digital innovation, and a true focus on the consumer, digital distribution is becoming the best thing that ever distribution is becoming the best thing that ever happened to the music business and the music fan.” happened to the music business and the music fan.” Eric Nicoli, CEO EMI Group Eric Nicoli, CEO EMI Group

“Zune is delivering innovative “Zune is delivering innovative ways for consumers to ways for consumers to discover new music and discover new music and connect with others through connect with others through social experiences enabled social experiences enabled by its wireless sharing by its wireless sharing New information and accounting systems New Ways Of Filtering Music To Consumers have been introduced by record companies capabilities. Innovation is capabilities. Innovation is to effectively market these products. Each of 2006 saw the evolution of new services that Scrobbler’ which notes what the music key – whether it’s how we work key – whether it’s how we work the major record companies currently promote and filter music for consumers in users have listened to in their computer with artists, new technology with artists, new technology partners with 400 to 500 separate businesses a far more flexible way. Many of them are (via iTunes or Windows Media, for in the digital space. This has been an experimental, and it is too early to say example) and builds playlists based on features or giving consumers features or giving consumers enormously complex and costly undertaking, which ones will thrive in the long term. similar tracks. Pandora’s Tuneglue the all-you-can-eat ZunePass the all-you-can-eat ZunePass with the required digital business and recommendation tool is based on the subscription, we are focused subscription, we are focused operational infrastructure costing many Tastemaker Services ‘Music Genome Project’ – a rating of each on changing the game.” on changing the game.” millions of dollars in investment in new Fmagazine, Pitchfork, Playlouder, music track in the catalogue based on up technology, skills, and product digitisation. Drowned in Sound, NME.com: these are to 400 distinct musical attributes. Bryan Lee, Corporate Vice Bryan Lee, Corporate Vice Fulfilment, account management and IT e-magazines, strong on editorial such as President of Entertainment President of Entertainment infrastructure are all affected. In nearly every news, features, interviews and reviews. Platform Specific Business, Microsoft Business, Microsoft aspect of their operations, from business They provide links to download stores and Nokia has launched its Music development to royalties, record companies increasingly feature preview content, free Recommenders service for use with its have evolved from the traditional business of sampler downloads and other editorial. range of music phones. The service distributing and marketing physical products. focuses on indie music across 12 genres Recommendation Services with music experts generating Last fm, Pandora, The Filter: these services recommended playlists each month. offer personalised recommendations to Other mobile providers offer similar “It’s hard enough for artists and “It’s hard enough for artists and users – often based on combining features. SonyEricsson has launched labels to handle traditional labels to handle traditional preferences and ratings of users with M-Buzz and is also building music distribution without support. Add distribution without support. Add similar music tastes. For example, Last fm recognition software into its handsets. more than 10 times the content more than 10 times the content uses recommendation tool ‘Audio online, hundreds of digital music online, hundreds of digital music services, a dozen different business services, a dozen different business Classical was the fastest-growing music genre January 2007. These two services join models, complex accounting models, complex accounting in the US, growing by 23 per cent in 2006 established online stores such as systems, new ways of marketing systems, new ways of marketing (Nielsen SoundScan). There have been Classical.com and Chandos.net both of and promotion and you realise and promotion and you realise exceptional digital sales on particular titles. which offer classical downloads as iPod quickly that you need more quickly that you need more Universal Classics artist, violinist Janine compatible MP3s. Jansen’s recording of The Four Seasons sophisticated and skilled partners sophisticated and skilled partners received 75 per cent of its US sales through Record companies are also reaching out for on your team.” on your team.” downloads. Also from Universal, a jazz fans in a new way. In July 2006, Blue Note Scott Cohen, Founder, The Orchard Scott Cohen, Founder, The Orchard downloadable album of the New York Records began releasing jazz mastertones Philharmonic’s performance of a Mozart with recordings by Chet Baker and Art Blakey Digital Format Boosts concert secured top 40 chart positions on amongst others. Classical Genre iTunes in the US and the UK. “The past year has seen iTunes forge strong marketing “The past year has seen iTunes forge strong marketing The success of classical in the digital music In April 2006, Warner became the first major partnerships with major brands, such as Starbucks in the US partnerships with major brands, such as Starbucks in the US space has taken many by surprise. The record label to launch a classical online unlimited availability of titles that online stores music store (Warnerclassics.com). Warner and Coke in the UK and Germany, and with the addition of and Coke in the UK and Germany, and with the addition of provide has created renewed consumer intends to make its entire classical catalogue blockbuster movies and TV shows, Apple is continuing to raise blockbuster movies and TV shows, Apple is continuing to raise interest and new market development of 25,000 titles available on the service. the profile of legal downloading and the value proposition of the profile of legal downloading and the value proposition of opportunities for classical music. Universal launched classicsandjazz.co.uk in the iTunes Store worldwide.” the iTunes Store worldwide.” Eddy Cue, Apple’s vice-president of iTunes Eddy Cue, Apple’s vice-president of iTunes Some Of The Innovative Digital Releases In 2006 Included: Madonna’s latest album Digital bundles – was released digitally with British band Snow Patrol three price points in three achieved a sizable “If we in the EU are going to turn Europe into the “If we in the EU are going to turn Europe into the bundles, reaching proportion of sales of its leading knowledge-based economy and society, leading knowledge-based economy and society, numbers one, two and four latest album ‘Eyes Wide in the iTunes chart, with the Open’ via digital channels. then we have to ensure that our young people are then we have to ensure that our young people are most expensive bundle coming first. The album was released on iTunes as a both technologically savvy and aware of the basic both technologically savvy and aware of the basic ‘deluxe’ digital package featuring a bonus digital booklet, an exclusive ‘Making of…’ tenets of intellectual property which protects tenets of intellectual property which protects video and a video of the first single from creative content.” creative content.” the album. Erika Mann, MEP and Chair of the European Erika Mann, MEP and Chair of the European Internet Foundation Internet Foundation

