Future Of Music

After nearly 5 years of full blown operation, the legitimate digital music distribution business seems to have failed to deliver the volume of sales that many in the industry have hoped for.  The much trumpeted Apple effort with iTunes and the iPod have yet to deliver on the promise of digital music as a path to salvation for the recorded music industry.

According to Nielsen SoundScan, average weekly download sales as of November 27th fell .44% vs. the third quarter.  That’s no growth at all.

According to a recent Bloomberg article, overall the numbers don’t support a exploding market.

"Digital music sales in the U.S., the world’s biggest market, have hardly budged in the past five months. They almost tripled to 6.6 million downloads a week in the year through May, and were at 6.7 million in the week ended Oct. 23, according to Nielsen SoundScan, a unit of Dutch media company VNU NV.

The iPod, with more than 28.2 million sold, isn’t providing the panacea that the music industry seeks. EMI Group Plc Chairman Eric Nicoli forecast in May that digital sales would help revive the $34 billion recorded music market. For now, they’re unlikely to offset falling CD sales that are causing global revenue to shrink for a sixth straight year.

Digital optimism seems to be crashing in on itself,” says Simon Baker, a media analyst at SG Securities in London, who has a sell” rating on shares of EMI, the world’s third- largest music company.

Downloads in the U.S. have alarmingly plateaued. This has devastating implications for predictions that digital sales would grow exponentially.’

The shares of EMI, whose roster includes Coldplay and The Rolling Stones, have dropped 20 percent this year to 212 pence in London. Warner Music Group Corp. Chief Executive Officer Edgar Bronfman Jr. has seen his company’s stock fall to $15.47, below its May initial public offering price of $17.

Music stocks have declined while Apple soared. Apple shares have climbed to $57.50 in New York from $9.50 in October 2001, when the iPod went on sale. Fiscal fourth-quarter net income at Apple, which also makes Macintosh computers, rose to $430 million from $106 million a year earlier, as it sold 6.45 million iPods, the company said Oct. 12. Revenue from iTunes Music Store and iPod accessories accounted for just $265 million of Apple’s $3.68 billion in sales in the period."

Read all the gory details from Bloomberg here.

Billboard Article here.

See also "iTunes is a Scam" here.

New Formats

In a recent interview with Doug Dixon, David Kusek argues that the industry needs to develop new formats for music
distributed in physical formats. "Dual Disc is certainly a pointer in the
right direction," he says. "You need to create something that has
great value in order to continue to compete."

For example, in the movie A Clockwork Orange, says Kusek, "even
before CDs were out, they played music on a disk that was a little bigger than a
silver dollar. It reminds me of the idea that perhaps there are other formats
that could be developed, nontraditional formats, from what we have seen so far.
If you had a recordable format that was more convenient than CD, and held more
data, and was faster to record, then perhaps you could have a system where the
recording could be inside the stream of commerce."

The other critical trend, he says, is that "the price of these physical
products needs to come down. I’m encouraged that Dual Disc seems to be priced
around $18 to $20, and discouraged that CDs continue to hover in the $15 to $18
range. I don’t know how much control the manufacturers have over this, but to
the extent they can encourage their customers to be more realistic about pricing
CDs, the longer they will be able to stay in business. I really do believe the
price point for an audio CD is south of $10 at retail."

Music Commerce

But isn’t piracy destroying the industry? "There are two forms that are
currently labeled piracy," says Kusek. "You have the wholesale
replication of CDs and DVDs. To me, that’s counterfeit products and is obviously
not to be tolerated. It is certainly evil and criminal, and bad for
business."

"But the other kind of behavior that is labeled as piracy — downloading
files and trading files with your friends — I’m not sure that I would put that
in the same camp. Often there is no profit margin, there’s no distribution
network, other than yourself and a handful of people that you know. Generally,
you are not selling files to your friends."

"You can measure wholesale piracy and replication in many billions of
dollars, whereas for downloading and file sharing, it’s hard to quantify whether
it has had any negative impact at all in terms of real sales. I actually think
that is good for music, as painful as it may be for to the record
companies."

"I don’t think that file sharing and downloading of music is going to
stop," says Kusek, "until there is something easier, and better, and
cheaper, and more appealing. So as I argue in the book, why not embrace that
behavior, license and tax it, and somehow derive money from it? Make it easier
to find music, improve the quality of the files, and make it easier to record,
instead of trying to fight it. It seems a completely losing battle; People are
never going to stop doing it as long as the price of CDs is too high. So why not
go with the flow and embrace it?"

Investing in the Future

Says Kusek, "by and large the record companies are not in touch
with their customers at any significant level. They thought that their customer
was Wal-Mart. They are out of touch with their ultimate customer, and their
customer shifted away from them. They are still selling a ton of CDs, but the
whole file sharing thing was off their radar screen until someone told them
about it. So then they decided, let’s just go sue all these bastards."

"That bothers me as well," he says. "I ran the numbers, and
somewhere between 30 and 40 million dollars is being collected in the
settlements from the RIAA. But none of that money is going to the artists or
songwriters. It is going to the attorneys and the courts to process the papers,
and whatever is left is going to fund more lawsuits. It’s incredibly wasteful.
The numbers I see show file sharing growing on a monthly basis, ever since they
started the lawsuits, so it is not working. Imagine if they took $40 million and
invested it in a new way of delivering music that is attuned to the way people
want to buy."

