A strange thing happened in the first half of 2011: People actually started paying money for music again. A Nielsen SoundScan report on music sales between January and July found that total music sales were up 8.5%. Digital song sales were up 11%, and digital album sales were up 19% — marking the first period that album sales had actually grown since 2004. During the same period in 2010, sales grew a meager 1%, leading some to think the digital music business that was going to keep the industry alive was already on its way out.
Interested parties include Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) — the leaders in the digital music business. And add to them Google (NASDAQ:GOOG), which after years of rumors, finally is ready to compete head-to-head with iTunes.
Andy Rubin, head of Google’s Android division, told All Things Digital on Wednesday that Google is close to opening its own music store. He promised that Google’s music store “will have a little twist” and that the company “won’t just be selling 99-cent tracks” in the iTunes mold.
While Apple is the undisputed leader in the field — iTunes accounts for 70% of all digital music sales — the activity seen in the broader digital music business this year suggests there’s money yet to be made. All three aforementioned companies opened cloud-based music services this year — Google Music, Amazon Cloud Player and iCloud — that charge users an annual fee to store their already purchased digital music on those companies’ servers so they can access it from anywhere.
Now, Google is launching its own direct digital sales business. Amazon’s share of the market grew 4% between 2010 and 2011, taking 12% of the total digital market to trail Apple at second place. Even Facebook is getting in the game, partnering with retailers like Amazon alongside streaming music businesses like Pandora (NYSE:P) to maximize options.
Growth, innovation, competing technology businesses sharing venues — to the expectant eye, this is the start of precisely the turn around the music industry has been praying for. But before investors start eying up the companies providing these digital marketplaces — or even music label stocks, hoping to get in on the ground floor of a revenue surge akin to the CD boom of the ’90s — it’s not clear that these new developments in the digital music business are going to equate to real earnings.
Although digital track and album sales were both up, Nielsen SoundScan said in July that it’s unclear if that growth translated to a revenue bump as well. There’s evidence to suggest it did, but that evidence is misleading, to say the least.
For example, Apple’s iTunes has turned in record-breaking quarters this year — a record $1.4 billion during the quarter ended in March, and $1.5 billion for the quarter ended in September. However, those numbers aren’t just music sales — they include movie sales and, most significantly, app sales. And it’s those apps that appear to be driving iTunes’ growth.
Actual revenue from music sales on iTunes was down 5% year over year as of February. With Nielsen not reporting dollar sales, it’s unclear if all this new development in the digital music sales business will legitimately impact earnings for these companies.
The entire music business is a murky place right now. Digital music sales is a diversifying market — one that’s transforming because of the growing Internet radio/streaming/social music business headed by Pandora, Spotify and others. Consider this, though: According to Strategy Analytics, the entire music industry in the U.S. pulled in just $6.2 billion in 2010. Even if the unexpected growth in sales equates to revenue growth, that’s a small pie to share between companies like Apple, Amazon and Google — all valued between $369 and $105 billion.
The short version: Pay attention to these developing digital music businesses, but don’t start looking for big money where it won’t be.