Digital Music Report 2007 Page 16 “What reassures me for the future is to see the “What reassures me for the future is to see the strength, calm and determination with which strength, calm and determination with which the labels and record companies are dealing the labels and record companies are dealing with the issues they’re facing. New economic with the issues they’re facing. New economic models are developed, contracts are models are developed, contracts are adapted, while commercial and marketing adapted, while commercial and marketing operations are transformed. What energy!” operations are transformed. What energy!” Gilles Bressand, CEO, XIII Bis Records Gilles Bressand, CEO, XIII Bis Records “As we continue our transformation from a ‘songs-and- “As we continue our transformation from a ‘songs-and- records’ company into one that delivers a wide variety records’ company into one that delivers a wide variety of rich, music-based content on multiple platforms, our of rich, music-based content on multiple platforms, our experience has shown that the key to harnessing the experience has shown that the key to harnessing the vast digital opportunity is ensuring innovation remains vast digital opportunity is ensuring innovation remains our guiding principle. We always work towards our guiding principle. We always work towards establishing strategic partnerships, pioneering new establishing strategic partnerships, pioneering new products and exciting user experiences within a products and exciting user experiences within a framework that recognises the needs of consumers framework that recognises the needs of consumers alongside the rights of copyright holders, and we alongside the rights of copyright holders, and we believe that is the best way to ensure that legitimate believe that is the best way to ensure that legitimate music services are first-choice for fans.” music services are first-choice for fans.” Patrick Vien, Chairman and CEO, Patrick Vien, Chairman and CEO, Warner Music International Warner Music International

“In this internet age, the consumer is using music “In this internet age, the consumer is using music content more than ever before – whether that's content more than ever before – whether that's playlisting, podcasting, personalising, sharing, playlisting, podcasting, personalising, sharing, downloading or just simply enjoying it. The digital downloading or just simply enjoying it. The digital revolution has caused a complete change to the revolution has caused a complete change to the culture, operations and attitude of music companies culture, operations and attitude of music companies everywhere. It hasn't been easy, and we must certainly everywhere. It hasn't been easy, and we must certainly continue to fight piracy in all its forms. But there can be continue to fight piracy in all its forms. But there can be no doubt that with even greater commitment to no doubt that with even greater commitment to innovation, and a true focus on the consumer, digital innovation, and a true focus on the consumer, digital distribution is becoming the best thing that ever distribution is becoming the best thing that ever happened to the music business and the music fan.” happened to the music business and the music fan.” Eric Nicoli, CEO EMI Group Eric Nicoli, CEO EMI Group

Mobile packages – USB single – Grammy-winning “If we in the EU are going to turn Europe into the “If we in the EU are going to turn Europe into the In July 2006, Sony Ericsson Island Records released a R&B artist John Legend began offering exclusive single from UK act Keane teamed up with US mobile leading knowledge-based economy and society, leading knowledge-based economy and society, Robbie Williams content in on memory stick format in operator Verizon Wireless then we have to ensure that our young people are then we have to ensure that our young people are their line of Walkman®- October 2006. The ultra thin to promote his album branded handsets in Latin limited edition 512Mb USB ‘Once Again’ with two 30 both technologically savvy and aware of the basic both technologically savvy and aware of the basic America, giving Robbie’s global fan base stick was sold in HMV stores for £3.99. In second clips of his songs provided to tenets of intellectual property which protects tenets of intellectual property which protects exclusive access to tour performances, new addition, the USB holds the track’s video and subscribers who then voted on which should creative content.” creative content.” music releases and features that include a a number of screensavers and web links. be released as his next single. memory stick loaded with the chart topping Erika Mann, MEP and Chair of the European Erika Mann, MEP and Chair of the European album Intensive Care, exclusive live Internet Foundation Internet Foundation recordings and video clips, exclusive wallpapers and pictures.

