Thursday, April 14, 2011

Making sense of the new music industry

Written by Mike McCreedy

How will fans experience music in the digital age?

If you haven’t been following the evolution of the traditional music business, there’s a lot to catch up on but let me give you the quick overview:

To begin with, Warner Music Group is for sale. Both BMG (which sold its recorded music assets to Sony a couple years ago) and Sony are in the running to acquire Warner but rumor has it that Yucaipa Companies (a holding company focused on private equity investments) is in the lead and is aligned with Sean Parker, co-founder of Napster and Facebook. EMI is also on the block after falling into the hands of Citigroup when EMI’s financial backers defaulted on their obligations to the financial giant. Meanwhile, former Universal Music head Doug Morris has moved over to lead Sony Music while all of the aforementioned companies fight over their share of an ever-shrinking market for recorded music sales.

What’s more, the major labels have not been doing a good job breaking new artists. A recent IFPI report showed that total sales by debut artists in the global top 50 album chart in 2010 were only 25% of the level they achieved in 2003.

Needless to say, artists and their managers have been trying to regain their revenue via other avenues such as touring and merchandise sales (T-shirts & trinkets). However, high ticket prices, ticket sales gimmicks and sub par shows are jading fans who seem to be flocking to fewer and fewer shows. Live Nation, the world’s largest concert promoter reported a whopping 10% drop in ticket sales in 2010.

All this is happening at the same time that more music is being created by musicians and heard by fans than ever before. The dichotomy of thriving demand for evermore-abundant art while the traditional music business is failing has perplexed many industry watchers. But as with every disrupted business, the opportunities for entrepreneurs abound and what we’re seeing in the music business is an exciting emergence of the structures that will define the industry for at least the coming decade.

So, that brings you up to speed with where things stand. Now to address the question I asked at the top: How will fans experience music in the digital age?

A recent report by Edison Research found that in the 12 to 24 age group, music radio listenership fell by nearly half in the past decade, from two hours to 43 minutes per day and radio fell from the number 1 means of consuming media to number 3 behind Internet and TV. On the other hand, music consumption via the Internet is on the rise with personalized streaming radio company Pandora leading the way and competitors like CBS’ and Jango making great strides too. Pandora has even partnered with some car companies to have their system streamed to drivers, taking an even bigger bite out of traditional, terrestrial radio.

One of the more recent trends are online music lockers. Think of them as personal hard drives that are out there on the Internet where you can store your music collection and stream it to a connected device like a smartphone, a car or home stereo system or your computer any time you want. There is some legal controversy around these types of systems but everyone expects these types of solutions to move forward and become fairly ubiquitous – not just for storing your music rather for storing ALL your files. Good-bye hard drives, altogether. But will they be the way music is consumed?

The problem with the online music locker solutions is that they still require consumers to own digital files of music which either have to be ripped from CDs, purchased online or pirated and you won’t be able to have unrestricted listens to anything you don’t own. That seems so last century given that almost anything anyone would ever want to hear can already be easily found online – even if only at Youtube. Therefore, I’d place my bets on all-access on-demand music streaming services.

“What?” you ask.

On-demand streaming services already exist in the US but they have gotten less attention than they deserve. Companies like Rhapsody and Mog offer consumers a monthly subscription model in the $5 to $10 per month neighborhood and they allow you to stream music to any Internet connected device on demand. Not like Pandora, where you get a selection of music that is generally targeted to your taste but otherwise not within your control. These services let you chose what you want to hear, when you want to hear it and they have almost every song ever recorded available with only a few exceptions. The company that, by far, is generating the most buzz is Europe’s Spotify, which is preparing for a US launch. In Europe, they’ve already reached 1 million paying subscribers. A couple great things about their service is that it is completely integrated with Facebook which makes sharing your music and playlists both easy and legal and you can store up to 3,000 tracks for offline listening and swap them out for different tracks any time you want. Services like these make it completely unnecessary to own music at all. Why would you if you can have access to an unlimited library of everything that’s ever been recorded?

In Europe, Spotify offers a completely free version that is supported by advertisements. In the US, it is unclear what their free service will be like because the labels are putting extra restrictions on Spotify in the US. Music companies are concerned that the revenue they will derive from streaming services like Rhapsody, Mog and Spotify won’t replace the revenue they generated from the sales of albums – and they’re absolutely right.

Gone are the days when consumers had to buy 11 songs they didn’t want so they could hear the one song they did and gone are the days when the major music companies controlled distribution. Those days aren’t coming back and that means the supply-side of the music business (labels, promoters, managers and artists themselves) have to change and adapt. All of this is great for the consumer but it represents some serious changes for the music industry and those changes, how they are shaking out and what they mean for the artists and business people that make the music industry run are what I will cover in parts II and III in the coming days.

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