digital music nation 2010

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Digital Music Nation by Geoff Taylor ............... 1

UK digital music at a glance ............................. 3

The digital music market ................................... 4

Legal services: case studies ............................. 10

Marketing in the digital age: case studies ....... 16

The challenge of illegal free .............................. 19

Investment in music: case studies ................... 22

Digital music and the consumer ....................... 24

Changing consumer behaviour ......................... 31

BPI (British Recorded Music Industry) LtdRiverside BuildingCounty HallWestminster Bridge RoadLondon SE1 7JA

Telephone: 020 7803 1300www.bpi.co.uk

December 2010

Designed and produced by Sherry

©2010 BPI Limited

No part of this book may be reproducedin any form without written permissionfrom the copyright owner.

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Britain is a digital music nation.Wherever you look, people arelistening to music on their mp3players; millions of us everyday are watching music videoson YouTube or checking outthe latest releases on Spotify.The internet is an incredibletechnology for communication,and one of the things we use it for most is to listen to, shareand talk about music.

But where is all this digital musiccoming from? For the first time, thisreport provides a comprehensivepicture of the digital music nation at play.

Over the last five years, the legal digital music market has been an onlineinnovation success story. Digital nowrepresents a quarter of record labelrevenues, driven by partnerships withnew retailers, existing key brands andmajor internet players alike. There arenow 67 legal digital music servicesoperating in the UK, offering a vastchoice of new songs and cataloguethat can be browsed, streamed orbought online.

Many music fans have enthusiasticallyembraced these services. Since 2004,more than 500 million single trackshave been bought legally from digitalretailers in the UK. Digital albumshave also proved themselves a hugelysuccessful format, passing the 50million sales mark much faster thanthe CD and now accounting for almost20% of all albums sold.

These achievements are dwarfed,however, by the continued widespreadavailability and use of illegal servicesand the ongoing challenge of digitalpiracy on a huge scale. During 2010,three quarters of all music tracksdigitally acquired in the UK weredownloaded illegally – that’s two fullalbums for every man, woman andchild in the country. Despite the highawareness achieved by legal serviceslike Spotify, last.fm and we7, morepeople continue to use illegal P2P.

Unfortunately, the enormous scale of the piracy problem shows no signs of abating. Almost eight million people in the UK continue to download musicillegally according to research presentedin this report. Although P2P use hasremained stable, the number of peopleusing hosting sites and other illegalsources continues to rise dramatically.

BPI Chief Executive

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Despite the widespread availability of legal services, they’re having anegligible impact on overall levels of illegal downloading.

The internet plays an enormous rolein our society. It has become centralto how we work and shop, learn andentertain ourselves, as well as creatinga new social space connecting ustogether. But we should pause to thinkabout whether the frenetic pace oftechnological innovation online is indanger of trampling on basic ethicalvalues we rightly cherish elsewhere –that stealing is wrong; that creativity ispositive and deserves to be rewarded;that our culture defines who we are,and should be protected.

This challenge is playing out rightacross the creative industries.Newspapers are introducing conditionalaccess or ‘paywalls’, having recognisedthat not all information can be free of charge if investment in qualityjournalism is to be maintained.

Online book piracy is already damagingthe fledgling market in e-publishing.And the illegal streaming of movies/TVand sports online harms the funding ofnew productions and reduces the valueof sports rights.

The economic stakes are high. Thecreative industries employ nearly twomillion people in the UK, and arerecognised as a key engine of growthin the new economy. But digital piracyis putting many thousands of jobsunder threat and is holding backinnovation and investment in the new sector of digital content services.Unless decisive action is taken quicklyto create a properly functioningmarketplace for digital entertainment,the UK cannot expect to remain amajor global creative hub.

This wouldn’t be good news for Britishconsumers. They have every right toexpect that the internet should be aplace where, if they are browsing formusic or other content, they generallyencounter legal content which is high quality, virus-free and is what it purports to be. As our reportshows, this is far from the case now. Consumers paying to accessentertainment also have a right toexpect that this will help to pay fornew content for them to enjoy.

If we work now towards that internet – through proportionate, education-ledmeasures such as those passed byParliament in the Digital Economy Act – not only do we give our music thechance to flourish, but we will spur ondigital innovation and investment. If wefalter and lack the courage to act, werisk creating a serious cultural deficitin the UK. The voices of a generationof new bands and artists simply won’tget signed and won’t be heard. Wewill have abandoned values thatmatter. As a country, and as humanbeings, we will be the poorer for it.

Geoff TaylorChief Executive, BPI

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152,700,000 – sales of singles in 2009, 98% of which were digital*

500,000,000 – digital singlessold to date in the UK by Sept 2010*

50,000,000 – digital albumssold to date in UK by Sept 2010*

1,200,000,000 – single musictracks illegally downloaded in 2010from unauthorised sources**

£280.5m – retail value of digitalmusic market in 2009, 20% of overall£1.4bn recorded music market***

£984,000,000 – retail value of single tracks downloaded in 2010from unauthorised sources***††

67 – legal digital services in the UK,more than any other country***

82p – average retail price of singledigital track*

13,000,000 – individual tracksavailable for licence to legal digital services***

17 (out of 20) – average number oflinks to illegal sites in first two pagesof Google results, when searchingfor UK Top 20 singles***

94% – awareness amongst internetusers of legal music download stores**

28.8% – proportion of UK onlinepopulation (age 16-54) involved inillegal downloading**

23% – proportion of UK onlinepopulation (age 16-54) using P2Psites and software to obtainunauthorised music**

13% – proportion of UK onlinepopulation (age 16-54) using cyberlocker links via blogs to obtain unauthorised music**

7,700,000 – UK internet usersengaged in illegal downloadingacross all sources**

55% – proportion of internet userswho believe the Government should takeaction against persistent downloaderswho had been previously warned**†

54% – proportion of internet userswho believe that websites offeringmusic illegally should be banned or blocked from the internet**†

76% – illegal proportion of all musictracks obtained during 2010***

6,100,000 – people usingsources of illegal content inSeptember 2010 alone****

+7% – net increase in P2P useduring last 6 months**

+15% – net increase in cyberlockeruse during last 6 months**

79% – users who had encounteredproblems as a result of acquiringmusic from a P2P network**

Sources:

* OCC

** Harris Interactive

*** BPI

**** UKOM/Nielsen† Excludes ‘Not sure’ responses†† Recording industry losses from foregone

spend are estimated by Jupiter Researchat £219m for 2010

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Online Music Comes of Age Digital has transformed the UK’s musiclandscape, growing rapidly from themargins of the internet to become amainstream format for the masses.The Official Charts Company (OCC)began measuring its impact at the startof 2004, when MyCokeMusic launchedin the UK. By the end of the year –during which time the iconic iTunesstore had opened – almost 5.8m songshad been legally downloaded, around18% of all singles sold.

Skip forward to the present day and the singles market has been revitalised,with record sales achieved (152.7m in2009) and more than half a billiondigital singles bought since 2004.Digital now completely dominates thesingles market. By the end of this year,sales of single track downloads may forthe first time top 5m in a single weekas people unwrap and look to use newmusic services on their ChristmasiPods, digital music players, iPads,mobile devices or laptops. The digitalalbum is also making impressiveheadway, passing 50m sales inSeptember 2010 and looking set to account for around a fifth of allsales by the end of the year.

Annual Download Sales

2004 2005 2006 2007 2008 2009 2010*

Singles 5.8 26.4 53.1 77.9 110.3 149.7 160.0

Albums** na na 2.8 6.2 10.3 16.1 21.0

TOTAL*** 5.8 26.4 81.1 139.9 213.3 310.7 370.0Source: OCC * estimate **sales tracked from April 2006 onwards ***assumes 1 album = 10 tracks

This year saw the first single trackdownload pass the million sales mark(Black Eyed Peas’ I Gotta Feeling) and todate 19 albums have sold over 100,000digital copies, including two (Kings Of Leon’s Only By The Night and Lady Gaga’s The Fame) that havesurpassed the quarter-million mark.