Page 17 “What reassures me for the future is to see the “What reassures me for the future is to see the strength, calm and determination with which strength, calm and determination with which the labels and record companies are dealing the labels and record companies are dealing with the issues they’re facing. New economic with the issues they’re facing. New economic models are developed, contracts are models are developed, contracts are adapted, while commercial and marketing adapted, while commercial and marketing operations are transformed. What energy!” operations are transformed. What energy!” Gilles Bressand, CEO, XIII Bis Records Gilles Bressand, CEO, XIII Bis Records Digital Music In 2007 – A Brave New World Consumers Shape The 100

90 100 5% 39% 20% 10% 32% 21% 11% 14% 13% 16% 90 Future Of Recorded Music 80 4% 5% 17% 41% 39% 20% 10% 32% 80 70 4% 25% 17% 41% 70 60 20% 35% 25% 60 50 26% 20% 50 40 38% 39% 35% 15% 26% Digital Market 40 30 38% 39% 30 20 20% 8% 15% 4% 14% 13% 20 10 Overview In 2006 8% 20% 4% 10 0 14% 13% UK GERMANY FRANCE ITALY SPAIN 0 ONLINE SINGLE ONLINE ALBUM MASTER RINGTONE MOBILE SINGLE UK GERMANY FRANCE ITALY SPAIN ONLINE SINGLE ONLINE ALBUM MASTERTONE MOBILE SINGLE OTHER Online Services Across The World 1800 1200 926 1600 1556 1000 1400 1400

1200 1177 800 304 423 1000 964 Digital Diversifies 600 800 821 721 720 600 400 Consumer Buying Habits 400 200 200

0 0 2000 2001 2002 2003 2004 2005 2006 EST 2000 2001 2002 2003 2004 2005 2006 EST PHYSICAL DIGITAL TOTAL UNITS Music On Mobile Grows In Popularity 100 90 90 90 87% 80 80% 78% 75% 80 80 80% 70 75% 71% 70% 70 71% 64% 70 60 59% 60 60 Emerging Business Models 55% 50 52% 50 50 40 40 40 30 30 30 20 20 20 10 10 10 0 0 SPAINKOREA FRANCE UK US GERMANY KOREASPAIN UK GERMANY ITALY FRANCE US 0 Portable Players Drive 100 88% 90 Music Demand 80 70 60 53% 50 40 Record Companies Boost 30 20 24% Consumer Choice 10 14% 0 11% 9% 9% 8% 8% SOUTH JAPAN ITALY UK SPAIN AUSTRALIA GERMANY FRANCE US KOREA

20 Copyright, Music And

18 18% 16 The Education Challenge 14 13% 13% 12 12% 11% 10

8 7% 6

4 3% 2 Awareness Grows On 0 UK FRANCE US GERMANY SPAIN ITALY JAPAN

50% Virus And Spyware Risks 49% 60 42% 90 50 50% 49% 80 42% 40 70 Containing Piracy 60 30 22% 50 22% 20 40 30 10 20 0 PORTABLE PLAYER BRAODBAND CHEAPER THAN CDS VOUCHER Research10 Shows Legal ProtectingPORTABLE PLAYER BR intellectualOADBAND CHEAPER THAN CDS property VOUCHER is key to Actions0 Are Helping Contain growing the digital business. Illegal File-sharing Progress Against

Internet piracy and the ubiquity of unlicensed illegal file-sharing in 2006, bringing legal Recent findings from Jupiter Research music have caused enormous problems for actions against more than 10,000 individuals in key European markets (UK, Germany, Pirate Operations the recording industry as it evolves into the in 18 countries, including Brazil, Mexico, France, Italy, Spain and Sweden) suggest digital age. The music industry was the first Poland and Portugal for the first time. The that IFPI’s legal campaign against 62% 62% of the modern creative, intellectual principal aims of the campaign are large-scale uploaders is having an impact. property-basedFINDING MUSIC WANTED industries to feel the impact education and deterrence. While broadband household penetration FINDING MUSIC WANTED of the mass availability of its core product for is rapidly rising, the percentage of internet 58% free. Today the film, TV and news media Surveys on levels of illegal file-sharing58% across users engaged in frequent unauthorised Internet Piracy – industriesVARIETY OF CHOIareCE all grappling with the same different countries show that legal actions are P2P usage is actually falling. VARIETY OF CHOICE 39% dilemma of how to monetise their business having a clear effect. Studies also show that in an environment where the main fear39% of legal action is an important factor In Germany, for example, the proportion of The Call To ISPs internet users frequently file-sharing PRICE OF MUSIC competitorPRICE OF MUSIC is free. driving consumers away from unauthorised 23% P2P. In the US lawsuits were the most cited copyrighted music fell back from 13 per Record companies’ sales and2 3%investment in reason among internet households for cent in 2004 to just eight per cent by 2006. GETTING MUSIC FOR FREE music has been severely hit by internet piracy changing from unauthorised P2P to legal In the UK, 11 per cent of internet users 22% GETTING MUSIC FOR FREE in recent years. Global CD sales fell by 23 per downloading (NPD Group, June 2006). frequently engaged in file-sharing in 2004 and this remained constant in 2006 0 5 10 15 20 25 30 35 40 45 50 55 60 65 LISTENING TO SONG CLIPS BEFORE PURCHASE cent in value between 2000 and22% 2005. following a drop in 2005. DRM Promotes Consumer Experience suggests the problem can be Actions have been taken against uploaders 0 10 20 30 40 50 60 70 80 containedLISTENING TO SONGby a CLIPS range BEFORE of PU differentRCHASE strategies, who use all the main unauthorised P2P but will not be eliminated. In 2006 despite key services, including BitTorrent, DirectConnect, When the industry in France announced successes against unauthorised peer-to-peer eDonkey, Gnutella, Limewire, SoulSeek and impending action against illegal file- Flexibility And Protects Content operators, networks like Limewire and WinMX. The average legal settlement in these sharers in 2004, the percentage of internet BitTorrent continued to be massive carriers cases is now 22,420 and people from all users engaging in frequent unauthorised PERCENTAGE OF HOUSEHOLD WITH BROADBAND P2P activity fell from 24 per cent to 14 per 35 32% of copyright theft. walks of life are affected. In Argentina, one 45 40% cent. In 2006, following a gap between PERCENTAGE OF BROADBAND USERS ENGAGED mother made her son sell off his car to pay IN FREQUENT ILLEGAL FILE-SHARING 40 30 In 2007, the recording industry will be her back the settlement fee. legal actions, the percentage of frequent unauthorised P2P usage crept back up to sustaining and expanding its programme of 31% 35 25 23% 21 per cent. 21% legal actions against file-sharing while A recent study in Hong Kong shows that the 30 increasingly focusing on the “gatekeepers” industry’s advice to parents about checking 20 18% 18% Following25 on from the highly publicised 17% closest to the source of the problem. 21%their children’s use of the family computer for 15.4% 16% launch in Stockholm of an international 18% 18% is also having an impact. Researchers at 20 15 13% wave of actions, the number of Swedish Legal Actions Have An Impact Lingnan University15% found that more14% than a 12% 17% internet users15 regularly infringing music 10 third of parents (36%) have advised their copyright fell from 24 per cent in 2004 to IFPI and affiliate7% recording industry bodies children to refrain from illegal downloading in 10 5% 14 per cent in 2006. 5 continued the global campaign against the last year. 5

