ifpi 2007

Digital Music Report 2007 Page 02

Progress Against Pirate Operations

Copyright, Music And The Education Challenge

DRM Promotes Consumer Flexibility And Protects Content

Containing Piracy

Emerging Business Models

Digital Diversifies Consumer Buying Habits

Portable Players Drive Music Demand

Awareness Grows On Virus And Spyware Risks

Record Companies Boost Consumer Choice

Music On Mobile Grows In Popularity

Online Services Across The World

Digital Market Overview In 2006

Consumers Shape The Future Of Recorded Music

Digital Music In 2007 A Brave New World

Internet Piracy The Call To ISPs

However, there is correctly a certain amountof nervousness around. This is sensible; there iscertainly no room for complacency. We areall troubled by the research that suggests thenumber of new tracks purchased per MP3player is low, and yet at the same time digitalmusic is hitting new milestones. It has helpedthe singles business to its best year ever,revived genres like classical and isregenerating formats like music video. It isspreading internationally. New markets likeChina, that have been historically closed to legitimate business by ruinous levels ofpiracy, are offering the prospect of a leap to digital.

The chief winners in the rise of digital musicare consumers. They have effectively beengiven access to 24-hour music stores andservices with unlimited shelf space. They canbuy or consume music in new ways andformats an iTunes download, a video onYouTube, a ringtone or a subscription library.To cap it all, Time magazine crowned theinternet user as their person of 2006.

We are still in a period of innovation andexperimentation. Some believe thesubscription model wont work and othersbelieve it is the industrys brightest hope forthe future. However, the subscription modelcannot be properly tested whilst there areinteroperability issues to resolve.

The market remains a challenge. Otherindustries are struggling with the sameproblems we have had to live with. The filmindustry is increasingly suffering from onlinepiracy, and the newspaper industry is facinga slump in sales triggered at least partly bybehaviour on the internet.

As an industry, we enforce our rightsdecisively, and this will continue. In 2006, we had significant legal victories, led by aUS$115 million settlement against Kazaa. We were told we could never track downsuch offenders on the internet. We were toldthey would hide in places where we couldnot find them!

We have taken some 30,000 actions against illegal file-sharers globally and, as the research in this report shows, theseactions clearly work. Illegal file-sharing inEurope was contained last year against a 30 per cent increase in broadbandhousehold penetration.

However, actions against individualuploaders are onerous and expensive andwe shouldnt have to be taking them. That jobshould not be ours it should be done by thegatekeepers of the web, the Internet ServiceProviders (ISPs), who unquestionably havethe technical means to deal with copyrightinfringement, if only they would takeresponsibility for doing so.

At one time you were considered a newmedia philistine if you wanted to regulate theinternet. But then Google promised theChinese government that censorship waspossible. Then Google blacklisted BMW in theinternet world for anti-social behaviour. Itseems policing is acceptable for all sorts ofthings but not intellectual property!

With cooperation from ISPs, we could makehuge strides in tackling content piracyglobally. Disconnection of service for seriousinfringers should become the speeding fineor the parking ticket of ISP networks. We needgovernment help to make it clear that ISPsmust face up to their responsibilities and cutoff copyright infringing users. To be fair, at theend of 2006 the UK government signalledthat it may be prepared to play a facilitatingrole in this and set a deadline of December2007 for tangible progress.

What does John Kennedy wish for 2007? Hehopes politicians who talk about theimportance of the Knowledge Economycome up with actions to match their words.For an internet lifetime we have heard thatthe Knowledge Economy is the future. Withmanufacturing economies lost to manygovernments, there is an acknowledgementthat in the future we are going to be morereliant on the creative industries foremployment, tax revenues, overseasearnings and general economic growth. The rhetoric is wonderful but is simply notmatched by deeds. Lets hope that willchange in 2007. The music industry is still anexciting, innovative and vibrant industry, butthere are no easy wins and everyoneinvolved knows that in 2007 we must all strive even harder for that holy grail that Ireferred to earlier.

To end on a high note however. Doug Morris,as CEO of Universal Music, the largestrecording company, has announced that heexpects 2007 to be Universals mostsuccessful financial year ever. Thats anencouraging signal to send to the gloommerchants and a motivational message forhis employees and his competitors!

Page 03

6

Music is not only the most popular consumer product in the industrialised world. It is a key driver of the digital economy.

Consumers Shape the Future for Recorded Music

?Digital music expands worldwide

The record industry today has evolved into adigital thinking, digitally literate business.

In 2006, we saw internet advertising revenuesincrease to the stage where they will shortlyovertake radio advertising revenues. We sawnewspaper headlines talking about the fourlap-top home. In 2006, we learned that someof the online business will be about microtransactions where a million dollars ofrevenue can be the result of 57 milliontransactions! And, most of all, we learned thatthis is a market that is evolving not only on adaily basis but with regular revolution in themarket to add spice to the evolution.Frequent surprises in the market are alsomatched by an air of expectation, and in2007 that has borne fruit with the iPhone,which should herald a shake up of themobile music market. This is a market wherethe learning curve changes direction on aregular basis!

The pace of transformation in our industry isbreathtaking, but at the moment the holygrail is evading us. I would like to beannouncing that a fall in CD sales is beingcompensated for by an equal or greaterincrease in online and mobile revenues. Butthat is not yet happening on a global basis.

The digital music business continues to grow.Trade revenues in 2006 doubled to aboutUS$2 billion around 10 per cent of our sales.By 2010 we expect at least one quarter of allmusic sales worldwide to be digital.

Some commentators have expressedconcern about the pace of annual growth.Yet we never claimed it would double everyyear and the rate of growth that we areseeing today would be consideredwonderful for many businesses.

greatest challenge is the widespreadunauthorised availability of its product for free.Digital piracy and the devaluation of musiccontent is a real threat to the emerging digitalmusic business.

This report outlines the ways in which therecording industry is responding to theconsumer and building a digital business. Italso identifies the problems faced and wherethe music sector needs action by governmentand by industry partners to tackle piracy andprevent the undermining of its intellectualproperty rights.

Highlights Of 2006

Record companies digital music salesare estimated to have nearly doubled

in value in 2006, reaching a trade value ofapproximately US$2 billion. The split betweenonline and mobile remains fairly equal, butvaries substantially across markets. Digitalsales are estimated to have grown from 5.5per cent in 2005 to around 10 per cent ofindustry sales for the full year 2006.

Single track downloads are estimatedto have totaled 795 million in 2006, up

89 per cent on 2005. Single track downloads




Containing Piracy












Consumers are changing the ways they discover, access andlisten; copyright remains key to the digital music business.New digital delivery channels are drivingmusic consumption to its highest-ever levels as consumers demand access to music inmore ways than ever.

Digital music has empowered the music fan.The popularity of single track buying, thegrowth of mobile music and the risingdemand for music video on the internetexemplify this. The past year has also seen asurge in user-generated content on socialnetworking sites such as MySpace, Bebo andYouTube a new way for record companiesto legitimately bring their music to the public ifthey can successfully control widespreadcopyright infringement, and a greatopportunity for independent labels toshowcase their talent.

Digital music is still in an early phase ofdevelopment. In 2006 record companiesexplored new and different revenue streams. Examples of these includedadvertising-supported online services andshared revenues from the sale of portabledigital devices. Record companies arecontinuing to focus on what they do best discovering, marketing and licensing greatmusic using all the digital tools at theirdisposal to help them compete for a share ofthe market. Digital is also opening uppotential in countries blighted by physicalpiracy. International teams at recordcompanies are extending digital operationsinto China, India, Russia and Eastern Europe.

However, digital music has not yet achievedits holy grail: growth has not offset the fall inCD sales. The recording industrys single

and mastertones remain the main digitalmusic formats, but other formats, such asmobile downloads, digital albums, musicvideos and ringback tones all saw healthy growth.

The number of tracks available onlinedoubled to reach over four million on

leading services in the last year.

There are 498 online music servicesavailable in over 40 countries, offering

consumers a wide variety of choice andgreat value.

Portable music players are helpingdrive digital music consumption.

Portable player sales totalled around 120million in 2006, an increase of 43 per cent onthe previous year (Understanding andSolutions). Portable player owners are morelikely to buy music legally than generalinternet users; but the amount of purchasedmusic stored on devices is still low.

New revenue streams and businessmodels emerge. Social networking

sites exploded in popularity while advertising-supported models such as video licensing on Yahoo! Music and MSNemerged as a potentially exciting revenuestream for record companies.

