A brave new world: the music biz at the dawn of 2008

Is the music industry dying?

An anecdote in a recent Economist perfectly summed up the problems facing the major music labels. After EMI, the smallest of the Big Four, invited a teen focus group to its London headquarters in 2006, it wanted to give the teens something for their time. The response is worth quoting in full.

At the end of the session the EMI bosses thanked them for their comments and told them to help themselves to a big pile of CDs sitting on a table. But none of the teens took any of the CDs, even though they were free. “That was the moment we realised the game was completely up,” says a person who was there.

Given the years of declining revenues at the major labels and the constant stream of stories in the mainstream press about music’s decline, you’d be forgiven for thinking that the music industry’s pallbearers are already lined up and waiting in the hallway. But music isn’t on its deathbed yet; in fact, people are listening to more artists than ever before, on more white earbuds than ever before, in more places than ever before. They’re just not paying as much.

Don’t put all the blame on file-swapping, either, or chalk the problems up to an inability to “compete with free.” Digital music sales soared in 2007, and in fact, the total number of “units” moved during the year increased over 2006. eMusic, the number two music download service in the US behind iTunes, doubled its own projections for the Christmas season, pushed out 10 million tracks in the month of December, and added 50,000 new paying customers in the last six months.

And all of this happened without the four major labels even offering DRM-free tracks online. Now that Sony BMG has finally capitulated, 2008 is poised to be the year digital goes so mainstream that even your parents use it.

All that good news means that music is alive and well—but it doesn’t mean that things are rosy at the major labels. Let’s run the numbers from 2007, then do a case study on eMusic’s recent results to see just what kind of success can be had in the digital download world by competing with free.

Major label blues

Revenues at the four major labels (Warner, EMI, Sony BMG, and Universal) have been on a slow decline throughout the decade. From 2002-2006, the majors’ revenue declined by 11 percent even as movies held steady at the box office and video games grew. Despite the downturn, the chart below makes clear just how large the major label music business truly is.

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Things have gotten bad enough that the labels themselves are demanding change even from their trade groups. EMI has recently been pushing both the IFPI and RIAA to restructure their operations, for instance, and all four labels have tried to adjust to a new world by dropping DRM and launching innovative programs like “Comes With Music.”

Is the downturn due to people not paying for music, though? Hardly; it’s due in large part to people not paying for CDs.

Again, looking at data from 2002-2006, we can see that CD sales have seen sharp decreases in all but one year, with 2006 having the sharpest drop of the bunch (2007 may have been worse).

 

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  But unit sales have actually been rising over the last few years, with 2007 being another strong year. Reuters recently reported that overall unit sales rose 14 percent in 2007, with digital sales jumping by 45 percent.

 musicsales2.jpg

What’s happening is obvious; consumers are making far more purchases than ever before, but are often choosing to grab only selected tracks rather than complete albums. The album may not be dying in a general way, but it has certainly lost its importance as the primary way that buyers in the digital era get their music. Bands with a track record of putting out uneven albums won’t be able to milk that strategy for massive profits anymore, nor will any labels that nurture such acts.

That has translated into a grim situation at the major labels. Warner Music’s stock price is down more than 70 percent from its IPO price in 2005. EMI, recently acquired by private equity firm Terra Nova, was appalled by some aspects of the business it had acquired. In a recent interview with the Financial Times, new EMI boss Guy Hands asked rhetorically, “Can you imagine what would happen if most consumer industries over-shipped by 20 per cent? Can you imagine any consumer industry having 10 per cent of employees as middle management? Can you imagine only 6 per cent of staff in production?” Things are so bad that EMI has been spending $50 million a year just to destroy CDs it couldn’t sell, and has announced plans to lay off as many as 2,000 employees.

The situation is reminiscent of a Tim O’Reilly essay from 2002 in which he pointed out that “File-sharing networks don’t threaten book, music, or film publishing. They threaten existing publishers.” The same holds true of music. As long as the demand is present, there are huge opportunities to make money by giving consumers what they want—but that’s no guarantee that existing business models will continue to support companies.

It’s often said that it’s hard to compete with free, and that may be true for some segments of the population. (Are college kids ever really going to cough up much cash?) But for most adults who don’t get off on breaking the law or on stiffing artists, it’s easy enough to compete with free. Make something that’s faster, more reliable, with better metadata and album art, and a huge DRM-free selection. Throw in charts, some editorial staff, and some community features, and money is there to be made.

Even as the majors have found their revenues declining, indie-focused companies like eMusic are growing rapidly. Ars talked to eMusic CEO David Pakman to get some insight into how his company fared in 2007.

