CHAPTER 1
THE AUSTRALIAN RECORDED MUSIC INDUSTRY - AN OVERVIEW
Introduction
1.1 The Australian record industry is a complicated mix of interconnected
players. As a part of the broader music industry, it is both economically
significant on a national level, and a clear reflection of the highly
concentrated industry internationally. [1]
1.2 As with many other industries, in a very immediate sense it faces
the challenges imposed by the growing integration of world markets and
the consequences of the new digital technologies. It is also an industry
that uneasily combines artistic and cultural elements with aggressive
free market capitalism in what one witness termed `a fairly ugly mess'.
[2]
1.3 Almost all recorded music is now sold on compact discs (CDs), which
became the dominant format after 1991. During most of the 1980s, the dominant
music format was the cassette, and for many years prior to this was the
vinyl record. The industry is currently examining alternative formats
including digital video discs and minidiscs. It should be stressed that,
while consumers buy CDs, the industry's product is not the CD but the
music it contains. Essentially, the format in which music is sold is irrelevant
to the concerns which prompted this Committee's inquiry.
1.4 The purpose of the remainder of this Chapter is to provide an overview
of the structure, economic significance and characteristics of the recorded
music industry in Australia.
Industry structure and income
1.5 As noted above, the recorded music industry is a complicated and
untidy mix of participants. Significant industry players include record
companies, composers, artists and their managers, music publishers, operators
of recording studios, record manufacturers, music journalists, music retailers,
and various industry trade associations. [3]
Others more peripherally involved include lawyers and accountants, advertisers,
concert promoters, public relations firms, specialised music media organisations,
and those involved in music distribution.
1.6 On the consumption side, sales in the CD market in Australia were
valued at $544 million in 1993-94, representing more than 30 million CDs.
It is estimated that the average Australian household spends $83 each
year on sound recordings. [4]
1.7 On the income side, the Australian Bureau of Statistics (ABS) estimated
that, in 1995-96, the total income of the 541 businesses which comprised
the industry as defined was $1064 million. [5]
This figure is analysed in greater detail below.
Record companies
1.8 The pivotal role in the industry is played by record companies. [6]
Their principal activities include recording music; releasing, marketing
and promoting recordings; obtaining licences to distribute the repertoire
of other record companies in a territory; finding and developing new artists;
and making royalty payments to artists, music publishers and others from
the proceeds of record sales.
1.9 Internationally, the industry's five leading companies, which are
often referred to as `the majors', are vertically integrated, multinational
corporations. In order of estimated global market share, these corporations
are PolyGram (19%); Time Warner (18%), Sony (17%), EMI (15%) and BMG (13%).
[7] The combined sales of the majors have been
estimated at between 80% and 90% of total global sales of music.
1.10 In a study undertaken in 1995/96, the Australian Bureau of Statistics
(ABS) estimated that there were 153 Australian record companies and distributors.
[8] The 5 largest companies – Sony Music
Entertainment, EMI Music Australia, PolyGram Australia, Warner Music Australia
and BMG Australia, - are local subsidiaries of the majors. The Committee
was told that approximately 77% of the Australian market is shared between
4 of these companies as follows: Sony (24%); EMI (20%); PolyGram (17%)
and Warner (16%). [9] Other significant record
companies in Australia are Festival Records (which is owned by News Corporation)
and Mushroom Records. These seven companies are generally spoken of as
`the majors' in Australia. More recently, Shock Records has emerged as
another significant Australian record company. [10]
1.11 The remaining 146 record companies surveyed by the ABS are generally
termed `the independents'. These are of varying size, and carry out a
more limited range of activities than the majors. They often specialise
in particular types of music, or the development and marketing of a small
number of local artists. [11] Some independents
undertake joint ventures under which risk capital is supplied exclusively
by one of the majors. It is generally asserted that the independents provide
a greater opportunity for developing artists to record their music and
develop a public profile. [12]
1.12 The economics of the industry, and the general difficulty in getting
the majors interested in signing developing artists, has led a great many
of those artists to self-finance the production and recording of their
music, which they then market directly to audiences at their live performances.
