Ifpi Details Global Biz Decline

What once was a $40 billion business is now down to $32 billion.

The global recorded-music business experienced another downturn in 2003, bringing the industry back to a level not experienced since 1993.

Overall, the value of the global recorded music industry in 2003 fell 7.6% from the previous year. Volume was down 6.5% to 2.7 billion units, according to a report by the International Federation of the Phonographic Industry.

Industry executives and analysts say that while many regions had disappointing results, there were encouraging performances in several major markets. They add that the development of legitimate online music services, coupled with strong action against online piracy, are cause for some optimism in the industry.

"We are still running downhill," Sony Music International president Rick Dobbis says. "Most of the key markets are down, and that's not encouraging. But we've seen some interesting changes, especially the development of legitimate services spreading around the world. It is not exactly a new dawn, but it is not pitch-black either."

Dobbis says the new market situation forces all players to adapt. "Everyone is evaluating how to operate under these circumstances," he says.

On the bright side, IFPI chairman/CEO Jay Berman highlights legitimate online activity, the growth of DVD and encouraging performances in the Australian, U.S. and U.K. markets.

"The performance [for full-year 2003] represents an improvement from the 10.9% drop in value of the market in the first half," UBS analyst Helen Snell says. She adds that seven of the top 10 markets posted better growth rates than UBS' original forecast.

The top 10 markets were the United States, Japan, the United Kingdom, France, Germany, Canada, Australia, Italy, Spain and the Netherlands.

On a regional basis, all territories except Australasia reported declines. North America, the world's biggest region, registered a 5.9% drop in value to $12.5 billion.

However, Berman is keen to note that the U.S. market, which accounts for 37% of the world's music sales, experienced a recovery in the last quarter of 2003. That upward motion has continued in first-quarter 2004.

The value of the European market fell 8.7% to $11.8 billion; Asia was down 9.8% to $5.8 billion, and Latin America slid 14.4% to $800 million.

The United Kingdom, Europe's largest market, showed resilience, but the second- and third-largest territories—France and Germany—fell sharply by 14.4% and 19%, respectively. (A full analysis of the German market appears on page 57.)

"A year ago, France was one of the few countries holding up, and it all fell apart," Dobbis says. "Germany is where it was five years ago. Fortunately, there is Great Britain."

Aside from France and Germany, many European markets posted double-digit value declines: Belgium (down 10%), Greece (10%), Denmark (12.5%), Ireland (15.4%), Portugal (12.3%), Sweden (14.7%) and Switzerland (12.3%).

Eastern Europe was all over the map. Some countries—Russia, Ukraine, Romania and Croatia—posted gains in value, while Bulgaria, Slovenia, Estonia and Poland were negative.

"Russia, clearly, is still a hot spot [for piracy]," Berman says. "There has been no satisfactory development in Russia. We're still waiting for change in the copyright law there. Factories continue to operate, we get a lot of promises, but we haven't had any substantial developments."

Many executives see potential in Eastern Europe. One of them is Joe Cokell, CEO of Sanctuary Records Group. "It is a region that works well for us. We are not scared of doing business there," he says. "We see growth in these territories and opportunities for our catalog."

Latin America suffered from bad economic conditions and rampant piracy. Mexico and Brazil, which have both been among the top 10 markets in the past, were among the hardest hit. Berman calls the situation in Mexico an "unhealthy development."

"In both those places, quite frankly, it is a question of physical piracy—markets are being overwhelmed," Berman says.

In the Asia-Pacific, some countries—China, Malaysia, the Philippines—reported growth in 2003, but the region's top market, Japan, under-performed. It is the fifth consecutive year of decline for the Japanese market, which is No. 2 in the world.

According to the report, Australasia's 4.5% growth to $800 million was driven partly by the success of music DVDs and the performance of local repertoire in Australia.

On another positive note, the global market for music DVDs increased by two-thirds and now accounts for 5.7% of the overall value of recorded music. DVD is now the second-most-popular format after CDs, at 105.7 million units.

"DVD growth has been fantastic. It has more than doubled in three years," Berman says. "It's such a bright spot; we need a few. I think we still have a couple of years of really substantial growth."

Looking ahead, UBS' Snell estimates that the global music market will drop by an additional 3.1% in value in 2004 and 1% in 2005. UBS forecasts a return to growth by 2006 but with a mere 0.6% increase.

Dobbis admits that the industry must be prepared for another couple of difficult years. "We have to be optimistic about the artistic side of our business, even if the environment is not leading to optimism," he says.