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New BPI Report Shows Illegal Downloading Remains Serious Threat to Britain's Digital Music Future, 16 December 2010

The UKs digital music market continues to expand, but record levels of illegal downloading present a serious threat to the countrys online music future, confirms a major new report Digital Music Nation 2010 published by recording industry trade body the BPI today. The report, featuring new research from both Harris Interactive and UKOM/Nielsen, for the first time provides a comprehensive picture of the legal and illegal digital music landscape in the UK. The UK is one of the worlds most advanced digital music markets. With 67 legal services, the UK offers music fans unprecedented choice over how to access their favourite bands online and awareness of digital music offerings is at an all-time high. Around a quarter of record industry revenues now come from digital. But while the UK digital music market has expanded, widespread illegal downloading means it is growing much more slowly than it ought to be. The lack of action against illegal downloading continues to undermine the potential for the digital music sector to expand, eroding value for investors, discouraging innovation and harming Britains musical culture. These effects are now felt right across the UKs creative industries. In 2010, illegal music downloading continues to rise in the UK. The number of people using peer-to-peer software to download music has remained steady, while the use of non-P2P channels such as cyberlockers and MP3 pay sites is rising alarmingly. More than three-quarters of the music downloaded in the UK is illegally obtained, with no payment to the musicians and songwriters or music companies who invest in them. The range and variety of services in the UKs innovative legal music market is encouraging some migration away from piracy. But in the absence of any effective deterrent, it is unsurprising that overall, illegal downloading continues to rise. This confirms the need for the urgent implementation of the Digital Economy Act, alongside industry initiatives that continue to raise awareness of legal services and the value of music.

Geoff Taylor, BPI Chief Executive, said: Digital music is now mainstream in the UK, with much to be proud of nearly 70 legal services and a further increase in the numbers of digital singles and albums set to be sold online in 2010. Yet this growth is a fraction of what it ought to be. Illegal downloading continues to rise in the UK. It is a parasite that threatens to deprive a generation of talented young people of their chance to make a career in music, and is holding back investment in the fledgling digital entertainment sector. As the internet becomes central to many aspects of our lives, including how we access our entertainment, we must decide whether we can afford as a society to abandon ethical values we stand by elsewhere - that stealing is wrong; that creativity should be rewarded; that our culture defines who we are, and must be protected. The creative industries employ two million people in the UK and are the fastest growing sector of the economy. Urgent action is needed to protect those jobs and allow Britain to achieve its potential in the global digital market. 2011 must be the year that the Government acts decisively to ensure the internet supports creativity and respects the basic rules of fair play we embrace as a nation. Two companies have underlined the challenge of investing in music in a market distorted by unchecked competition from digital piracy. Paul Bedford, Investment Director at Ingenious, added: Our experience of investing directly in recorded music artists has shown us that it remains incredibly risky against a landscape dominated by illegal downloading. Music remains a hits-driven business, but the impact of piracy on sales means even the big hits now struggle to compensate for the misses. The music industry is going through massive structural change, which has destroyed traditional business models. New models are emerging, driven by scores of new entrants to the market, but it seems clear that continuing action to support rights holders and combat piracy is crucial. Nick Page, Partner at leading business and financial adviser Grant Thornton UK LLP, commented: Investors need a proven, robust revenue stream to underpin their investment, and in the face of continued piracy the retail music sector struggles to present a digital model that delivers certainty. It is clear that there is a mismatch between the perceived value of music in the marketplace when consumers can obtain content illegally at little or no cost.