0 0 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 P2P Usage vs Broadband In Europe

BROADBAND HOUSEHOLD PENETRATION

INTERNET USERS REGULARLY FILE-SHARING 40% UNAUTHORISED MUSIC

31%

21% 18% 18% 15% 15% 14% 12%

2002 2003 2004 2005 2006

Source: Jupiter Research, Sep 2006: UK, France, Germany, Italy, Spain, Sweden.

Digital Music Report 2007 Page 18 “As we continue our transformation from a ‘songs-and- “As we continue our transformation from a ‘songs-and- records’ company into one that delivers a wide variety records’ company into one that delivers a wide variety of rich, music-based content on multiple platforms, our of rich, music-based content on multiple platforms, our experience has shown that the key to harnessing the experience has shown that the key to harnessing the vast digital opportunity is ensuring innovation remains vast digital opportunity is ensuring innovation remains our guiding principle. We always work towards our guiding principle. We always work towards establishing strategic partnerships, pioneering new establishing strategic partnerships, pioneering new products and exciting user experiences within a products and exciting user experiences within a framework that recognises the needs of consumers framework that recognises the needs of consumers alongside the rights of copyright holders, and we alongside the rights of copyright holders, and we believe that is the best way to ensure that legitimate believe that is the best way to ensure that legitimate music services are first-choice for fans.” music services are first-choice for fans.” Patrick Vien, Chairman and CEO, Patrick Vien, Chairman andD CEigiO, tal Music In 2007 – Warner Music International Warner Music InternationalA Brave New World “We are encouraged by the growth of “We are encouraged by the growth of online and mobile music sales, as well online and mobile music sales, as well as by our success in developing a variety as by our success in developing a variety of new business models, including ad of new business moCodels, incnsumluding ad ers Shape The supported video distribution on the supported video distribution on the internet. As our physical revenues internet. As our phyFsicalut reurevenues Of Recorded Music continue to decline, we need to continue to decline, we need to proactively continue to build digital proactively continue to build digital growth and identify new digital growth and identify new digital opportunities that further extend the opportunities that further extend the reach of our artists.” reach of our artistsD.” igital Market Thomas Hesse, President, Global Digital Thomas Hesse, President, Global Digital Business, SONY BMG Music Entertainment Business, SONY BMGO Musveric Entervietainmewnt In 2006

“2006 was an enormous year for Universal Music internationally “2006 was an enormous year for Universal Music internationally and, therefore, the industry. We saw huge growth in all our digital and, therefore, the induOstrnliy. We sawne huge Sergrowth in vicall our diesgital businesses, spurred by a wide range of partnerships. Universal businesses, spurred by a wide range of partnerships. Universal Music will also continue to deliver when it comes to signing and Music will also continAue tocross deliver when it comThees to sig Woning and rld breaking the best artists. Just as importantly, don’t forget the breaking the best artists. Just as importantly, don’t forget the consumers. Ignore them at your peril, as the future of music lies consumers. Ignore them at your peril, as the future of music lies in their hands!” in their hands!” Lucian Grainge, Chairman and Chief Executive, Lucian Grainge, Chairman and Chief Executive, Universal Music Group International Universal Music GrouDp Interiginationtalal Diversifies Consumer Buying Habits “In this internet age, the consumer is using music “In this internet age, the consumer is using music content more than ever before – whether that's content more than ever before – whether that's playlisting, podcasting, personalising, sharing, playlisting, podcasting, personalising, sharing, downloading or just simply enjoying it. The digital downloading or just simply enjoying it. The digital revolution has caused a complete change to the revolution has cauMused a comsicple teOn chang eMo to the bile culture, operations and attitude of music companies culture, operations and attitude of music companies everywhere. It hasn't been easy, and we must certainly everywhere. It hasGrn't beowsen easy, a ndIn we Pomust cpulertainly arity continue to fight piracy in all its forms. But there can be continue to fight piracy in all its forms. But there can be no doubt that with even greater commitment to no doubt that with even greater commitment to innovation, and a true focus on the consumer, digital innovation, and a true focus on the consumer, digital distribution is becoming the best thing that ever distribution is becoming the best thing that ever happened to the music business and the music fan.” happened to the Emusmergic business anding the m Buusic fan.”siness Models Eric Nicoli, CEO EMI Group Eric Nicoli, CEO EMI Group

