Are Streaming And Vinyl Going To Save The Music Business?

Welcome to Spotify: subscription streaming is now a $600m business


Music industry trade body the RIAA published its annual report on sales and shipments of music earlier this week.  It’s a great snapshot of how much America’s music consumption has changed in recent years, and it puts numbers behind the trends that music lovers are already living with.

(You can find the full data, with comparisons to past years, in this spreadsheet that I’ve built on Google Docs.  You’re welcome.)

Unsurprisingly, the survey documents the seismic shift from physical to digit formats. Revenue from digital formats – downloads and streaming – adds up to $4.4bn, or 64% of the recorded music business, up from 40% in 2009. Digital formats superseded physical formats back in 2011.

So let’s look for the more interesting stories within the data:

Surprise! the music market is stable
The music industry spent most of the 2000s tumbling down a CD-shaped cliff.  Fellow blogger Music Business Research reports that CD albums were a $13bn business in 2000, and a $3bn business today.  More recently, the music business has plateau’d at around the $7bn revenue mark.  The recorded music industry has bounced along at $7bn revenue a year since 2010.

Downloads are declining
We’re at Peak Download.  Download volume dipped from $2.9bn to $2.8bn in 2013, led by a 4.5% drop in the number of singles downloaded down to 1.3bn.  Album downloads are only slightly ahead of last year at 118m units.  We’re already moving from the first wave of digitization, where users graduated from physical ownership to digital ownership, into a second wave, where users graduate from ownership to streaming.

Momentum is moving from downloads to streaming
2013 was a banner year for music streaming services.  Streaming grew 39% to a $1.4bn business, led by a 57% revenue uptick to $628m for paid subscription services such as Rhapsody and Spotify.  Paid subscription services leapfrogged Sound exchange distribution services (up 28% to $590m) as the biggest segment in streaming.  There are now 6.1m subscribing to paid services, up 79% from 3.4m in 2012.

Record Store Day: vinyl’s resurgence is still a fraction of the CD’s decline

Vinyl is making a comeback, but it’s not going to save the physical music industry

Vinyl sales increased by 33% in 2013, following a similar 36% hike in 2012.  This is a genuine growth story (vinyl sales have more than doubled since 2010) and vinyl gets a lot of love as a resurrected format and a tie back to record stores that have supported the music scene for decades.  But this growth still amounts to just $211m in annual sales.  CD sales, which continue to tank, are still worth ten times more than vinyl sales.  The vinyl market grew by $50m in 2013, which barely replaces the $450m fall in CD sales.

Even the industry struggles to keep up with itself
What we measure reflects what we think is important.  This is the first year that the RIAA broke out figures on free on-demand streaming services, and highlighted YouTube and Vevo as music channels.  RIAA used to report extensively on ringtones, a $1bn market in 2008, but now relegates them to a thin 0.5% share sliver on a pie chart.

The music industry enters a new paradigm every year
For an industry that has already been through so much disruption, recorded music continues to pass landmarks and milestones. 2013 alone saw peak vinyl, streaming coming of age, and download revenue surpassing physical format revenue. If you don’t like the current paradigm, another one will be along soon.

For context, America’s broader love of music is as strong as ever. The Grammys continue to attract 28-29 million viewers. 7 of the 10 most followed people on Twitter are singers. And Americans’ spending on live music continues to trend upwards. Live music will soon be a $10bn business. The love keeps growing. But the format keeps shifting.

 

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Why Is High Fashion So Expensive?

Louis Vuitton’s Murakami Handbag: A Collaboration Worth 350 Million Dollars

Last year, The Business Of Fashion noticed a tipping point in the price of designer footwear. More than 100 pairs of shoes on fashion retailer Net-a-Porter cost over $1,000. At the same time, The Daily Telegraph noted that over 130 handbags on Net-a-Porter’s UK site retailed for over £1,200 ($2,000.) The trajectory of the prices was as dramatic as the prices themselves: the tag on Hermes’ iconic Kelly bag and the Manolo Blahnik shoes made famous by Carrie Bradshaw in Sex And The City had increased by some 60% in ten years. The consumer price index rose just 27% over the same period. With New York Fashion Week launching today, it’s a good time to ask why is high fashion so expensive?

We can rule out the tired sexist argument that fashion preys on weak women. As watch blog Crown & Caliber explains, the inflation-adjusted price of a mens’ Rolex Daytona has risen from $2,085 in 1973 to over $12,000 today, while a guy on Net-a-Porter’s men’s site Mr Porter has no fewer than 19 opportunities to drop more than $5,000 on a winter coat.

Loro Piana’s suede-trimmed, beaver-lined cashmere coat: yours for $12,695

Prices are high and rising due to a mix of rising costs, expensive expansion and a dramatic change in demand. Let’s break it down.

Prices are high because costs are high. The Business Of Fashion states that Chinese labor costs are growing by an annual rate of 14%, cotton prices by 13% and cattle prices (which affect leather) by 7%.

Prices are high because margins are high. Again, The Business of Fashion states that luxury businesses target a 65% margin: a bag that retails for $3,500 should cost about $1,225 to produce.

London’s New Bond Street, where retailers pay up to £1,050 ($1,700) per square foot to rent store space


Selling is becoming more expensive. Luxury brands like to sell from directly-operated stores, where they can best project the brand and defend its margins. Luxury brands are expanding their store base: according to holding company Kering’s annual report Gucci operates 474 stores worldwide (up 10% from 429 in 2012), while sister brand Bottega Veneta increased its number of stores by 13% from 196 to 221 in the same period. According to property firm Cushman & Wakefield, high fashion areas Causeway Bay in Hong Kong, Fifth Avenue in New York and Bond Street in London are amongst the top 10 most expensive rental areas in the world. In Mayfair, which has the highest concentration of haute couture stores in the world, fashion houses are expanding the upper stories of their buildings to build lounges for high-value customers. For fashion brands, selling means more than retail: Vogue publisher Conde Nast has increased it number of advertising pages by 5% in 2013, suggesting that the cost of advertising is up too.

More rich people = higher prices. Perhaps the biggest impact on fashion inflation is not supply costs, but rising demand. We have seen a dramatic rise in the number of high net worth individuals. CapGemini’s World Wealth Report states that there are now 12 million HNWIs around the world, up from 10m in 2007. In other words, there are two million new millionaires, and $5.5 trillion of new wealth for high fashion brands to attract. In China, which is responsible for much of the growth of fashion and luxury spending, consumers have developed high-end tastes incredibly fast. A survey by KPMG shows that the typical Chinese middle-class consumer now recognizes 59 different luxury brands, compared to just 34 in 2006. And the affluent Chinese are much more likely to buy luxury goods than their counterparts in the US. French bank Exane BNP Paribas reports that Chinese household earning 75-150,000 Euros ($100-200,000) will spend 2,902 Euros on luxury goods, while a US household in the same income bracket will typically spend just 569 Euros. Beyond the rise of the millionaires, there’s a new class of Asian high fashion buyer.

It’s over a hundred years since Thorstein Veblen articulated the idea of conspicuous consumption, where wealthy people would happily invest in displays of wealth. Now that eight times as many students are enrolled in the Savannah College of Art and Design’s prestigious accessories design program as in 2008, society is gearing up for more, and more expensive, high fashion.

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