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, Last.fm, 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.

Warner Threatens Music Streaming Model

We have long watched and waited for music streaming to become commercially viable and right back to the days of Spiral Frog we could see the potential, it was just a case of getting the model right.

The big success story of last year was Spotify, who took captured 7 million users across six European countries and presented competition for others such as Last.fm and We7. The record companies came on board, the consumers came onboard, the advertisers came and importantly they started to break the mould. Some said it was just like having your own radio station, playing your own selections and for a premium payment, you could even switch off the adverts. However the majority selected the free model based on advertising sponsorship over subscriptions. Three mobile even plugged Spotify premium into their contracts and we got it included in ours.

Now Warner, one of the four major labels, have declared that streaming services were "clearly not positive for the industry". The real issue is that they are not lucrative enough for labels and the fact is that the are popular with the consumers and are legal.It obviously would make sense to fight piracy with something that consumers clearly want than acting like a spoilt child and saying ' we don't want to play'.

So 7 million are on Spotify, 2.5 million are on We7 and there are others queuing up to offer the new service and we also have the likes of the mobile operates getting in on the opportunity, but a major label now wants to change the game and move the goalposts. Does it sound familiar to other media markets where commercial controls are being fought over?

Will Warner merely tear up the deals they have and tell 10 million consumers they got it wrong and don’t want to play any more? Will they try to shift the price up, demand subscriptions for all and demand a greater return? Will they honour what is in play today and squeeze future deals out?

What is clear is that Warner are showing the sort of uncertainty and arrogance that has been indicative of the music industry labels since the advent of digital. The one industry not to follow is music and its digital music experts, that is unless you want to know how not to do it.

The main legal streaming services have deals with most major and independent record labels and pay royalties for each song played but the amount is less than a label would earn if that song was downloaded or if they had a greater slice of a listener's monthly subscription.

However just to demonstrate that music is a minefield of contradictions, Rob Wells, senior vice president of Universal Music Group International, said only last month that Spotify was well on the way to proving its commercial viability and had, ‘a very sustainable financial model - full stop’.

Will Warner pick up their sticks and leave the field demanding their new terms are met? Will Spotify delist them? Will consumers go back to downloads and the old model or will they return to the pirates? These are dangerous waters and raise many questions about who controls what? It is also about giving consumers a continuity of service and trust that what they have bought or signed up to will not be withdrawn because someone changed their mind.

It would be a tragedy if Warner renegotiates with Spotify,content is withdrawn and the commercials are rewritten before they have had chance to settle. It isn’t just about getting premium subscriptions but also about the advertising model and shifting to streaming technologies and that takes time and importantly needs consumer confidence to be sustained not played with.

The pirates will obviously be watching with interest as Warner tries to correct what they see is wrong with the model today.

Warner Switch Off the Music

Warner Music Group has demanded that thousands of its videos be removed from YouTube. The battle is once again media companies, which expect to be paid for their online content and Google who have not matched the valuation sought by the likes of Warner and although all the major labels reached agreement some 2 years ago with YouTube on a per view fee and advertising revenue share. The debate is now about whether the labels should be paid in advance or after the videos are viewed and as the old agreement has expired, the renegotiation of a new licence.

Music videos current experience billions of hits on the service and 6 of the 10 most popular videos of all time are music. TubeMogul says musicians and record labels are responsible for over 8 billion views on YouTube. Warner reported $639 million in digital revenue for the last fiscal year but has expressed that YouTube only contribute less than 1% of this. This is obviously a problem that Warner has to solve as physical music sales continue to drop through the floor both in volume and revenues.

Digital content pricing is a difficult one to price today as tomorrow the value and price model is likely to change. The obvious key is to keep to licensing on relatively short term times and remain flexible on the model but as this also has to be acceptable to the licensee that can become a challenge as they don’t want to have to dramatically revisit costs as the service grows.

The one thing that is clearly coming home is that the old adage that the Internet is free is certainly changing at the point of consumption and that it may be free to use but you may be paying via a different business model moving forward. The big issue on advertising models is that aggregation will count and therefore players such as Google will have to upper hand as they will control the money.