You've probably read a lot of reports about how the recording industry is going under financially and how record companies are becoming closer and closer to being a failing enterprise. Curious about whether this was true or not, I decided to check up on the latest Nielsen Soundscan forecast to see how well the recording industry was doing in comparison to previous years. Here are the facts from their 2011 report:
- Total music purchases reached the 1.6 billion mark for the first time
- Overall album sales are up by 3.2% from 2010
- Total album sales are up for the first time since 2004 with total sales equaling 330.6 million
- More vinyl albums were purchased in 2011 than in any other year since Soundscan's inception - interestingly enough they accounted for 1.2% of album sales (WOAH!)
- Digital music sales account for 50.3% and for the first time digital sales are larger than physical album sales
- Physical album sales declined by 5%
What Nielsen's forecast shows us is that overall the music business is doing extremely well for itself, but consumers are still under the impression that it's in this state of failure. Why is this so?
What consumers don't know is that the "Big Four" record companies control 80% of the music market, aka the number of albums that come out in any given year. These four record companies have the ability to influence media coverage and consumer beliefs about the music business and about music piracy. So if the Big Four tell the media that they're in a state of failure because they're not recouping enough money from album sales this makes it seem like the entire industry is in a state of failure. Is this an ethical move by the Big Four? My initial response is a big N-O. Why? Because as a music consumer myself I feel like I have been deceived into believing that an entire industry is failing when it's really just a couple of companies who aren't making as much of a profit and want me to believe an entire industry is failing so they can recoup their losses. It just puts a bad taste in my mouth. But then I had to ask myself: Even thought overall music sales are up, does that mean profit is up within the industry overall? To be honest I can't really say, but let's delve into this a little further to see if we can figure it out.
Let's say that putting out an album costs $500,00 to create and distribute. This money comes out of the record company's pocket in the form of an "advance" to the artist and then the artist is expected to recoup a large percentage (if not 100%) of this cost through album and merchandise sales before the record company or the artist ever gets paid.*
Now putting together a physical album package (CD and jewel case) probably costs around $0.90 to make and is then sold in a retail store for about $15. This means for every album sold the artist is getting back $14.10 that they can use to pay off that $500,000 advance so that both artist and record company make money faster. But with a digital album sale there is no physical album to distribute so when the artist sells a single song on let's say iTunes, they get $0.99 from each single song and $9.99 for each album sold that they can use to pay back that $500,000. Furthermore, many online music shoppers don't purchase full albums anymore because they're only interested in purchasing their favorite individual songs on iTunes. This is very different from purchasing a physical album for obvious reasons: with a physical album you're paying for all of the songs on that album and don't have the option to purchase individual songs. So artists are likely not recouping money as quickly, which means both record company and artist suffers.*
So is the industry failing? I think it's probably just moving into a new plain of existence. Time will tell.
NOTE: I'm sure some of the numbers and projections in these paragraphs aren't 100% correct so forgive me for that. I just wanted to give a general view of how the system works more than anything.
Let's say that putting out an album costs $500,00 to create and distribute. This money comes out of the record company's pocket in the form of an "advance" to the artist and then the artist is expected to recoup a large percentage (if not 100%) of this cost through album and merchandise sales before the record company or the artist ever gets paid.*
Now putting together a physical album package (CD and jewel case) probably costs around $0.90 to make and is then sold in a retail store for about $15. This means for every album sold the artist is getting back $14.10 that they can use to pay off that $500,000 advance so that both artist and record company make money faster. But with a digital album sale there is no physical album to distribute so when the artist sells a single song on let's say iTunes, they get $0.99 from each single song and $9.99 for each album sold that they can use to pay back that $500,000. Furthermore, many online music shoppers don't purchase full albums anymore because they're only interested in purchasing their favorite individual songs on iTunes. This is very different from purchasing a physical album for obvious reasons: with a physical album you're paying for all of the songs on that album and don't have the option to purchase individual songs. So artists are likely not recouping money as quickly, which means both record company and artist suffers.*
So is the industry failing? I think it's probably just moving into a new plain of existence. Time will tell.
NOTE: I'm sure some of the numbers and projections in these paragraphs aren't 100% correct so forgive me for that. I just wanted to give a general view of how the system works more than anything.
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