Having now fully digested all of the happenings at Midem, the music industry’s annual trade event held in Cannes, we are all now in a better position to gauge the health of the music industry. The mood was a mix of pessimism and optimism, which is becoming ever more common at such events.
On one hand, Spotify has broken through the symbolic figure of 250,000 premium subscribers, and labels in Sweden at least are reaping the rewards of the Swedish service’s success. Digital sales have also helped power UK label Beggars to a US No. 1 album – the first in 25 years from any UK independent label – courtesy of indie band Vampire Weekend.
On the other hand, the growth of digital-music revenues is slowing, as it becomes clear that the a la carte offering will not come close to replacing the losses in physical sales that the recording industry has experienced. And several countries are still going down the route of disconnecting or suing users caught illegally sharing files, something that in this day and age seems woefully short-sighted.
Inevitably, there were a lot of well-worn cliches on display at the event, but they were punctuated by the occasional moment of real clarity. One of these was provided by Vincent Castaignet, CEO of French music-discovery service Musicovery. He said that “all music services are made by geeks, for geeks.” Although an amusing assessment, is he right?
Consider Last.fm. The site has done a lot of things right, and has more-or-less nailed the social aspect of the service, but simple it is not. The home page is crowded, it’s difficult to immediately grasp what all the different parts of the service do, and even getting to the music is not completely straightforward.
This isn’t necessarily a problem for Last.fm, which has always been a service for people who want to interact with their music. But other services that do profess to serve the mainstream have similar failings in simplicity. Apple has won plaudits for its hardware design, but iTunes and the iTunes Store frankly leave a lot to be desired. Transferring music from your computer to your iTunes library and to your device is nowhere near as simple as it should be. And Apple operates in so many different content verticals – TV shows, movies and, now, applications – that the iTunes storefront is a crowded beast indeed. Why has Apple not solved this problem? The simple answer is because it has not had to, and because iTunes has not been a high priority for the company (though its recent acquisition of Lala means this is likely to change).
TDC’s Play service, something of a child prodigy among music services, also falls into the trap. In under 18 months, it racked up 20 downloads for every man, woman and child in Denmark. But not every man, woman and child uses the service. Those that use it do so heavily, but TDC privately admits that it has struggled to get some of its users to sign up for the music offering.
There are several reasons for this. DRM on the service means that you cannot use it outside your house, unless you are a TDC mobile consumer. And its main problem, say many Danes, is that the user experience is not good. The service is cluttered, complicated and visually unappealing, they say, and people simply don’t like that.
The take-up rate for TDC Play shows that giving away music for free alone is not enough for many people. But a more fundamental question is whether people actually want free, unlimited music. The notion almost seems perverse. We live in an age of always-on broadband access and unlimited consumer choice. In this context, a service such as TDC Play should be a music-lover’s dream. And it is. But what about music likers?
Although many people are diving head-first into services such as TDC Play and Last.fm, many more still have fairly conservative music-listening and -buying habits. Radio is still a popular way of consuming content. “Best of” albums and compilations still sell extremely well. And a service such as TDC Play won’t necessarily appeal to music likers – those who enjoy music but for whom it is not a life-defining activity – particularly if the trade-off for having unlimited access to music is that they cannot take their music with them.
It’s clear that the next big challenge for the music industry should not be how to “solve” the problem of piracy, or even how to make the advertising/subscription/freemium/unlimited-download model work. It should be to come up with a product, offer or experience that addresses the needs of the music likers. At the moment, they are under-represented in the field of online music. Address this large group, and you have a very exciting prospect indeed.
New research published by Music & Copyright has revealed that royalty collections from the world’s authors’ and mechanical-rights collection societies increased 1% at constant-currency exchange rates in 2008, to US$10.91 billion, from US$10.81 billion in 2007. The rise was lower than the previous year. Music & Copyright has also stated that the increase in 2009 will be just 0.1%, to US$10.92 billion. Total distributions in 2008 were US$9.31 billion, and a marginal increase is expected in 2009.
Although the estimated rises in royalty collections and distributions are small, they do provide the music industry with a rare bit of good news, particularly as recorded-music sales are expected to fall again in 2009. In 2008 recorded-music accounted for 71.8% of the combined total, with authors’ royalties taking the remaining 28.2%. But this share is steadily rising; in 2007 authors’ rights had a share of 26.2%, up from 24.1% in 2006. For 2009, the continued demise of recorded-music could push the authors’ share to 30%.
However, as is customary with all music industry good news, there is a down side. Some collection societies have forecast that total collections will be lower in 2009 than 2008. Those societies that collect both authors’ and mechanical reproduction royalties have achieved growth through higher broadcasting and performance royalties, compensating for the fall in mechanicals. But the global financial crisis and its effects on advertising revenues and live performance events will limit broadcast and performance-related collection growth. This means they are less likely to be able to counter the mechanicals’ decline, which is caused by the decrease in recorded-music sales. Music & Copyright has calculated that total mechanical collections were down 9.1%, to US$2.37 billion, in 2008, from US$2.61 billion in 2007.
