Why do so many digital music services fail?

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In the pre-digital music market, people had a wide array of options of where, and how, to purchase music. Both tiny specialty stores and big chains succeeded by serving particular demographics. But when it comes to digital music, only a handful of outlets can truly be classed as successful.

As the CEO of Merlin, an organization that represents independent music rights, I’ve watched the growth of the digital music market with great interest. The current process of supply and licensing should make it simpler and more efficient than ever to create a compelling music destination. So why do many services fail, and so few succeed?

The growth of the legitimate digital market, and in particular the recent growth of subscription services such as Spotify, Muve Music and Rdio (all of whom are partners with Merlin), strongly suggests that, when given the opportunity, consumers are happy to pay for an easy-to-use, cost-effective service that provides them with all the music they need. Yet on the other hand, we have seen services such as Nokia Comes with Music, iMeem, the first iteration of Myspace Music (and, if we are to believe recent speculation, Mog) fail to capture the attention of consumers and ultimately fail as attractive commercial propositions.

From Merlin’s perspective, we believe that there are a couple of key factors that contribute to this state of affairs. First off, some new services seem to fundamentally misunderstand where the actual value in the digital music market lies. The second factor, related to the first, is the behavior of the largest players in the market. These companies seem more concerned with protecting and recreating the long-lost market advantages they once enjoyed in the physical market place, rather than offering consumers a broad, attractive set of digital music services.

With its limited shop windows, its pricy shelf space and its tightly controlled marketing channels, the major labels had much more control over the shape of the physical market than they do in the online world. By its very nature, the Web can offer music fans a vast array of opportunities to discover new music. (A survey conducted by Merlin of its members’ digital business last year bears this out, showing that independents perform better in the digital sphere than they did in physical markets). However, new digital services often construct their services based on physical market shares. Major labels, who are actively trying to reconstruct their old-world advantage in a new digital economy,  are undoubtedly influencing these startups. So instead of providing what listeners want to hear, music services end up building their consumer offering around what the majors force upon them as a cost of getting to market.

At Merlin we still see services that, through ignorance or as a consequence of major label market distortions, treat independents as an afterthought and end up launching with an inferior repertoire. Not surprisingly, they struggle to succeed. Consumers are not stupid. They are the ones paying the subscription fees, they see the gaps in the catalog. And when those gaps include some of the world’s leading artists or its rising indie stars, they quickly stop paying — or never start.

By now it should be patently clear that the services that are truly successful have one thing in common (be they iTunes or Spotify on the legal side of the fence, or BitTorrent or Pirate Bay on the other); they offer a truly comprehensive repertoire from all labels — major and independent — to an ever-increasing and loyal client base.

If you are a startup music service looking to attract the digitally active, early adopters (the key demographic you need to build hype so that you may ultimately reach a broader market), you need to recognize that Arcade Fire, Grizzly Bear and the National are more likely to be at the top of the search lists, not Gaga or Maroon 5.

Such successful services as iTunes and Spotify recognized early on that the digital market was a totally new dynamic. The secret to success was to provide access to a remarkable depth and breadth of music, embodied particularly by leading indie bands. These services stuck to their guns, ensured that independents were properly represented — not consigned to the fringes — and now they are reaping their reward.

Those neighborhood specialist stores and chains would not have succeeded without the right mix of products for their customer base. So it is no surprise that the digital services that have ignored this fundamental fact have failed.

The effort to further consolidate the major labels with the UMG-EMI acquisition will likely make things worse. Putting even more power in the hands of a company that already tries to shape legal music services to its own advantage probably won’t lead to a consumer-friendly outcome. I sincerely hope the EU and U.S. regulators reviewing this transaction will realize the negative impact further consolidation would have on the digital music market, and act accordingly.

One thing is absolutely clear — services that ignore consumers’ needs by not offering a comprehensive catalog or who launch only what the major labels tell them to launch will be quickly found out, and will fail. Our hope, and that of independent artists everywhere, lies with those services that understand the new digital consumer, and construct their offerings according to that vision. The services that focus on satisfying the needs of music buyers, rather than the needs of the dominant suppliers, will be the ultimate winners.

With 20 years of experience in the music and digital media industries, Charles Caldas moved to London in 2007 to launch and assume the role of  CEO of Merlin, a global rights agency for the independent label sector. Merlin’s members’ repertoire represents approximately ten percent of digital services worldwide.

Image courtesy of Flickr user photosteve101.

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