«COUNTING THE NOTES The economic contribution of the UK music business A report by the National Music Council – November 2002 Preface This is the ...»
Source – Customs and Excise data Comparisons with figures from the early 1990’s, when higher surpluses were reported are not particularly meaningful as there were changes in methods of data collection and in the definition of products. It is also important to note that the figures include a mixture of products both at manufacturing cost and at full wholesale value. The trend figures do however indicate that between 1996 and 2001 there has been little growth in export value and also a significant decline in the overall trade surplus, attributable in part to the growth in importance of domestic repertoire in most international markets (especially North America) and the significant rise in the value of sterling in the second half of the 1990’s.
Alongside direct exports of physical products UK record companies generate significant invisible overseas earnings from royalty income. Here data are based on surveys conducted by the BPI, combined with estimates for non-respondents and non-members.
A factor which contributed to the declining surplus in the period was the rise in the value of sterling against key European currencies. Between the end of 1995 and 31st December 2000, sterling appreciated by 40% against the Deutschmark and 38% against the French Franc, (Source - Dane : UK Record Industry Annual Survey 2001) thus reducing sterling receipts of royalties based in foreign currencies. In addition there was, according to IFPI statistics, a growing demand in many countries for domestic repertoire at the expense of international material. This was certainly the case between 1996 and 2001 in developed markets such as Japan, France, Australia, Ireland, Spain and the Netherlands.
No hard data exist on the overall share of the world record market attributable to UK artists. The BPI last published an estimate for this of 18% for 1993, though subsequent unsubstantiated industry estimates have suggested a significantly lower level. Notwithstanding this recent relative decline, the UK remains the world’s second-largest source of musical recordings.
Examples of the UK recording industry’s recent economic success and commercial vitality in overseas
• the discovery and development, by both majors and indie labels, of new artists who have achieved commercial success not only in the UK but also abroad. These include Dido, Robbie Williams, Radiohead, David Gray, The Prodigy, Craig David, Charlotte Church, Russell Watson, Jamiroquai, Coldplay and Travis.
• the continuing commercial success enjoyed by such established acts as The Beatles, (whose “1” album was the world’s top-selling album in 2001), Pink Floyd, Rolling Stones and Sting, (whose last album “Brand New Day” was the biggest-selling title in his career to date).
• the success of independent labels in niche market areas such as Ministry of Sound in the dance sector, World Circuit in world music and Hyperion in the classical market in addition to other independents with more broadly based repertoire such as Beggars Banquet.
One pertinent current issue for UK record companies is the lack of market share recorded by UK artists in the US market. The recent study Make or Break – Supporting UK Music in the USA set out an analysis of UK artists’ share of the Billboard Top 100 US album chart from 1965 to 2001, which indicated a much weaker performance in the years since 1994 than in the previous three decades. This was attributed in part to what might be called “musical factors”, such as a downturn in the relevance of the UK’s musical output for the US market. It also however identified a number of other business factors and trading conditions which led to the decline, and concluded that one potential solution might be the establishment of a UK music office in North America, to support the efforts of the industry there.
In addition to the sale of CDs and other physical products and overseas licensing, UK record companies also derive income from the public performance of their recordings, which is distributed by Phonographic Performance Ltd (PPL). PPL distributed over £27.2m of public performance revenues to its UK record company members in 2000, compared to £25.5m in 1999 and £24.2m in 1998, with similar amounts – page 38 Counting the notes – the National Music Council report on the economic contribution of the music business being collected on behalf of musicians featured on the recordings. Further royalty income is derived from licensing recordings for use in films, advertisements, computer games and for other media such as on the Internet. There are no reliable estimates of such “other licensing” income. The Value of Music estimated that for 1995, the amount including income from PPL was £100m, though one would anticipate an increase in the subsequent period.
The UK recording industry is however currently confronted with some serious issues of concern. Both domestically and internationally the growth of CD-R burning, which is closely linked with downloading from pirate Internet sites and unauthorised file-sharing services, have become very significant factors affecting the world music market. This to date has been particularly important in such key territories as Germany, Canada and the USA, all of which experienced a decline in sales in 2001. The International Recording Media Association estimated that sales of blank CD-R’s worldwide to the trade in 2001 reached 3,730m, up from 2,730m in 2000. The IFPI meanwhile estimated that for every CD album sold, one copy was burned, and that at least half of all blank CD-R sales were for the purpose of copying music, of which only a very small proportion was authorised by rights owners.
One key component of the threat to the record industry’s long-established revenue streams from the sale of CDs and other formats has been the free and unauthorised availability on the Internet of copyrighted music owned by record companies. The industry has on a worldwide scale, (with the main battles being fought in the US) been combating such Internet pirates and has won a number of important legal cases.
However these victories have so far failed to remove the problem, and the perception that music is a commodity that should be available for free is growing among some demographic groups.
Whilst the industry on an international basis is struggling to come up with a solution to the problem of piracy, it has also been devoting considerable amounts of time, effort and investment to develop music services on the Internet; both the majors and a number of new independent companies have introduced facilities for legitimate downloading. However the business models for the digital future are still in their infancy and revenues from downloading or streaming activities are still immaterial in the context of the industry’s overall revenues.