Lawsuits are having an impact.Recent research from anylists Jupiter

shows that illegal file-sharing in Europe hasbeen contained in the last year, in the contextof a 30 per cent increase in broadbandhousehold penetration.


Global Digital Music Market In Figures (millions)

Broadband lines

Song catalogue online

Single tracks downloaded

Subscription service users

Mobile subscriptions

3G mobile subscriptions

Portable player sales

2005

209

2

420

2.8

1,817

90

84

2006

280

4

795

3.5

2,017

137

120

Change

34%

100%

89%

25%

11%

52%

43%

Sources: IFPI,PWC,M:Metrics,Understanding & Solutions

As we continue our transformation from a songs-and-records company into one that delivers a wide variety of rich, music-based content on multiple platforms, ourexperience has shown that the key to harnessing the vast digital opportunity is ensuring innovation remainsour guiding principle. We always work towardsestablishing strategic partnerships, pioneering newproducts and exciting user experiences within aframework that recognises the needs of consumersalongside the rights of copyright holders, and we believe that is the best way to ensure that legitimatemusic services are first-choice for fans. Patrick Vien, Chairman and CEO, Warner Music International

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

Cingular announced its mobile musicstrategy in November 2006 and became thefirst US operator to provide a mobile platformto online music services such as Napster,eMusic and Yahoo! Music. It will also be theoperator carrying the iPhone when it goeslive in June 2007 in the US.

Digital Diversity In Europe

European markets account for around 20 percent of global digital sales. Despite stronggrowth in most countries, digital sales inEurope remain concentrated in the topmarkets UK, France, Germany, Italy andSpain. Overall, digital channels accountedfor six per cent of total music sales in Europein the first half of 2006, lower than theestimated global average.

Less developed promotion and marketing ofdigital music services and lower broadbandpenetration in the smaller markets are factorsin the slower development of the onlinemusic market in some parts of Europe.However markets such as the UK have seenstrong growth.

The mobile music market in Europe isdeveloping steadily. The cost of data-transfersis high compared to Asia and thirdgeneration 3G technology is notwidespread across the region. This iscontributing to the slower development ofadvanced mobile music services in someEuropean markets.

Digital music sales are estimated to havealmost doubled in value worldwide in 2006,reaching an estimated trade value of aroundUS$2 billion. Digital channels accounted foran estimated ten per cent of music sales forthe full year 2006, up from 5.5 per cent in 2005.The global split between online and mobilesales remained fairly equal worldwide, butvaries substantially across markets.

Key Year For Mobile Music In The US

Single track downloads in the US totalled 582million in 2006, up 65 per cent compared to2005 (Nielsen SoundScan). Digital albumsnow account for six per cent of all albumsales in the US and grew faster than singletracks in 2006, although from a small base.

iTunes, the leader in online downloads, hassold over two billion tracks since its launch inApril 2003 and more than one billion in 2006alone. In November 2006 it expanded itsoperations in the US to include a mini-storededicated to Latin music and entertainmentincluding music, videos, television shows,audiobooks and podcasts.

2006 was a key year for mobile music in the US and this continued in 2007 with themuch-anticipated Apples iPhone. Sprintlaunched the first full track download-to-mobile service at the end of 2005 and hassold over ten million tracks in since. Verizonfollowed suit, launching a service in thebeginning of 2006. Mastertones are still themain mobile music format in the US, butringback tones and single track sales are growing.

Europe is, however, very well provided withonline digital services, with a more diverse mixof retailers than in the US. According to IFPIstracker, there are currently 320 online musicservices in Europe and 20 available in morethan one market.

There were 53 million single track downloads inthe UK in 2006, double the number in 2005.Digital album sales have reached 2.2 millionsince the Official Chart Company (OCC)started tracking the figure in April 2006. The UKhas also the highest proportion of regularonline buyers in Europe, currently at eight percent of internet users, up from four per cent in2005 (Jupiter Research).

Mobile operator 3 leads the mobile musicmarket in the UK, with a 70 per cent share of 3Gsubscriptions and 75 per cent of all mobilemusic sales (3). 3 makes up about 25 percent of all chart-eligible download sales in theUK. The company upgraded its MusicStore inOctober 2006 to include faster searches andover 500,000 tracks available to download toPCs or mobile phones. 3MusicStore is poweredby Groove Mobile and 24/7 MusicShop.

The German digital market is estimated tohave seen modest growth in 2006. Single trackdownloads are believed to have reached 24million, up from 19 million in 2005. Widespreadavailability of unauthorised music in the form ofP2P file-sharing, stream ripping and CD burningare clear obstacles to growth of legitimatemusic services. Consumer reluctance to makeonline payments via credit card and the lackof interoperability are also having an impact.

Page 05

European Digital Music Market (millions)

Broadband lines




2005

68

62

622

6

2006

94

111

656

27

Change

39%

80%

5%

440%




Containing Piracy












Sources: IFPI,Nielsen SoundScan,PWC,M:Metrics

Sources: IFPI,Nielsen SoundScan International,PWC,M:Metrics

US Digital Music Market (millions)

Broadband lines


Album downloads



2005

43

353

16

174

3

2006

57

582

33

194

15

Change

31%

65%

101%

11%

448%

Spotlight: Koreas MelOn

South Korean SK Telcoms MelOn was oneof the first services to embrace theconcept of ubiquitous music use, offeringover 800,000 tracks any time andanywhere for consumers to enjoy on thePC, mobile phone or MP3 player. For amonthly flat rate of around US$5 SKTelecom customers can stream anddownload music online or via mobile, aswell as reproduce their songs withoutlimitations, as long as the monthlysubscription is maintained. All tracks areprotected by digital rights management.

SK Telecom has over 20 million subscribersand music has become its biggestgrossing data service. As of early June2006, MelOn had nearly 4.5 million users,with 15 per cent of those on a flat-ratesubscription. According to SK Telecom, thesite ranked first among South Korean paidmusic sites in terms of revenue.

We are encouraged by the growth ofonline and mobile music sales, as well as by our success in developing a varietyof new business models, including adsupported video distribution on theinternet. As our physical revenuescontinue to decline, we need toproactively continue to build digitalgrowth and identify new digitalopportunities that further extend thereach of our artists.Thomas Hesse, President, Global DigitalBusiness, SONY BMG Music Entertainment


In France, iTunes is the leading online service,followed by Virgin Mega and Fnac, althoughmobile sales dominate the market. Newlaunches of subscription music services tookplace in 2006. eMusic launched inSeptember and Fnac extended its service inNovember to include a subscription option(FnacMusic Illimit), offering a catalogue ofone million tracks costing 29.99 per month atthe end of the year.

In the mobile music sector, in December 2006Musiwave and French mobile operator SFRannounced quicker download times for over-the-air downloads, as well as enhanceddual-delivery options, a simpler purchasinginterface, better streaming and previewing.Full-track prices also dropped to 20.99 from21.99. SFR reported sales volumes of 300,000tracks per month at the end of 2006, anumber the company hopes to boost to one million.

Mobile music also accounts for the majorityof digital sales in Italy and Spain. Advancedmusic handsets are noticeably more popularin Italy than in the rest of Europe. Italy is thethird biggest mobile music market in Europeafter the UK and France, but has the biggestsingle track download market in Europe, dueto higher 3G penetration, operator marketingand Italian consumers enthusiasm forentertainment on mobile phones. Rampantpiracy in Spain has limited the growth of thedigital business there.

Mobile music has also attracted fans in India,which is one of the fastest growing wirelessservices market in the world. Some 55 millionhandsets were sold in 2006, up 71 per cent from2005 (Consumer Electronics Association).Soundbuzz launched Indias first full song andvideo mobile download service in May 2006.The Indian industry has grown since then to10,000 over-the-air full song downloads per day across all mobile carriers, according to Soundbuzz.

Asia Leads In Mobile Music

Consumers in Asia have taken to mobile musicin their millions in 2006, supported by theongoing roll out of 3G networks and rich mediacontent such as full audio and video tracksdelivered wirelessly to handsets. Asia accountsfor 25 per cent of global digital sales, led byJapan, South Korea, China and Indonesia.

Mobile music accounts for an overwhelming90 per cent of Japans digital sales and growthin the sector remained strong in 2006, pointingto a mature but not yet saturated market.Japan has an advanced mobile culture with high penetration of advanced phonesand 3G.

Mastertones are still the most popular mobilemusic format in Japan, but record companiesare creating new multimedia packages forconsumers. Full track downloads grew stronglyin 2006 and already represent over a third ofmobile music revenues (RIAJ). NTT DoCoMo,the biggest mobile operator in Japan, beganselling full track downloads to mobile in June2006, following KDDI and Sofbank. Full lengthvideo downloads to mobile also showedpotential in 2006, with sales predicted to risefurther in 2007 as device capabilities continueto improve.

