Wednesday, March 30, 2011

Music Lessons?

Music is a complex business that is not just about selling recorded music. It like all media is fundamentally a rights business with creation, performance, synchronised royalties.

We all know the music business remains stuck in digital treacle and it is no surprise to see that the global recorded music sales fell by some $1.5bn (£930m) last year.

The UK music business physical sales dropped by almost 20% with the overall performance down some 11% and although digital sales continued to rise by some 20% it did not offset the equivalent loss in physical sales. The result is that the market is shrinking and the UK is sliding down the ranking and has now been overtaken by Germany.

Now US economist Joel Waldfogel disagrees with the music industry bodies and major labels and claims that music piracy hasn’t hurt the creation of new music, but that changes in creation, production and distribution have turned the previous economics of scale of their head. He and many academics also claim that there is no link between Internet piracy and the revenues of the major music labels and that the losses claimed by the industry itself are being hugely exaggerated.

With new and cheaper recording technologies, digital music outlets and social networks, many of the tasks that were previously fulfilled by the big labels could easily be taken over by independent labels, or even the artists themselves. This sounds very familiar to that being experience in other media sectors. The economics are changing and scale is no longer an asset.

EMI was acquired last month by Citigroup and rival Warner Music is also seeking a buyer and many question whether there is a future for these former titans? EMI's losses over the past four years total £2.82bn.Warner’s fourth-quarter revenues in 2010 was down 14% at $789m and its digital turnover fell 5%, giving it a loss for the quarter.

The big labels’ monopoly is falling apart as their role can be taken over by independent labels that operate with a much smaller profit margin. Where the majors sometimes have to sell half a million albums to break even, independent labels can do the same by selling 25,000 or less.

Established artist now make a substantial amount of their money from live music and some claim this could be as high as 90%.

Creation, promotion, and distribution aided by new technologies have changed the music landscape and the Internet offers millions of ways to promote content at a fraction of the cost of the old world. Youtube, Facebook,, Spotify and Pandora, now offer artists many new platforms to promote themselves.

Distribution has changed too and with little investment artists can now upload their work for sale on iTunes. The loss of major UK retailers such as Zavvi, Borders and Woolworth has also changed people access to physical music as they are increasingly forced online and once there they aren’t going back.

The impact of these seismic changes don’t just impact the UK with the global recorded music revenues falling by 8.4% last year. According to the Recording Industry body, the IFPI, physical sales, fell by 14.2% year on year. Again although digital revenues grew by 5.3% and account for 29% of all recorded music revenues the growth rate of digital revenue growth has halved year on year .US overall sales fell by 10% with physical sales down 20% and digital sales are stagnating with 1.2% growth. Japan’s music market declined by 8.3%. Digital revenue growth in Europe continues to grow by some 20% plus but still does not compensate for the decline in physical sales.

So is Waldfogel correct to conclude that piracy is not the root of the music industry’s declining fortunes and that the entire music industry has instead changed with more power going to the artists and smaller labels? We believe that today music is more alive, accessible and broader in its offer than ever before. If we accept this, or even a large proportion of this, then we better take a cold look at what is happening closer to home and focus less on yesterday’s economics and models and more on tomorrow’s.

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