Top 5 Digital Singles 2004 – Q3 2010

1 I Gotta Feeling Black Eyed Peas 1,056,812

2 Sex On Fire Kings Of Leon 1,010,679

3 Poker Face Lady Gaga 983,108

4 Fight For This Love Cheryl Cole 841,428

5 Just Dance Lady Gaga 833,048

Top 5 Digital Albums 2006 – Q3 2010

1 Only By The Night Kings Of Leon 276,662

2 The Fame Lady Gaga 262,417

3 Lungs Florence & The Machine 228,636

4 It’s Not Me It’s You Lily Allen 168,415

5 Sigh No More Mumford & Sons 168,2664

Lady Gaga Kings of Leon


This extraordinary growth has beenreflected in the amount spent byconsumers. In 2004 the nascentmarket was worth around £5m – in2009, the retail value of the digitalmusic market grew by 43% to reach£280.5m, accounting for more than 20%of the £1.4bn recorded music market.

The reality is that downloadable musichas now cemented its place in themainstream, accounting for over 99% of sales in the singles market.According to consumer research fromKantar, 20% of the UK population aged12+ (almost 10m individuals) bought

some digital music in the past yearwith expenditure skewed towardsmen who account for two thirds ofevery pound spent.

Building New RelationshipsCompared with just five years ago, themarketplace is unrecognisable: whilethe early success of digital was solidlyfounded on ‘a la carte’ stores (astypified by iTunes), now the modelsare manifold, from streaming andsubscription to freemium and ‘TheCloud’. There are now nearly 70services legally offering music

from every genre and suited to everypocket, with several free at the point ofaccess. The music industry’s MusicMatters initiative shows consumershow to find a wide range of legaldigital music services.

This ubiquity has only been achievedbecause music companies haveinvested heavily in forging newbusiness relationships with a widerange of new partners. Thesepartnerships, with some of the mosticonic and forward-thinking brands ofthe day, have ensured that music islegally accessible in more ways andplaces than ever thought imaginable.

Apple have, of course, helpedpopularise the concept of legallypurchasing digital music online, withother partners such as Amazon helpingfurther acclimatise and introducemusic fans to the process. Forward-thinking Internet Service Providershave worked extensively with recordcompanies and artists to try and workout new ways to bring music to theircustomer base, while brand leaderssuch as Nokia and Sony Ericssonhave been instrumental in bringingdigital music to mobile audiences.

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100%

80%

60%

40%

20%

0%

AlbumsSingles

2004 2005 2006 2007 2008 2009 Q1-3 2010

99.0%

19.6%

98.0%

12.5%

95.8%

7.7%

90.1%

4.5%

79.3%

1.8%

55.1%

17.9%

DIGITAL’S SHARE OF SALES

Source: OCC


Legal Sites and Services ExplainedA La CarteApple’s iTunes is probably the brandmost associated with this model, whichallows ‘cherry picking’ of isolated tracksas well as purchasing albums in theirentirety: over 10 billion tracks have beendownloaded around the world from the store since its launch. Competitionhas grown considerably over the years,however, with major retailers such asAmazon, Play.com, Tesco and HMVall operating in the UK.

The average price of a track iscurrently 82p (data from OCC), but inpractice the music download marketis highly competitive as consumersbenefit from large numbers ofpromotions. Many legal sites areoffering tracks by new artists for freeand popular singles can be on sale foras little as 29p. Likewise, albums canbe promoted at very appealing prices –Take That’s Progress was available, for example, for £3.99 in its week ofrelease, as were all the shortlistedalbums for the Mercury Music Prize inthe week of their nomination. What’smore, this information is all readily tohand – customers can easily find thebest deals by using online comparisontools such as Tunechecker andCompare Download.6

While these connections have helped break important new commercial ground,there is a lot of scope for new commercial partnerships to leverage the powerof music to attract and retain an audience. In particular, there remains great – and very lucrative – potential for ISPs and search engines to deliver music as an added-value service to their users. Indeed, any business with a largeconsumer base – such as supermarkets, online retailers, sports/leisure brands, broadcasters and newspapers – could offer their customers digitalservices and benefit from both music’s enduring popularity and credibility.

Music companies have shown themselves to be willing and ready to go farbeyond their traditional models and circle of partners to bring about credible and accessible legal music offers in the digital age. The following section looks at some of the different services currently in operation in the UK.

HMV Digital


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Pricing Tiers – Spotify

Tier Features Cost per month

Open 20 hours of streaming music; advertisements Free

Unlimited Unlimited streaming music; no advertisements £4.99

Premium Unlimited streaming music; no advertisements; £9.99mobile access; playlists available offline

StreamingServices such as Spotify and we7 arenever far from the headlines. Both allowusers to ‘stream’ (i.e. listen to but notdownload) music for free, with labelsand artists’ income deriving from theadvertisements that play in betweentracks. Despite only launching officiallyin February 2009, Spotify now claims tohave 7m users globally, while we7 hasaround 3m unique users every month.The growth of both the user base andvolume of music now being accessedon these dedicated legal services islittle short of phenomenal – well over50m audio tracks are streamed in theUK alone each week (2.6 billion peryear in the UK at current usage rates).

Both Spotify and we7 have latterlyintroduced a paying tier allowingusers to access the service withoutadvertisements (thus earning themthe ‘freemium’ tag) and via theirmobile devices.

Many other sites allow visitors to legally stream music in either audio or videoformats. MySpace, MSN Music and mflow have all either launched or re-launchedin the past year, while YouTube and Muzu both house all manner of authorisedmusic video content. Console gamers can even access the latter now with theadvent of the Vidzone service on the Sony PlayStation 3 – over 200m musicvideos have been streamed since its launch in 2009.

Spotify we7


SubscriptionAlthough we7 and Spotify both nowhave subscription tiers, two majorservices predate them. Napster wasoriginally an infamous filesharingservice but was relaunched as a legalbrand in 2003, allowing users (whosubscribed for a monthly fee) to listento unlimited advertisement-free musicand purchase it on an a la carte basis.Its library now boasts more than 10mtracks, with music from 800,000artists. Independent music specialisteMusic originally launched in the UKwith an ‘all you can eat’ subscriptionmodel, but now lets users downloadvarying numbers of tracks accordingto which plan they sign up for (theirentry-level tier is priced at £9.99 permonth and allows 24 downloads).

Other subscription services includeCarphone Warehouse’s MusicAnywhere service, launched inAugust, which allows subscribers to remotely access their music.

Accessing personal media collectionsvia ‘the cloud’ – i.e. free of thetraditional personal hard drive orphysical formats – is touted by manyas the next ‘great leap forward’ (seepage 14 for a more in-depth look).

This is just one of many new modelsthat music companies are beginningto license; new partnerships areconstantly being forged, all with aview to serving the evolving needsand desires of the UK’s music lovers.

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Music Anywhere


Digital Revenues Record companies have investedsignificant amounts of time andmoney in digitising their catalogues ofrecordings and negotiating licensingdeals with legitimate online musicservices. This investment is nowbeginning to reap meaningful results.Although rising levels of income fromdigital music have not yet offset thedecline in revenues from falling CDsales, BPI figures for the 12 monthsending in September 2010 show that

digital now accounts for a big slice ofindustry revenue – 24.5% (up from19.2% a year earlier). This impressiveshare of the overall market has beendriven by innovation above and beyondthe standard a la carte model. Almost afifth of digital income now comes froma mixture of subscription services(Napster, eMusic etc), ad-supported(Spotify, we7, etc), music videodownloads and ‘other’, which includesringtones, ringback tunes and otherone-off or ad-hoc payments.