Online music sales in Japan more thandoubled to an estimated 22 million in 2006,after iTunes Japan launched in August 2005.Other key players include LabelGate-backedservices Mora, HMV, Listen and Napster thefirst online subscription service to launch inJapan (October 2006).

SPAIN

13%

32%

16%

35%

0102030405060708090

100

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90

0102030405060708090

100

38%

20%

17%4%

5%

25%

39%

20%14% 13%

20% 10%

15%

41%

39%

8%

26%

32%

4%

35%

0

10

20

30

40

50

60

70

80

90

100

UK GERMANY FRANCE ITALY SPAIN

MOBILE SINGLEMASTER RINGTONEONLINE ALBUMONLINE SINGLE

4%

UK

38%

20%

17%

21%

GERMANY

25%

39%

20%

11%

FRANCE

20%

10%

15%

41%

14%

ITALY

14%

39%

8%

26%

13%

4%

MOBILE SINGLE OTHERMASTERTONEONLINE ALBUMONLINE SINGLE

PERCENTAGE OF BROADBAND USERS ENGAGED IN FREQUENT ILLEGAL FILE-SHARING

PERCENTAGE OF HOUSEHOLD WITH BROADBAND

INTERNET USERS REGULARLY FILE-SHARING UNAUTHORISED MUSIC

BROADBAND HOUSEHOLD PENETRATION

0

200

400

600

800

1000

1200

1400

1600

1800

0

200

400

600

800

1000

1200

1400

1177

964

304

721

926

720

1556

TOTAL UNITSDIGITALPHYSICAL

2000 2001 2002 2003 2004 2005 2006 EST

423

821

2000 2001 2002 2003 2004 2005 2006 EST

0

10

20

30

40

50

60

70

80

90

100

87%80%

75%71%

55%52%

KOREASPAIN FRANCE UK US GERMANY0

10

20

30

40

50

60

70

80

90

80% 78%75%

71% 70%64%

59%

SPAINKOREA UK GERMANY ITALY FRANCE US

88%

SOUTH KOREA

53%

JAPAN

24%

ITALY

14%

UK

11%

SPAIN

9%

AUSTRALIA

8%

FRANCE

9%

GERMANY

8%

US

0

2

4

6

8

10

12

14

16

18

20

18%

13% 13%12%

11%

7%

3%

UK FRANCE US GERMANY SPAIN ITALY JAPAN

0

10

20

30

40

50

60

50% 49%

42%

22%

PORTABLE PLAYER BRAODBAND CHEAPER THAN CDS VOUCHER

50% 49%

42%

22%

PORTABLE PLAYER BROADBAND CHEAPER THAN CDS VOUCHER

0 10 20 30 40 50 60 70 80

62%

58%

39%

23%

22%

FINDING MUSIC WANTED

VARIETY OF CHOICE

PRICE OF MUSIC

GETTING MUSIC FOR FREE

LISTENING TO SONG CLIPS BEFORE PURCHASE

62%

58%

39%

23%

22%


VARIETY OF CHOICE

PRICE OF MUSIC



18% 18%

17%15% 14%

7%

12%

21%

31%

40%

2002 2003 2004 2005 20060

5

10

15

20

25

30

35

18% 18% 17%15.4% 16%

5%

13%

21%23%

32%

2002 2003 2004 2005 2006

18% 18%

15% 15% 14%

7%

12%

21%

31%

40%

2002 2003 2004 2005 2006

05

1015202530354045

0 5 10 15 20 25 30 35 40 45 50 55 60 65

5%

Source: IFPI, first half 2006

Digital Sales Value By Format

2006 was an enormous year for Universal Music internationallyand, therefore, the industry. We saw huge growth in all our digitalbusinesses, spurred by a wide range of partnerships. UniversalMusic will also continue to deliver when it comes to signing andbreaking the best artists. Just as importantly, dont forget theconsumers. Ignore them at your peril, as the future of music lies in their hands!Lucian Grainge, Chairman and Chief Executive, Universal Music Group International

South Korea stands out as an extraordinarydigital music market, the second largest in Asiaand the only one where digital sales haveovertaken physical sales of music. Digital musicrepresented 57 per cent of South Koreas musicmarket in the first half of 2006.

South Korea has seen exploding demand for advanced mobile handsets. Mobile carriers estimate sales of ten million musicplayer-equipped phones in 2006. Streaming isthe most popular digital music format in SouthKorea, closely followed by full track downloads.

Mobile operators are the key to the digitalmarket in South Korea, offering integratedonline and mobile services such as MelOn (SKTelecom), Dosirak (KT Freetel) and MusicOn(LG Telecom). In May 2006 Warner Music Koreaannounced a new joint venture with mobileoperator SK Telecom, an example of thegrowing importance of mobile phones forbuying, storing and listening to music.

There are also constraining factors in SouthKorea. For example, the proprietary digital

rights management systems used by mobileoperators are limiting consumers ability totransfer music.

Australia saw strong growth in digital sales in2006, although from a small base, following thelaunch of iTunes in August 2005. Online andmobile sales are equally split in Australia. iTunesalso launched its 22nd Music Store in NewZealand in December 2006 with two milliontracks including a range of local acts.

Latin America Shows Promise

The Latin American digital market is still in itsinfancy, limited by low broadbandpenetration, resistance to online credit carduse and high levels of piracy. However, severalmarkets are showing promising progress.Broadband and mobile penetration is risingfast in Brazil, Argentina and Mexico andmarketing of legal online services hasintensified alongside a campaign forcombating digital piracy.

In Mexico, online downloads topped ninemillion units up to the third quarter of 2006 15times the volume registered during the sameperiod in 2005. In spite of this growth, digitalsales remain concentrated in mastertones andpre-loaded music to mobiles growingrevenue streams for record companies in theabsence of fast 3G networks or highpenetration of MP3 capable phones.

In Brazil, two major legal sites were launched inmid-2006 (Terra and UOL) adding on to themore established iMusica. There are now 20websites offering legal downloads in thecountry. More than 90 per cent of all digitalsales are made as mobile downloads, themajority of them mastertones.

Argentina is also showing a steady growth indigital sales, which quadrupled in the year toJuly 2006. Some 80 per cent of all digital salesare currently made as mobile downloads.

Page 07

China: The Leap To Digital?

China has a small digital music businessbut, with over 430 million mobile subscribers,fast-growing broadband and potentiallymassive consumer demand, the countryhas the potential to throw off historicallyruinous levels of physical music piracy andmake the leap to digital.

Whether China does succeed inharnessing digital channels for a newvibrant legitimate music market very muchdepends on how seriously a commitmentthe country and its key operators will maketo protecting and enforcing intellectualproperty rights. The recording industrysupports the US Governments moves toraise the pressure on China, if necessary viathe WTO, to ensure effective enforcement ofintellectual property rights.

In late 2006, the legitimate online musicsector in China suffered a setback when aBeijing court failed to rule against thebiggest unlicensed free music service,Baidu which is also Chinas biggest internet search engine. IFPI is appealingagainst that judgment, which is out of stepwith court rulings against similar so-calleddeep link music sites in China and across the world.

Record companies in China say Baidu hasbeen the biggest stumbling block topersuading consumers to pay for licensedmusic downloads.

In South Korea and Taiwan, the closure ofinfringing peer-to-peer services Soribada,Kuro and Ezpeer by court judgments orsettlements has benefited the legitimate market.

Despite the setback, record companies areworking hard to develop a digital business inChina, partly modelled on digital success inSouth Korea. There is clear evidence thatChinese consumers are prepared to pay formusic via digital channels, particularly viamobile platforms.

The CEO of China Mobile, the countrysdominant mobile operator, said that a singlesong was downloaded 15 million times on hisnetwork over six months, a rate 15 timeshigher than a typical best-selling CD.

A handful of online music sites are licensedby major and independent recordcompanies, including QQ, Top100.cn and Aigomusic.com.