[13]
Music publishing companies
1.13 Most record companies, whether majors or independents, have an associated
publishing company. These companies play an important role in developing
the careers of composers and lyricists - often through advances, the payment
of recording costs and other financial assistance. They also promote the
works of composers and collect income from the exploitation of the rights
in songs. Publishers may also instigate litigation on behalf of composers
where their rights have been infringed. [14]
The usual range of earnings retained by publishers is between 10% and
30%. [15]
1.14 The ABS survey estimated that there were 73 music publishers in
Australia, with a total income of almost $120m. [16]
Publishing royalties accounted for almost $90m (or 75%) of this income,
with sales of sheet music accounting for a further $17m (or 14%). Almost
two-thirds of the publishing royalties were mechanical royalties [17]
earned from the sales of recordings.
CD manufacturers
1.15 As noted above, most music is now sold on CDs. Australia has a healthy,
world-competitive, technologically sophisticated and highly capital intensive
CD manufacturing sector. Between 90% and 95% of the CDs sold in Australia
are manufactured in Australia. [18] The sector
comprises independent manufacturers such as Pacific Mirror Image and Southern
Star Duplitek (who service both independent record companies and the majors),
and `captive' local manufacturers which are vertically integrated into
the Australian subsidiaries of some of the majors (for example, EMI, Warners
and Sony). [19] Record companies are under
no obligation to manufacture locally and, under the current legislation,
may source their CDs from manufacturing plants anywhere in the world.
1.16 The ABS survey estimated that there were 23 manufacturers of recorded
music in Australia, sharing a total income of $95m. [20]
Music retailers
1.17 Recorded music is sold to consumers through major department store
chains such as Big W, K-Mart and Target. It is also sold through large
specialist music retailing chains such as Brashs, HMV and Sanity; and
through numerous small specialist independent music retailers. Approximately
70% of specialist music retailers are located in suburban shopping malls.
1.18 Recorded music is also sold through direct mail, and, increasingly,
is purchased by consumers over the Internet at a saving of between 25%
and 30% on the Australian equivalent dollar retail price. [21]
Part of this saving is represented by the non-payment of sales tax on
on-line purchases. This change in the pattern of consumption is seen as
a threatening trend by established music retailers, who have suggested
that Australians are now the major purchasers of CDs on-line. [22]
Operators of sound recording studios
1.19 The ABS survey estimated that there were 292 businesses mainly involved
in operating a recording studio, sharing a total income of almost $57m.
Approximately 30% of this income was contributed by the seven largest
business. Nearly two-thirds of the studios received their income mainly
from music recording, mixing and mastering. However, these studios generated
only 33% of the sector's total income, and had a higher proportion of
working proprietors. The most profitable studio activity was advertising
and jingle composition. [23]
Managers
1.20 The ABS survey estimated that there were 113 businesses managing
one or more “musical entities”, sharing a total income of $11.3m,
of which $7.5m was management income. [24]
These businesses managed 248 musical entities and reported income from
those entities of $45m. Almost two-thirds of this income was from live
performance. The ABS notes that these figures understate the income earned
by all musical entities because only those which employed managers were
included.
1.21 Music managers represent and seek to protect the interests of musicians
and performers. They are usually paid by way of a proportional amount
of the earnings of the clients they represent. In practice, they report
that they “are often the last to get paid especially in the case
of developing artists”. [25]
Recording artists
1.22 Recording artists are all those individuals or groups who perform
their own (or others') material and record it. The ABS made no attempt
to determine income details for artists, though one comment made during
the inquiry was that “90 per cent of the contracted artists in Australia
are subsidised by the dole”. [26]
1.23 Anecdotally, music managers outlined the financial dilemmas typically
faced by a developing band:
It is usually the case that, for a very long time, bands are not able
to derive a livelihood from live shows and what they do. You then hopefully
reach a stage - it is quite a critical period - when you cannot possibly
be working a day job because of the level of commitment that is involved
in promoting your act and your CD. At the same time, you probably cannot
derive enough income from what you are doing to have a livelihood completely
from that. We struggle and find ways to survive. That is part of the
passion. [27]
1.24 Artists who became successful - whether internationally or even
only domestically - might end up as millionaires. [28]
Economic significance
1.25 As indicated in Table 1 below, in 1996, Australia was the eighth
largest recording market in the world, providing a major source of, and
market for, English language music.