Expanding Consumer ChoiceChannel & RepertoireThe growth of the legal digital musicmarket has only been made possibleby providing music fans with an ever-growing choice of catalogue, through acomprehensive range of access points.The services on offer are evolvingconstantly too, with many mixing and matching features to better meetcustomer demand. Music on mobile, for instance, is now not only served bypure a la carte and streaming models,it also houses services such as Nokia’sOvi Music Unlimited, which bundlesin unlimited downloading into theprice of a handset.

Services such as Napster are offeringa new spin on the streaming model,with credits for downloads (to keep)included in the monthly subscriptionfee, while the Nectar Music Storeallows members to purchase musicfrom credits accrued from theirsupermarket shopping. Many otheronline stores are also experimentingwith new features, with some – suchas Bleep.com – giving immediatelyredeemable download codes whencustomers order a CD online.

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Other 0.9%Ad-supported 4.8%Subscriptions 6.2%

Mobile 4.6%Music Video 1.3%

Tracks & SingleBundles 45.7%

Albums36.5%

BREAKDOWN OF DIGITAL REVENUES 12m ended September 2010

Source: BPI


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Fairsharemusic

Fairsharemusic.com offers a unique take on theconcept of the music download store. Users canbrowse over 11 million tracks – including newrelease and exclusive content – and downloadhigh quality MP3s straight into their existingiTunes or Windows library. The difference isthat for every track they download, the siteguarantees to donate half the profit from thesale to charity.

The site’s philosophy is evidently appealing togreater and greater numbers of music fans,with customer numbers doubling month onmonth since its launch in June 2010. It hassince had over 50,000 visitors from more than 140 countries and over half of those whoregister with the site make a purchase on theirfirst visit. According to the site’s founders,customers are spending almost double theestimated industry average on each visit andmore than a third of customers are returningvisitors coming back more than once.

Fairsharemusic currently has eleven registeredcharities it donates to, including the NSPCC,WWF, Centrepoint, Amnesty International,Oxfam, British Heart Foundation, British RedCross, Friends of the Earth, Great OrmondStreet Hospital, Sue Ryder Care and theTeenage Cancer Trust with five more charitiesto be announced by the end of the year.

There are almost 70 services in the UK that provide streaming or downloadable multi-label content legally in the UK.Here we focus on two of them:


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Spotify

Spotify launched in the UK in October 2008with the aim of offering a powerful musicexperience within a 100% legal framework.We’ve built up a catalogue of more than 10million tracks from both major and independentlabels, and combined this library with a servicethat makes it easier than ever before to searchfor and share music.

The success of Spotify in the UK has beendriven by the 'freemium' business model. Userscan register either for free accounts supportedby adverts, or upgrade to paid subscriptionswithout ads and with a range of extra featuressuch as portability, higher quality streams andoffline music access. Our users tell us thebiggest reason they subscribe to Spotify is totake their music with them, which is possibleon a range of mobile devices.

It's fantastic to see so many people in the UKenjoying Spotify. As we continue to establishthe service, we're also proving to be a majorsource of digital revenues for artists and labels.

Piracy continues to be the music industry'sbiggest challenge. Look at it this way – in thephysical world, an enormous supermarketgiving entertainment away illegally and forfree would be a serious deterrent to setting up and running a shop where you charge for the same products.

Online, we continue to face a comparablechallenge where our ability to convert people to paying for music subscriptions, or attractadvertising for our service, will be challengedby the continued availability of that samemusic on illegal services.

Spotify has invested in and developed a servicethat people are moving to in their millions, andis playing an increasingly important role inattracting people away from filesharing andillegal streaming. As ever, a level, legal playingfield remains vital for any business looking to flourish in the digital age.

Daniel EkSpotify co-founder and CEO


The range of music available on legalservices has expanded in tandem asthey have flourished. Figures fromOCC show that the number of differenttracks downloaded each week in theUK has grown by almost four times injust five years while Spotify now offersusers a choice of over 10 million tracksand adds around 10,000 every day.

The announcement in mid-Novemberthat The Beatles’ catalogue was to bemade available on iTunes has meantthat one of the last few pieces of thedigital repertoire jigsaw has falleninto place. Very few artists are stillinaccessible via legal downloadservices, with the catalogues ofmajor artists such as Metallica, LedZeppelin and Pink Floyd all presentafter some periods of unavailability.

The UK has moved particularly fast inmaking a wide choice of legal sourcesof music available, as the comparisontable above illustrates. Acrossstreaming, a la carte, subscription,bundled and mobile channels there arecurrently almost 70 recognised servicesproviding multi-label content legally,more than in all the other leadingEuropean territories. By comparison,for the USA – the biggest per capitaconsumer of digital music – IFPI’sPro-Music website lists 20 services.

Number of Legal Music Services by Territory (multi-label content, September 2010)

UK 67

Germany 42

Spain 29

France 27

Italy 27Source: BPI/IFPI

Innovative deals have helped to growthe legal digital offer, but the effect ofpiracy is without doubt undermining thepotential for expansion in this sector. Allof these legal businesses are workinghard to compete against services thathave little or no regard for the conceptof copyright and do not remunerateanyone in the creative chain.

Sound QualityAs well as vast consumer choice interms of catalogue and a growing retailbase, today’s music downloader canalso often choose to buy music whicharrives with premium sound quality.

Kbps (kilobit per second) is a measureof bit rate, or the speed at which datais transferred. In the early days oflegitimate music downloading 128kbpswas the norm; internet connection

speeds were slower and computerhard drives and the capacity of digitalmusic players were much smaller.Whilst the sound quality of filesdelivered at this speed was acceptableto most listeners, today bit rates of256kbps or 320kbps are commonplace(for downloads and streaming servicessuch as Spotify Premium), resulting inmuch improved audio quality. Fasterbroadband speeds, cheaper harddrives and digital music players withlarger capacities have all combinedto greatly enhance the digital musicexperience for fans.

For most consumers, a 256 or 320kbps MP3 file provides a completelysatisfactory listening experience viastreaming and will also download in arelatively short time. However, as in-home technology becomes increasinglysophisticated and ever more affordable,music lovers are beginning to discoverand appreciate the benefits of evenhigher quality downloads.

Sites such as Bleep.com, Linn Recordsand Theclassicalshop.net are meetingthe growing demand from the ‘audiophile’market who want the very best in sound quality. In addition to 320kbps MP3 downloads, other high quality lossless formats are also available.

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Although considerably larger thanstandard MP3s, these enable the file to be compressed without losing anysound quality – i.e. the same as CD,but without taking up the sameamount of disk space as a straighttransfer. There are several types oflossless formats, such as Microsoft’sWMA (Windows Media Audio) and

FLAC (Free Lossless Audio Codec), allof which give the listener outstandinglevels of audio reproduction. At thevery top end of the scale are studiomaster quality downloads which offerthe same listening experience asSuper Audio CD (SACD), a highresolution CD format which offers the highest quality available.

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Linn Records


Music – At the Heartof Digital MediaThe popularity of music has neverbeen higher and this is reflected inthe number of emerging services andtechnologies that place musical contentat their heart. Many of the biggestselling games of recent years, such asSingstar, Rock Band and Guitar Hero,are based around interaction withofficially licensed songs, with storesaccessible through the gamer’s ownconsole meaning that new content isconstantly made available.