Four main types of broadband operator online music service have emerged since the first ones launched in the early part of this decade: pay-per-track, subscription-based, pay-per-track/subscription-based, and bundled.
Unsurprisingly, the first services were pay-per-track, as operators attempted to ape the phenomenal success of Apple’s iTunes. But over time, many of these operators and others new to the market have embraced pay-per-track/subscription models, and a handful have launched bundled services.
There are two main reasons for this shift. For one, many operators have become pessimistic about their ability to compete purely with pay-per-track services, given the spread and success of iTunes and the recent entrance of Amazon and other major retail brands into the market. Second, they find subscription models to be a better fit with the telecoms industry’s heritage, which lies largely in selling services for monthly fees.
In addition, some have began to view music and other value-added services less as a source of extra revenue and more as a means to reduce churn, particularly as the online-content market becomes more competitive. By bundling their music services, they hope to at least give customers a reason to keep subscribing to their telecoms packages, even if they continue to use iTunes, Amazon or others for music as well.
Despite the overall shift to subscription and bundled models, each operator is taking a slightly different approach. In some instances, operators’ choices have been influenced by the competitive conditions in their domestic telecoms and online-content markets. But in all cases, there is a strong sense that there is more experimentation is to be had – by both operators and content providers – before the right model is discovered.
The most prevalent mobile music services in the world are ring tones. According to the latest worldwide survey by Informa Telecoms & Media of Music & Copyright, ring tones accounted for nearly 38% of operator-deployed mobile music services, followed by full-track downloads, at just over 32%, and ring-back tones, at 26%.
For all the talk of a declining market, ring tones still have the highest per-download prices among all mobile-music products, averaging US$2.44 in their real-music format. Even polyphonic ring tones sell, on average, for slightly more than full tracks. Ring-back tones are the third-most-featured mobile music service on operator Web sites, accounting for just over a quarter of the services detected by the Informa survey. Ring-back tones are the second-cheapest, after monophonic ring tones, but that is only if seen from a purely “per download” perspective. Ring-back tones actually generate more revenue than any other, since download payments are rental payments that must be repeated at regular intervals to secure ownership of the tone. They also incur a monthly subscription charge.
Chris Anderson, the author and journalist best known for developing the “long tail” theory, has published its long-awaited follow-up, Free. In short, the central argument is that, in the age of mass broadband use, companies should give away at least some of their content and products. Moreover, they might have to if they want to stay in business. The differences between the digital and physical worlds, Anderson says, have created a major shift. It now costs a fraction of the cost of distributing a physical product to distribute it online. It is easy to copy, share, edit and customise content online. The digital world has torn down the barriers that stopped people from offering content and allows everyone to be a content producer, owner and distributor.
Since the cost of offering products online is so low, Anderson suggests that companies might as well go the whole hog and give it away. In these instances, revenue and profit can come from other related sources. He cites budget airline Ryanair, which charges next to nothing for its flights but makes a significant proportion of its revenues from associated services, as an example of how this model can work.
Rights holders are already feeling many of the dynamics Anderson is describing, albeit not through choice. These dynamics, plus increased broadband penetration and speeds, have led to a world in which a nearly limitless amount of any type of content is easily available online, more often than not free.
Great news for consumers, but less so for businesses, many of whose content is already being given away and not exactly to their benefit. A few content owners are benefiting from this model. Online games that are free but in which users can buy pieces of content that enhance or improve game-play have been a great success. And musicians, many of whom now accept plummeting sales of their recorded products, are increasingly looking to touring, merchandise and sponsorship arrangements to boost their bottom line. It’s no coincidence that concert-ticket prices have soared over the past few years. Nor should anyone be surprised that several previously warring band members who said they would never speak to one another again have buried the hatchet to reunite for that lucrative world tour.
But Anderson’s utopian future scenario will not work quite as well for all types of content. Movie makers, for example, are unlikely to be eager to rely on T-shirt revenues to pay for their hugely expensive products. The average Hollywood movie costs US$100 million to produce and nearly the same again to market. In fairness to Anderson, he does not say that all content should be free and maintains that paid-for content will always exist. The problem is that the lines that separate the types of content that people will pay for in the online world have blurred significantly.
For online video, advertising might seem the obvious answer. It is one that Anderson even addresses in his book. But the medium is still in its infancy. It’s worth remembering that YouTube only soft-launched in-video advertising two years ago. The format has gone from an experiment to the potential saviour of online video in lightning-quick time. But advertising will not offset the cost of creating, acquiring and distributing online content. Premium content costs money.
Spotify, despite its successes, is unlikely to rely on advertising revenues in the longer term. It is widely believed to be making less than £100,000 (US$161,000) a month in ad revenue in the UK. That is equal to mere pennies per user and is certainly not enough to fund all of those expensive label deals it has signed. Indeed, it seems that teenagers will only pay for experiences they absolutely cannot get for free online, even if it means watching illegal downloads or listening to stolen music.