Table 1: Top 10 Record Markets in 1996 [29]
| Country |
Retail Value ($USm) |
% Share |
| USA |
12,297.7 |
30.88% |
| Japan |
6762.3 |
16.98% |
| Germany |
3179.4 |
7.98% |
| UK |
2709.8 |
6.80% |
| France |
2318.0 |
5.82% |
| Brazil |
1394.5 |
3.50% |
| Canada |
911.6 |
2.29% |
| Australia |
815.2 |
2.05% |
| Netherlands |
660.1 |
1.66% |
| Italy |
637.5 |
1.60% |
| Total |
31,686.1 |
79.56% |
Profitability
1.26 There is some dispute both about the industry's profitability and
about appropriate measures to determine this. In 1990, the PSA estimated
that the average return on shareholders funds in the industry in the previous
year had been approximately 55% (the all company average in the same year
was 11%). [30]
1.27 However, the appropriateness of this figure was disputed by ARIA,
which observed that it was a significant overestimate given that the value
of copyrights was not shown as an asset on a record company's balance
sheet. [31]
1.28 The ABS calculated an overall industry profit margin of 7.5%, and
with particular regard to record companies, a profit margin of 7.1% for
the seven majors, and of 3.4% for the other 146 record companies. [32]
1.29 The profit margin for music publishers was 6.9%. Manufacturers enjoyed
a profit margin of 16.3%, and sound recording studios of 13.8%. [33]
Employment
1.30 Given its structure, the numbers of those employed in or associated
with the record industry are difficult to determine with any precision.
The ABS concluded that, in 1995/96, the industry as defined employed a
total of 3886 people. Record companies and distributors employed 2324
of these (more than half of whom were employed by the seven largest companies);
sound recording studios employed 800; manufacturers of recorded music
employed 493; and music publishers employed 269. [34]
Managers employed a further 189.
1.31 However, the ABS in its figures did not calculate the employment
generated by live performance and merchandising activities, nor numbers
of those employed in music retailing. Estimates in these areas were prepared
by Price Waterhouse Economic Studies and Strategies Unit in a 1993 study
undertaken for the Music Industry Advisory Council. In that year (and
not necessarily using the same definitions as the ABS), Price Waterhouse
estimated that 5055 people were employed in live performance and merchandising,
while another 4350 were employed in music retail. A “memorandum item”
estimated that there were a further 33,500 artists and 13,300 songwriters.
[35]
1.32 Others have suggested that the music retail sector employs approximately
3900 full-time workers, [36] and that ABS statistics
indicate that there are only 291 full-time composers in Australia. [37]
Recorded music in Australia
1.33 A number of general points may be made about recorded music in Australia.
First, the overwhelming majority of music sold in Australia originates
from overseas artists. The ABS calculated that sales of recorded music
by Australian artists in 1995/96 were $90.6m. This represented only 16%
of total sales. [38] The number of titles released
by Australian artists during the year was 1397 - this represented only
15% of all titles released in Australia.
1.34 To similar effect, the ACCC stated that:
- foreign music accounted for approximately 86% of all licensed records
sold in Australia;
- the seven major Australian record companies sold 73% of all licensed
music sold in Australia; and
- 94% of the music sold by the majors in Australia was foreign.