Music is also central to some of thebest selling apps on mobile. Gamessuch as Tap Tap Revenge (nowdownloaded over 25m times globally)are underpinned by the music ofsuperstar acts such as Coldplay, Lady Gaga and Metallica, while other artists have created innovative,officially-endorsed apps with a twistlike the autotune-replicating I Am T-Pain and the remixing tools fromLittle Boots and Deadmau5. Songrecognition app Shazam has also had an impressive take-up, with thecompany stating in early 2010 that itfacilitates over a quarter of a milliontrack purchases a day globally.

Labels are making sure that they arerepresented on a variety of digitalplatforms. As well as the requisitewebsite, app and Twitter presence,many are reaching out to thousands offans with dedicated YouTube channelsand podcasts (such as Drum & Basspioneers Hospital Records, whorecently reached the 100th episode oftheir award-winning podcast). Artistsand labels are also looking at thepossibilities offered by webcastingperformances, such as U2’s gig at thePasadena Rose Bowl in California inOctober 2009, which was watchedlive by 10m people on YouTube.

Indeed, a 2010 report by analytics firmSysomos demonstrated that music isvery much at the centre of YouTube’ssuccess, accounting over 30% of itstraffic in the period surveyed.

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Guitar Hero 5

TwitterShazam


Creating Online ConversationsAround MusicFor many fans, the thriving communitiesbuilt online around music are almost asimportant as the music itself. Digitalservices have evolved and adapted tocater for social networking, allowinglike-minded fans to talk about music,recommending and sharing links to it with friends online.

Some long-standing music services,such as YouTube and MySpace, sought to grow communities of fansfrom the outset. Others focused onrecommendation, including Last.fmwhere users ‘scrobble’ – keeping arecord of what they listen to on mediaplayers – then suggest more songs andeven concerts based on their existingtastes. Users of the service alsoconnect with musical ‘neighbours’ who are fans of similar music genres.

Most new services now recognise that many customers want to conductconversations around the music they’rebuying and listening to. But at the sametime, they take a pragmatic view that theestablished networks like Facebook andTwitter are where most people alreadycongregate, and have built functionsthat interface with these services.

Streaming service Spotify, in particular,has benefitted from developing featuresthat allow users to share music andplaylists with friends on socialnetworking sites. The innovativeservice launched in 2010 by mFlowallows users to follow friends, artistsand even entire labels, getting aconstant feed of the music they’resharing – and, in turn, share this musicwith their own followers. Users also get20% of the price of a track credited totheir accounts when others buy musicbased on their recommendations.

In September 2010, Apple unveiled Ping– a major evolution of iTunes that addeda raft of social networking functionsto the market-leading digital musicservice. With an installed global userbase of more than 160 million people,Ping allows customers to add personalprofiles to their accounts, follow artistsand keep track of the comments andreviews of other iTunes users.

Facebook

15last.fm mFlow Ping


The internet has offered a multitude of challenges and opportunities toartists and labels alike looking toconnect with potential audiences.While the opportunity aspect is fairlystraightforward – that digital mediaenables fans on the other side of theworld to access content at the click ofa mouse – the challenges are slightlymore complex. Not only do labelshave to make sure their music isavailable on the particular sites andservices each potential fan is using,they also have to find ways to maketheir content stand out.

As a result, those making andpromoting music have to use evermore ingenious and creative methodsto attract attention in an increasinglycrowded marketplace, a factacknowledged in the UK by thecreation of an awards ceremony(BT’s Digital Music Awards) solely to recognise excellence in this field.

GorillazOne of the most ingenious campaigns of the year was createdaround the release of Gorillaz’ 2010 album Plastic Beach. A double winner at the Digital Music Awards, it offered fans awealth of engrossing content, with the band’s website actingas the central hub. Prior to the album’s release a number ofshort video clips featuring excerpts of music were posted,followed by an eight-minute ‘minimix’ of the album which wasavailable to download for free. As well as constantly updatednews across the projected 18-month duration of the campaign,the site houses reams of interactive content, including mini-games (and also a larger Escape To Plastic Beach game withdifferent stages released over time), broadcasts and videosalong with some features and offers that are only accessiblevia subscription or the purchase of the ‘Experience Edition’of the album itself.

The campaign also extends into the mobile and retail arenas.The Plastic Beach app features an innovative ‘augmentedreality’ layer (that enables the user to open up a virtualGorillaz world) and also plays host to a regularly updatednews feed. Fans can also follow band member Murdoc on his travels thanks to a GPS tracking map.

Content for fans was also provided via the iTunes LPversion of the album, which included two extra tracks, a gallery, lyrics and exclusive videos as well asfeatures such as an interactive game and a storybook.

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Tinie TempahTinie Tempah has been one of the UK'sbreakthrough artists of 2010, selling well overa million singles and seeing his debut albumcertified platinum. Having already built a strongpresence via media such as Twitter, YouTube(nearly 40m views to date) and his blog Milkand 2 Sugars, his is a young audience whohave grown accustomed to interacting with – and getting information about – theirfavourite artists online.

The campaign around his debut album Disc-Overy was centred on this interactivity. Onekey innovation was the launch of a new format – a unique lanyard featuring a code enablingfans to download the album and accessexclusive content including videos, behind thescenes footage, wallpapers and messagesfrom Tinie himself. The marketing activityincluded a campaign across Facebook, theofficial site, Ping and Twitter to make fansaware of the iTunes Complete My Albumfeature, which ensures that those who havebought the singles do not have to re-purchasethem as part of a download album bundle. This gave Disc-Overy a very strong digitalshare in its first week (31%), with impressivetake-up of the Complete My Album feature.

There was also a considerable amount of onlineactivity surrounding concerts. On each night ofthe Disc-Overy tour Tinie streamed footage livefrom the dressing room, interacting directly withfans and exclusive content was delivered directlyto audience mobiles via Bluetooth at certain gigs. All this digital innovation was recognised in this year's Digital Music Awards where Tinie was voted Best Newcomer.

While projects such as these are hugelyimpressive, they have only been achieved with considerable investment both in terms oftime, expertise and capital. While the cost ofdistribution may have been driven down in thedigital age, the shop window is more packedthan ever and artists, labels and all thoseworking with them will have to continuallyinnovate to be noticed.


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Future Developments – The CloudSeen by some as the next potential‘game changer’ for digital music, theconcept of ‘the cloud’ is relativelysimple. Instead of having music – orindeed any digital media, such as filmsand TV shows – stored as individualfiles on computer hard drives or otherpersonal devices, customers will havetheir content stored on a central lockerand be able to access it remotely on themove. Consumers would have fewerworries about the ‘interoperability’ offiles with the cloud service providersmaking sure the content is universallyplayable. The spectre of losing personaldigital content following a hard drivefailure would be removed, and storagecapacity of PCs and portable deviceswould cease to be an issue. In addition,the vast improvement in the soundquality of remotely delivered music ismaking such services a real alternativeto ‘tethered’ listening.

Sites such as Lala have already laid thegroundwork, but it will take a launchbacked by a major brand to propel thecloud concept into the mainstream.Rumours persist of imminent servicesfrom Apple (who have already made a move into streaming TV shows and

movies with Apple TV) and Googlebut several companies have alreadyannounced their intentions for this area.Tesco have made public some details of their proposed Clubcard-linkedscheme, which would make digitalcopies of all music or film contentpurchased by customers at their stores available for remote access.

Meanwhile, Sony have unveiled theirMusic Unlimited service, which willstream music to various forms ofbranded hardware in the first instance.Carphone Warehouse’s MusicAnywhere is also an important stepforward, allowing users to legallyreplicate and access their own music collections from any suitablePC/laptop or mobile device.

It is the ‘personalised’ aspect that isperhaps key here: technically, manystreaming services already operate ‘inthe cloud’. The main differentiator of thenew services is that consumers wouldbe accessing music from their ownlibraries, making the selection of tracksmore convenient. Spotify, for example,now includes functionality that scans a user’s hard drive music collectionand automatically generates playliststhat users can access from their site.

