Digital music is expected to surpass physical music sales within the next several years as revenue from downloading and streaming increases and the overall business shrinks, according to a new report.
Digital music is picking up share and will account for the majority of the industry's sales by 2017, said the report from from Siemer Ventures, the investment arm of Santa Monica-based merchant bank Siemer & Associates LLC.
Part of that growth is coming from streaming on a plethora of services, including Pandora, Clear Channel's iHeartRadio, Spotify, Rdio and MOG, as well as online video companies such as YouTube and Vevo.
The streaming space is getting more crowded with big players, including Google Inc.'s recently introduced offering and the impending launch of Apple Inc.'s iTunes Radio. The growth will continue as companies offer new services, such as streaming in cars, said John Rudolph, a senior advisor at Siemer.
"You've got a lot of initiatives that are going to bring in people who are not already engaged with digital music," he said. "We tend to think services like Pandora are ubiquitous, and they're not."
Over the next three years, revenue for the digital industry, including money from the downloading and streaming of songs, is expected to grow 12% each year to about $11.6 billion, the Siemer report said. Meanwhile, the overall global music industry will continue to shrink to $26.5 billion in 2016, down 8% from last year.
Online streaming revenue grew 40% to $1.1 billion in 2012. That accounts for a small share of the total music industry, but it's a fast rate of growth compared with 8.5% for downloads.
The number of digital music users grew 9% last year to 1.2 billion and is expected to rise to 1.8 billion in the next three years. That's an increase of more than 10% every year.
Digital music has attracted plenty of interest from investors. Siemer said digital music companies raised a total $476 million in 2012, helped by funding rounds by Spotify and Deezer, which both raised more than $100 million.
While Spotify and Deezer are high-profile examples, much of the funding is going to companies that work behind the scenes to help rights-holders and other businesses make money from the fast-changing music business.
"One of the big issues that all those folks have is, how do they account for the rights-holders and how do they establish an efficient licensing scheme," Rudolph said. "Now they're looking internally and going, how do we actually pay people and track content?"
That category includes companies like Tunecore, which helps artists get their music onto services like iTunes and Spotify, and Gracenote, a data company that's a division of Sony Corp.
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