“We see the trend in the player market moving away from single “We see the trend in the player market moving away from single purpose devices towards multipurpose, and more importantly, purpose devices towards multipurpose, and more importantly, connected devices. This trend will enable hundreds of millions of connected devices. ThiPs orttrend wiablll enable heundr Peds layof millionsers of Drive people to have their music collections with them, as well as to people to have their music collections with them, as well as to download and enjoy digital music on their mobile device. Nokia’s download and enjoyMu digital msicusic on t heirDem mobile deviceand. Nokia’s leadership in this area means we can offer a compelling mobile leadership in this area means we can offer a compelling mobile music experience combining devices, content and connectivity.” music experience combining devices, content and connectivity.” Ed Averdieck, Managing Director, Nokia Music Service Ed Averdieck, Managing Director, Nokia Music Service Record Companies Boost “We need to legitimise consumer behaviour without “We need to legitimise consumer behaviour without asking them to change their usage habits. Advertising asking them to chaConge theirnsum usage habits.er Adv ertChoising ice funded services offer such a solution. But to succeed funded services offer such a solution. But to succeed they need support from content owners, advertisers they need support from content owners, advertisers and the financial community, as well as a critical mass and the financial community, as well as a critical mass of users. SpiralFrog was set up from the start to address of users. SpiralFrogCo was setpyrig up from the staht,rt to a Muddress sic And these criteria.” these criteria.” Robin Kent, CEO, SpiralFrog Robin Kent, CEO, SpiralTheFrog Education Challenge

“The success of eMusic in Europe “The success of eMusic in Europe and around the world shows that and around the world shows that consumers are eager for a digital consumers are eager foCor a digital ntaining Piracy music service that focuses on music service that focuses on music beyond the commercial music beyond the commercial mainstream. By offering customers mainstream. By offering customers well-priced, expertly curated well-priced, expertly curated adventurous music that they can adventurous music that they can own in the universally compatible own in the universally compatible MP3 format, we’ve shown you can MP3 format, we’ve shown you can sell a lot of it. This combination has sell a lot of it. This combination has helped eMusic become the world’s helped eMusic becomePr the worogreld’s ss Against number two digital music service number two digital music service and sell more than 100 million and sell more than 100 million downloads in three years.” downloads in three years.”Pirate Operations David Pakman, President and CEO, David Pakman, President and CEO, eMusic eMusic

“Zune is delivering innovative “Zune is delivering innoIntervative net Piracy – ways for consumers to ways for consumers to discover new music and discover new music and connect with others through connect with others Tthrheough Call To ISPs social experiences enabled social experiences enabled by its wireless sharing by its wireless sharing “Gatekeeper” ISPs hold the key to the problem. capabilities. Innovation is capabilities. Innovation is key – whether it’s how we work key – whether it’s howD weRM work Promotes Consumer The recording industry accepts that online industry. However, they should with artists, new technology with artists, new technology mass-scale legal action against uploaders recognise their responsibility to assist in Tackling Pre-release Piracy features or giving consumers features or giving consumers is the second best solution for containing enabling control of piracy and the Pre-release ‘leaks’ of the all-you-can-eat ZunePass the all-you-can-eat ZunePass internet piracy. The best answer lies in development of a legitimate online market. Flexibility And Protects Content pirated material, tackling the problem closer to its source. subscription, we are focused subscription, we are focused which is often Most ISPs’ terms of service prohibit using the on changing the game.” on changing the game.” uploaded to P2P Internet Service Providers (ISPs) are the service to infringe copyright, and reserve the networks with the Bryan Lee, Corporate Vice Bryan Lee, Corporate Vice gatekeepers to the internet. They have it right to terminate service to those who do so. potential to reach President of Entertainment President of Entertainment within their power to limit access to ISPs should enforce this condition and mass distribution copyright infringing material and therefore terminate their service to people using their Business, Microsoft Business, Microsoft within hours, can have a serious impact hold the key to substantially reducing networks to steal and distribute music on an album launch and have a online piracy. without permission. IFPI has asked ISPs to damaging effect on legal sales. come to the table and address these issues Technology similar to that used to block voluntarily. Many of them initially made Several new albums were available access to child pornography could be used promising noises, but the discussions have illegally online weeks before launch in to block access to websites that facilitate so far gone nowhere and ISPs have 2006 – including high-profile releases by “It’s hard enough for artists and “It’s hard enough for artists and infringing file-sharing of copyrighted music. generally refused to take effective action. Placebo, Franz Ferdinand, The Strokes, labels to handle traditional labels to handle traditional The Flaming Lips and The Red Hot Chilli distribution without support. Add distribution without support. Add Disconnection of serious copyright Governments have a vital role to play in Peppers. In response, pre-release security more than 10 times the content more than 10 times the content offenders by ISPs is the easiest and most requiring ISPs to engage in the fight against has tightened enormously. practical response to illegal file-sharing. ISPs piracy. In the UK, the government- online, hundreds of digital music online, hundreds of digital music have been very slow to help the music commissioned Gowers Intellectual Property services, a dozen different business services, a dozen different business Record companies now use encryption industry crack down on internet P2P piracy. Review recommended in December 2006 models, complex accounting models, complex accounting and watermarking technologies to try to To a significant extent their incentive to do so that ISPs should either come to a voluntary systems, new ways of marketing systems, new ways of marketing ensure promotional copies can only is limited by so-called ‘safe harbours’ in agreement with the industry for a procedure and promotion and you realise and promotion and you realise be listened to by a select few. Often many countries’ laws, including the US and to remove users who engage in piracy, or pre-release security involves a more quickly that you need more quickly that you need more the EU, that were drawn up some years ago face government intervention. complex strategy. An intense operation sophisticated and skilled partners sophisticated and skilled partners to encourage the development of the was mounted by teams at IFPI and EMI to on your team.” on your team.” protect the first new Beatles album for Scott Cohen, Founder, The Orchard Scott Cohen, Founder, The Orchard over 30 years, “Love”.