There are also benefits beyond therealm of the customer experience –already some services are allowinglabels to publicly preview their newreleases and collect digital demosubmissions from unsigned artists. Assites such as MySpace and Facebookgave bands and labels new platformsto reach music fans, these new cloudservices may well present a wholenew raft of opportunities.


iTunes, Spotify and other legal serviceshave been taken up by millions of UKmusic fans. The good news is that theyare generating meaningful revenues forlabels and artists alike. The bad newsis that they have not solved the problemof endemic illegal downloading ofmusic. Illegal websites and “peer-to-peer” networks don’t just depriveartists, songwriters and musiccompanies of vital revenue – theyalso affect the development of thelegal digital music sector.

While in some cases there is a smalllevel of technological know-hownecessary to acquire music illegallyfrom the internet, in most instances it is worryingly straightforward and can be as simple as typing the name of the track or artist into a search engine.Consumer research from HarrisInteractive (explored later in the report)amongst illegal downloaders revealedthat 58% of them used Google to directthem to free music, for example.

Mass unauthorised music downloadingbecame prevalent with the creation ofthe original Napster. This was a peer-

to-peer (P2P) network that surfacedin 1999, connecting individual internetusers around the world and enablingthem to share digital files quickly and easily.

Since those early days, the methodsused to unlawfully acquire copyrightedcontent like music and film haveevolved and diversified. Currently, themain forms of illegal downloading ofmusic can be divided broadly into P2P,where users host the content on theircomputers, and a variety of othermethods which rely on content heldon a central server.

19


Peer-To-Peer (P2P) MethodsBitTorrent is currently the most popular of all the P2P networks. Its designmakes it very efficient in the distribution of large volumes of data. Like all P2Pmethods, this efficiency comes from splitting a file into lots of pieces thusmaximising the available bandwidth and circumventing the need for anything to be centrally hosted. Though this method is also useful for distributing largefiles legally, it is overwhelmingly used for sharing copyrighted content withoutpermission. P2P generally requires a piece of such software to be installed onthe user’s computer rather than being accessed via a web browser. Gnutella,eDonkey and Direct Connect are other examples of P2P networks, relying onthe use of software applications like Limewire and DC++.

20

Non-P2P MethodsOutside of the P2P environment, thereare a number of other ways that musicis unlawfully distributed and acquired.Newsgroups are one of the oldestinternet communications technologiesaround. By allowing users to postmessages (similar to emails withattachments) to a server, other users are able to download theseposts complete with music files or other content.

Forums are examples of morecommunity-based websites that allowmembers to link to content for others to download, often with a commoninterest or theme. Blogs are similarlyfocused and usually specialise on aparticular genre or artist, with links to content hosted elsewhere, postedby the author or its readers.

Aggregators and search enginescollate links to tracks or full albums to give users a convenient, singlelocation to search for content.

Hosting sites, or ‘cyberlockers’, can be used to store and transfer fileslegally, but in reality a huge volume of infringing content is held on lockerservices at any one time, with links tothis content provided from websites,newsgroups, forums and other sources.


Some of the better known examples –Rapidshare and Megaupload amongstthem – regularly feature in the Top 50of the most-visited websites in theworld, attracting almost as manyunique users as mainstream sites such as the BBC’s.

Unlicensed pay sites often resemblelegitimate retailers, listing albums andtracks for download at a very lowprice. They are commonly hosted in Russia/Eastern Europe and often make false claims that they are fullylicensed and pay the appropriateremuneration to copyright holders.

Unauthorised streaming sites allowusers to start listening to tracks oralbums at the click of a button withouthaving to download the whole file first.As we have seen, there are good legalstreaming services available but thereare also many unlicensed ones. Giventhe increase in streamed content,stream ripping sites and software are becoming increasingly popular,enabling users to capture the sourceaudio from a legitimate streamingservice (such as YouTube or Spotify)and convert it into downloadable MP3 files.

The role of search enginesSearch engines are as popular as P2Papplications as a source of illegaldownloads. It’s not hard to see why.Key in the name of any popular artist,add search terms like “mp3” or“download” – both neutral terms –and typically the large majority ofresults that appear are blatant links to illegal downloads.

In a single week in November, BPI test searches were made on Googlefor the UK’s top 20 singles or albums,followed by “mp3”. On average 17 ofthe first 20 Google results for singlesand 14 of 20 search results for albumswere links to known illegal sites.

The predictive search tools offered bysome search engines go further byactively directing users towards freeillegal downloads by auto-completingartist searches with additional phraseslike “torrent”, or providing specificreferences to unlicensed sources like Mediafire or mp3raid.

The music industry continues to presssearch engines to help consumers stayon the right side of the law and hassuggested concrete solutions such asprioritising music search results infavour of legal online services suchas those highlighted by the MusicMatters campaign.

21

Examples of sites/services from the above categories

BitTorrent Tracker/Indexer Piratebay.org; Isohunt.com

Newsgroups Newzbin.com

Forums/Blogs Warez-bb.org; Rlslog.net

Aggregators Filestube.com; Beemp3.com

Hosting sites Rapidshare.com; Mediafire.com

Pay sites Mp3fiesta.com; Legalsounds.com

Streaming/Stream ripping Skreemr.com; Fetchmp3.com


22

Ingenious MediaIngenious has been heavily involved in mediainvestment and, more particularly, investmentinto the music space since the late 1990’s,ranging from advisory to direct investment into traditional music companies. In 2005-6,Ingenious raised in excess of £40m for twofunds aimed at direct investment in recordedmusic artists with a view to generatingsignificant commercial success from financiallysupporting both new and existing performers.

As we began investing, it was apparent that therecorded music market was rapidly becomingmore and more difficult as the landscape wasbecoming dominated by illegal downloading. Oneof our early releases by a very successful bandsold roughly 150,000 units in the UK (the bandhad sold in excess of 3 million units in the UKwith previous albums) and further investigationshowed that, from one major bit torrent sitealone, a further 150,000 copies had beenillegally downloaded! We estimated that inexcess of 1 million units of the album were‘stolen’ in this way.

In 2009, our second music fund invested inhelping to resurrect the career of The Prodigy,resulting in the biggest selling independentalbum in Europe that year. The problem was

that the album only sold around 600,000copies in the UK and 1.5 million across Europe,whereas in the ‘pre-piracy’ era sales wouldhave been two to three times this number.

The success of that album certainly helped the record label, Cooking Vinyl, to double insize, thereby creating significant employment.However investment in music content is a‘hits driven’ play where the hits must pay for the misses, which are inevitably far morenumerous. Our experience across the musicinvestment portfolio is that the successes, aseroded by piracy, are no longer big enough tocompensate for the misses in what remains an incredibly risky investment space.

The music industry is going through massivestructural change, which has destroyedtraditional business models, while new modelsare emerging driven by scores of new entrantsto the market. Sadly, few, if any, of them aredriving significant revenues, let alone making aprofit. Against that background it seems clear to us that further positive action to combatpiracy is crucial if the industry is to survive in a recognisable form.

Paul Bedford, Investment Director

A failure to act on illegal downloading continues to undermine the potential for the digital music sector to expand, erodingvalue for investors, entrepreneurs and innovation in general. Two companies here explain the challenge of investing inmusic in a market distorted by unchecked competition from digital piracy.


23

Grant Thornton UK LLPGrant Thornton recently published a report –‘Where is the smart money going in Media?’ –looking at investor activity in the media sector.

It analysed the opinions of 40 private equitypractitioners with experience of investing in theUK media sector. Music, alongside consumerpublishing and TV/film, was found to be one ofthe least attractive sectors for private equityinvestment. One of the key reasons that themusic industry is not seen as a key sector forinvestment is the impact that piracy has had inremoving value and margins from the market.

