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By Raghav “Rags” Gupta 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, […]

By Raghav “Rags” Gupta

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.

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  1. It’s kinda sad though. This new industry is going to kill the album. Even today, if an album doesn’t stand up as a complete entity I don’t buy it. Do you think “Dark Side of the Moon” could ever be recorded in this day and age? Full length album, great sound, all wasted in this day of 99 cent downloads in lossy audio formats. I’m sounding old

    DRM must die!!!

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  2. Detailed and good. IMHO, too long for a blog

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  3. Very good. I think, and I’m betting on, the industry turning to the model offered by Tamago, where fans are paid to distribute music; and artist/labels publish straight from the studio.

    as for the demise of the “Album,” who cares? Music was free format until radio, then songs become 32 minutes long; the album was shaped by the LP…stop thinking like an old person. the future, in digital, will provide much more freedom for artist.

    we’re at the begining of something wonderful.

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  4. Great post Rags!

    The key point in my opinion is “Gold is the new platinum”. Absolutely right – the record labels are losing the automatic right to create sell-out successes, and the winners from this situation are the recommendation services, communities, and music discovery sites (including our offering – idiomag.com) that help users find what they really really want!

    Andrew

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  5. Tower’s bankruptcy removed millions of square feet and property owners will look askance at music retailers looking for space.

    Focusing on Tower alone understates things. Suncoast/Sam Goody declared bankruptcy twice in the last six or seven years, as did the FYE owners, Transworld Entertainment (who later bought Suncoast/Sam Goody/Media Play.)

    Essentially every specialty music and movie brick and mortar retailer chain has declared bankruptcy at least once in the last seven or eight years. Why? Squeeze from both ends is killing them. They can’t beat the prices for the hits at the discount retailers you mention, who only stock the big sellers. Traditionally they made it up by having a broader selection. However, they can’t beat Internet retailers like Amazon when it comes to wide selection and catering to the Long Tail. To really have a broader selection, a retailer needs a copy of that rare album in stock at every store; going to a store to find out that you have to wait to get it shipped anyway is a waste. But Amazon and others can stock one copy in a warehouse in the middle of nowhere and ship it out when sold.

    They can’t compete on the hits, and they can’t compete on variety. Hence, the specialty music and movie retailer is dying.

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  6. Nothing original said here. Similar to articles that must be written and read on daylight savings when that time of the year arrives. Nothing original there either!

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  7. The ad supported model is interesting, but the label’s terms make it a very slim margin business – since the ad revenue must be split between a network, the label, the music publisher, and the website owner. It all works when prerolls are in the 20 dollar range, but what will happen as more inventory becomes available and cpms drop?

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  8. I see nothing wrong with labels and musicians no longer making millions of dollars for singing and playing instruments. People sing and play instruments for free all the time, the world over. If they are good, great – let’s shower them with accolades and applause. But does that effort really deserve millions of dollars? No. And does their God-given gift of talent mean they deserve millions of dollars? No. Sing and play on, while we listen and enjoy and applaud. And get a job that contributes to the world in your spare time.

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    1. I see nothing wrong with labels and musicians making money for singing and playing instruments. They provide a service, just like a plumber, a mechanic, whomever. They ARE contibuting to the world by creating art, inspiring others to do what they love.

      It’s not a god given gift. It’s a job, for which you have to study, practice, invest, and work hard on to become successful. It’s only natural that you get compensated for your efforts, if they are appreciated.

      The main problem is that most of the time the balance is a bit off, as in that the labels get compensated way more than the musicians.

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  9. Thank you this round up is great! There’s certainly no shortage of need for some experimentation here, because the standing still won’t stem the sales erosion that industry has faced for several years now.

    On the mobile front, it will be exciting to watch as phones evolve to more intimate human communication with our media. We share all media with from our phones now except music: text, photos, and even video we take. I still hold hope that when music companies realize users want an effortless digital “purchase and share” mobile user experience, we’ll someday – even legally – be sharing that hottest track too.

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  10. That is why there are so many new music portals like Mix2r.com, Myspace, etc popping up all over. The old industry assumed that the audio file was the product. The product is the way the consumer feels about the band or identifies with the concepts represented by the artist. http://www.mix2r.com uses a new model of collaboration participation to get artists and their fans to work together on audio projects.

    Monetizing the new music industry will be hard and I suspect the majors will struggle. This is bad for them but good for the artists who got screwed anyways. Read Courtney Loves “the love manifesto” to see why.

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