On the underground music piracy scene, obtaining a copy of the album to distribute illegally on the internet was a “The past year has seen iTunes forge strong marketing “The past year has seen iTunes forge strong marketing high priority. partnerships with major brands, such as Starbucks in the US partnerships with major brands, such as Starbucks in the US Promotion of the album and its release and Coke in the UK and Germany, and with the addition of and Coke in the UK and Germany, and with the addition of to journalists and reviewers before blockbuster movies and TV shows, Apple is continuing to raise blockbuster movies and TV shows, Apple is continuing to raise release was achieved under the profile of legal downloading and the value proposition of the profile of legal downloading and the value proposition of unprecedented security. The internet the iTunes Store worldwide.” the iTunes Store worldwide.” was also closely monitored for potential leaks prior to release. Eddy Cue, Apple’s vice-president of iTunes Eddy Cue, Apple’s vice-president of iTunes

The operation was successful. The first leaks of the album were found only some 36 hours prior to the first official release “If we in the EU are going to turn Europe into the “If we in the EU are going to turn Europe into the date and just few hours away from the UK radio embargo time. leading knowledge-based economy and society, leading knowledge-based economy and society, then we have to ensure that our young people are then we have to ensure that our young people are Post-release investigators tracked both technologically savvy and aware of the basic both technologically savvy and aware of the basic down the original content uploaders and removed a high volume of tenets of intellectual property which protects tenets of intellectual property which protects infringing content. creative content.” creative content.” Erika Mann, MEP and Chair of the European Erika Mann, MEP and Chair of the European Internet Foundation Internet Foundation

Page 19 “What reassures me for the future is to see the “What reassures me for the future is to see the strength, calm and determination with which strength, calm and determination with which the labels and record companies are dealing the labels and record companies are dealing with the issues they’re facing. New economic with the issues they’re facing. New economic models are developed, contracts are models are developed, contracts are adapted, while commercial and marketing adapted, while commercial and marketing operations are transformed. What energy!” operations are transformed. What energy!” Gilles Bressand, CEO, XIII Bis Records Gilles Bressand, CEO, XIII Bis Records Digital Music In 2007 – A Brave New World Consumers Shape The Future Of Recorded Music Digital Market Overview In 2006 Online Services Across The World Digital Diversifies Consumer Buying Habits Music On Mobile Grows In Popularity Emerging Business Models

Portable Players Drive Music Demand Record Companies Boost Consumer Choice Copyright, Music And The Education Challenge

Awareness Grows On Virus And Spyware Risks Containing Piracy

Progress Against Pirate Operations

Courts create new legal landscape for digital music. Internet Piracy – The last year has seen a string of court October 2006, a Danish court came to a clarified that making available a searchable rulings against illegal services. At the same significant judgment that the internet service website of deep links to unlicensed mp3 files time, services that have been hosting provider Tele2 should block users’ access to for download is illegal in the Netherlands. It The Call To ISPs copyright infringing material have signed the infringing website. This ruling was not followed a judgment in Australia against agreements with record companies to appealed by Tele2 and led to other Danish mp3s4free.net. clean up their content. ISPs voluntarily blocking users’ access to the site. This is a significant development in Bearshare Kazaa enlisting the support of ISPs in tackling In May 2006 the American operators of the Kazaa was the biggest international brand copyright infringement, but the site still offers BearShare service agreed to cease to name in music piracy until July 2006, when the unfair competition to legitimate digital operate any music or film download DRM Promotes Consumer service signed an agreement with record services in many countries. services and sold its assets to iMesh, a legal companies ending its infringing activity and file-sharing service. paving the way for the development of a Illegal FTP Servers in Denmark Flexibility And Protects Content legal service. This followed the landmark The Danish Supreme Court ruled in February Kuro ruling in the Australian Federal Court that 2006 that internet service providers can be In September 2006 Kuro, Taiwan’s best-known found the Kazaa operators liable for obliged to prevent their customers from using unauthorised P2P file-sharing service, settled widespread copyright infringement. Kazaa their services to infringe copyright by with the recording industry. Kuro’s operator, paid US$115 million in compensation to the terminating the user’s accounts. The ruling Fashion Now Co Ltd, also agreed to stop record companies that took legal action to was based on European Union (EU) copyright distributing its P2P software and end all stop copyright infringement on its network. laws and has implications across the EU. ISPs support for the copyright-infringing service. Kazaa also agreed to introduce filtering in Denmark can now face injunctions if they technologies that would prevent its users from do not co-operate with rights holders in Mp3s4free distributing copyright-infringing files. identifying people engaged in unauthorised In December 2006 the Full Federal Court of P2P activities and terminating their accounts. Australia rejected the appeal of Stephen allofmp3.com Cooper, the operator of the the mp3s4free Russian-based allofmp3.com has offered Zoekmp3 website and his ISP who had earlier been music for sale around the world without the A Dutch court gave a landmark judgment found guilty of copyright infringement. The licenses to do so, in contravention of Russian against Zoekmp3, a major “deep links” site, in website provided access to illegal music files. law and international copyright treaties. In the Netherlands in June 2006. The ruling