Online music comes of age Sales of digital singles could well top 160m in 2010, beating 2009s record of 149.7m by over 10m. The BPI also expects digital albums to sell around 21m copies this year, easily beating the 16.1m sales total in 2009. This means the total market would be the equivalent of 370m separate digital tracks. Several UK digital music milestones were passed in September 2010 as all-time sales of digital singles soared past the 500m mark and digital albums topped 50m sales in total, according to the Official Charts Company sales tallies. 2010 also saw the first single track download sell more than a million copies (Black Eyed Peas I Gotta Feeling) and more than 19 albums have sold more than 100,000 digital copies, including two (Kings of Leons Only By the Night and Lady Gagas The Fame) that surpassed 250,000 sales each according to Official Charts Company data. 2010 was the year when digital albums took off. During Q1-Q3 2010, digitals share of album sales was 19.6% overall, and by the end of 2010 is expected to pass 20%. The singles market remains overwhelmingly digital 99% of single tracks sold during the first three-quarters of the year were digital. Digital revenues rise BPI figures for the 12 months ending in September 2010 show that digital services now accounts for a big slice of UK record industry revenue - 24.5%, up from 19.2% a year earlier. Rising levels of income from digital music are not offsetting declining revenues from falling CD sales, however. Innovation is helping to drive growth beyond the traditional a la carte music purchase model pioneered by market leader iTunes. 18% of digital income now comes from a mixture of subscription services like those offered by Napster and eMusic and the ad-supported services including Spotify and We7. Better choice for consumers The UK now boasts 67 legal digital music services believed to be the widest available choice in the world spanning streaming, a la carte, subscription, bundled and mobile offerings. Britain compares favourably with Germany (42), Spain (29), France and Italy (both 27) and the USA (20). The range of music available to UK consumers on legal services has expanded, drawn from a global catalogue of licensed digital music in excess of 13 million tracks. Consumers are responding enthusiastically. In the UK, where the average price of a digital single track download is 82p, the number of different tracks downloaded each week has grown by almost four times in five years. Spotify now offers users a choice of over 10 million tracks, adding around 10,000 new songs every day.

The digital repertoire jigsaw is practically complete following the announcement in midNovember that The Beatles catalogue was available on iTunes there are now very few significant artists whose recordings are not available on legal online services. Harris Interactive outline the scale of the piracy problem In September 2010 BPI commissioned Harris Interactive to conduct an in-depth online survey into the awareness, usage and attitudes towards both legal and illegal acquisition of digital music. Respondents were aged between 16 and 54 and of the 5,393 surveyed, 29% were engaged in some form of unauthorised music downloading. Harris Interactive looked at the four main sources of illegal music downloads - P2P, links via forums and blogs to cyberlockers, MP3 search engines and overseas pay sites. 23% of all respondents are using P2P to acquire music illegally, the same percentage recorded as research carried out by Harris in February and November 2009. 13% of internet users were using links on blogs, boards or forums to access music illegally from cyberlockers, and 12% using MP3 search engines. Nearly four out of five illegal downloaders still use P2P as their main way of acquiring music illegally. More people are regularly using illegal sources to access music than some of the biggest legal music services on the internet usage figures show Spotify (18%), (15%) and we7 (8%) have many fewer regular users than P2P. In the survey, those who use illegal sources admitted to having used each of the four methods to acquire music illegally more, not less, during the last six months. P2P use recorded a net increase of +7%, whilst astonishing rises in use were found for overseas MP3 pay sites (+36%), MP3 search engines (+28%) and cyberlockers (+15%). Huge numbers of tracks being downloaded illegally By volume, P2P accounts for 46% of all tracks illegally acquired across the four main sources, compared to 25% for links to cyberlockers, 18% for MP3 search engines and 11% for overseas search engines. Harris Interactive calculate that the total number of people in the UK illegally downloading music on a regular basis is 7.7m. It is likely to be even larger given other methods by which music can be illegally obtained, such as e-mail, instant messaging and newsgroups. In total, Harris conservatively estimates that 1.2bn tracks will be illegally downloaded in 2010 equivalent to a stack of CDs some 74 miles high stretching well into space. Illegal downloads represent three quarters of all music obtained digitally, when set

against BPIs prediction of 370m tracks in total across singles and albums bought legally by the end of this year. UKOM/Nielsen confirm P2P levels stable while non-P2P rising UKOM/Nielsen monitors the actual website and application usage of more than 35,000 people in the UK, tracking online behavior both at home and work. Participants opt-in, knowing that their behavior is being observed, and therefore the panel is not likely to under-represent individuals engaged in heavy illegal downloading. However, UKOM/Nielsen found that 6.1m people had used at least one P2P or non-P2P site or application in August 2010 alone, with 4.4m using P2P. The UKOM/Nielsen research also confirmed that levels of P2P use have remained fairly consistent. In the last year, tracking of just eight P2P applications shows average users consistently around the 4m level. The popularity of sites hosting illegal material has risen dramatically in twelve months. According to UKOM/Nielsen, visitors to the five most popular hosting sites Megaupload, Filestube, Rapidshare, Mediafire and Hotfile - have increased by 45% from 1.6m in September 2009 to 2.3m in September 2010. Migrating users from the illegal market Harris Interactive found that 13% of respondents engaged in some form of piracy had recently stopped using P2P services. The reasons for this change in behaviour demonstrate that the widespread availability and promotion of legal services - coupled with industry education campaigns designed to reinforce the value of music - are having some impact. However, with the DEA still not implemented, few downloaders are concerned about any consequences from their illegal downloading. The most popular reason given was that better pay services were available now (29%), Its not fair to artists and songwriters (24%), use free streaming services (23%) and social networks more (21%). By contrast, the current impact of perceived deterrents is negligible - only 12% of people who had stopped filesharing cited worries over being caught. Worryingly, a substantial proportion of illegal downloaders claim not to realise that their actions are unlawful. Nearly half (44%) of all P2P users stated that they believed their actions to be lawful, rising to 69% for those using overseas pay sites and 56% using cyberlockers via board/forums. ENDS NOTES FOR EDITORS 1. This is the estimated retail value of music tracks illegally downloaded during 2010, not the recording industrys losses from foregone spend, which are estimated by Jupiter Research as 219m in 2010.

