Blog Post

Is Digital Music The Next Eurozone Crisis Waiting To Happen?

Much of the contemporary debate about digital music’s financials centres around perceived inequities in artist pay outs, particularly from streaming services.

These are very valid concerns and I continue to argue for an honest and transparent debate.

However there are two equally worrying issues: the sustainability of the stores and services themselves and the class divide that has grown between the US and European digital music markets.

The Trans-Atlantic Digital Divide

It has been clear for a number of years now that the US digital market has been massively outperforming its European peers. A number of factors contribute to this, including:

  • The stronger footprint of Apple in the US
  • That the US is a more unified and more easily addressable consumer market
  • The fragmented rights landscape in Europe
  • European online consumer behaviour lags that of the US

Those factors alone would be enough to stifle European prospects, but paradoxically Europe has developed a much larger number of digital services than the US, both in relative and absolute terms. According to the IFPI et al’s Pro-Music website, pre-accession Western Europe has 465 services compared to just 24 for the entire US. In relative terms that translates to 1 service for every 600 thousand European Internet Users compared to 1 for every 10 million US Internet Users.

Music’s Digital Double Whammy

So in effect we have a ‘digital double whammy’: Europe has too many services chasing too few customers.

When we look at the per-service revenue picture the picture becomes even more concerning (see figure). In the chart we are looking at the Average Margin Per Service (AMPS). This assumes an operating margin of approximately 20% per service following deductions for recording rights, publishing rights and payments. 20% may sound like a healthy margin but bear in mind that this pot has to pay for a wide range of costs, including Marketing, Technology, Fulfilment, Customer Care, Staff etc. (In fact scale is crucial and even Apple can only make downloads an ‘on average break even’ business.) Of course the exact margins vary according to the precise business model, label terms etc but the 20% assumption gives us a good working measure to gauge regional trends.

The first thing that jumps out is the massive disparity in US AMPS ($26.03m) compared to Europe ($0.61m). In effect the over-supply of European services acts as an accelerator on the disparity between the regions. At a country level there is further diversity, with the UK and France standing out as the strongest – or rather least weak – margin markets.

Scrapping over Apple’s left-overs

But of course the digital music market is not an equally distributed one. Apple’s iTunes store accounts for the vast majority of the download market, hence the second metric in the chart: AMPS post-Apple (NSDQ: AAPL). This shows the average margin per service based upon what is left of the market after Apple’s share has been removed. (To do this a 70% share assumption was applied to the paid download segment of each digital market. In some markets this will underrepresent, in others over-represent, but it nonetheless gives us a good comparative directional guide). Looking at AMPS post-Apple the situation is starker, with the average margin per service in Italy dropping to less than a quarter of a million dollars.

Too many services are chasing too few customers

Back in 2006 at JupiterResearch I wrote a report that made a case for the lack of sustainability in the digital music value chain in Europe and the risk it posed for services. Five and a half years on and the situation is unfortunately beginning to come to fruition.

The reason we haven’t had a market implosion yet is because so many of the owners of these services – such as ISPs and mobile operators – continue to show appetite to run them at a loss because of perceived benefits to their core businesses. But the simple fact is that there are too many services. In the pre-digital age most markets had but a small handful of national music retailers. So why in the digital age should that become dozens, particularly when the recorded music market is half its peak size? (The UK alone has 74 services).

When choice doesn’t = choice at all

And it is not as if these 465 services are bringing extensive choice to European consumers. The majority of them offer the same catalogue, at the same price with the same device support. All that this over supply of me-too services does is muddy the water. There is so much choice that there is no choice at all. If digital music is ever going to get out of its current impasse, the music industry must fix the over-supply issue. Until it does so, any progress in discussions on artist pay-outs is going to be constrained by the growing concerns posed by an underperforming digital market.

» For 11 years, Mark Mulligan was a vice president and research director at Jupiter Research (later acquired by Forrester Research). He now blogs at The Music Industry Blog, where this piece was originally published.

This article originally appeared in Music Industry Blog.

2 Responses to “Is Digital Music The Next Eurozone Crisis Waiting To Happen?”

  1. Jesse Kanner

    But don’t artists benefit equally from having their works sold across many, small outlets as they do from fewer, larger ones? I can see how this situation is perilous for music startups – but what’s the impact on the artists’ bottom line?

  2. To be fair, one of the issues is that in the US they prefer to use the word ‘opportunity’ instead of ‘crisis’ and that’s partly why Europe finds itself where it is today. Europe has so many advantages it can ring fence and trade, especially in music but it will never have the same unified single mass market to underpin a digital music strategy and it is pointless trying to compete with that. What Europe has is that it is cool. Music discovery is based on being cool and music consumers want cool. (Especially American ones) Many of the world’s greatest creatives are European. The guy that makes Apple cool is a Brit and even in Hollywood you’ll usually find a European at the source of style or originality in a movie. Traditionally the industry could amplify that sense of cool by limiting supply and tabloid fueled ‘discovery’ but we all know that is a truly broken mechanism. The X-Factor has added a Y at the end and is no longer cool and certainly doesn’t represent the scope of European talent. (IMHO) But European artists are still amongst the coolest in the world.

    Personally I liken this to the High Street battle and whilst I love being able to grab a burger, coke or coffee and know it will be reliable, it doesn’t inspire me. So why didn’t we invest in supporting local restaurants and retaining individuality? The Americans would. Similarly; Apple, Spotify, Google, Facebook et al are merely platforms and whilst Sir Martin Sorrell recently commented they were media companies masquerading as technology companies which I’d tend to agree with to an extent; the moment they really start to try and influence demand from the top, their credibility will nosedive. Likewise, as the proponents of social sharing, how can they possibly be seen to favor US artists and stay true to that global promise (which by the way includes a market share of 70% excluding China on recent examples) and sustain their business models? They can’t.

    I think you are right and there are some big casualties to come, but the overidingly obvious thing to me is the need to innovate in discovery. What are the opportunities in promoting European talent on a global stage? I think they are bountiful and am close to some very exciting investors in that space. And you know what, I think the Americans are probably mystified why we spend so much time talking about things instead of just doing them. We’ve relied too much on tabloid press and plugger/ radio & TV mix to steer demand and been too greedy in the middle men department. It won’t be the likes of Apple to blame for our demise, it will be our lack of ability to innovate globally and carrying too much weight between content creation and delivery. To the artists I would say, for the first time the world is truly your oyster. If your label can’t innovate beyond local radio or suggesting you queue up for X-Factor, then you may make more money creating your own channel and using that awesome creativity to fuel your own discovery. To the music biz innovators, go back to being original. That’s what you have always done best. And lastly to my many great American friends, I don’t think people mind you owning the platforms, but if you start to use them to influence the diet it may prove commercially counter productive. As Yahoo and AoL have perhaps started to demonstrate…