Argentina10musicaFarolatino*Ubbimusica*Zapmusic

AustraliaBigPondMusicChannelGo*ChaosMusiciTunesJB Hi-FiMP3.com.auOptus Zoo MusicNineMSNSanity.com.auSoundbuzz

AustriaAonMusicDownloadChello Music ZoneConnecteMusic*iTunesMSN MusicMusic Networld*MusikladenPreiser*

BelgiumBelgacomBelgian Music OnlineConnecteMusic*Free Record ShopiTunesMSN MusicTuneTribe*

BrazilAmericanas.com Antena 1Brazil TelecomBrTurboiMusicaMSN MusicOiSom LivreSonora*SubmarinoUOL Megastore*Yahoo! Music

BulgariaM.DirMusic.gbg

CanadaArchambaultBonfire@FutureshopConnect*iTunesMuchMusic*

NapsterPuretracksSympaticoMSNTelusYahoo! Music

China9skyA8*AigoMusicQQTop100*

DenmarkBilkaBoxCDONElgiganten*eMusic*iTunesJubiiMSN MusicMTVMusikhyldenTDC OnlineUrban Payload

FinlandBiisiCDONeMusic*IltaSanomat MusiikkiiTunesLataamo MusiikkiPepsi MaxMusicMSN MusicNetAntillaPHNetPop City

FranceConnectE-Compil eMusic*FnacMusiciTunesMagasin UMSN MusicMTVStarzik*TiscaliVirgin MegaWanadoo

GermanyAOL MusicConnecteMusic*FreenetiTunesMedia OnlineMedionMSN Music

MusicloadNapsterOne4MusicSaturn

GreeceeMusic*Go mp3iTunesmpGreekMusicnow*Tellas MusicVirgin Mega

Hong KongEolasiaiMusicMoovNWTmusicO8MediaSoundbuzz

IcelandTonlist

India CrimsonBayIndia TimesSoundbuzz

IrelandConnecteasyMusiceMusic*EircomiTunesWippit

ItalyAzzura MusicCD RaieMusic*iTunesLibero iMusicMessaggerie DigitaliMSN MusicMTV ITNet Music

MediaWorldRadio Deejay*RossoAliceTiscaliUnitedmusicVitaminic

JapanExcite Music Store HMV Digital*goo Music Store iTunes LISMO*Moocs Mora

MSN Music Napster*OCN Music Store OnGen Rakuten Music

DownloadYahoo! Music

LuxembourgConnecteMusic*Free Record ShopiTunesTuneTribe*

MalaysiaSoundbuzz

MexicoBeonTarabu

NetherlandsConnectCountdownloadDownload.nleMusic*FreedownloadshopiTunesMusicMinutesMusicStorePlanetTiscaliToostMusicTuneTribe

New ZealandAmplifier CokeTunesDigiramaiTunes*

NorwayCDONDagbladetiTunesMooxMSN MusicMusicOnlineP4PrefueledSOLthe24TV2

PhilippinesFliptunes*

PolandeMusic*iPlayMelomp3.pl

OnetplejerSoho

PortugaleMusic*iTunesSAPO

RussiaAudioFind*Fidel*mp3.ru*Soundkey*Yanga*Zakachay*

SingaporePacific InternetSingnetSoundbuzzStarhub

SloveniaeMusic*Zabavaj

South AfricaMSN MusicMusicaSAMP3

South KoreaBugsCyworldDosirakJukeOnMaxmp3MelOnMTVMukeboxMusicOnMuzOimusicTubemusicWavaa

SpainCarrefoureMusic*iTunesMagnatuneMSN MusicMTVMU4USTerra Pix Box*Wanadoo Jukebox

SwedenAhlensBengansCDON eMusic*Gunvor

HomedownloadsiTunes MSN Music MusicbrigadePoplife SkivhuggetTelia

SwitzerlandConnectEx Librisi-m Music DownloadiTunesMSN MusicOne2Joy

TaiwanEzpeer+*KKBoxYahoo! Music*

TurkeyMUZIPowerclub*

UK7Digital MediaBleepConnecteMusic*FOPP*HMV DigitaliTunesMinistry of Sound*MSN MusicNapsterTescoTiscaliTuneTribeVirgin DigitalWippit

USAConnecteMusiciTunesZune Market Place*MusicMatchNapsterPuretracksRhapsodySoundbuzz*Digital*Univision*Urge*Wal-MartYahoo! Music




Containing Piracy












* 2006 launches

** This listing is not exhaustive and for illustrative purposes only. See www.pro-music.org

Today there are some 500 legitimate online music services in over40 countries.




Containing Piracy












Single Track Downloads Move Ahead

Many consumers have discovered thebenefits of the digitally unbundled album. This has taken global singles sales volumes to an expected all-time high in 2006. Overallsingle sales in physical and digital formatsreached over 900 million units in 2006 withdigital accounting for over 80 per cent of thatfigure (IFPI). In the US, Canada and SouthKorea digital sales completely replaced thephysical singles market.

Popularity Of Music Video Grows

Although DVD music video sales peaked in2004, the format is now beginning to see thepositive impact of digital delivery. Music videoaccounted for three per cent of total digitalrevenues in the first half of 2006. From January2007 video downloads will count towards thesingles charts in the UK an indication of thecommercial impact music video now has.Music video is also helping fuel the growth ofadvertising-supported business models.

Music video has taken off in particular asvalue-added content on platforms such as Yahoo!, YouTube and MTV. For example,Yahoo! shares its advertising revenues with some record companies on a per-stream basis.

YouTube, a largely unknown start-up in late2005, became the largest video sharing siteon the web by mid-2006. YouTube receives

Beck personally shot a video for every one of the 15 tracks on his latest album TheInformation and describes the videocollection as a visual version of the album for the internet.

Good Charlotte plan to film two sets ofvideos to coincide with their 2007 albumrelease: one for TV and a set ofunderground shorts for mobiles and web-based services like YouTube.

Rock band OK Go scored the biggest hitof their career with the video Here It GoesAgain. The video was viewed by over onemillion people on YouTube in the first six days.As of November 2006 the video had beenviewed nine million times, becoming theeighth most viewed video on YouTube.

Hard-Fi cut an exclusive made-for-mobileedit of their video for the single CashMachine for UK mobile music store 3.

Music Video A Digital Hit

UK mobile operator3 first launched itsmusic video jukeboxservice in 2004,offering consumers aselection of the latestmusic videos to enjoyon the move. 3 has

sold over 25 million music videos to date,making up almost half of its total musicrevenues. Combined audio and videosales on the 3 network now surpass onemillion units per month. The companyclaims second place in the UK digitalmusic market, behind iTunes, with a 20per cent share.

Buyer behaviour reported by 3 on itsnetwork offers some insights into howmobile music creates new opportunitiesfor record companies. Music sales peakat around 10 p.m. and many customersbuy tracks while travelling on publictransport. This represents a brand newsales window for music. One in three of3s sales are from customers between theages of 18 and 24, demonstrating thatyoung people will buy music, if it ispresented to them in the right way.

Music fans have embraced digital singles and videos.

some 65,000 new video uploads per day fromindividual users to add to an existingcatalogue of well over ten million. Each daysome 100 million videos are streamed to oversix million viewers nearly half of all the videosstreamed on the web.

With music video at the forefront of YouTubes service, first Warner and then other record companies have embarked ona series of licensing deals with the service,although there are still some concerns overcopyright issues.

Music Videos: New ChannelsEncourage Innovation

Music video looks set to thrive over the nextfew years something that is driving acreative resurgence in the format.

OK Go Here It Goes Again

In this internet age, the consumer is using musiccontent more than ever before whether that'splaylisting, podcasting, personalising, sharing,downloading or just simply enjoying it. The digitalrevolution has caused a complete change to theculture, operations and attitude of music companieseverywhere. It hasn't been easy, and we must certainlycontinue to fight piracy in all its forms. But there can beno doubt that with even greater commitment toinnovation, and a true focus on the consumer, digitaldistribution is becoming the best thing that everhappened to the music business and the music fan.Eric Nicoli, CEO EMI Group


Mobile music is helped by impulse buying and a well-establishedpayment infrastructure.




Containing Piracy












High Demand For Music On The Move

Ringtones were the first mass market mobilemusic product to offer phone personalisationto music fans. Consumers are now movingaway from traditional ringtones tomastertones/real or true tones ringtones that feature the original sound recording and full track downloads to mobile.

Research carried out by UK mobile operator3 in September 2006 shows that consumerswant to own music on the spot. Some 76 percent of respondents aged between 16 and 24 said that when they heard a track theyliked they wanted to own it straight away.

Mobile music benefits from the fact thatmobile music services have paymentsintegrated with consumers mobile bills. This helps particularly among the youngerdemographic, where credit card ownership is limited.

Music Phones Catching On

The handset revolution has played animportant role in developing the mobilemusic market, with audio/video-supportedhandsets becoming the norm. Leadinghandset manufacturer, Nokia, sold 80 millionmusic phones in 2006, double the number in2005. Meanwhile, Sony Ericsson is reportedlyselling over one million Walkman phones per month.

