Digital Music Consumption Patterns

There has been a lot of melodramatic news coverage recently about the decline of the music industry. But as previously mentioned in this blog, those areas like CD sales in which we have seen declining sales are compensated for by massive growth in newer sectors.

According to the Neilsen Soundscan figures (a measure of sales across all platforms) the total number of ‘music units’ sold is up from 814.6 million tracks in the first three quarters of 2006 to 951.3 million in the first three quarters of 2007. They also report that digital sales are up 46.3% on last year, at 612.2 million, a staggering 64.3% of total music sales this year.

Consider also that a record company’s costs are far lower when selling a download than a physical recording. Manufacturing costs, warehousing, distribution, and the expense of supporting a physical retail outlet are all removed from the equation, meaning more of the purchase price ends up in the label’s bank account, especially if the track sells from a site they own rather than iTunes or another reseller, when 100% of the money goes straight to them. An increase in total track sales and an increase in the percentage of the sale value retained by the label doesn’t sound like decline, but like overall growth, and rewards for those who are bold enough to embrace new, online sales platforms.

Another thing this rise in digital sales seems to highlight is that record company’s fears about the unregulated ease with which files are shared over the internet will damage their profitability. The industry is right in fearing that music piracy is now easier to perpetrate than it has ever been, with torrent trackers like The Pirate Bay and Demonoid under heavy attack from corporations worldwide for facilitating the peer-to-peer sharing of files for which no-one pays. Torrent tracking sites make obvious scapegoats, but people have always copied music illegally; remember the outrage that cheap audio tapes caused among the record labels in the 80’s by suddenly allowing people to share music with each other in a way then unprecedented in it’s convenience.

The big labels seem to be overlooking the fact that it is precisely this convenience and availability that are attractive to consumers. This is not to condone music Piracy, but to point out that those that ‘steal’ music have done so and will continue to do so whatever efforts the industry makes. Their knee jerk reaction to the rise of piracy since Napster’s inception in ’99 was to create a system of Digital Rights Management limiting the ways in which a downloaded file can be played. This was fighting fire with gasoline; trying to combat a new media format which owed its enormous growth to its ease of use, by making their music more restricted and difficult to use. Adding to this futility is the fact that even if every download sold was DRM protected, someone would crack the protection and keep on sharing music with those people that are not concerned about paying for copyright, just as happens in the software industry. As it stands, each one of the CD’s that the big labels are still so keen to see sales of has no rights protection on it at all (as Steve Jobs’ famous open letter points out), meaning that the least technically able of pirates can rip, upload, and share it very easily.

This is a key fact to understand when trying to predict the shape of the future music market. When a consumer wants to obtain a track, they want to do so as easily as possible, in a form that they can use wherever they want. They no longer need to go to the high street, if they can sit down at their PC or pick up their iPhone and search the web for it. Piracy is attractive because consumers needn’t pay or go through the rigmarole of registering an account and putting their bank card details online every time they want to get a song. iTunes retains a huge market share because of the massive investment in very well packaged and resultantly popular consumer technology they’ve designed to link directly into their site, and the perfect matchup of their existing loyal, tech-savvy, professional and affluent user base with the ideal digital music buyer. Other companies like eMusic and Rhapsody win market share because their tracks are cheap, and their subscription models reward consumers stay faithful to them rather than register elsewhere, but no one reseller can yet match the pirates for size of catalogue.

The first company to provide a service with as much available content as the file sharing networks, with the faster download times of hosted files versus p2p sharing, and the advantage that the RIAA won’t be after a consumer’s blood for using it, will dominate the market. If iTunes can rid themselves of the DRM problems that their contracts the record labels impose on them, they will be that company. However, allowing a third party to accumulate a universal catalogue of DRM free music is not in the interests of the big record companies: a sale through iTunes is one from which Apple take a percentage of the price, and the millions of dollars that this percentage adds up to are more than enough incentive for them to develop their own online stores, attempting to attract the rogue customers who are not committed to a relationship with one of the major resellers (perhaps they could even sell the same track at lower prices…) For independent artists this is not quite the case. They can still develop their own websites selling their product, but without a marketing budget it is difficult for them to get their music in front of the same number of purchasers (something RouteNote aims to help with by giving access to the major online outlets).

Another key point is the way that high quality content spreads virally across the internet, especially if it arrives through the right channels. The kind of new-geek Internet users that perpetrate this viral spread strongly object to corporations trying to limit the freedom the web gives them, but if approached right will adopt new things early and promote them extensively through tight knit communities, along with what amounts to a personal and trusted recommendation in that circle. Traditional marketing could never hope to be so focussed on a market, and often comes over more as an intrusion and an affront rather than the attractive recommendation of a product. This calls for a change in tactics from heavy spending on the most generally acceptable and inoffensive artists to lower key, more subtle and consumer-interactive marketing of diverse, high quality acts, and gives niche artists much greater scope to market themselves, rather than depending on a label to swoop in with a big advance and buy the rights to exploit their music.

Some other events that have unsettled the industry establishment over the past few months are the decisions by major artists like Prince to give their music away and focus on getting revenue from live performances and merchandising, an attitude Madonna shares, as evidenced by her switch from working with a record distribution label to one with a live promoter. The closure of retail flagship store Tower Records, the failure of Fopp (a big music and dvd retail chain in the UK), and Virgin’s sale of their US Megastores to a new operator are all indications of the massive tectonic shifts occurring throughout the music retail industry towards digital, online consumption.

The particular effects of these events cannot be precisely predicted, but the general trend seems to be towards musicians moving away from record labels and toward live promoters to raise their profile, selling their music digitally and finding ways to retain a much greater percentage of each track’s sale price. We will also see a further decline in CD sales, but not a total death – people love having an artefact, as the resurgence in the vinyl record market shows, and artists and manufacturers alike will profit from making beautifully packaged records available, as Radiohead have made a box set available alongside their free download.

While we at RouteNote won’t be pressing any limited edition LP’s in the near future we can offer artists a tool that allows them total freedom to deal with their own promotion and marketing while retaining easy access to the biggest established online retailers, helping maximise their market reach and the profit share they retain from their own work.

Im your friendly RouteBot. Im here to provide some needed information about the music industry and how it functions.

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