This result was not a surprise to us. Investorshave always needed to understand how theymake a return on their investment and, post-recession, investors are increasingly looking forproven, robust and profitable revenue streams to underpin their investment. In the face ofcontinued piracy the retail music sector, with theexception of iTunes, has struggled to present adigital model that delivers this certainty.

It is clear that there is a mismatch between theperceived value of music in the marketplacebecause consumers can obtain content at littleor no cost, or recourse from illegal sources.

The music industry is responding to this newvalue paradigm in a number of ways, includingincreasing pressure on illegal content sourcesand their gatekeepers, but also by continuingto explore e-commerce and m-commercemodels where micropayment is built intoalready established subscriptions or payment mechanisms.

Furthermore, the industry is starting to createinnovative experiences that are more compellingthan the illegal services and for which theconsumer is prepared to pay – for example bymaking content easy to access, engaging andavailable without penalty across the variety of devices that consumers now own.

Nick PagePartnerGrant Thornton UK LLP


As we have seen, despite the unfaircompetition that licensed digitalservices face from illegal sources ofmusic on the internet, legal serviceshave obtained a strong foothold amonginternet music fans. But what share of overall music downloading andstreaming do they represent in the UK,and how can this share be increased?

To answer this, in September 2010BPI commissioned Harris Interactiveto conduct some in-depth research viaan online survey into the awareness,usage and attitudes towards both legaland illegal acquisition of digital music.Respondents were aged between 16and 54 and of the 5,000+ surveyed29% were engaged in some form ofunauthorised music downloading.

Awareness – Legal Services

Aware Of

Legal download stores 94%

Music videos from YouTube 92%

Radio station website 85%

Music via social networks 83%

Spotify 65%

Last.fm 54%

Awareness – Sources ofUnauthorised Music Downloads

Aware Of

P2P 74%

Cyberlockers 66%

MP3 search engine 51%

Overseas pay sites 45%Source: Harris Interactive/BPI Digital Music SurveyBase: all respondents

Awareness of many of the legalchannels – from download stores to streaming sites and radio/videoservices – is very high. Over 90% of allrespondents were aware of YouTube,while eight out of ten were familiar with the availability of music via socialnetworking sites and online radio. Twothirds (65%) were aware of the legalstreaming service Spotify and only 6% were unaware of any of the legaldownload services currently available.Clearly the internet population is wellinformed about the legal access pointsfor music in the online environment.At the same time, knowledge ofunauthorised online sources is high –three quarters of all respondents wereaware of P2P as a source for illegaldownloads and two thirds were awarethat storage sites such as Rapidshareand Hotfile are also prevalent sources.

It’s clear that legal services face a difficult battle to compete whileknowledge of unlicensed services is so commonplace.

Usage of Music Services The survey also asked respondentswhether they were users (regular oroccasional) of both legal and illegalsources of music. This does not, initself, reflect the actual volume ofmusic being acquired from any onesource and the high level of incidencereported by Harris’ respondentssuggests that for many sites theremay well be a significant number of infrequent users.

While services such as YouTube enjoyrelatively high levels of usage amongrespondents, the survey also showedthat the popularity of both P2P andnon-P2P is high. Around a quarter(23%) of all respondents stated thatthey use P2P services and over onein 10 (13%) were using either blogs or boards and forums to find links for music content on hosting sites. It is also worth noting that the level of acquiring music unlawfully viacyberlockers, for example, is almost as high as the legal (and much-publicised) streaming service Spotify.

24


Reported Usage of Music Sites andServices (% using, any frequency)

Legal Services

TOTAL

Music videos from YouTube 54%

Legal download services 41%

Radio station websites 34%

Music via social networks 27%

Spotify 18%

Last.fm 15%

we7 8%

Sources of Unauthorised Music Downloads

TOTAL

P2P sites and software 23%

Cyberlocker links via blogs 13%

Cyberlocker links via 13%boards/forums

MP3 search engine 12%Source: Harris Interactive/BPI Digital Music SurveyBase: all respondents

Among illegal downloaders, P2P is still clearly the main channel foracquisition of music. Four in every fivestated that they use such sites andsoftware, although there are also highlevels of usage for methods such asblog and board links to cyberlockers(47% and 44% respectively) and MP3search engines (42%). Well over half(58%) of these respondents had usedthe search engine Google to lead themto free music downloads.

Profile of UsersWell over a quarter (28.8%) ofrespondents in the Harris Interactivesurvey were involved in illegal musicdownloading. Men account for 60% ofthose acquiring music unlawfully andthe profile is biased towards youngerpeople, with 62% aged under 35 andthe 25 to 34 age group accounting forthe biggest single share (38%). Theyoungest (aged 16 to 24) comprisedalmost a quarter (24%) of illegaldownloaders, compared to just undera fifth (19%) of those who downloadedmusic legally. The Harris data alsoshowed that this age group wereproportionally the heaviest users of illegal services, although not the largest group numerically.

Demographic Breakdown of Legaland Illegal Downloaders (% down)

Legal Illegal

Male 53% 60%

Female 47% 40%

16-24 19% 24%

25-34 35% 38%

35-44 29% 23%

45-54 17% 15%Source: Harris Interactive/BPI Digital Music Survey

What is being downloaded?The survey shows that usage of P2P is of course not limited to musicdownloading, but that music is themost popular type of content accessed:

% of Respondents DownloadingEntertainment Content from P2P

Music 23%

Films 20%

TV programmes 19%

Software (non-gaming) 18%

Video games 15%Source: Harris Interactive/BPI Digital Music SurveyBase: all respondents

25


Almost one in four (23%) ofrespondents said they used P2Pservices to acquire music, with one in10 (9%) doing so at least fortnightly.Film and TV programmes were thenext most widely downloaded, withone in five (20%) stating that theyuse P2P sources for the former.

The Scale of the Problem of Illegal DownloadingP2P remains the biggest singlesource, accounting for 46% of alltracks acquired from services in the chart below, with each P2P useracquiring an average of eight tracksper month via this method alone.Users of these sources do so on afairly frequent basis too – well overhalf (57%) of those downloading tracksvia overseas pay sites claim to do soweekly or more often. Over four inevery 10 that professed to using P2P,

MP3 search engines and cyberlockersstated that they too visit these sourcesat least weekly. In total, users of thesefour key methods downloaded anaverage of 6.3 tracks per month.

Harris Interactive estimate that the totalnumber of users across each of thesefour main categories of unauthoriseddownloading (P2P, links via forums/cyberlockers, MP3 search engines andoverseas MP3 pay sites) is 7.7m.

Scaling up self-reported levels ofunauthorised track downloading fromthe Harris survey suggests that some80m tracks are acquired from thesesources every month. Across a wholeyear this amounts to almost a billionsongs unlawfully acquired.

Overseas MP3 sites

11%

P2P 46%

MP3 search engine 18%

Links via forums/cyberlockers 25%

SOURCE OF UNAUTHORISED DOWNLOADS (% Vol)

Source: Harris Interactive/BPI Digital Music Survey

26

The Scale of the ProblemHarris Interactive estimatethat in 2010 more than 1.2billion music tracks will be illegally downloaded. “An equivalent stack of120 million physical CDs,each containing 10 of theillegal tracks, would reachwell into space.”


This figure, however, will be even largerconsidering the other methods by whichmusic can be illegally obtained, suchas email, IM and newsgroups. Aconservative estimate of all illegaltracks may therefore be in the region of1.2bn in 2010. This figure dwarfs thelegal music market downloads figure:BPI forecasts that some 370m tracksacross singles and albums releases willbe purchased in 2010. If that were to bethe case then legally obtained trackswould only constitute about a quarterof all those downloaded in the UK.