For all the popularity of music-capablemobile phones, the digital market is a longway from a single all-function portabledevice. New research from IFPI/M-Lab(1) inNovember 2006 shows that less than 10 percent of portable player owners in Europe usetheir mobile phones as their main portablemusic player.

The move to convergence was boosted inearly 2007 as Apple annouced the launch ofthe much anticipated iPhone. It will beavailable exclusively through the operatorCingular in the US by June 2007, and thenrolled out to Europe and Asia

In October 2006, Nokia launched itsdedicated music brand XpressMusicfeaturing the new Nokia 5300. The handsetcan store 1,500 tracks, supports all majormusic formats (MP3, AAC and WMA), and hasdedicated music buttons and FM radio. Nokiawill launch a music store to tie-in with itsmassive global handset distribution, aiming tobe the market leader in digital musicdistribution within five years.

Sony Ericsson also expanded its Walkmanmusic phone line, launching the W830i with astorage capacity of up to 1,000 songs, anadvanced Walkman 2.0 music player, musicrecognition function, FM radio and enhancedaudio quality.

3G Sees Limited Growth

Third generation mobile technology (3G) iscrucial for the development of advancedmusic-to-mobile services such as full track andvideo download services. It allows for fastdownloads of full tracks to mobile as well asvideo services and streaming. Whilepenetration in Asia is already high, levels inEurope and in the US are lagging behind.

Establishing New Music Formats:Ringback Tones

Ringback tones exemplify the varied newuses of music via digital channels. Ringbacktones are songs a caller hears while waitingfor their call to be picked up. They haveproved very successful, now accounting forapproximately three per cent of global digitalsales. This share rises to a much higher level in markets like China. Consumers in Europehave not adopted the format as readily, butsales in the US are growing strongly.

Ringback tones are also promoting newmusic in a new way. Universals new signingSamsons, for example, has become thebiggest act in Indonesia following sales ofover two million ringback tones.

SPAIN

13%

32%

16%

35%

0102030405060708090

100

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90

0102030405060708090

100

38%

20%

17%4%

5%

25%

39%

20%14% 13%

20% 10%

15%

41%

39%

8%

26%

32%

4%

35%

0

10

20

30

40

50

60

70

80

90

100



4%

UK

38%

20%

17%

21%

GERMANY

25%

39%

20%

11%

FRANCE

20%

10%

15%

41%

14%

ITALY

14%

39%

8%

26%

13%

4%






0

200

400

600

800

1000

1200

1400

1600

1800

0

200

400

600

800

1000

1200

1400

1177

964

304

721

926

720

1556


2000 2001 2002 2003 2004 2005 2006 EST

423

821

2000 2001 2002 2003 2004 2005 2006 EST

0

10

20

30

40

50

60

70

80

90

100

87%80%

75%71%

55%52%


10

20

30

40

50

60

70

80

90

80% 78%75%

71% 70%64%

59%


88%

SOUTH KOREA

53%

JAPAN

24%

ITALY

14%

UK

11%

SPAIN

9%

AUSTRALIA

8%

FRANCE

9%

GERMANY

8%

US

0

2

4

6

8

10

12

14

16

18

20

18%

13% 13%12%

11%

7%

3%


0

10

20

30

40

50

60

50% 49%

42%

22%


50% 49%

42%

22%


0 10 20 30 40 50 60 70 80

62%

58%

39%

23%

22%


VARIETY OF CHOICE

PRICE OF MUSIC



62%

58%

39%

23%

22%


VARIETY OF CHOICE

PRICE OF MUSIC



18% 18%

17%15% 14%

7%

12%

21%

31%

40%

2002 2003 2004 2005 20060

5

10

15

20

25

30

35

18% 18% 17%15.4% 16%

5%

13%

21%23%

32%

2002 2003 2004 2005 2006

18% 18%

15% 15% 14%

7%

12%

21%

31%

40%

2002 2003 2004 2005 2006

05

1015202530354045

0 5 10 15 20 25 30 35 40 45 50 55 60 65

5%

Sources: M:Metrics, IFPI (Korea, Japan, Australia)

3G Penetration (% mobile subscribers)Urban Music Popular on Mobile

Fans of urban music in particular appearto be driving mastertone sales in the US.Almost half of US rapper T-Pains RapperTernt Singa sales came throughmastertones, as did 38 per cent ofCassidys Im a Hustlaand 31 per cent ofBow Wows Wanted revenues. Rock andpop acts, by contrast, seem to generatemore digital sales through onlinechannels.

1 Sample 2,249 portable player owners in the UK (iPod owners only), Germany and France.

Most popular music phones in 2006.

Source: M:Metrics

France

Samsung D500

MP3 player stores up to 20 songs

Video player stores up to one hour of footage

1.3 Megapixelcamera stores up to1,000 photos

Bluetooth

E-mail

96MB internal memory

Italy

Nokia 6630

3G

Realplayer download and playmusic & video files

MP3 player plays MP3 & AAC files

Video capture &playback up to onehour per clip

1.3 Megapixel camera

Bluetooth

E-mail

10MB internal memoryplus removable 63MBMulti Media Card

Spain

Motorola V360

MP3 player plays MP3, AAC & WAV files

Video capture &playback

VGA Camera

Bluetooth

E-mail

5MB internal memoryplus up to 512MBremovable memory slot

UK & Germany

Nokia 6230i

MP3 player plays MP3, AAC & M4A files


1.3 Megapixel camera

Bluetooth

E-mail

32MB internal memoryplus up to 512MB MultiMedia Card

US

Motorola RAZR V3

MP3 ringtones


VGA Camera

Bluetooth

E-mail

5MB internal memory

We see the trend in the player market moving away from singlepurpose devices towards multipurpose, and more importantly,connected devices. This trend will enable hundreds of millions ofpeople to have their music collections with them, as well as todownload and enjoy digital music on their mobile device. Nokiasleadership in this area means we can offer a compelling mobilemusic experience combining devices, content and connectivity.Ed Averdieck, Managing Director, Nokia Music Service





Containing Piracy












Social Networks: Licensing AndPartnerships Develop

Social networks and user generated content made a major impact on digitalentertainment in 2006 and represent anopportunity despite copyright concerns.Social networks have been around for severalyears, but really came to worldwide attentionwith the growth of MySpace, famouslyacquired by News Corporation.

User generated content is booming throughnetworks such as MySpace, Bebo andYouTube. The latter has declared an ambitionto host every single music video ever madeon its site and was acquired by Google in late2006. Other social networks have exploded inparticular markets Orkut in Brazil and India,QQ in China, muvee in Singapore, Mixi inJapan and Cyworld in South Korea. MySpace launched a Japanese version inpartnership with telecoms group SoftBank inNovember 2006.

Social networking sites are potentially a greatopportunity for the music industry. These sitesreach a huge community of music fans, offernew ways of marketing music and sellingtracks, albums and videos. They also can helpthe industry discover new artists. Some bandshave even begun holding virtual onlyconcerts; Ben Folds launched his albumsupersunnyspeedgraphic, the LP! bythrowing a virtual launch party on 3D virtualworld Second Life in October 2006, whileDamon Albarns new project The Good, TheBad and The Queen threw an exclusiveMySpace gig in December 2006.

Several record companies have licensedYouTube on the basis of identifyingcopyrighted works posted by users as well asproviding content. Yet at the same time socialnetworking sites raise important copyrightconcerns. Their technological innovationsshould never become an excuse for them topractice massive copyright infringement.These networks must respect copyrightedcontent and ensure there are filtering tools inplace for that. Record companies are lookingto embrace social networking sites, but thisshould not be at the expense ofcompromising their copyright and that ofartists and songwriters.

In the UK, Yahoo! Music offers over 6,500 free videos.

Other services offering ad-supported legaldownloads of audio and video content are expected in 2007. One of the most high-profile, Spiralfrog, signed deals withUniversal Music Group, KOCH Records andEMI Music Publishing.

Another ad-supported service, Qtrax, is set tolaunch in 2007 and offers tethereddownloads in the proprietary mpq formatthat can only be played a limited number oftimes. Qtrax offers click-to-buy purchasing or aflat monthly fee to upgrade to a premiumsubscription service that provides unlimiteddownloads in the Windows Media format.

Ad-supported services are also expandingvia mobile platforms. In April 2006, EMIpartnered with Rhythm New Media, a USmobile advertising company, to trial an ad-supported mobile video service in the US.The service offers free mobile video with TV-style ads embedded in a highly targeted fashion.

