Has digital music failed or are the digital expectations simply too high?

An often repeated conclusion at this year’s MIDEM conference, as well as in subsequent news reports on the state of the music industry, was that digital music services have so far failed. Digital sales are still not offsetting the decline in physical sales, they have not managed to maintain the format replacement cycle and they are not competing with piracy.

It is certainly fair to say that the music industry is having a very rough time and digital is not proving to be the saviour that many thought it would be. But should we really expect any other conclusion? Have digital services failed or have we just set the bar way too high?

In most of the leading territories that have published sales figures for last year, digital track and album sales have stalled. It is also true that they remain a long way off from compensating for the decline in physical sales. This means that in markets such as the US and Japan, the value of music sales are going to fall for a few more years. But here’s the thing. Every single track or album that has been released in the last 30 or so years is available at no cost through one of the many file sharing networks.

Recent studies have shown just how popular file sharing networks are. Moreover, other illegal distribution systems such as cyberlockers are quickly catching up. Regardless of whether there is a provable effect from file sharing on digital music, the practice has grown at a staggering pace. Although the pro-file sharing lobby makes a convincing case for the positive aspects of the practice, it is almost inconceivable that the level of file sharing activity evidenced in recent studies and the huge decline in recorded-music sales in the past 10 years is not connected.

There are no other examples of any other industries launching a product into a market that is already awash with exactly the same product that can be accessed easily for free, albeit illegally. Added to this is the public reluctance of the facilitators of free services to do anything about the situation. Is it any wonder that a-la-carte digital sales are stalling?

Realistic digital expectations
But, as the argument goes, a-la-carte is not what the consumer wants. Not true. For a large number of consumers, a-la-carte is exactly what they want. In the US last year more than one billion digital tracks were downloaded, according to Nielsen SoundScan. Apple has now sold more than 10 billion digital tracks from its iTunes Music Store and this figure is rising. This is aside from the fact that a free version of most of these 10 billion tracks is only a few clicks away. What is true is that buying a download is not the same as buying a CD and there are clearly a good number of consumers that have not made the switch. For these consumers, digital a-la-carte services are not giving them what they want. But this should not be seen as a failure on the part of a-la-carte.

No format shift? Again, not strictly true. The birth of file sharing coincided with the completion of the shift from analog formats to the CD in most developed markets, making a fall in sales more likely. This is because a percentage of CDs sold were bought simply to replace albums people owned in a different format rather than new sales. In 1981, unit sales of vinyl LP albums peaked at 1.14 billion, and the LP was soon replaced by the audiocassette as the album format of choice. But in 1982, global album-unit sales decreased, before rising again the next year. Similarly in 1997, despite a rise in CD sales, the larger fall in audiocassette sales resulted in an overall album-unit decline. Although album-unit sales rose in 1998, no new “replacement” album format meant that unit sales peaked in that year and have fallen annually ever since.

Competition from other entertainment sectors will also have had an impact on music sales. But the switch from physical formats to digital, seen in the context of format shift, is a repeat of a process established in the music industry more than 30 years ago. Although no legal alternative was available at the time, access to the “new format” was provided by file sharing networks. Whereas previous format shifts have resulted in consumers paying more for a better-quality product, the consequences for the music industry of switching to digital have been far more complex and damaging.

It should be remembered that there are a large number of consumers still buying CDs. But there are probably more that do not. These are the ones that digital music services need to target. Streaming and subscription services are really starting to appeal at the moment. Quite a few trade associations have reported sharp increases in music revenues from streaming and subscriptions and it would be nice to think that these consumers haven’t switched from a-la-carte but are converts from file sharing, or even new digital users. A few years ago the subscription method of music consumption was labelled as a failure but here we are reporting growth rather than closure. This shows that writing off certain digital initiatives after they hit the first bump in the road is misguided.

It is fair to say that the digital sector still has a lot of problems that need ironing out. Licensing for one is an issue that is likely to hinder future digital rollouts. But the transition to digital is not something that is going to happen overnight. It took the CD close to 20 years to complete its dominance and so rather than be so quick to judge the performance of digital, we should perhaps first address the basis of our expectations.

Music & Copyright is a fortnightly research service published by Informa Telecoms & Media.