Illegal Downloading Trends – Monthly UsageMeasuring illegal downloading is by itsvery nature difficult. Respondents toconsumer surveys are often unwillingto admit to behaviour that they knowto be of dubious legality. Similarly,methodologies that measure actualonline behaviour are also likely tounder-represent some activities atthe fringes of social acceptance.

Nevertheless, data from UKOM/Nielsen – which monitors actual website andapplication usage (for the UK OnlineMeasurement company on behalf ofthe UK online advertising industry) – provides valuable information toassess the changing patterns ofusage of different types of sites andservices. UKOM/Nielsen’s minimumpanel size is 35,000 individuals in the UK, is representative of the onlinepopulation and tracks actual onlinebehaviour both at home and at work.As their survey is ‘opt-in’, i.e.participants choose to join and installsoftware on their PC knowing thatthey are being actively monitoredonline, it is reasonable to assume thata significant number of heavier usersof illegal sites and services are notrepresented on their panel.

The figures presented in this reportmay well therefore understate theproblems the music industry faces. Ofcourse, it cannot be said that all of thisactivity on the sites and services isbased around illegal music – othertypes of content are available fromsome of these sites and some of it islegitimate, but it is fair to say that thisis indicative of changing patterns of acquisition and illustrates thewidespread use of such services.

27

Illegal(1.2bn = 76%)

Legal(370m = 24%)

TRACKS ACQUIRED BY SOURCE (UK) 2010(Volume and %)

Source: Harris Interactive/BPI Digital Music Survey/OCC


0

1

2

3

4

5

6

7

8

9

0

1

2

3

4

5

6

7

Non P2P P2P Total Users

Legal Download Legal Streaming iTunes Application*

0.8

2.7

7.7

2.6

4.4

6.1

In September 2010 4.4m individualsused at least one of the P2P sites or applications tracked on theUKOM/Nielsen survey and 2.6m hadused at least one non-P2P site. In totalthere were 6.1m unique users of anysuch type of services. A list of the sitesand applications tracked is presentedon page 34. It should be noted thatthese are monthly rather than the ‘allfrequency’ users presented in theHarris findings and therefore the twodata sets are not directly comparable.

Comparisons between consumernumbers in the legal and illegal marketsare somewhat difficult using the Nielsendata. The figure for iTunes measuresonly those who use the application on a monthly basis, as opposed to thosewho actually make purchases from theiTunes store. A significant number ofusers may well be simply using theapplication to manage their collectionof ripped CDs and/or illegally acquiredmusic. Similarly, the user data forYouTube (17.5m) captures all usage, not just music. For the sites monitoredoutside of these two major services,however, legal music download sites(including HMV, Napster, Amazon and eMusic) attracted just under 1munique users in September, with legalstreaming services (such as Spotifyand we7) visited by just under 3m.

28

MONTHLY USAGE OF SOURCES OF ILLEGAL CONTENTUnique Users (m)

MONTHLY USAGE OF SOURCES OF LEGAL CONTENTUnique Users (m)

* see text for explanation. Source: UKOM/Nielsen


3,972

3,889

4,086

3,887 3,671

4,149

3,969

4,085

4,046

4,117 4,412

4,273

Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10

0

500

1,000

1,500

2,000

2,500

LimewireSpotify

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Mar-0

9Ap

r-09

May-0

9Ju

n-09

Jul-0

9Au

g-09

Sep-

09Oct

-09

Nov-

09De

c-09

Jan-

10Fe

b-10

Mar-10

Apr-1

0May

-10Ju

n-10

Jul-1

0Au

g-10

Sep-

10

SUM OF P2P APPLICATION USERS (Thousands)

LIMEWIRE V SPOTIFY USAGE – MONTHLY USERS (Thousands)

Source: UKOM/Nielsen

P2P TrendsThe widely held belief that illegaldownloading from non-P2P sourcesis accounting for a growing proportionof online infringement is borne out by UKOM/Nielsen’s data as well asBPI’s consumer research from HarrisInteractive. However, it shouldn’t beconcluded that the threat of P2P isdiminishing. Far from it, levels of usehave been fairly consistent since thebeginning of 2009.

This graph (above right) shows theusage of the eight P2P applicationsBPI track via UKOM/Nielsen’s panelover the past year. In September of2010 the user numbers of thesetotalled 4.3m; across the whole year,the average was around 4m.

The graph (right) illustrates the usageof Limewire (one of the most popularP2P applications) in relation to Spotify,the most successful legitimatestreaming service available. Althoughmonthly usage of Limewire hasdeclined since March 2009 and thenumber of people using Spotify hasrisen impressively, the number ofpeople using Limewire on a monthlybasis has been 45% higher than forSpotify during the course of 2010.

Although this is significant growth,the graph shows how the use ofillegal services continues to eclipsethat of legal alternatives.

29

Note: This graph excludes usage of websites such as The Pirate Bay and Torrentz – it represents the total number ofUK users of the Ares, BitTorrent, eMule, Frostwire, Limewire, Soulseek, uTorrent and Vuze applications each month.


The Rise of Non-P2PUsage of hosting sites is becomingmuch more commonplace. UKOM/Nielsen data shows there were 1.3munique users in September 2010 andthe chart below shows how usage of specific sites has been generallyincreasing since the beginning of 2009.

While services such as Spotify andwe7 are attracting growing numbersof users, so too are unauthorisedapplications such as uTorrent andhosting sites such as Megaupload andHotfile, which are popular sources ofinfringing content. The net effect overthe 12 months ending in September is that while total usage of P2Papplications has remained relativelyflat in the UK, usage of hosting sites and other non-P2P sites andapplications has risen significantly.

The combined effect is that overalllevels of illegal music downloading in the UK continue to rise.

The impact this behaviour is having on the music industry is far-reaching.Many consumers have becomeaccustomed to acquiring music for freeand licensed services have to try tocompete with illegal alternatives whichare mainly free to the consumer.

30

Megaupload.com RapidShare MediaFire Hotfile

1,400

1,200

1,000

800

600

400

200

0

Jan-

09Fe

b-09

Mar-0

9Apr

-09

May-0

9Ju

n-09

Jul-0

9Aug

-09

Sep-0

9Oct-

09Nov

-09

Dec-0

9Ja

n-10

Feb-

10Mar

-10Apr

-10May

-10Ju

n-10

Jul-1

0Aug

-10Sep

-10

THE INCREASED USAGE OF HOSTING SITES (Audiences, thousands)

Source: UKOM/Nielsen


Competing with ‘Free’The Harris survey also looked at thereasons given by some respondentsfor their decision to download musicunlawfully. As might be expected, themost popular reasons cited were cost(‘It’s free’ was the most common reasongiven) and convenience. Many ofthose surveyed seem to have simplybecome accustomed to getting theirmusic this way (‘Grown used to doingit’ (22%) ranked highly) without beingchallenged, with several citing that theyare unconcerned about the prospect ofpossible action being taken against them.All seem to point towards the fact thatthe absence of any effective action toprevent unauthorised downloading hasled to this behaviour becoming ingrainedas part of everyday leisure activity.

Many of those surveyed were wellaware of the legal context in whichillegal downloading is framed, and werekeen to see action taken to address the issue. When questioned about theirattitudes towards different aspects of illegal downloading, a considerablenumber of respondents engaged inunauthorised music acquisition agreedthat more needs to be done to tackle theproblem. A significant proportion (41%)believed the Government should takeaction against persistent downloaders

who had been previously warned, while over a third (36%) believed thatwebsites offering music illegally shouldbe blocked or banned from the internet.Many were also aware of some of theethical issues at stake – 56% statedthat downloading illegally is not fair to artists and songwriters. Levels ofagreement were unsurprisingly higheramong all respondents and significantlyhigher among those who onlypurchase music legally.