2006 saw the development of a competitive digital musicmarket with a mixture of different business models.

Advertising-Supported Services SetTo Make An Impact In 2007

Advertising-supported services created abuzz in 2006 and became a new revenuestream for record companies, as advertiserscontinue to divert their budgets fromconventional TV, radio and print to theinternet. The internet accounted for six percent of global advertising spend in 2006(Zenith Optimedia). Internet advertising isforecast by Forrester Research to overtaketraditional radio advertising in 2010. Music isplaying a key role in this change.

In the US, Napsters ad-supported serviceNapster Free Player allows users to streamsongs from its catalogue of two million tracksfor free up to three times, before beingdirected to a purchase or asked to subscribeto a Napster paying service. Yahoo! Musicpartnered with EMI in December 2006 andoffers an ad-supported music video service toEuropean customers. The service allows forfree access to videos while supported bytargeted advertising.

We need to legitimise consumer behaviour withoutasking them to change their usage habits. Advertisingfunded services offer such a solution. But to succeed they need support from content owners, advertisers and the financial community, as well as a critical mass of users. SpiralFrog was set up from the start to addressthese criteria.Robin Kent, CEO, SpiralFrog

Music subscription services have experienced tremendous growth,but are constrained by closed hardware and the absence of a healthy compatible device market. Over the next few years,subscription services will go from a very small market in portabledevices to having the ability to attach to hundreds of millions of cell phones. 2007 will mark the beginning of this transformation.Chris Gorog, CEO, Napster

Darcus Beese, A&R executive at IslandRecords, says social networking sites areimpacting the way he does his job, but thatthey sit alongside rather than replacetraditional ways of discovering andmarketing artists. Artists like Arctic Monkeysand Lily Allen have gained popularitythrough social networking sites, albeit as partof marketing campaigns that also involvemainstream media.

He argues that social networking sites arealso just another tool to be used to bringnew acts to the public, asserting thatsomeone with the talent and charisma of LilyAllen would have come to prominencewhether MySpace had existed or not.

Beese adds that he has seen promising acts on social networking sites, but when he follows this up by going to their gigs they often fall short of what their internet clips promise: Thats the sleight of hand that is MySpace. It can be a barometer or a red herring.

The main benefit of these sites is theimmediacy with which they let consumersdiscover music. Someone just has to mentionan artists name and you can type it into yourcomputer and go straight to the music. Youdont have to wait for the gig or go down tothe shops to get the CD.

Social networking sites are impacting onrecord company artist and repertoire (A&R)work and marketing but are not a panacea.Rather they are being used by recordcompanies in conjunction with moretraditional practices like promotion, publicrelations and plugging.

Social Networking A New Tool For A&R?

Record Company Direct-To-Consumer Channels Emerge

Record companies have also rolled out theirown video and music-streaming services toconsumers. Sony BMG announced MusicboxVideo, featuring free content from its roster ofartists. Visitors can view full length videos,share streams with friends or embed contentin their own websites. Universal partnered withvideo delivery platform WWEBNET to launchMusiVidz, offering a broadcast networkfeaturing videos from a wide range ofUniversal artists.

Both services will ultimately offer artistinterviews, live performances and behind-the-scenes footage. The launches indicateearly developments in direct-to-consumerinitiatives by music companies.

Subscription Services Wait ForWireless And Interoperability

Music subscription services such asRhapsody, Napster and eMusic now reach3.5 million consumers worldwide, growing by25 per cent in the last year, with the majority ofsubscribers located in the US. Musicsubscription services accounted for seven percent of digital revenues in the first half of 2006.

Subscriptions offer enormous customer valueand work exceptionally well with wirelesshome entertainment systems such as theSonos Zone Player a wireless system thatallows music to be played in every room ofthe house regardless of where the musiccollection is stored.

Some services are expanding their offers tomobile platforms as well. Napster partneredwith Japanese mobile operator NTT DoCoMoand plans to expand its mobile offer in Europein partnership with O2.

Subscription services are seeing modestmarket growth. Portable or To Go versions ofsubscriptions have suffered significantly fromlack of compatibility with the dominantportable music player, the iPod.

Subscription services also appear not yet tohave met consumers demand to own theirmusic, with most services offering unlimitedmusic only as long as the subscription is live.

Launched in Europe in September 2006,eMusic is a subscription based service thatseeks to address this by allowing an allocationof permanent downloads in an unprotectediPod compatible format for 29.99 per month.Its catalogue is composed of over two millionsongs from independent record companies.eMusic announced that it had achievedsome 20,000 subscriptions during its first twomonths in Europe and has reported a globaluser base of 220,000.

The success of eMusic in Europeand around the world shows thatconsumers are eager for a digitalmusic service that focuses on musicbeyond the commercialmainstream. By offering customerswell-priced, expertly curatedadventurous music that they canown in the universally compatibleMP3 format, weve shown you cansell a lot of it. This combination hashelped eMusic become the worldsnumber two digital music serviceand sell more than 100 milliondownloads in three years.David Pakman, President and CEO,eMusic





Containing Piracy












The increasing popularity of portable digital music players isdriving interest in music services.The global portable digital player marketgrew sharply to an estimated 120 million units sold in 2006 with a 75:25 split betweenflash-based and hard drive players(Understanding & Solutions). This has had amixed impact on digital music sales. Portableplayer owners are more likely to buy musiclegally than general internet users; but theamount of purchased music stored ondevices is still low.

New research by IFPI/M-Lab carried out inNovember 2006 in the UK, Germany andFrance(1) shows that portability is a key driver ofgrowing demand for recorded music:

Two in five (39%) European portable playerowners have bought music online at leastonce in the UK that figure is 58 per cent.

About half (47%) of those portable player owners who bought music online said they now buy music only, or mostly, indigital format.

One in seven (14%) portable player ownersuse paid music downloads as their mainsource of music roughly in proportion tothose who use P2P networks and freewebsites (13%). However a greater volume ofmusic on portable players is obtained fromP2P and free sources than is purchased onlegal sites and the frequency of purchase onlegal sites is still low.

Separate research by Jupiter shows that iPodowners are three times more likely thangeneral internet users to be regular payingmusic downloaders. Sixteen per cent ofinternet users that own an iPod in Europedownload music legally on a monthly basis,compared to five per cent of internet usersthat dont own a portable player(2). Thisindicates that portable ownership is drivinginterest in legal music buying, althoughresearch suggests volumes of new tracks are low.

New Players Launch In 2006

A number of new music players launched in2006, notably Microsofts portable musicdevice, Zune, in the US in November. Zune is a hard drive player with a built-in FMtuner and Wi-Fi networking. The Wi-Fi featureallows limited sharing of songs, recordings,playlists and pictures. Tracks received fromanother persons Zune can be played for up tothree days, or three plays. This is the first use ofwireless music-sharing from a music portabledevice. Microsoft expects to sell one millionunits of the Zune by the end of June 2007.Universal Music struck a revenue share dealwith Microsoft whereby Universal receives a fee

SPAIN

13%

32%

16%

35%

0102030405060708090

100

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90

0102030405060708090

100

38%

20%

17%4%

5%

25%

39%

20%14% 13%

20% 10%

15%

41%

39%

8%

26%

32%

4%

35%

0

10

20

30

40

50

60

70

80

90

100



4%

UK

38%

20%

17%

21%

GERMANY

25%

39%

20%

11%

FRANCE

20%

10%

15%

41%

14%

ITALY

14%

39%

8%

26%

13%

4%






0

200

400

600

800

1000

1200

1400

1600

1800

0

200

400

600

800

1000

1200

1400

1177

964

304

721

926

720

1556


2000 2001 2002 2003 2004 2005 2006 EST

423

821

2000 2001 2002 2003 2004 2005 2006 EST

0

10

20

30

40

50

60

70

80

90

100

87%80%

75%71%

55%52%


10

20

30

40

50

60

70

80

90

80% 78%75%

71% 70%64%

59%


88%

SOUTH KOREA

53%

JAPAN

24%

ITALY

14%

UK

11%

SPAIN

9%

AUSTRALIA

8%

FRANCE

9%

GERMANY

8%

US

0

2

4

6

8

10

12

14

16

18

20

18%

13% 13%12%

11%

7%

3%


0

10

20

30

40

50

60

50% 49%

42%

22%


50% 49%

42%

22%


0 10 20 30 40 50 60 70 80

62%

58%

39%

23%

22%


VARIETY OF CHOICE

PRICE OF MUSIC



62%

58%

39%

23%

22%


VARIETY OF CHOICE

PRICE OF MUSIC



18% 18%

17%15% 14%

7%

12%

21%

31%

40%

2002 2003 2004 2005 20060

5

10

15

20

25

30

35

18% 18% 17%15.4% 16%

5%

13%

21%23%

32%

2002 2003 2004 2005 2006

18% 18%

15% 15% 14%

7%

12%

21%

31%

40%

2002 2003 2004 2005 2006

05

1015202530354045

0 5 10 15 20 25 30 35 40 45 50 55 60 65

5%

Source: IFPI/M-Lab Survey, Nov 2006.What made you start buyingmusic online? Base: all who buy online.

