"We have to rethink how we sell music, throw the rule book out the window, and open ourselves up to entirely new possibilities," says media analyst Paul Verna.
By Alice LaPlante, InformationWeek
Jan. 31, 2008
Michael Bracy has a file on his Windows desktop labeled "solutions." In it, he's collected the many dozens of suggestions that have come to him over the years as policy director of the Future of Music Coalition on how to fix the music business. He occasionally reads through them with wry amusement.
"It's very sweet of people," said Bracy, who founded the nonprofit think tank that advocates for musical artists trying to make it in an increasingly technological world, "but the current business model has been completely shattered, and there is no single one-size-fits-all solution." However, he believes that despite all the industry negativity about this fact, "we're seeing unprecedented creativity and innovation that in the end will benefit both artists and consumers alike."
As evidence, Bracy points to all the technology-spurred experimentation with new business models. From the advertising-supported free music downloads offered by Spiral Frog, to subscription-based services such as Rhapsody, to Amazon engaging Apple in a head-to-head competition in the music download space, some of the best and brightest minds in both the technological and music fields are testing the waters to see how to make money from music, now that physical recorded media is going the way of the buffalo. "All the chaos actually spells incredibly good news," said Bracy.
Indeed, in the December issue of Wired, the musician David Byrne wrote a feature naming six different models that artists were pursuing to profitably get their music to consumers. These ranged from the traditional relationship with labels all the way to a do-it-yourself model in which the artist handles everything from recording to marketing to distribution.
One of the biggest music business news stories of 2007 was Radiohead releasing its latest album in digital form and giving music consumers the option of paying what they liked for it. But although Fortune magazine called the move one of the "dumbest business moments" of the year, citing comScore numbers indicating that only 40% of consumers paid for it -- and only paid a meager $6 each. Yet band member Thom Yorke pointed out that it netted the band $3 million. And others say that trying out new business models, and learning from failures as well as successes, is exactly what the industry should be doing. "The industry shouldn't be searching for the answer, but should be pursuing all the very many possible ways there are for monetizing music," said Peter Faber, professor of marketing at the Wharton School of Business at the University of Pennsylvania.
"We have to rethink how we sell music, throw the rule book out the window, and open ourselves up to entirely new possibilities," agreed Paul Verna, senior analyst for media and entertainment for eMarketer.
Independent musicians, labels, and, increasingly, Web sites, are doing this. Some are trying the subscription model; others are attempting to market value-added services and products that are tied to sales of conventional albums; still others are blending digital downloads and physical media. "Unfortunately, there's a very strong herd mentality among the major labels, and the lack of variety in their practices is quite shocking given all the opportunities that are out there," said Faber.
"Everyone is both hopeful and uncertain about what we need to do to transform the music industry," said Samantha Murphy, a singer/songwriter and founder of samanthamurphy.com. Like a growing number of musicians, Murphy believes that the only way to evolve as an artist as well as a businessperson is to pursue a more populist business model based on using technology to cultivate more intimate relationships with consumers. "I'm convinced that people, when given the opportunity, will be willing to pay for the music they love," she said. "With so many smart and creative people working on this challenge, I'm sure we will succeed."
From Service To Product And Back Again
Until 130 years ago, music was a service -- an entertainment experience provided by musicians to the public in a live venue. But with the invention of the phonograph, it was transformed, practically overnight, into a physical product: the record.
Colin Brumelle, a San Francisco-based musician and developer of software for musicians and record labels, pointed out that when the phonograph was invented in 1877, it was a radical invention able to, in Thomas Edison's own words, "annihilate time and space."
The response from the music business was immediate and alarmist. John Philip Sousa wrote an essay titled "The Menace of Mechanical Music" that warned how recorded music would cause the entire music industry to go into a disastrous decline. "Of course, much of the subtext of this was economic," said Brumelle. "Musicians were understandably worried that recorded music would undercut their ability to command fees for performance."
Later, in the 1930s, radio caused the same upheaval, as the recorded music industry worried its business would be destroyed. Much later, the tape cassette, the first easily recordable media, caused widespread consternation. Indeed, the slogan of the British Phonographic Industry from a 1980s-era anti-piracy campaign was "Home Taping is Killing Music." MP3 provoked the same outcry, as evidenced by the reaction to, and effective killing of Napster by the industry, in the early 2000s.