To help people in the industry examine these options, Kusek runs an online
course on "The Future of Music and the Music Business" through the
Berkleemusic.com online extension school. "The course is for people at any
level of the music business," he says, "from artists, songwriters,
managers, record company, publisher, promoter, venue. We have had a lot of
people sign up from those areas trying to figure out what am I going to do in
the future: I own a record label, and how I get into this digital thing, or I am
a manager, and I can see that the labels are not really servicing my clients
anymore, so how can I grow my business in an appropriate way. A lot of the work
we do in the class is class projects or personal projects where you apply what
we are talking about to your situation and try to figure out what the next step
might be."

From his classes and consulting work, Kusek also sees differences in the
music business across the global economy. "One of my online students runs a
CD and DVD manufacturing company in India," he says. "They’re finding
that sales are actually quite healthy because the computer thing has not taken
off in the way it has in other parts of the world. I think there are many areas
in the global economy where there are lots of legs left to the existing physical
media, and those folks have more time to figure out alternatives."

Read the complete interview here at Manifest Technology.

Let’s face it.  Even though Steve Jobs and Apple almost single handedly led the major labels into the digital age of music, the numbers just don’t make sense, for anyone but Apple.  With the licenses for the music that Apple sells on iTunes coming up for renewal, it is time for the music industry to take a cold, hard look at the reality of the deal that it made, and consider their options.

According to research firm Fulcrum Global Partners, while the installed base of iPods will quadruple from 2004 to 2005, the average number of paid downloads per iPod fell by nearly 50%, from 31 to 16.  All of those iPods are almost entirely filled with ripped, copied or pirated music.

Here are the numbers as of Summer 2005:

While CD revenues have declined by some $1.7 Billion dollars on an annual basis,
iPod revenues are predicted to total over $4 Billion dollars in 2005.
At the same time, iTunes gross revenues for music downloads are about $200 million annually, with the labels taking home approximately $130 Million.

Do the math:  CD revenues down $1.7 Billion.  Download revenues up $130 Million.  That leaves a shortfall of $1.57 Billion for the music labels.   At the same time, Apple makes $4 Billion off of the iPod this year alone.  Surely the labels cannot be happy with this.  As a major label shareholder I would be outraged.

Those precious music licenses are up for renewal soon.  The future of music is at stake.  What does the smart money say the labels should do?

As reported in Digital Music News, in our Book, in this Blog and in many, many other places - one has to really question whether the RIAA should continue it’s litigation strategy against P2P file-sharing? According to a recent report by the Electronic Frontier Foundation (EFF), the answer is decidedly no. The EFF, which has long been at loggerheads with the RIAA both inside the courtroom and out, recently released a highly critical report. In the review, called "RIAA v. The People: Two Years Later," the EFF argues that overall file-sharing volumes continue to increase, despite ongoing lawsuits. "Studies show that P2P usage is increasing instead of decreasing," commented EFF senior staff attorney Fred von Lohmann.

Part of the problem is a simple numbers game. Out of millions of file-sharers in the United States, the RIAA is only targeting a group of several hundred monthly. But the EFF injected a human factor into the equation, pointing to the financial hardships that targeted swappers often endure. Citing a "a single mother in Minnesota who faces $500,000 in penalties for her daughter’s alleged downloading" and a "disabled veteran who was targeted for downloading songs she already owned," the EFF paints a picture of a legal campaign that may be overly aggressive. That has had a negative publicity effect on the RIAA, despite the arbitrary nature of the suits.

So what should major labels be doing? According to the EFF, a strong alternative is a voluntary collective licensing scheme. Such a plan could involve monthly payments to an ISP "or software provider or other intermediary". A large pool of cash would then be divided among rights holders. While that represents a major paradigm shift, and a complicated transition, the EFF sees a big opportunity. "The more people share, the more money goes to rights-holders. The more competition in P2P software, the more rapid the innovation and improvement. The more freedom to fans to publish what they care about, the deeper the catalog." But even though that concept has been on the table for years, labels have been mostly resistant. Whether that will change in the coming years may depend on just how physical CD sales do, and whether a meaningful story emerges in the paid download, subscription, and mobile music markets.

From Digital Music News

MySpace, the fan driven music commmunity that has grown like wildfire in the past couple of years is about to start a record label.  Let’s hope that they have a broader vision for this than what was reported in  Digital Music News.

"The move has been anticipated for some time, and could catapult several artists to stardom. But unlike a traditional record label, MySpace will be able to avoid some of the pitfalls associated with talent scouting. Picking bands has always been a hit-and-miss game, and the number of losers has always dwarfed the number of winners. But in the selection of Hollywood Undead, Anderson pointed to feverish activity among MySpace users, making the decision less about gut and more about actual fan response. The Hollywood Undead album is slated for release during the second quarter of next year."

These are really smart people on a tear and backed by Rupert Murdoch megadollars.  Watch for signs of a new generation music company springing forth.