Drivers to Online Music Buying

1 Sample 2,249 portable player owners in the UK (iPodowners only), Germany and France.

2 Jupiter Research, September 2006. UK, Germany, France, Italy, Sweden, Spain.

Zune is delivering innovativeways for consumers todiscover new music andconnect with others throughsocial experiences enabledby its wireless sharingcapabilities. Innovation is key whether its how we workwith artists, new technologyfeatures or giving consumersthe all-you-can-eat ZunePasssubscription, we are focusedon changing the game. Bryan Lee, Corporate VicePresident of EntertainmentBusiness, Microsoft




Containing Piracy












Record companies are digitising catalogues and offeringmusic in a variety of formats and channels.Unlike traditional music outlets, digital musicstores offer 24-hour shopping and unlimitedshelf space. The number of tracks available inthe largest digital stores doubled from twomillion in 2005 to four million in 2006. Thiscompares to a maximum of 150,000 CD titlesphysically available in the largest specialistmusic stores and far fewer in non-traditionalstores such as supermarkets.

The importance of greater choice forconsumers is borne out by research. ANielsen/Net Ratings UK survey of internetmusic users revealed that consumers rate thebest attributes of digital music as being ableto find the music they wanted and varietyof choice way above other attributes.

Record Companies Invest InDigitising Catalogues

Record companies have made goodprogress extending digital catalogues wellbeyond what is available in the physicalworld. This is critical as consumers rate morechoice available as a major reason forincreasing their purchase of music throughdigital channels in the future (IFPI/M-LabResearch, November 2006).

Universal Music, for example, announced inFebruary 2006 the first step in its plan to make 10,000 older, out of print Europeanalbums available for download over the next few years, with the release of 300 albums.By October, online music fans had downloaded more than 250,000 tracks from this selection. The second phase of theinitiative was rolled out in November, addinga further 700 albums.

In another catalogue push Universalannounced wholesale price reductions on1,500 digitally-delivered titles in Europe,dropping album retail prices from 7.99 to5.49. The company says this shouldencourage greater album sales and moreprice differentiation although iTunes has still

insisted on keeping single tracks at a uniformprice point. Meanwhile other major recordcompanies and the majority of independentlabels are undertaking similar initiatives.

Olivier Robert-Murphy, VP Strategic Marketing,Universal Music Group International said: Itseasy for our consumers online to find anddownload current artists and current hits, butthrough this deep catalogue reissueprogramme we are now able to respond toand quantify the appetite for more eclectic,diverse recordings from the past. It is clear thatthis is a tail worth chasing.

Digital-Only Album Releases Increase

Digital-only releases are rising sharply,contributing to a larger share of all releases. Inthe US there were over 13,000 new digital-onlyalbum releases in the first half of 2006,accounting for as much as 36 per cent of all new album releases in the period. Thiscompares with 16,580 new digital-onlyreleases in the entire year of 2005 (Nielsen SoundScan).

In the UK, the industry released over 37,000albums in 2006 (BPI), 30 per cent of thesereleases where digital bundles, underliningthe power of digital delivery to expand the output of music.

Record Companies Transform As Consumers Ask For More

High profile album releases are now oftenaccompanied by hundreds of digital formatsand products including the album itself,digital singles, exclusive digital tracks, digitalbundles, artwork, videos and a whole rangeof music products created for mobile phones.

While music products diversify, the business ofgetting it to the consumer is becoming moreholistic, with digital marketing and distributionstrategies developed right from the start of acampaign. It is not unusual for a recordcompany to offer an artists fan base wirelessfull song and video downloads to go withpersonalisation tools such as ringtones and wallpapers.

The Long Tail

The Long Tail, a term coined by ChrisAnderson, Wired Magazine editor-in-chief,argues that products with a low salesvolume can collectively make up a marketshare that rivals or exceeds that of thebestsellers and blockbusters if the store ordistribution channel is large enough. The Long Tail illustrates the opportunitiesthe internet has created in distribution and sales.

SPAIN

13%

32%

16%

35%

0102030405060708090

100

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90

0102030405060708090

100

38%

20%

17%4%

5%

25%

39%

20%14% 13%

20% 10%

15%

41%

39%

8%

26%

32%

4%

35%

0

10

20

30

40

50

60

70

80

90

100



4%

UK

38%

20%

17%

21%

GERMANY

25%

39%

20%

11%

FRANCE

20%

10%

15%

41%

14%

ITALY

14%

39%

8%

26%

13%

4%






0

200

400

600

800

1000

1200

1400

1600

1800

0

200

400

600

800

1000

1200

1400

1177

964

304

721

926

720

1556


2000 2001 2002 2003 2004 2005 2006 EST

423

821

2000 2001 2002 2003 2004 2005 2006 EST

0

10

20

30

40

50

60

70

80

90

100

87%80%

75%71%

55%52%


10

20

30

40

50

60

70

80

90

80% 78%75%

71% 70%64%

59%


88%

SOUTH KOREA

53%

JAPAN

24%

ITALY

14%

UK

11%

SPAIN

9%

AUSTRALIA

8%

FRANCE

9%

GERMANY

8%

US

0

2

4

6

8

10

12

14

16

18

20

18%

13% 13%12%

11%

7%

3%


0

10

20

30

40

50

60

50% 49%

42%

22%


50% 49%

42%

22%


0 10 20 30 40 50 60 70 80

62%

58%

39%

23%

22%


VARIETY OF CHOICE

PRICE OF MUSIC



62%

58%

39%

23%

22%


VARIETY OF CHOICE

PRICE OF MUSIC



18% 18%

17%15% 14%

7%

12%

21%

31%

40%

2002 2003 2004 2005 20060

5

10

15

20

25

30

35

18% 18% 17%15.4% 16%

5%

13%

21%23%

32%

2002 2003 2004 2005 2006

18% 18%

15% 15% 14%

7%

12%

21%

31%

40%

2002 2003 2004 2005 2006

05

1015202530354045

0 5 10 15 20 25 30 35 40 45 50 55 60 65

5%

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

Top Five Attributes of Internet

Madonnas latest albumwas released digitally withthree price points in threebundles, reachingnumbers one, two and fourin the iTunes chart, with the

most expensive bundle coming first.


New information and accounting systemshave been introduced by record companiesto effectively market these products. Each ofthe major record companies currentlypartners with 400 to 500 separate businessesin the digital space. This has been anenormously complex and costly undertaking,with the required digital business andoperational infrastructure costing manymillions of dollars in investment in newtechnology, skills, and product digitisation.Fulfilment, account management and ITinfrastructure are all affected. In nearly everyaspect of their operations, from businessdevelopment to royalties, record companieshave evolved from the traditional business ofdistributing and marketing physical products.

Digital Format Boosts Classical Genre

The success of classical in the digital musicspace has taken many by surprise. Theunlimited availability of titles that online storesprovide has created renewed consumerinterest and new market developmentopportunities for classical music.

Digital bundles British band Snow Patrolachieved a sizableproportion of sales of itslatest album Eyes WideOpen via digital channels.

The album was released on iTunes as adeluxe digital package featuring a bonusdigital booklet, an exclusive Making ofvideo and a video of the first single from the album.

Some Of The Innovative Digital Releases In 2006 Included:

Classical was the fastest-growing music genrein the US, growing by 23 per cent in 2006(Nielsen SoundScan). There have beenexceptional digital sales on particular titles.Universal Classics artist, violinist JanineJansens recording of The Four Seasonsreceived 75 per cent of its US sales throughdownloads. Also from Universal, adownloadable album of the New YorkPhilharmonics performance of a Mozartconcert secured top 40 chart positions oniTunes in the US and the UK.

In April 2006, Warner became the first majorrecord label to launch a classical onlinemusic store (Warnerclassics.com). Warnerintends to make its entire classical catalogueof 25,000 titles available on the service.Universal launched classicsandjazz.co.uk in

January 2007. These two services joinestablished online stores such asClassical.com and Chandos.net both ofwhich offer classical downloads as iPodcompatible MP3s.