Case study: eMusic

eMusic remains the number two source of digital music downloads in the US. While it’s a bad time to be in the business of physically distributing music, the converse is also true: it’s a great time to sell songs online. eMusic blew away its own internal sales projections for the holiday season, moving more than 500,000 songs on Christmas Day alone, and 10 million in the month of December.

In the last few months, the service has seen subscriptions surge from 350,000 to more than 400,000, with each of those users paying at least $10 a month to download a set number of tracks (each song can cost as little as a quarter, but you can’t buy only one track).

“We really crushed it,” CEO David Pakman told me last week, in an obviously ebullient mood after doubling his company’s own sales projections for the holiday season. That stands in stark contrast to sales of physical CDs, which were down 20 percent over the same time period.

Convenience isn’t the only thing at work here; price is also a major factor. Pakman believes that the CD is priced “completely wrong,” and points out that hundreds of major DVDs can be had for $4 or $5. Despite the pressure that music labels have been under the last few years, CD prices have never approached this level (not counting those Beatles Greatest Hits! (as played by the Western Ljubljana State Radio Orchestra) discs you find in value bins).


David Pakman

Whatever artists and labels might think their music is worth, Pakman believes that consumers see music as simply being worth less than movies. If a thriller can be made for $80 million but be sold for $7.50, why should music remain in the $11 to $14 range? At those prices, fans would much rather 1) use P2P services and pay nothing, 2) pay a tiny amount to pick up the “hits” from online music vendors, or 3) purchase digital albums online for under $10.

The CD, with its lossless music, album art, and (general) lack of DRM, could move more units if it were appropriately priced, Pakman believes, but he doesn’t see this happening. Instead, his view is that we’ll see another 20-30 percent drop in CD sales in 2008.

But the divide here isn’t just between physical and digital distribution; it’s also between major labels and the indies. eMusic only distributes independent music. At first, this was simply a response to the fact that the majors refused to release their music without DRM, and the music has always offered MP3s. Now that the DRM walls are coming down, though, the company still has no interest in the vast majority of major label catalogs. Pakman says that eMusic might like “portions” of major label music, but much of it is not targeted at the eMusic demographic (music lovers 25 and older).

So eMusic’s success this year is also good news for the independent labels. The indies can now move serious units and have become much more than the major label’s “farm team.” Just consider a few of this year’s indie releases: Paul McCartney, James Taylor, Arcade Fire, David Gray, Spoon, Taylor Swift, the New Pornographers, and John Fogerty. Hardly a group of no-name lightweights.

Internet distribution has opened up music (like many other products) to the effects of the “long tail.” Since huge quantities of goods costs so little to store and deliver, online venues can offer products that appeal only to very small numbers of people and still make money. “The long tail does better online,” said Pakman, saying that eMusic is proof of that fact.

That’s great news for smaller labels, which have been grabbing a larger percentage of the total music market for the last few years. One major music conference coming up next month is even running a session called “The Indie Takeover?” to discuss the shift.

The majors haven’t helped themselves by pushing legendarily shifty contracts over the past 50 years, and artists are well aware of the pitfalls. Now that other options are proving workable, groups like Radiohead are publicly telling other artists to “think different.”

Diagnosis: Competition

So, in conclusion:

  • Indies gaining market share
  • Digital downloads up 45 percent in one year
  • Well-known artists going indie
  • DRM-free downloads from all major labels
  • Major label revenues declining
  • CD sales in a death spiral

Those don’t suggest that the music business is dying so much as changing, and the center of gravity is shifting to individual artists and to smaller, more focused operations. There will always be a role for what are still called the “major labels”; who would put out all those American Idol and Hannah Montana albums, for instance?

It’s too simple to say that the majors suck and indies are the future. Labels like Nonesuch (part of Warner) are putting out great music with a lean staff. They’re also willing to make artist-friendly gestures like allowing Wilco to sell CDs with no Nonesuch logo, no Warner logo, and no copyright information (this is contained on a disposable cardboard sleeve around the jewel case).

But the majors aren’t entitled to their “major” status by an act of God. They have to scrap for it like anyone else. The Economist put it well when it concluded that the majors may have to adjust to lower revenues. Calling it the current experiments with music “a leap into the unknown,” the magazine noted that “some among their number, indeed, may not survive.”

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2 responses to “A brave new world: the music biz at the dawn of 2008

  1. robertradamantsco

    this issue will be very interesting to watch. i’m publishing my works under cc licences on those indies, and it seems that free access is changing the shape and the very way of working of all the labels – doesn’t matter if they are the major one or the smaller…

  2. Oho says : I absolutely agree with this !

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