A recent report by the University of Kingston Banking on a Hit, The Funding Dilemma for Britain’s Music Business, concluded that the small and medium sized enterprises which make up 90% of the UK’s music businesses faced distinct problems which hinder their ability to grow. These include a lack of confidence in accessing external finance caused in part by a lack of knowledge and understanding of the sector by banks and investors.
Within the independent music recording sector the difficulty of accessing funds for development can also be seen in the context of general problems in accessing markets. Contributory factors inhibiting the development of independent labels are the consolidation and standardisation of radio play lists, as well as difficulties in securing suitable distribution both in the UK and overseas to gain optimum access to the retail market. There are also concerns that if the majors discontinue their own distribution and manufacturing activities, independent labels will see a decline in their relative importance to their current distributors and manufacturers.
6.1 Employment and value added
Information on the number of people employed by major record labels and their affiliates in the UK has been collected from a BPI survey of the majors, supplemented by analysis of relevant annual reports and accounts for periods ending in the year 2000. On the basis of these, we estimate that in 2000 the majors employed approximately 3,100 people in the UK in their label activities i.e. excluding distribution and manufacturing. This compares to an estimate of 3,274 for 1997 in A Sound Performance. Using figures disclosed in published accounts the value added by the majors in the UK was £295m compared to £325m in 1997. With employment costs in 2000 very similar to those for 1997, the decline was due to a fall in disclosed operating profits.
The above methodology, based purely on amounts disclosed in the published accounts, may however tend to understate the value added created by the majors in the UK as the companies included may not represent the whole of their UK activity.
– page 39 Counting the notes – the National Music Council report on the economic contribution of the music business Based on its knowledge of its 660 member companies, AIM has estimated that its members have approximately 2,400 employees. Adding in an estimate of 700 for non-members in the independent sector, reaches a total of 3,100 full-time employees. Using analysis from the published accounts of over one hundred indie labels we estimate value added by the independent sector at £112m. On this basis overall UK record labels generated value added estimated at £407m in 2000.
If one extends the definition of value added to include not only employment costs but also payments to freelance staff, such as those working in such areas as design, PR and promotion, this figure could be substantially higher.
Within the recording sector, the largest element of value added is not the operating profits and direct employment costs of record labels, but the recording royalties and advances against those royalties received by UK recording artists. There are no firm data in this area available for recent years.
However applying conventional music industry cost structure ratios to UK record sales and exports and licensing income and considering additional factors such as phonographic performance income, produces a total of approximately £475m.
6.2 Recording studios and facilities The music recording sector includes a wide variety of companies, who are represented by a wellestablished trade association, the Association of Professional Recording Services (APRS). As well as individual members APRS has 46 member companies within its post-production studios association, 38 within its Studio Accord division, and 45 members engaged in supplies to the sector. Overall there are probably some 300 or so economically significant recording studios in the UK (The Value of Music in London report in 2000 identified 189 recording and post-production studios in the capital alone).
Alongside these are companies providing services to studios such as the manufacturers and suppliers of mixing consoles and other studio equipment.
The scale of individual studios varies considerably. At the “top” end of the market are what might be termed the “super” studios such as Abbey Road, Sony and AIR Lyndhurst which are large enterprises which offer an extremely wide range of facilities. There are also large urban-based independents such as Metropolis, Eden and Sphere and also studios offering rural locations with residential facilities and/or large acoustic rooms such as Rockfield in Gwent, Sawmills in Cornwall and Real World in Wiltshire.
There are then a large number of smaller establishments with particular areas of specialisation, such as digital technology, multimedia or services geared to a particular sector, for example film soundtracks or commercials. As technological changes (such as the development of hard-disk, non-linear digital recording formats) have brought a significant reduction in the capital expenditure required to create high quality digital recordings, there has also been a growth of so-called Project Studios, smaller operations which can offer services previously only available at much larger and generally more expensive studios.
The most significant factor which has affected the recording services industry in recent years, and which continues to have a profound effect on its operations, has been the dramatic technological change associated both with the development of digital recording and in particular the introduction of the computer into professional recording. The equipment needed to carry out multi-track recording, mixing and editing has become increasingly cheaper, more compact and more efficient, bringing much greater flexibility, speed and convenience at much lower cost. As this equipment is now sufficiently inexpensive to be installed in both home and project studio environments, entire segments of the commercial recording industry have been threatened, requiring a constant process of adjustment to the new technology and market conditions.
In this environment one significant corporate trend, which appears to be continuing, is for the major record companies to move out of the studios sector. Thus EMI sold its Townhouse Studios complex in 2002, though it still retains Abbey Road and Olympic, which followed earlier disposals and closures by major affiliates such as Decca, Phonogram and Polydor. This has been one factor in enabling companies such as Sanctuary to build up significant studio/facilities based divisions.
There is a lack of up-to-date reliable economic data on the recording studio sector, with no significant new published estimates since those contained in A Sound Performance in 1999. However, if we accept the
6.3 Producers - employment and value added Whilst many engineers engaged in the recording process tend to be employed directly by studios, record producers typically operate via their own companies or as self-employed individuals. The historic role of the producer in the recording process is well documented with figures such as Sir George Martin (The Beatles), Brian Eno (U2) through to Nigel Godrich (Radiohead) making significant contributions to some of the most successful albums recorded in the UK. The profile of the producer has recently been raised by the success of many pop hits by so-called “manufactured” bands such as Steps, S Club 7 and artists from TV series such as Popstars and Pop Idols.