Once music was turned into a product, the business model for producing it was straightforward: record companies would invest in artists by paying them money upfront for the right to record and sell their music, and by spending the necessary funds on recording, marketing, and distribution of the physical disks that held that music. This investment was then recouped -- and, under optimal circumstances, exceeded -- by sales of the records. "In effect, the record labels acted simultaneously as investment banks and as marketing and distribution companies," said David Kusek, coauthor of The Future of Music and a VP at the Berklee College of Music.
But that model, everyone agrees, is now broken, largely due to the advent of the Internet, digital downloads, and other technological advances which have turned the physical product back into a service. Although major labels are still selling hundreds of millions of CDs, those numbers have been declining rapidly and precipitously -- largely due to the escalating popularity of digital downloads.
Between 2006 and 2007 revenues from CD sales plummeted from $14 billion to $9 billion, according to James McQuivey, VP and principal analyst of consumer media technology for Forrester. And according to Nielsen SoundScan, in 2007 CD sales were down 5% over 2006, whereas digital track sales increased by a full 65% and digital album sales more than doubled to 33 million.
Moreover, the profit margins of the recorded music industry, which in the 1980s were 15% to 20%, have declined to less than 5% today, according to Plunkett Research's "Entertainment and Media Industry Trends and Statistics 2007."
"For years, people were willing to compensate the music labels for going to the hassle of finding the artists, organizing their best stuff in shiny plastic disks called albums, and promoting them," said McQuivey. But now that the Internet is providing consumers with another way to discover music, and there's no longer a need for the actual physical product, "consumers are suddenly much less willing to do this. They have the Internet and friends sending links, and all sorts of ways to listen to new songs. Suddenly, there's no role left for the labels."
Music Consumption, However, Is Growing
Yet despite all the woeful sounds tolling the death of the music business, in fact it is growing overall at a healthy rate. It is arguably only recorded music that is in trouble. eMarketer estimates that the worldwide market for recorded music, live music, and music publishing will exceed $67 billion by 2011, compared to $62 billion in 2007. But this 2.2% growth will come largely from online and mobile music, live concerts -- where revenues are growing rapidly -- and licensing of music for public performances, commercials, TV shows, films, and video games.
Indeed, overall music consumption seems to be dramatically on its way up. Bridge Ratings, which tracks the percentage of the U.S. population that consumes music, has seen dramatic increases. In 1980, only 20% of the population was actively consuming music; in 1990, it was 21%; in 2000 it was 26%; and in 2006 it was 32%. "On the face of it, that's impressive," said Verna. "But if you plot those figures against per capita music expenditure, you see a drastic decline." In other words, said Verna, more people listen to music, but they spend a lot less money while doing so.
"We live in an age where music is all around us. Music has proliferated across all these channels -- commercials, video games, television shows, movies, amusement park rides -- it's part of what's in the air and it accompanies us no matter where we are or what we are doing," said Verna. "We expect to have our collections with us at all times, and in many ways, music is now taken for granted." Part of the problem is that people -- especially younger people -- simply don't believe they owe anyone anything for the privilege of listening to music, especially when that music exists in digital form. "It's not that they don't value it, just that they don't feel they need to pay for it," said Verna. "They simply don't think of this in moral terms. They've always gotten their music for free, and they don't see why that should change."
Thus although online music might seem to offer a "lifeline" to the major music labels, it's hard to say whether the escalating growth in digital downloads will fill the hole left by the disappearance of so much physical sales revenues, according to Dan Cryan, a music analyst with Screen Digest, a London-based media analyst firm.
"Yes, the Internet is facilitating discovery of new music and new artists by consumers," said Cryan, "but discovery on its own is pointless. Discovery that drives sales is what matters to the labels. And the underlying deal infrastructure that facilitates the sharing of revenues between the online services and traditional broadcast and recorded media players is not yet in place."
Telecom: The New Music Scouts?
In the mobile space, there is growing talk of how handset makers and carriers might be in the best position to do exactly that. Because they already have the infrastructure in place to deliver music, it makes sense for them to charge users for music -- the subscription model is generally perceived as the one that would work in this scenario -- and return some of those revenues to the artists.
Whether these companies will want to do the upfront work of investing in artists' recording costs is another matter. "It's very unclear who would do the investing in new artists, and how the money would be split between them, and distributors, and the artists themselves," said Kusek.
In the past, radio was the primary way that people discovered music. Now that is moving toward social networking and the word of mouth that social networking enables. "Quite a few bands have broken through as a result of word of mouth on MySpace and Facebook," said Kusek. The way Kusek envisions it, $2 would be added to your ISP or phone bill that would go into a pool to be shared by everyone involved.
