Music Industry Downfall: The Rise of Social Streaming

If any industry has felt the brunt of the internet as a disruptive technology, it’s the music industry, which has been dealt a heavy blow by the onset of digital music distribution. On the April 28, the RIAA again confirmed this state of affairs when reporting that CD sales, the mainstay of the business for the last 15 years, were down a whopping 20.5% in 2007. Then on May 2, a Federal Court ordered AOL (TWX), Real Networks (RNWK) and Yahoo! (YHOO) to pay $100M to music artists as back payment for streaming their music online, proving that it’s not just the Big Four labels who have been affected by this disruptive shift.

Apple (AAPL), a technology company, has become the most powerful player, with sales of 2 billion songs last year. The iPod/iTunes combo, the default of cool in our culture, has freaked out the Big Four and sent traditional music retailers like Wal-Mart (WMT) and web 1.0 giants like Amazon (AMZN) scrambling into digital music distribution. So far their nascent incursions have not had a big impact, despite offering DRM-free music and savings of a few pennies.

While Apple and other legal download options have somewhat offset declining CD sales, the industry carries far too much overhead from 60 years of jacked up prices to make the digital transition smoothly. Music buyers used to pay up to $18 for an album and rarely was every song a keeper, now they pay 99 cents a drink.

Moreover, many consumers don’t pay for music at any price. The chart below, based on Compete’s data on more than 1,000 music sites, shows how the most popular options for listening to music online are free.

Despite lawsuits against illegal download sites, the fastest growing category in online music last year was P2P downloads, which shot up 140%. Nearly ten years after Napster raged through college networks, online music piracy continues to grow.

Meanwhile, the largest category in online music in March, 2008, was streaming, which racked up 28M unique visitors. The portals have driven the category’s dominance for many years by plugging into their massive traffic bases. MySpace (NWS) joined the top ranks in 2005.

Then in 2007, a new breed of Web 2.0 sites with sleek, bright graphics and deep search and social feature integration, began to spread virally through social networks and heavily-linked music blogs. The sites combine streaming music with community-based sharing (vs. the anonymous exchange at P2P download sites) and in doing so can skirt thorny legal download issues.

These social streaming communities have risen rapidly in popularity. iMeem recently overtook Yahoo! Music as the most popular streaming site on the web.

*The Hypem1500 presents aggregate traffic to the more than 1500 music blogs tracked by the Hype Machine, a popular blog aggregator. The Hype Machine itself is ranked separately from its network at #16.

Collectively, the social streaming communities are flattening out the curve of online music. Compared to a year ago, the distribution of unique visitors at the Top 25 Streaming sites has a more gradual drop-off and longer tail.

As the music industry seeks to reassemble itself in the wake of digital distribution, it should recognize social streaming communities as the fastest growing opportunity in its evolution.

Comments

[JohnPseudonym]

It's also becoming easier for people with talent to bypass the music industry all together.

If you're good, there is no need for contracts with record labels. More and more bands are producing and releasing their own music.

Either offering it for free or selling it at "whatever you think it's worth" prices.

Music companies are dinosaurs...

[music fan]

The RIAA members caused their own downfall by failing to recognize (early on) that their bloated business model was formerly successful only because music patrons had no ability to buy music alacarte.

Patrons were in effect victims of a monopolistic system where they had the buy the whole album even if they wanted only a couple of songs.

Instead of recognizing that this monopolistic approach was going to break down - and thereby adapting (eliminating the old infrastructure and embracing digital distribution), they instead sought to fight their own customer's wishes.

Even today songs should not cost $1 per song. They should be 25 cents. If record companies shut down the old distribution model (and shed the costs) they could afford to sell them that cheap and still make a large profit. The only way to eliminate these so called free distribution sites is to reduce the cost of downloads radically and improve the quality of the service. If songs are only a quarter a piece from a high quality well run website - who would waste their time searching peer networks for a file of dubious origin and quality?

Until the RIAA realizes that the old days of bloated administration and label costs (and ridiculous profits) are gone forever, it will continue to lose legitimate opportunities for digital sales.

I'm not saying that the downloaders are morally correct - I'm saying you are not going to return to the old model by simply scolding people. Lower price - higher quality is the key for the RIAA.

FYI - I pay a subscription music service through Yahoo.

[K. Lewis]

The numbers don't lie but I have don't see streaming staying atop the heap without a factor of mobility. iPods allowing you to take your music library with you is the killer feature that keeps it ahead of the streaming sites. I stream internet radio constantly while I'm at a computer but once I'm on the go it's iPod and nothing else. The best bet to meet the demand for any song anywhere still appears to be on the device that allows streaming on the go. Cell phones are the closest to that prize and Apples a major player there as well. As for 25 cents per song, that seems low to me. Especially if it's the only option. I like Nine Inch Nails approach of a tiered offering of more content and supplemental content at a higher price. 25 cents for a simple raw mp3 download and nothing else, perhaps. For guys like me who like to hold a book of liner notes and see who wrote and produced each track, $1 per song with additional info doesn't seem too much to ask.

[bluesmoke]

I wasn't going to comment because I didn't read anything that was new. The comments, on the other hand, offer a world of insight. But is anyone in the industry really listening? I doubt it.

[Texas Terry]

Why buy music a la carte when you cantake it to go on your subscription enabled portable player? I feel good about compensating artists each month when I pay my Rhapsody subscription.

Why do labels give their music away for free on sites like imeem when they don't pay a guaranteed rate on each play the way that Rhapsody does? At least that's my understanding of the models, I'm no expert.

If you want to take 5 million songs on the go, get a Haier Ibiza, it's the future. Wireless access to Rhapsody. Get anything they offer anytime you're near a wi fi connection, or load up the 30GB. No one knows about this device, and I can't believe it. You can also play Rhapsody's "channels" which is like picking a genre and having a DJ spin for you. Let's see your iPod do that.

TT

[BerkeleyBob]

I have found MOG to be a good place for music heads. I subscribe to internet radio (Sirius) for the car, buy from Itunes and Amazon and from brick and mortar music stores. I am intrigued by ORCD and Seeqpod. Best way to support musicians is to buy a CD at a gig. There is tremendous upheaval in the music business, trend not good for terrestrial radio or record labels.