1.35 These figures were disputed by AMPAL, which said that they had been
calculated incorrectly. AMPAL claimed that the figures had been produced
by comparing the quantity of goods and services sold by the seven largest
businesses from distributing product licensed from Australian resident
businesses, with product licensed from non resident businesses. However,
this ignored the fact that the overwhelming majority of Australian product
released by these companies would be product which they had developed
themselves. This would have been categorised by the ABS as `Sales of recorded
music product released by the companies themselves'. Combining both categories
indicated a percentage of Australian product which would represent 30%
of total sales. Interestingly, combining both categories also indicated
that the percentage of Australian product would still represent only 19%
of total sales for the 7 majors.
1.36 Secondly, the vast majority of music composed and recorded by Australians
is sold within Australia. [39] The ABS calculated
that sales of recorded music by Australian artists to Australian resident
businesses during 1995/96 were valued at $88.5m; sales to non-Australian
resident businesses were valued at $2.1m. However, the ABS did point out
that most overseas sales of recordings by Australian artists would result
in royalty payments to the Australian record companies rather than sales
income. [40]
1.37 Thirdly, the overwhelming majority of music sold in Australia from
all sources is categorised as `popular'. The ABS indicated that popular
music accounted for 91% of all recorded music sales in Australia, followed
by classical music with 7%. [41]
1.38 ARIA figures confirm the dominance of `pop/rock' music, but indicate
that sales of country music represented almost 7% of reported total sales
in 1996. In terms of recordings by Australian artists, country music was
said to account for 18.6% of the ARIA total, and for 44% of all country
music sold in Australia. Examples chosen elsewhere in this report will
reflect this break up and predominantly be taken from the `pop' sector.
1.39 Fourthly, market sales are overwhelmingly dominated by the top-selling
CDs. A typical sales pattern shows that the top 3.3% of titles generate
55% of all sales in a year, and the top 10% of titles generate approximately
75% of all sales. [42] Put another way, the
following Table (provided by ARIA) indicates the numbers of CDs sold per
week for a typical record company.
Table 2: Numbers of CDs sold (Per Week) [43]
| Top 10 |
100th Best Seller |
1000th Best seller |
2000th Best seller |
3000th Best seller |
| 1200 |
191 |
14 |
3.7 |
2 |
1.40 Given this sales pattern, it is difficult to generalise about the
wide variety of music available, but relatively easy to focus on that
music which is the most financially profitable (ie the top 40 CDs in any
year). This music has a comparatively short `shelf-life'. The Committee
was told that most such CDs are purchased in the first few weeks following
their release. [44] Image, fashion, marketing
and other `non-musical' considerations clearly play a major role in the
successful marketing of CDs.
1.41 It should also be noted that the most profitable sector of the market
is, it seems, not price sensitive. In the words of one witness:
[Y]our top 20 A-zone stuff, such as contemporary popular recordings
at first release, is not price sensitive. If you have a market of 250,000
kids in the western suburbs of Melbourne and Sydney and you put out
a Michael Jackson record or a Nirvana record, they will buy it even
if they have to sell their mother for it. They will pay $100 for it
if they have to. It is not price sensitive. If you can constrain the
costs in that sector, you can milk the market. You do not care about
the rest of it. [45]
1.42 While top-selling CDs are hugely popular, disproportionately profitable
and not price sensitive, elsewhere in the market more than 50% of the
CDs available to consumers retail for $20 or less: [46]
The way that the music industry is structured, it is only fashion product
or new product that retails for the premium price. This is a global
marketing situation. A huge amount of older music is sold cheaper simply
because it is older. The same profit margin applies to it. Retailers
… stock a very broad range of that old music because there is a
big demand for what we call catalogue. Our point is that this issue
is over $30 CDs, which does not represent the entire industry volume.
[47]
1.43 Finally, when compared with other countries, Australia has a relatively
low level of `consumption' of records. For example, the Committee was
told that, in 1996, Australians purchased 2.7 albums per head compared
with 3.9 in the US and 4.0 in the UK. [48]
1.44 This, among other considerations, led some to question the health
of the industry under current policies, and one witness to suggest that
it was “moribund” and in need of a funeral. [49]
Footnotes
[1] Submission No 164A, p 7 (ACA).