Tackling illegal downloading has been the biggest challenge the musicindustry has ever faced. There is nosilver bullet that will solve the problem.The industry recognises that a multi-faceted strategy is needed involvinglicensing our music to all kinds of newdigital services that meet the needs of different consumers. This includeseducating fans about how to get musiclegally and about the risks of illegaldownloading, driving consumer

It's free

Grown to used to doing it/Habit

Pay enough for broadband already

It’s what my friends do

Nothing done to prevent me

Not deterred by newson possible actions

Don’t believe I will get caught

Don’t believe serious consequences if caught

52%

22%

19%

15%

11%

11%

9%

6%

0% 10% 20% 30% 40% 50% 60%

REASONS FOR DOWNLOADING FROM UNAUTHORISED SOURCES

Source: Harris Interactive/BPI Digital Music SurveyBase: all qualified respondents

31


education programmes such as those with Childnetand the Music Matters campaign, and persuadingGovernments that proportionate measures needto be put in place to discourage illegal filesharingand to remove access to blatantly illegal sites.

It is clear from the research that there is a continuingneed for education about accessing music and otherentertainment online. It is also apparent that illegaldownloading has become ingrained and that somedeterrent measures, such as those contained in theDigital Economy Act, will be essential to effect ameaningful shift in behaviour.

32Music Matters


Migrating Users from theIllegal MarketThe data from Nielsen shows that P2P usage is not falling and the use ofnon-P2P sites and services is on theincrease. At the same time, consumerresearch from Harris Interactive doesreveal that there are a number ofpeople who are moving away fromP2P downloading towards legalalternatives – 13% of respondents said they no longer use P2P services.This can be explained by churn –some users are ceasing to be active,replaced by new users.

When ex-P2P users were asked whythey had stopped, their answersshowed that there were positivereasons for their shift in behaviour.The most popular responses includedthose which indicate a greater uptakeof legal streaming and downloadservices and a belief that artists andsongwriters deserve to be paid fortheir works. Whilst it is heartening tosee the effectiveness of legal servicesin driving some people away from P2P,deterrents are not yet anywhere nearhaving the same impact. Proposedmeasures under the DEA need to makean equal – if not more significant – contribution to influencing P2P users.

33

Music, Film, TV and the Internet – A Guide for Parents and Teachers

This guide saw the music and movie industries join forces to providea comprehensive overview of the most commonly asked questionsabout accessing entertainment content online. It offers informationon how young people can get the best out of downloading, streamingand sharing music, film and TV programmes in a safe and legal way.

Supported by a major media campaign and set to continue during2011, the guide is helping to educate consumers about legal services,copyright laws and the risks of using illegal file-sharing services.Leaflets are being distributed to secondary schools across the UKand it is hoped that retailers and ISPs will come on board, offeringthe Guide to their own customers. The Guide can be downloadedhere: www.childnet.com/downloading.

Music Matters

The Music Matters campaign – www.whymusicmatters.org – is acollective effort by artists and all those who work in and aroundmusic to remind listeners of its enduring value. It highlights theprofound impact of music and educates consumers on how toidentify and obtain music from legitimate sources.

Allowing the music to speak for itself, the campaign comprises agrowing collection of short animated films about inspirational artistswho have dedicated their lives to music and helped shape ourcultural landscape.

To help consumers make the ethical choice when looking for musiconline, a Music Matters trust mark has been developed to certifylegitimate digital music services and leading music retailers.


34

All this must be, however, viewedagainst the background of an overallrise in net usage. When users of eachgroup of unauthorised sources wereasked about their activity in the last sixmonths, a net increase was recordedagainst each source. Among P2Pusers, there was over a third (35%)who reported greater usage, comparedto only 28% who stated their activityhad decreased. This increase wasespecially notable among younger P2Prespondents with 46% of 16 to 24 yearolds reporting that their usage hadincreased, compared with 26% whostated that it had decreased. This isdespite media coverage of measuresproposed under the Digital EconomyAct and also a great deal of onlinediscussion instigated by the artistcommunity, along with music industryinitiatives to promote legal services.

There is also evidence that piracy istransferring to other online sources.Recalled usage of non-P2P methodswould appear to be increasing at aneven faster rate – half of the customersof illegal MP3 pay sites stated theirusage had increased over the past six months.

Better pay services available now

Not fair to artists & songwriters

Use free streaming services instead

Use social networks more for music

Use forums, blogs etc more instead

Have downloaded most of songs I want

Worried I would get caught

It's wrong to use unauthorised services

0 10% 20% 30% 40%

12%

12%

13%

16%

21%

23%

24%

29%

WHY HAVE YOU STOPPED USING P2P?

Source: Harris Interactive/BPI Digital Music SurveyBase: all lapsed P2P users

Usage Trend Over Last 6 Months (user recall)

Source Use More (%) Use Less (%) Net

Overseas MP3 pay sites 49% 13% +36

MP3 search engine 45% 17% +28

Cyberlockers 38% 23% +15

P2P 35% 28% +7Source: Harris Interactive/BPI Digital Music SurveyBase: all qualified respondents


Worryingly, a substantial proportion ofthose who continue to use unauthorisedservices do not – or claim not to –realise that their actions are unlawful.Nearly half (44%) of all P2P usersstated that they believed their actionsto be lawful and this proportion roseamong users of other services such as overseas pay sites (69%) and usingcyberlockers via board/forums (56%).

The Dangers of FilesharingA common occurrence for users ofunauthorised services has been thefrequency of unwanted problems thatarise as a result. BPI’s survey ofillegal downloading behaviour nowquantifies this. Out of 746 P2P usersfour in five (79%) had encounteredsome sort of problem when acquiringmusic illegally from a P2P network.

These ranged from downloadingincorrectly labelled or poor qualitytracks to the more serious issues of encountering spyware, viruses or trojans. When questioned furtherabout the consequences of theproblems they had encountered, 12% said that they had to have their PC or laptop repaired and 17% said that their PC or laptop crashed andwas unusable for a period of time.

Combining messages about the risks of filesharing, the availability oflegitimate online music services andbroader communications strategiesabout the economic and culturalimportance of music can go someway to changing consumer behaviour.

But this will only go so far. It must be backed by graduated but robustmeasures against persistent illegalfilesharers and unlicensed websites.These should not only send a clear

message that illegal music downloadingis wrong but also steer consumersback towards services that rewardartists and all the backroom peoplewho help to create great music.

Not only will this ensure that Britaincontinues to punch well above itsweight as a music nation, it will spuron investment and innovation in thelegal content sector, creating newjobs and a better online musicexperience for everyone. 35

0% 20% 40% 60%

32%

38%

39%

39%

41%

51%

59%Downloaded poorquality recordings

Downloaded incorrectlylabelled tracks

Downloaded spyware

Downloaded avirus or trojan

Multiple pop-ups

Computer slowedsignificantly

Downloaded unwantedexplicit content

PROBLEMS FROM FILESHARING

Source: Harris Interactive/BPI Digital Music SurveyBase: all P2P users


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P2P sites and applications tracked (see page 22)

Ares, BitTorrent, eMule, FrostWire, LimeWire, Soulseek, The Pirate Bay,Torrentz, uTorrent, Vuze

Non-P2P sites and applications tracked

BeeMP3, bomb-MP3, Elbo.ws, Emp3World, Filestube, Giganews, hypem, MOG, Mp3Fiesta, Mp3va, Newzbin, RLSLOG, Katz Forums, WarezBB, Hotfile,Mediafire, Megaupload, Rapidshare, Wrzuta, Free To YouTube MP3 Converter,Grooveshark, Soundcloud

BPI gratefully acknowledges the assistance provided by these companies in the compilation of this report:

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digital music nation 2010

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