For further information on BPI, please contact: Adam Liversage - 020 7803 1326 / 0780 1179032 or email Lynne McDowell - 020 7803 1395 / 0776 3619709 or email About BPI The BPI is the representative voice of the UK recorded music business. We are a trade organisation funded by our members - which include hundreds of independent music companies and the UKs four major record labels. The BPIs members account for approximately 90% of all recorded music sold in the UK, and globally the UK's recorded music market is the third biggest. The BPI also organises the annual BRIT Awards show as well as the Classical BRIT Awards show. The organising company BRIT Awards Limited, is a fully owned subsidiary of the BPI. Substantial proceeds from both shows go to the BRIT Trust, the charitable arm of the BPI that has donated almost 15m to charitable causes nationwide, since its foundation in 1989. About Harris Interactive Harris Interactive is one of the worlds leading custom market research firms. Known widely for the Harris Poll and for pioneering innovative research methodologies, Harris offers expertise in a wide range of industries including entertainment, healthcare, technology, public affairs, energy, telecommunications, financial services, insurance, media, retail, restaurant, and consumer package goods. Serving clients in over 215 countries and territories through our European, North American and Asian offices and a network of independent market research firms, Harris specialises in delivering research solutions that help us and our clients stay ahead of whats next. The study was conducted online by Harris Interactive. Figures for age, sex, education, region and Internet usage were weighted where necessary to bring them into line with their actual proportions in the population. Propensity score weighting was used to adjust for respondents propensity to be online. About Nielsen The Nielsen Company is a global information and media company with leading market positions in marketing and consumer information, television and other media measurement, online intelligence, mobile measurement, trade shows and business publications (Billboard, The Hollywood Reporter, Adweek). The privately held company is active in more than 100 countries, with headquarters in New York, USA. For more information, please visit, About the Official Charts Company

The Official Charts Company (OCC) is a joint venture between record labels' body the BPI and ERA, the Entertainment Retailers Association. The OCC is responsible for the commissioning, marketing, distribution and management of the UK's industry standard music and video charts and is endorsed by the BVA (British Video Association). The Official Charts Company compiles its charts from sales information gathered across all key distribution (or entertainment) channels including all major high street retail chains, independent stores, supermarkets, mail order internet retailers and digital music service providers. This market research sample equates to 99% of the total UK Singles market; 98% of the total UK Albums market and 90% of the total UK DVD market. About Ingenious Ingenious is a UK based investment and advisory group specialising in the media sector and is one of the leading investors in the UKs creative industries. Ingenious Investments offers a range of alternative investments, principally in the media and entertainment sectors, spanning film, television, video games, music and live entertainment. Ingenious Asset Management provides discretionary investment management and innovative solutions to the private investor. Ingenious Corporate Finance provides comprehensive advice on strategy across a wide range of transactions focusing particularly on the media, entertainment and communications sectors. About Grant Thornton UK LLP Grant Thornton UK LLP is a leading business and financial adviser with offices in 28 locations nationwide. We are a member firm within Grant Thornton International Ltd, one of the world's leading international organisations of independently owned and managed accounting and consulting firms. Clients of member and correspondent firms can access the knowledge and experience of 2,600 partners and 30,000 employees in over 100 countries and consistently receive a distinctive, high quality and personalised service wherever they choose to do business. For further information on Grant Thornton, please contact Helena Holm on 020 7728 2152 or email: