Friday, October 8, 2010

Selling music - a dead man walking

If you believe in selling music as a business model, or are about to fund someone who does, then you might want to pause to consider a few numbers, as well as recent trends.

First, the numbers.  97,751 albums were released in 2009, according to Billboard.biz and Nielsen Soundscan. 12 of those sold over 1 million units (down from 35 albums just three years earlier). That’s a paltry 0.0123% of all new albums.

Yet, there is an even more disturbing number to consider: 2.1%. That is the percentage of new albums that sold at least 5,000 units. In fact, only 2,050 albums reached that goal in 2009. Which means that 95,701 albums--97.9%--didn’t.
If you don’t think this looks like the last breaths of a dying business model, we can wait for the 2010 numbers...

While waiting, we might take a closer look at recent trends among music start-ups:  a spate of already established, brand new, and about-to-launch music subscription services. If the number of start-ups in a given field is any indication, there must be a ton of money to be made. Or not?

The New York Times observed correctly “Suddenly, Mobile Music Services Seem to Be Everywhere” and surely it won’t be long until Apple and Google sing the same tune as well.

Seamless, cloud-based music streaming is certainly feasible these days. And it’s not just feasible, it’s great. It will happen and we will love it. Why should anyone need to manually select, buy, download and sync files when we are always online?  The superiority of cloud-based services with local caching will pretty much kill the “old” way of distributing music (e.g. “buying and downloading files”).

However, regardless of the superiority and bright future of the cloud-based music service itself, I don’t see a big buck to be made.

Here is a likely scenario:

  1. Someone will figure out a significantly better way to distribute digital music. This is basically what just happened.
  2. More than 10 companies will compete for the users who are willing to pay 10 bucks per month for a music subscription.
  3. One or more companies will try to gain momentum by offering subscription services for less than $10 per month.
  4. A company with complementary products and services like Nokia, Samsung, Dell and HP (devices); Apple (devices, advertising); Google and Microsoft (advertising); or AT&T, Verizon and T-Mobile (network) will feel the need to bundle music with their core products to make them competitive.
  5. Competitors will follow to stay competitive and, by doing so, will turn music into a commodity.
  6. The effective price of music will be zero.


The fact that we already see so many startups with very compelling services in this field turns #1 and #2 into done deals.

There are also some signs that #3 is already under way. Rhapsody used to charge $10 ($9.99) per month and the same price point was adapted by Rdio and Thumbplay. However, the market hasn’t stopped there.

Napster pushed a $5 per month price point and others followed suit. Rdio and Mog offer packages that are somewhat limited for $5 a month in addition to their regular $10 packages. Furthermore, there are quite successful players like Pandora, last.fm and Spotify that offer ad-supported music streaming services for free, and ad-free options for a subscription fee.

Given this high level of competition (plus the “default” option to freeload music illegally), there is only one way for the price of music to go: down.

It’s only a matter of time until the price of music will disappear completely. Nokia’s “Comes With Music” looks like the first serious attempt to implement #4 and bundle music with other products and services. Comes With Music is part of Nokia’s strategy to become an internet service company and it seems to be gaining traction in some markets. For instance, by the end of the third quarter of 2009, Comes With Music had claimed around 10 percent of the digital music market in Brazil, according to IFPI.

The more that global music revenues decline (down 7% in 2009 to $17.03 billion), the cheaper it will be to implement a bundling strategy. The cost for bundling music with other services might become astonishingly low compared with the profits at risk for some of the above mentioned global players.

Nokia desperately needs a silver bullet to compete with Apple and the iPhone. The same is true for Microsoft, whose latest push to improve the music search experience on Bing in order to beat Google’s dominance indicates the same strategy. If they want to make Windows Mobile 7 a success, it had better “come with music” as well.

But Microsoft is not alone here. With Google Music, Google might also decide to become a more disruptive force in the music business in order to steal iPhone’s thunder when it comes to music.

We will see. As a consumer, the future sounds excellent. As an entrepreneur or investor in paid music services, it just doesn’t rhyme with making money.

Posted by @soerenstamer

14 comments:

  1. Graham Glass
    I find this trend depressing because it means that it's become very hard for musicians to earn a good income and focus on their trade. This in turn will be bad for consumers since they'll have less good music to choose from.

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  2. Picki
    Moin Tweetheart :)
    i could follow your argumentation as long as the consumer will always consume music in a bundle with something else (e.g. mobile, ads), cause in this case somebody else will pay for the music. (e.g. nokia).
    But what if i what to listen to music adfree and bundlefree, just music?

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  3. Charlie
    It has always been a difficult task to get kids to understand that music is not just free for the taking, that it is owned by its creators who deserve to be paid for their creative work. Your post seems to infer that the music industry is doomed. I'm not so sure. I think maybe it will be more of a restructuring. I agree that the big business of music may be threatened. However, the artists may actually benefit. Much of the money the generate they never see. With cloud technology, artists can market their products directly and see a bigger piece of the revenue without having to dole it to so many "handlers

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  4. Sören
    @Graham: I totally agree, the fact that most musicians (my rough guess is more than 90%) can't make a living with their creative work is the real issue here, and I think it is a highly important problem to solve. All I am saying is that selling music won't be the solution. It just doesn't work. However, there will be smarter ways in a highly networked world.

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  5. Sören
    Moin @PickiHH : )
    I see your point. Bundling can be pretty annoying. Who wants to buy a less useable phone just because it comes with music? Therefore, bundling might at the end not be the silver bullet.

