The annual IDPF Digital Book conference took place this week in New York, as part of the BookExpo America trade show for the publishing industry. You can count on two topics being discussed at any book publishing conference: Amazon and DRM. IDPF Digital Book 2015 was no exception. One particular panel featured writers from leading book industry trade magazines, and the moderator was Joe Wikert, a well-respected digital publishing executive who is an outspoken opponent of DRM. The discussion turned to the pros and cons of “walled gardens” such as Amazon’s Kindle ecosystem. Wikert remarked on how quickly the music industry got rid of DRM and suggested (as he often does) that book publishers should follow.
The usual story is that the music industry went DRM-free in 2009 when Apple completed its removal of DRM from its vast iTunes music catalog. But how true is that? Not very, as it turns out. I’d argue not only that DRM never really went away but that it’s making a comeback.
The first thing to recognize is that downloaded files are the only mode of digital music delivery in which the music isn’t encrypted. All on-demand music services (Spotify, Rhapsody, Google Play Music, Beats Music, etc.) encrypt streams as well as music tracks that users download for “offline listening.” And all forms of digital radio — Internet (Pandora), Satellite (SiriusXM), and digital TV (Music Choice) — are encrypted.
These modes of delivery are now more popular than download purchases. Music download sales peaked in 2012 and have moved into sharp decline. Based on publicly available subscribership figures and studies such as Edison Research and Triton Digital’s The Infinite Dial, I estimate the total U.S. active monthly listenership to on-demand music services in the 60-70 million range. That’s counting the use of YouTube as a de facto on-demand music service, which The Infinite Dial estimates as more than four times that of Spotify. (The study says that 73% of YouTube music users don’t even watch the videos but just listen.) Internet radio, led by Pandora and iHeartRadio, has well north of 100 million active listeners, while over 27 million people subscribe to SiriusXM. All of these numbers are growing steadily.
How many people purchased digital downloads? About 40 million in a year (based on 2013 research from NPD), and declining. Of course, once someone has downloaded a file, she can play it any number of times, but the number of download buyers is a reasonable measure of active users of the purchased-download model. So it’s safe to say that the number of people who obtain music using a DRM-free model (legally) is much lower than the number of people who get it through a model in which music is encrypted. To be more precise, the percentage of people who purchase music downloads is only about 18% of the total digital music market. (That’s a lower bound, assuming no overlap, but it doesn’t include satellite or digital TV radio.)
More recent research by GlobalWebIndex reinforces the trend. The firm’s Q1 2015 survey of teenagers around the world shows that while 60% used a streaming service during the last month, only 21% purchased a music download.
Compare this to the numbers in 2008, the end of the supposed “DRM era.” At that time, iTunes represented about three-quarters of the music download market. At least 10 million people in the U.S. purchased music on iTunes on a monthly basis, meaning that over 13 million purchased music downloads from anywhere. Internet radio had perhaps 7 million active users, and on-demand services had less than 2 million subscribers. In other words, download purchasers accounted for a lower bound of 60% of all Internet music users in 2008 — more than triple the percentage today. (These are all rough estimates; email me to find out how I calculated them.)
An even better way of measuring the percentage of digital music delivered with and without encryption is the revenue that record labels get from music through these various modalities. For this, we turn to numbers compiled by the RIAA. Here’s what they tell us:
This chart shows the percentages of total digital recorded music revenues that come from DRM-free vs. encrypted modalities. DRM-Free includes downloaded singles, downloaded albums, kiosk sales, and ringtones (even though some of the latter may be DRM-protected). Encrypted categories include SoundExchange distributions (all forms of digital radio), Paid Subscriptions (paid on-demand services and premium Internet radio such as Pandora One and Rhapsody unRadio), and Ad-Supported On-Demand Streaming (YouTube, Vevo, Spotify Free).
The chart starts in 2009, when iTunes went fully DRM-free. 2008 was a transitional year as two of the major labels (first EMI, then UMG) began to go DRM-free on iTunes, and Amazon launched its completely DRM-free MP3 store. Before then, perhaps 5% of digital music revenue was from DRM-free sources.
The trend began to reverse in 2011, when Spotify launched and the major labels completed deals with YouTube in which they allow most of their material to be shown in exchange for a share of ad revenue, resulting in “hockey stick” growth in listenership to on-demand services that continues to this day.
From this data it’s fair to predict that the lines will cross, that encrypted modalities will represent the majority of recorded digital music revenue by 2016.
As a footnote, the fastest-growing category of recorded music revenue is neither on-demand nor Internet radio; it’s vinyl. Vinyl has come back from near death in 2010; its revenue growth is at 50% per year and accelerating; it now contributes more revenue to record labels than YouTube. Now here’s a rather metaphysical question: should we count vinyl records as DRM-free or not? You decide, but look here first.