[2] Transcript of Evidence, p 145 (Mr D Newton).
[3] See, generally, UK Mergers and Monopolies
Commission, The Supply of Recorded Music, Cmnd 2599, June 1994, (“The
MMC Report”) para 3.5.
[4] Submission No 186, p 3 (DOCA).
[5] Australian Bureau of Statistics, Business
of Music, December 1997, (ABS Catalogue No 4143.0), p 4.
[6] The MMC Report, para 3.6.
[7] Submission No 166A, p 7 (ACA).
[8] ABS, Business of Music, p 5.
[9] Submission No 160, p 1 (Woolworths Ltd).
[10] Submission No 153, p 19 (ARIA).
[11] Submission No 153, p 19 (ARIA).
[12] See, for example, Submission No 166A,
p 15 (ACA).
[13] Submission No 182, p 5 (Musicians' Union).
See also Submission No 181, p 2 (SAMIA).
[14] The MMC Report, para 3.10; Submission
No 147, p 7 (AMPAL).
[15] Submission No 186, p 7 (DOCA).
[16] ABS, Business of Music, p 6.
[17] For discussion of `mechanical royalties',
see generally paras 2.13 and 4.46.
[18] Submissions No 153, p 20 (ARIA); No 173,
p 2 (Southern Star Duplitek).
[19] Transcript of Evidence, p 221 (Mr N Price).
[20] ABS, Business of Music, p 6.
[21] Submission No 160, p 2 (Woolworths Ltd).
See also Submission No 166A, p 18 (ACA).
[22] Transcript of Evidence, p 120 (Mr J Harrison).
See generally Submission No 81, p 3 (Mr M Davison).
[23] ABS, Business of Music, p 6.
[24] ABS, Business of Music, p 7.
[25] Submission No 171, p 4 (IMF). See also
Transcript of Evidence, p 138 (Mr J Woodruff).
[26] Transcript of Evidence, p 100, (Mr P Dwyer).
Another witness suggested a special music industry award to the CES for
its support for rock and roll: Transcript of Evidence, p 73 (Mr A Caswell).
[27] Transcript of Evidence, p 112 (Ms S Longhurst).
[28] Transcript of Evidence, p 138 (Mr J Woodruff).
[29] Source: Submission No 153, p 18 (ARIA).
[30] Submission No 159, p 4 (ACCC).
[31] Submission No 153, p 9 (ARIA).
[32] ABS, Business of Music, Table 5.
[33] ABS, Business of Music, pp 6-7.
[34] ABS, Business of Music, Tables 1 and 5.
[35] Submission No 153, p 32 (ARIA).
[36] Submission No 166A, p 27 (ACA).
[37] Submission No 166A, p 20 (ACA).
[38] ABS, Business of Music, page 8. The ABS
survey refers to sales at the wholesale/distribution level by record companies
and other distributors; it dos not refer to retail sales.
[39] Transcript of Evidence, p 62 (Mr E McCusker).
[40] ABS, Business of Music, Table 20.
[41] ABS, Business of Music, page 8.
[42] Submission No 153, p 13 (ARIA).
[43] Source: Submission No 153, p 11 (ARIA).
[44] Transcript of Evidence, p 10 (Prof A Fels).
ARIA estimated a `shelf-life' of around 6 months: see Prices Surveillance
Authority, Inquiry into the Prices of Sound Recordings, Report No 35 (December
1990), p 17.
[45] Transcript of Evidence, p 101 (Mr P Dwyer).
[46] Submission No 150, p 7 (AMRA).
[47] Transcript of Evidence, p 117 (Mr B Bull).
[48] Submission No 159, p 6 (ACCC). An international
survey used by the Prices Surveillance Authority saw Australians classified
as middle-ranking consumers: PSA, (1990) p 11.
[49] Transcript of Evidence, p 101 (Mr P Dwyer).