A Flip-Flopped Business Model
Artists have always received royalties based on a percentage of sales of their recordings. Under the traditional model, according to Bracy, artists would then go on tour and perform live to sell more records. "Now it's almost flipped, where people are selling the records and the digital downloads to promote their tours and ability to sell merchandise," he said. "And it's unclear whether musicians will be able to shift back to gaining the majority of their revenues from recordings under any of the new business models."
Indeed, the live performance industry is booming. According to Screen Digest, a full 50% of all music revenues in 2007 came from live performances. "Look at the Stones. Look at Springsteen. They're all making a killing from their tours," said Kusek. No wonder, then, with revenues from CD sales dwindling and revenues from online downloads not adding up to significant sums, the big question -- especially from newer artists' perspectives -- is how to leverage technology to reap monies from a broad range of activities, not just recordings.
"Everyone is asking how digital downloads can make up for the loss in physical recordings," said eMarketer's Verna. "The far more urgent question is: How can people -- whether artists or labels -- monetize all their assets?" Kelli Richards, president and CEO of the All Access Group, an established veteran in the digital music/media arena, believes that any viable business model incorporates the full range of artist activities into the revenue stream. She is especially interested in what she calls "the concert of the future," in which savvy artists will use technology to extend their relationship with their fans in a live concert experience.
For example, prior to playing a concert in a particular location, a band could push messages to fans in an e-mail blast based on zip code; at the concert itself, fans could vote for the set list using their cell phones. Leaving the show, the band could send songs to fans' cell phones, send follow up e-mail messages thanking them for coming to the show, and offer them discounted merchandise that they could purchase from an online store.
"Concerts are the No. 1 category in on-demand television," pointed out Richards. "People are willing to pay top dollar for live performances, and technology is a great enabler of turning these events into opportunities to draw fans closer and generate even more revenue."
Musician Samantha Morton provides a case in point. Like most independent artists, she makes most of her money by touring. Although she does record and make the CDs available at her concerts, as well as digital downloads available through iTunes, she uses recorded music sales primarily as vehicles to promote her live appearances. Each CD she presses costs her $1.60; she routinely hands them out to fans and tells them to pay her whatever they think they are worth. Rather than the $1 she gets if one of her songs sells on iTunes, she gets an average of $10 per CD, which leaves her with a net profit of more than $8.
Still, she sees this less as a significant revenue stream and more as a way to increase her fan base. She encourages people to burn copies of her CDs and give them out to friends. She has even provided blank CDs to concert goers to facilitate this way of spreading the word about her music and advocates free file sharing of her music over the Internet for the same reason.
Is Online Popularity Translating To Revenue For Artists?
But is Internet popularity translating into actual revenue for artists? This is the million-dollar question. "It's very nascent, but I don't believe that sales generated on MySpace or YouTube or Facebook are adding up to very much," said Richards. Like others, she believes that online tracks will promote sales of what she calls "value added content": backstage or behind the scenes footage, outtakes, interviews, or opportunities to interact with the musicians more intimately.
Faber is also a big believer in this value-added concept that piggybacks onto digital downloads. Under this scenario, the digital downloads are both a discovery mechanism and advertisement for the album, just as radio used to be. "By getting tracks out there as broadly as possible, and making them as accessible as possible, you can drive demand for the album and all the value-added content that's on there," said Faber.
Faber, who was an expert witness for Napster, calls the summer of 2000, before Napster was shut down, "the golden age of music." "I absolutely believe that Napster would have been the greatest thing to happen to the music industry. People were far more engaged than they ever were before or have been since in discovering music and passing it along to others." Indeed, surveys showed that Napster was associated with greater album purchasing, he said.
"Who needs major labels, and Rolling Stone, and MTV? You've got friends, and ways of communicating and talking about bands," said Bracy. "Hundreds of bands, not a single superstar among them, all have significant followings and fan bases thanks to technology."
The online music site Pitchfork has turned out to be incredibly influential at promoting discovery of relatively unknown bands. After a rave review on Pitchfork, Arcade Fire immediately began selling out venues all across the country, pointed out Bob Lefsetz, an independent music producer in Santa Monica and author of the Leftsetz Letter. "There will be the Google of the music business, and it will happen," said Lefsetz. "Someone will create the MTV, the Rolling Stone of the online music business -- the place to go for the online filter that tells you what you need to be listening to."
"A lot of people who had lost faith in the industry are very excited about all the possibilities -- the potential of finding out about new artists who have been flying under the radar," said Verna. "Clearly, there's terrific music out there, it's online, and an open field for companies to develop really great technology for filtering through the drek and finding the gold, and getting people to actually pay money for it."
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