A Growing Form of Piracy – Digital Stream Ripping The audience for digital radio has grown The threat of stream ripping is potentially dramatically. Digital radio offers a superior even greater where unprotected digital quality of sound, a wider selection of streams are transmitted over the internet. In stations, information on tracks as they play, addition to providing guidelines for digital sleek design and interference-free broadcasters to protect against stream reception. Over 500 million people around ripping, the recording industry is helping to the world can now receive nearly 1,000 develop technologies that webcasters and different Digital Audio Broadcasts (DAB) other streaming providers can use to protect services and in the UK alone, digital-only streams against a variety of stream rippers. radio stations are now attracting up to nine million listeners. Rights holders and streaming providers cannot deliver solutions alone. Governments While the technology behind DAB has recorded, a transmission licensed for should as minimum ensure that copyright provided the consumer with yet another one-time listening can in effect be turned law does not inadvertently legitimise stream way to discover and listen to music, it is into a library of permanent, free, high quality ripping services. Time shifting or private also vulnerable to “digital stream ripping” – downloads, each labelled with artist and copying exemptions adopted before the the process by which someone can track information. advent of stream ripping may, in effect, automatically identify and separate leave rights holders without protection. individual tracks from digital transmissions Stream ripping undermines the growing Exemptions that would inadvertently cover and store them for future playback in market for legal, paid-for download the activity of stream ripping need to be any order. services. It means that DAB becomes an limited, or else stream ripping services have “on-demand” service and turns a digital to be explicitly prohibited. This is not like time-shifting a favourite radio radio service into something that is not show for later enjoyment. The problem radio at all. with digital stream ripping is that once

Digital Music Report 2007 Page 20 Digital Music In 2007 – A Brave New World Consumers Shape The Future Of Recorded Music Digital Market Overview In 2006 Online Services Across The World Digital Diversifies Consumer Buying Habits Music On Mobile Grows In Popularity Emerging Business Models

Portable Players Drive Music Demand Record Companies Boost Consumer Choice Copyright, Music And The Education Challenge

A Leading Role For Government Dutch Kitemark Helps True Fans Digital technology has made education Download Legally about copyright and the value of creative content a critical priority for creative and intellectual property based industries like Awareness Grows On music. Intellectual property is the fuel of a media and entertainment sector estimated at over US$1 trillion (PWC), and which is a major Virus And Spyware Risks employer in the knowledge economy. Yet schools are providing insufficient education on the issues which the health of that sector, and the jobs in it, will depend.

Copyright education must become a In 2006 the Dutch recording industry Containing Piracy higher priority for governments. IFPI is launched a kitemark for legitimate calling for educational programmes on services – “Truefan” to help users copyright, intellectual property and the Awareness Grows On Virus And distinguish between legal and illegal value of creativity to be incorporated into Spyware Risks online music services. The project is the core curriculum of all primary and backed by the Dutch Online Shop secondary schools. In 2006, the FBI ran courses on security risks of P2P networks. At the same time surveys show organisation, which is supported by the growing concerns over P2P network safety Dutch Consumers Association. The project Digital File Check Helps Users among internet users. was undertaken after research showed To Stay Safe And Legal that men in their early 30s who were willing Progress Against In the UK research by Entertainment Media to pay for online music claimed not to be A publicly-available software Research in September 2006 found that six know where to find online music they programme, Digital File Check, helps to out of ten people who plan to cut back or could purchase legally. The Truefan mark remove or block any of the file-sharing Pirate Operations stop file-sharing say they will do so because of acts as a road sign on the digital highway. programmes commonly used to fear of computer viruses and spyware. In distribute copyrighted files illegally. It also Japan, 46 per cent of internet users who have schools, produced jointly by the music, film allows the user to delete copyrighted stopped using P2P networks cited viruses as a and video industries, will be launched in music and video files from the "shared major reason for doing so according to early 2007. This guide has been designed to folders" of the computer from where they research by the Recording Industry of Japan help university and school administrations are commonly swapped illegally on the Internet Piracy – (RIAJ) in July 2006. take responsibility for cleaning their internet. The system is available in computer networks and communicate to Belgium, Denmark, Finland, Germany, IFPI, with partners in the film and software their staff and pupils about the dangers of Greece, Ireland, Italy, the Netherlands, The Call To ISPs sectors, are directly addressing companies, copyright infringement. Poland, Portugal, Sweden and the UK at public offices and colleges to raise www.pro-music.org awareness of those security risks. A ‘Copyright and Security Guide’ for universities and

