The music business has been transforming before our eyes. Many players in the industry are struggling to survive amidst the tectonic shifts as the industry transforms itself for the digital age. And yet there has never been more demand for consuming music, and the ability to satifsy that demand, as there is today. The events of the past few weeks point to an acceleration of change that promises to make 2007 a landmark year in the music industry.
The Music Industry is Dead
The major music conglomerates, Universal Music, Sony BMG, Warner Music and EMI, are having to transform themselves and their business model. Theirs is a hit-driven, high-risk/high-reward business model, not unlike that of VCs, in which singles promoted through mainstream, offline outlets (mainly radio but also TV and print) spur the purchase of albums via physical retail stores. All aspects of this model are under duress:
- Consumers have proven resentful of the ‘bait and switch’ in which they were made to purchase albums just to get the 1 or 2 songs that were good. The proliferation of digital music platforms, both legal and not, now enable consumers to only get the song(s) that they want.
- Offline outlets no longer move the needle as they once did. Terrestrial radio has been undergoing its own changes as a result of the landmark Telecommunications Act in 1996. There are now fewer music stations on the dial with tighter playlists and increased scrutiny of anything that smells of payola. As a result, it is harder to break an act on radio. MTV plays few music videos on its flagship TV properties, while print is proving increasingly irrelevant to the younger demographic — they’re not exactly rushing to the stores to get the new Rolling Stone to determine what music to buy. The hits that do break are not proving as durable as they once were. More titles churned through Billboard’s tops spot last year than ever before . Gold is the new Platinum.
- Illegal file sharing is rampant and has only continued to grow notwithstanding the legal and technological tactics that the majors have been executing. 1.5 Billion songs are available at any given time with estimates from Big Champagne of over a billion files being traded on a monthly basis.
- Of most concern is the removal of shelf space devoted to music products at retail stores. Tower’s bankruptcy removed millions of square feet and property owners will look askance at music retailers looking for space. The last decade saw the rise of discount retailers, Target, Wal-Mart and Best Buy being the big 3, use cheaply priced CDs as a loss leader to drive foot traffic. This has been a successful strategy, however the question is how long these discount stores will continue to sustain this strategy. If they start devoting the space to other products — games, DVDs or even iPod and related accessories, it will hasten the demise of the CD-driven business model. As one executive at a major told me, ‘if Wal-Mart removes just 8 less square feet per store to CDs, it’s like losing 300 stores.’ This will be a major story to watch in 2007.
- Indie labels are also having a hard time. Although their acts have tended to be more album-driven, the loss of Tower has been a shock to the system and there will likely be losses from the inventory and/or receivables with Tower. There are few other major retailers that carry a lot of these records and so the savvier indie labels are being forced to sell a greater % of their music digitally.
- All in all, the declining physical revenue is not enough to offset the growth of digital revenues. That is causing the major labels to scramble for alternative revenue sources such as licensing music videos and advertising (two areas in which my company, Brightcove, is working with the labels). To spur the growth of digital further, they will also need to solve the interoperability issue, which many believe means selling their music without DRM. This has been in the news recently with Steve Jobs’ letter and the rumors of EMI selling their music as MP3s. Being both the smallest major label and the one under the most financial stress, EMI may well have to take such risks. This will be the other major story to follow in 2007.
Long Live the Music Industry
And yet there has never been as much demand for music from consumers. They are voting with their ears, eyes, fingers and wallets. They want music at a reasonable price whenever they want and wherever they are.
- The numbers around file sharing not only illustrate potential foregone sales (something that the industry continues to debate), but also pent-up demand for music.
- New mediums such as internet radio, podcasting and satellite radio are attracting tens of millions of end users.
- Billions of music videos are streamed every year on the Web. Who needs MTV when you can watch videos on-demand on the Web while chatting with your friends?
- The worldwide market for flash or hard-drive-based players was 140 Million units in ’05.
- Add in music-capabile mobile phones and it’s a much bigger pie. Already, ringtones are a multi-billion dollar market in the US. Mobile music promises to be an even bigger market if the operators and labels can figure out how to deliver music to consumers at a reasonable price. $2.50 per download + tax is not it.
- More people are buying instruments and related materials than ever before. Spurred by technologies to help people make and record music, the industry has doubled in the last decade to $7.5 B.
And so we have an industry transforming itself before our very eyes. If you would have told someone in 1999 that, 5 years later, Apple would become one of the most powerful companies in the music business, they would have thought you crazy. The overall market will be bigger than it is today but spread out over more entities. The music industry of 2012 will be markedly different than the one we have today with new winners and losers. One thing’s for sure — we will all be consuming more music.
Raghav “Rags” Gupta is VP of Consumer Services & Partnerships at Brightcove, where he has worked since ’05. His blog can be found at http://www.ragsgupta.com.