LONDON (Dow Jones)--After five years of revenue declines and angst about piracy and file sharing, the growth of digital music is putting record companies back on the road to growth, analysts said Thursday.
The global music industry has seen revenues falling since 2001, amid exponential growth in unauthorized file sharing and piracy, and major music companies have been accused of being slow to acknowledge the power of the Internet to distribute music.
But figures Thursday from music majors Universal Music Group, a unit of Vivendi (V), and EMI Group PLC (EMI.LN) show that digital is becoming a significant revenue stream, and analysts think it will soon start to make up for years of decline, although there is little evidence that illegal downloading is on the wane.
"I think there's a strong probability that digital sales will start to compensate for the decline of physical sales for the global recorded music industry this year," Mark Harrington, an analyst at ABN AMRO, told Dow Jones Newswires.
EMI said in a trading statement Thursday that digital music revenue jumped more than 150% in fiscal 2006, stripping out the impact of currency fluctuations, and was likely to account for more than 5.5% of the revenue of EMI Music, the company's recorded-music unit, in the full year.
Universal Music Group said digital revenue accounted for 10% of its global music sales during the first quarter of 2006. Analysts attribute the higher figure to Universal's exposure to the U.S. market, where digital music is more widespread.
Harrington's remarks echo a prediction from the International Federation of the Phonographic Industry, the global music body, in January, that digital sales would begin to compensate for declines in revenue from physical products during 2006. Overall sales of recorded music, including both physical and digital, fell by 3% in 2005.
Figures IFPI released for 2005 showed that global sales of digital music via the Internet and mobile phones tripled to $1.1 billion in that year, up from $380 million in 2004. In Europe's two largest markets, the U.K. and Germany, legal downloads outstripped illegal ones for the first time in 2005.
Analysts say consumers are becoming increasingly comfortable with the proliferation of new digital download services and the devices to listen to music. Market leader iTunes, a unit of Apple Computer Inc. (AAPL), still accounts for around 80% of global downloads, with its user traffic growing by 241% in 2005.
But new download sites - such as Microsoft Corp.'s (MSFT) MSN and Napster Inc. (NAPS) - have blossomed. Also appearing on the scene are what are known as "white label" services from companies as diverse as U.K. retail giant Tesco PLC (TSCO.LN), coffeehouse chain Starbucks Corp. (SBUX) and Dutch brewer Heineken N.V. (00916.AE).
Meanwhile, the spread of broadband Internet access with quicker download speeds makes buying music quicker and easier. The U.K. alone now has an estimated 10 million broadband users, according to Ofcom, the government communications regulator.
Consumer acceptance of digital sales is demonstrated by the recent chart success in the U.K. of the Gnarls Barkley track "Crazy," which went to the top of the singles chart purely on the basis of digital sales.
Forrester Research notes that the increasing availability of Internet-enabled mobile phones should help drive growth; 16% of European consumers now have the Internet-ready phones, although 77% of the owners of such phones don't actually take advantage of that particular function.
In research published in March, Forrester predicted that legal downloads - currently just 2% of the European music market - would expand to 36% by 2011. Forrester estimates that by then the European digital music market will be worth EUR4 billion, while the physical market will have declined to EUR7 billion.
Concerns remain, however, that while top music companies are making profits from digital and revenues look set to grow again, they still face major hurdles.
Illegal file sharing is still a significant problem for the industry, according to a 2005 MORI survey conducted for AOL U.K., which found that three-quarters of all online music consumers still downloaded music illegally over the internet. Forrester's own research shows that in Germany, just 3% of German users have paid for downloaded music as a one-off payment, with the figure even lower in the U.K.
Incompatibility between devices used to listen to music digitally, such as Apple's iPod and Sony's (SNE) digital music player, still discourages wider acceptance of downloaded music. And Forrester's research shows that despite the growth in digital, the overall European music market is expected to remain roughly the same size by 2011.
Paul Jackson, Forrester's music analyst, noted that the industry still faces a challenge with younger consumers, who have an array of other things to spend their disposable cash on, from video on demand to games and mobile phones.
But the record industry seems to have avoided some of the Doomsday scenarios about the impact the Internet would have on the music business. "The very bleak future of no one ever paying for music has been averted through the combination of carrot and stick," Jackson says.