Record companies are also reaching out forjazz fans in a new way. In July 2006, Blue NoteRecords began releasing jazz mastertoneswith recordings by Chet Baker and Art Blakeyamongst others.

2006 saw the evolution of new services thatpromote and filter music for consumers ina far more flexible way. Many of them areexperimental, and it is too early to saywhich ones will thrive in the long term.

Tastemaker ServicesFmagazine, Pitchfork, Playlouder, Drowned in Sound, NME.com: these are e-magazines, strong on editorial such asnews, features, interviews and reviews.They provide links to download stores andincreasingly feature preview content, freesampler downloads and other editorial.

Recommendation Services Last fm, Pandora, The Filter: these servicesoffer personalised recommendations tousers often based on combiningpreferences and ratings of users withsimilar music tastes. For example, Last fmuses recommendation tool Audio

New Ways Of Filtering Music To Consumers Scrobbler which notes what the musicusers have listened to in their computer(via iTunes or Windows Media, forexample) and builds playlists based onsimilar tracks. Pandoras Tunegluerecommendation tool is based on theMusic Genome Project a rating of eachmusic track in the catalogue based on upto 400 distinct musical attributes.

Platform SpecificNokia has launched its MusicRecommenders service for use with itsrange of music phones. The servicefocuses on indie music across 12 genreswith music experts generatingrecommended playlists each month.Other mobile providers offer similarfeatures. SonyEricsson has launched M-Buzz and is also building musicrecognition software into its handsets.

Its hard enough for artists andlabels to handle traditionaldistribution without support. Addmore than 10 times the contentonline, hundreds of digital musicservices, a dozen different businessmodels, complex accountingsystems, new ways of marketingand promotion and you realizequickly that you need moresophisticated and skilled partnerson your team.Scott Cohen, Founder, The Orchard

Did you get an e-mail about Razorlightsconcert in your home town? Has RobbieWilliams just made you one of his MySpace friends?

The way record labels and artistscommunicate with fans is fast-changing,according to UK label EMI Recordsmarketingexpert John Leahy.

Every EMI artist has a MySpace page. We use social networking sites to allow fans to post news and swap stories. We might get a fan that filmed Corinne Bailey Rae on hismobile while she was doing an in-storesigning in Leeds put his footage on a site forfellow fans to share.

Leahy says that the rise of digital technologyalso means that record companies have toprovide more content themselves for fans. He explains we film artists in rehearsal, wefilm them playing acoustically and we filmthem doing radio interviews to generatecontent for their official websites and thesocial networks.

EMIs official artist websites allow fans to buy music, videos, concert tickets andmerchandise. Leahy believes that EMIs deal

Did Lily Allen Send You A Note To Tell You It Was Her Birthday?

with Robbie Williams through which theyshare revenue from such sales is the future ofmarketing artists.

Thanks to the rise of long tail sales, it isimportant for labels to keep websitesreplenished even when an artist doesnt havea new release to plug. For example, when EdHarcourt played a gig in a bar in Londonrecently EMI created some film andphotographs to post on his website and e-mail to all his fans on their database.

Leahy adds that the growth of digital hasaffected all aspects of music marketing. Theincreased popularity of mobile music could

make video directors think about how theirimages will play when downloaded to ahandset, though he cautions against lettinga two inch screen dominate our thinking.

He also notes that labels now have onlinepluggers who work with the likes of AOL andMSN, in the same way that companiestraditionally employed people to promotesongs to radio stations.

A combination of new technology andeffective database management is makingmarketing much more targeted. Leahy saysthat if a band like Kraftwerk were to play aconcert in Scotland EMI could target all theirfans with Scottish postcodes.

New systems enable labels to alert fans aboutartist tours, TV performances and newmaterial. Leahy cautions that we aresensitive about who we target, and careful tolimit commercial messages.

Managing the relationship between an artistand fans through online technology is anincreasingly key role for record labels.Consumers have a rapacious appetite forinformation and companies have to meetthat demand. It is another reason why the roleof labels is set to grow in the digital era.

Page 17

Grammy-winning R&B artist John Legendteamed up with US mobileoperator Verizon Wireless to promote his albumOnce Again with two 30

second clips of his songs provided tosubscribers who then voted on which shouldbe released as his next single.

USB single Island Records released asingle from UK act Keaneon memory stick format inOctober 2006. The ultra thinlimited edition 512Mb USB

stick was sold in HMV stores for 3.99. Inaddition, the USB holds the tracks video anda number of screensavers and web links.

Mobile packages In July 2006, Sony Ericssonbegan offering exclusiveRobbie Williams content intheir line of Walkman-branded handsets in Latin

America, giving Robbies global fan baseexclusive access to tour performances, newmusic releases and features that include amemory stick loaded with the chart toppingalbum Intensive Care, exclusive liverecordings and video clips, exclusivewallpapers and pictures.

The past year has seen iTunes forge strong marketingpartnerships with major brands, such as Starbucks in the US and Coke in the UK and Germany, and with the addition ofblockbuster movies and TV shows, Apple is continuing to raise the profile of legal downloading and the value proposition of the iTunes Store worldwide.Eddy Cue, Apples vice-president of iTunes


Research Shows Legal Actions Are Helping ContainIllegal File-sharing

Recent findings from Jupiter Research in key European markets (UK, Germany,France, Italy, Spain and Sweden) suggestthat IFPIs legal campaign against large-scale uploaders is having an impact.While broadband household penetrationis rapidly rising, the percentage of internetusers engaged in frequent unauthorisedP2P usage is actually falling.

In Germany, for example, the proportion ofinternet users frequently file-sharingcopyrighted music fell back from 13 percent in 2004 to just eight per cent by 2006.In the UK, 11 per cent of internet usersfrequently engaged in file-sharing in 2004and this remained constant in 2006following a drop in 2005.

When the industry in France announcedimpending action against illegal file-sharers in 2004, the percentage of internetusers engaging in frequent unauthorisedP2P activity fell from 24 per cent to 14 percent. In 2006, following a gap betweenlegal actions, the percentage of frequentunauthorised P2P usage crept back up to21 per cent.

Following on from the highly publicisedlaunch in Stockholm of an internationalwave of actions, the number of Swedishinternet users regularly infringing musiccopyright fell from 24 per cent in 2004 to 14 per cent in 2006.

Internet piracy and the ubiquity of unlicensedmusic have caused enormous problems forthe recording industry as it evolves into thedigital age. The music industry was the first of the modern creative, intellectual property-based industries to feel the impactof the mass availability of its core product forfree. Today the film, TV and news mediaindustries are all grappling with the samedilemma of how to monetise their business in an environment where the maincompetitor is free.

Record companies sales and investment inmusic has been severely hit by internet piracyin recent years. Global CD sales fell by 23 percent in value between 2000 and 2005.Experience suggests the problem can becontained by a range of different strategies,but will not be eliminated. In 2006 despite keysuccesses against unauthorised peer-to-peeroperators, networks like Limewire andBitTorrent continued to be massive carriers of copyright theft.

In 2007, the recording industry will besustaining and expanding its programme oflegal actions against file-sharing whileincreasingly focusing on the gatekeepersclosest to the source of the problem.

Legal Actions Have An Impact

IFPI and affiliate recording industry bodiescontinued the global campaign against

illegal file-sharing in 2006, bringing legalactions against more than 10,000 individualsin 18 countries, including Brazil, Mexico,Poland and Portugal for the first time. Theprincipal aims of the campaign areeducation and deterrence.

Surveys on levels of illegal file-sharing acrossdifferent countries show that legal actions arehaving a clear effect. Studies also show thatfear of legal action is an important factordriving consumers away from unauthorisedP2P. In the US lawsuits were the most citedreason among internet households forchanging from unauthorised P2P to legaldownloading (NPD Group, June 2006).

Actions have been taken against uploaderswho use all the main unauthorised P2Pservices, including BitTorrent, DirectConnect,eDonkey, Gnutella, Limewire, SoulSeek andWinMX. The average legal settlement in thesecases is now 22,420 and people from allwalks of life are affected. In Argentina, onemother made her son sell off his car to payher back the settlement fee.

A recent study in Hong Kong shows that theindustrys advice to parents about checkingtheir childrens use of the family computer foris also having an impact. Researchers atLingnan University found that more than athird of parents (36%) have advised theirchildren to refrain from illegal downloading inthe last year.




Containing Piracy









Consumers Shape The Future Of R

ifpi 2007

Documents