This time last year, the music industry was celebrating the IFPI’s report showing that global recorded music revenues had risen 0.3% in 2012 – the first year of growth since 1999.

Today, though, the body’s annual Digital Music Report poured if not a bucket, then certainly a cup of cold water on those celebrations. In 2013, global revenues dropped 3.9% to a value of $15bn. However, the IFPI chose to focus on the positive aspects, as well as confirming that the overall figures are skewed by a particularly sharp drop in Japan.

“It’s a year of good news and bad news – but quite a lot of good news,” said Max Hole, chairman and CEO of Universal Music Group International, at a press briefing in London this morning. Hole cited the launch of major new digital services like Beats Music and iTunes Radio as examples of the latter. “We are moving towards a genuine portfolio business for the record industry,” he added.

The IFPI is rightly playing up the fact that key markets – among them the top five in Europe – all saw growth. It also points to streaming services as a serious boom area, trumpeting a 51% rise in revenues last year as streaming passed the $1bn mark for the first time.

Note, just one company – Spotify – is seemingly responsible for nearly half of that total, given that the company has claimed it was on course to pay more than $500m out to music rightsholders in 2013 – a figure that includes labels, publishers and collecting societies, but which still suggests Spotify accounted for not far off half the IFPI’s figure.

The report adds that 28m people globally now pay for a music subscription service, up from 20m in 2012. It was also revealed that the top 10 markets account for around two-thirds of the subscription market, suggesting there is plenty of scope for growth in secondary and emerging markets.

“I don’t see any reason why this wouldn’t be 100m in the near future,” said a bullish Edgar Berger, president and CEO of international at Sony Music Entertainment, speaking at the launch event.

The IFPI has not broken this down much further by service or market – nor did it separate individual subscriptions versus those bundled into an ISP or mobile operator package. And within this lies another tabulation problem – namely how many of those bundled deals are made up of zombie users?

For the moment, that is not the concern – it is about total revenue rather than active users. Even so, churn is a major concern here and those zombie users might just fall through the cracks when it is time for them to upgrade their mobile tariffs. Relying on them to renew their subscription when the time comes is not a wise strategy.

The labels are not unduly worried about this possible churn – or certainly not the potential scale of it. Francis Keeling had this to say on bundled deals when asked about them by Music Ally. “They are a small minority [of total subscription revenue] but are an important part of the growth,” he suggested, saying they are an important entry point for a lot of consumers.

Streaming soars, but is there a fissure in the downloads market?

Streaming (both subscription and ad-supported) now accounts for 27% of digital revenues (up from 14% in 2011). Streaming is making the right noises and moving in the right direction, but its sharp growth needs to be understood within the boarder context of total digital revenues.

Downloads still account for the lion’s share of the digital market – 67% last year, according to the IFPI numbers. That’s all well and good until you note that revenue from downloads actually slipped 2.1% in value last year.

The biggest revenue source in the digital sector appears to have hit the wall which means that, just as digital was unable to shoulder the decline in physical revenues since 1999, so, within digital, streaming may not yet be mature enough to shoulder a further decline in download revenues as well as the ongoing decline in CD sales.

We are long beyond a transition from physical to digital and the new growing pains for the record industry are from downloading to streaming.

The IFPI is keen to point out that downloading is growing in developing markets like the Philippines, Slovakia and South Africa, but this does not detract from the overall figures and the gnawing suspicion that downloading’s glory days could now be behind us.

We have really had a decade-long growth spurt, triggered by the arrival of iTunes Music Store in the US in 2003, but this sales channel may finally be running out of road. Yes, there are still significant revenues being generated here, but downloading could now be experiencing what the CD went through after 1999 – namely starting to see the rungs of the ladder it stands on start to crack and splinter.

Japan’s big drop isn’t the only crack in the market

A large chunk of the global decline was put down to a huge slump in the Japanese market – dropping 16.7% in value. Local industry body RIAJ separately fleshed this out in more detail, reporting that digital revenues overall were down 23% last year.

One key factor caused most of the damage here – a continuing collapse in the mobile content market, with ringtone revenues down 51%, mobile music videos slipping 62% and mobile single track downloads falling 56%. (It should be noted that track sales to smartphones are classed as digital downloads rather than mobile downloads and that the digital singles market actually grew 31% to 91m units and digital albums were up 44%, albeit to a mere 6m.)

Even so, this should put into sharp relief the huge hopes that many Western and developing markets are stacking on the mobile category to pull them into growth.

The IFPI called Japan a “market in transition” in an attempt to find optimism amid a startling downward trajectory. That may well be the case (and streaming services are thin on the ground there), but even if Japan was factored out (as IFPI did to try and lessen the blow), the global market still slipped 0.1% last year.

While a market like Japan contributes a huge amount to total numbers for the year, the fact remains that digital problems are not confined to it – they are also causing cracks in the wider global business.

A lot of Japan’s problems last year were down to a decline in the K-Pop market, according to Hole. “Why did it collapse?” he said. “Because there was a dispute between Japan and Korea over some islands [the Senkaku islands]!” What that meant was a lot of K-Pop acts getting pulled off the radio and this had a negative impact on CD sales (still the largest part of the Japanese market).

Hole added about Japan, “It is [an] amazingly difficult [market] to build consensus in.” He sounded a more optimistic note when he said that the drop last year would put in place processes that drive new growth. “The good news about a bad year is that it is going to kickstart change,” he said, adding that Spotify will launch there in the next year as will Google Play.

“The future is Japan is pretty bright but we just have to pull the industry together,” he said of how collectively labels and services can potentially push through growth in Japan in the coming years.

He then drew a parallel with another market that many though was down the toilet a few years ago as an example of the trajectory that Japan could now follow. “Sweden was a basket case for two or three years in a row and now look at it,” he said.

There is a real sense of economic variability here – some markets booming and other, larger ones, fumbling and falling. Markets like Argentina (up 69%), Peru (up 149%) and South Africa (up 107%) might be seeing staggering growth, their contribution to the overall global figures is slight.

“The world is transitioning at different speeds in different regions and 2013 was a set-back in the world’s second biggest market — Japan,” is how Hole explained this in the IFPI report. “In time Japan will bounce back as more digital business partners enter this vibrant market.” There may be outliers reporting huge growth, but when rolled into the fuller picture, there are still causes for concern.

Was last year’s growth a phantom recovery and is there worse to come?

By this time next year, digital could be the single biggest part of the recorded music industry revenue ecosystem, but if downloads continue to fall like they are, even with the growth in streaming, the overall sector could slump again by year end.

One could read some bitter symbolism into the fact that just as digital is about to overtake physical and bring in, in hard economic terms, a whole new era for the record business, the wheels start to fall off the download business.

It’s important to note that streaming’s growth in 2013 – $377m of extra revenues compared to 2012 – more than made up for that 2.1% decline in download revenues. This isn’t a streaming-cannibalising-downloads debate. Instead, the concern is that streaming is having to shoulder both the decline in CD sales and now downloads as well (if they have hit saturation point).

This could be a blip or a harbinger of more pain to come. Just as the record business dusts itself down from the collapse of physical, the digital support scaffolding that downloading has built piecemeal to date starts to sway and tilt in the wind.

We will have more analysis of the IFPI numbers in tomorrow’s Music Ally Report, including interviews with Max Hole and Edgar Berger.

Eamonn Forde