    So let's assume for a moment that artists find a different way to monetize the attention of their growing fan base. What if there was an attractive and sustainable revenue stream that is not based on selling music, bundling or ads?

    Wouldn't it be the smartest thing to do for every artist to give their music away for free. They should if they want to get more recognition in order to grow a bigger fan base. And wouldn't an artist suddenly be very thankful for every fan that shares the artist's work with friends and puts it on every peer to peer platform?

    As soon as we have a more direct way to monetize attention, "piracy" will be the artist's biggest friend.

    yokudo is working on such a new revenue stream for artists. If it works out, you certainly will g

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  6. Sören
    @Charlie: I couldn't agree more that creators deserve to be paid. I just don't think that they will get paid for the music itself in the long run.

    In a networked world, digital music is a pretty powerful tool to build attention. You can distribute it globally without any cost. Unfortunately, digital music tends to be a pretty poor product. There is no real scarcity for digital music. Hence, artists will have to sell something else to make a living.

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  7. chris
    doctorow is quite right on this one: "In the era of the web, most artists won't make a living. I think, in the era before the web, most artists didn't make a living. I think, in the era after the web, most artists won't make a living. That's just the way it works [...]"... just to bring it back down to earth. that's where we come from... next step?

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  8. Sören
    @chris: Doctorow certainly has a point with regard to the past and present. It might be the case that MOST artist won't make a living in the era after the web as well. We will see.

    Whatever the percentage of artists will be, we need to come up with a solution that funnels MORE money into the creative sector and enables MORE artists to make a BETTER living. The future of our global society seems to be doomed if building and selling more THINGS stays the dominant way to make a decent living.

    Fortunately, there is good news: yokudo will launch a service that generates a new income stream for artists that is not based on selling music or ads and therefore is not (negatively) affected by piracy. Stay tuned.

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  9. Timo
    Dear Sören!

    Lovely post, thank you, just twittered it. The money-mindedness of the music industry and the commercialism of music has led me to thinking that it's not right to spend money in this "system of unfairness".

    It has never been easier to access music (okay, maybe when our forefathers sat round campires and sang, but that doesn't count). If people today like a song they download it whereas they would have had to buy a full album a few decaded ago.

    When I listen to music, I do it, because it tells me something, because it has meaning. I would actually love to support musicians because they are artists (and I do sometimes!) and there is nothing I respect more than creative people because they are the driving forces of my and our world: they create, they innovate. I would not (no longer?) love to support a music industry on the other hand. I can't clarify why but I guess it has to do with some sort of deeper feeling. If there was a platform that would let me donate money to musicians directly with no dues for others (e.g. for those adversiting the album, etc.) I'd do it.

    Just my two cents.

    Wishing you all the best with all the attempts you make,
    Timo

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  10. Timo
    Okay, well, with "commercialism" I meant "commercialization".

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  11. Sören
    @Timo: Thanks for your open statement. I guess you are not alone with your view (and your behavior). There are multiple aspects of your perspective that made me think:

    1. You seem to know perfectly well that your behavior is illegal, but that doesn't stop you.

    2. You perceive the music industry as a "system of unfairness", and, because of that, you see your behavior as kind of moral fight against unfairness.

    3. You perceive the music industry as "money-minded" and damaging to the deeper core of the creative class, but you are willing to voluntarily give money to artists directly.

    4. Your strong apathy for the music industry affects your behavior, even though you will damage artists as well.

    Nobody I talked to in the past year told me that he or she doesn't think creative people should be able to make a decent living. We all seem to agree that artists should make money. However, they make less and less money in our networked world of "digital and free". I am sure, we can agree that that is not a fair solution.

    I can also see your point. The established copyright and royalty system of the music industry don't seem to be blessed with fairness either. For example, the multi-million Dollar charges against file sharer just seem ridiculous, as well as the legal challenges your are facing when you start to remix music. And some challenge the idea of copyright completely by claiming that creating a copy of something can't be stealing.

    Both sides of the above discussion claim that the other side has to change their behavior and everything will be fine (and fair) again.

    So, which fairness is the true fairness here?

    Well, to judge the fairness of your own behavior you have to take into account how the people who have to live with your actions perceive them.

    Based on this premise, there is NO fair solution for artists AND fans yet.

    The gold standard of a sustainable solution for the creative industry will be that artists AND fans embrace it and say it is fair.

    Does that make sense to you?

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  12. Timo
    Thank you for your answer. There are only few things more annoying than some American friend sending you a YouTube link and you can't access it and get a copyright message instead. Only a very few things.

    You see, I'm done with today's music business. But I'm done with today's "bestseller authors" as well. I mean, artists want to be free, that's why they are artists. Are they free? But I might be way too underinformed to judge the situation of today's art... My opinion on this is not a dogma.

    And yes, I agree, there is no fair solution: then, why not build one :-)? Easier said than done...

    Timo

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  13. Raub
    Hi guys,
    Raub from Roses Cafe, here(!)... Looking forward to seeing what you have in mind game-changer wise!
    In the meanwhile, here's the site that focuses on providing cheap assistants to do menial duties (posting tourdates, cd assembly, what have you) that I briefly told Heidi about last week: http://sivers.org/muckwork

    I'll see ya soon, and will save you a couple muffins!

    Raub

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  14. Soeren
    Thanks Raub, we will keep you posted.

    Where can we listen to your songs btw? If your music comes close to the delicious tasty experience of your muffins, we might become your greatest fans.

    Soeren

    ReplyDelete