Lesson Plans, Film Shorts and Guides ‘National Music Week’ for schools in The film ‘1001 Jobs in Music’ has been DRM Promotes Consumer Support Parents and Teachers the UK was launched in October 2006. shown in France at FNAC music stores across Schools involved in the project were provided the country to introduce public debates for IFPI and its national groups have launched a with lesson plans looking at the importance of young people on the value of music. In Flexibility And Protects Content series of educational projects in the last three copyright, and the business side of the music Finland, schools have been issued with comic years, providing audio-visual and lesson aids industry as well as music appreciation lessons. books aimed at 12–15 year olds about a to teachers. These include: Tokens to be redeemed against one of ten hopeful young band thwarting the efforts songs at leading retailers where offered to of music pirates to steal their music before it The information guide for parents and every child, forming a “schools top ten” of was released. teachers produced with children’s welfare new bands. charity Childnet International, “Young People, Other initiatives include the Value of Music and the Internet” which has been Programmes for young people from third Music pack in Austria, the film ‘Everything distributed in schools, shops and libraries in 23 grade to university have been run in the Begins With A Song’ in Argentina, ‘Listen Up 2’ countries. It is available at www.pro-music.org United States to educate as to what is legal in Canada and ‘Copy or Love’ in Italy. These and www.childnet-int.org. and illegal when it comes to obtaining music are all cutting-edge audio-visual on the internet. and educational tools made available for free to teachers. More information on all of the initiatives above is available upon request at [email protected]

Page 21 “As we continue our transformation from a ‘songs-and- “As we continue our transformation from a ‘songs-and- records’ company into one that delivers a wide variety records’ company into one that delivers a wide variety of rich, music-based content on multiple platforms, our of rich, music-based content on multiple platforms, our experience has shown that the key to harnessing the experience has shown that the key to harnessing the vast digital opportunity is ensuring innovation remains vast digital opportunity is ensuring innovation remains our guiding principle. We always work towards our guiding principle. We always work towards establishing strategic partnerships, pioneering new establishing strategic partnerships, pioneering new products and exciting user experiences within a products and exciting user experiences within a framework that recognises the needs of consumers framework that recognises the needs of consumers alongside the rights of copyright holders, and we alongside the rights of copyright holders, and we believe that is the best way to ensure that legitimate believe that is the best way to ensure that legitimate music services are first-choice for fans.” music services are first-choice for fans.” Patrick Vien, Chairman and CEO, Patrick Vien, Chairman and CEO, Warner Music International Warner Music International

“In this internet age, the consumer is using music “In this internet agCoe, the connsumsumer is usingers musi Shc ape The content more than ever before – whether that's content more than ever before – whether that's playlisting, podcasting, personalising, sharing, playlisting, podcasting, personalising, sharing, downloading or just simply enjoying it. The digital downloading or justFut simplyure enjoy ingOf it. T heRec digital orded Music revolution has caused a complete change to the revolution has caused a complete change to the culture, operations and attitude of music companies culture, operations and attitude of music companies everywhere. It hasn't been easy, and we must certainly everywhere. It hasn't been easy, and we must certainly continue to fight piracy in all its forms. But there can be continue to fight pirDacyigi in alltal its forms. M Butark there etcan be no doubt that with even greater commitment to no doubt that with even greater commitment to innovation, and a true focus on the consumer, digital innovation, and aO truever focus onvie the conswumer In, d 2006igital distribution is becoming the best thing that ever distribution is becoming the best thing that ever happened to the music business and the music fan.” happened to the music business and the music fan.” Eric Nicoli, CEO EMI Group Eric Nicoli, CEO EMIO Groupnline Services

Digital Music Report 2007 Page 22 www.ifpi.org www.pro-music.org

MUSIC. A LANGUAGE, A LIVELIHOOD, AN INDUSTRY. IFPI represents the recording industry worldwide with some 1400 members in over 70 countries and affiliated industry associations in 48 countries.

IFPI Mission: IFPI Services: Members are invited to get in touch for: I Promote the value of I Market Research I Key statistics on the digital and physical music markets worldwide recorded music I Advice on digital distribution and technology I New Technology I Help with pre-release security and anti-piracy I Safeguard the rights of I Research proposals that would benefit the industry I Internet Anti-Piracy Unit record producers I Questions about copyright laws and treaties at a national or international level I Expand the commercial I Industry Representation to I Grass-roots ideas to promote the value of music to their consumers uses of recorded music National Governments and European Union I Information about the international IFPI GRID and ISRC identification systems I Communications and Events I Information on IFPI membership, publications and resources

I Legal Policy

I Litigation & Regulatory Affairs IFPI membership Tel: +44 (0) 20 7878 7900 I Physical Anti-Piracy Email: [email protected] Enforcement

Page 23 Tel: +44 (0)20 7878 7900 www.ifpi.org www.pro-music.org

Published by IFPI, January 2007 Copyright©2007, International Federation of the Phonographic Industry (IFPI) All data, copy and images are subject to copyright and may not be reproduced, transmitted or made available without permission from IFPI.