Will Music Sales Be Profitable for Record Companies in Ten Years? 13 comments
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A few months ago I discussed how the real problem facing the music industry (artists, record companies and traditional music stores) was the changing economics of music sales, much more than their slowness in adopting digital music, lawsuits, etc. The idea is that consumers are actually purchasing just as much (if not more) music as the ever have, but the record companies aren't generating as much profit because the digital music revolution means that consumers can acquire significantly more music for a lot less money.
A perfect example is Real Network's (RNWK) Rhapsody service. With it, a consumer could spend $15.99/month and put hundreds (if not thousands) of songs on their Mp3 player that would cost them hundreds to thousands of dollars otherwise. Apple's (AAPL) iTunes improves the numbers somewhat, but there too, people can download the 2-3 songs they like the most from a particular album instead of paying the record company for the whole thing.
Think about it: in the mid 90s, $15.99 bought you a single CD and now it can buy you access to nearly every CD you could want for a single month. Alternatively, you can buy 15 songs across multiple albums that you would've had to buy in full and separately at that time.
The math here is pretty clear. I's more profitable for Universal (GE) to sell you 10 CDs via a retail chain than it is to give you subscription access to that music or sell it to you via iTunes.
Just the other day I used Rhapsody to drop music on to my Mp3 player to create a quick workout mix. The whole process took 5-10 minutes and I had access to new music that would've cost me nearly $200 at Best Buy. I suppose you could argue that over the course of a year I'll pay close to $200 in subscription fees, but the record companies who produced the 12-15 or so albums I transferred have to share that revenue with the hundreds of other artists I'll listen to (or transfer to my Mp3) player over the next 12 months. They're getting pennies per song/album vs. the $200.00 or approximately $15.00/album they would get otherwise.
It's analogous to Toyota suddenly selling new Camrys for $100 instead of for $25,000.00.
While the audiophile in me is going to buy those CDs this weekend anyway (I only use Rhapsody for the convenience factor not as my primary source of music), I'm not the typical customer and many people my age listen to the bulk of their music via a subscription service or iTunes. As the years go by, the record companies could wind up with fewer and fewer profitable customers.
As more and more digital music services become available, as the competition causes prices to go down and/or as people just switch to the subscription model (the most economical option available), the question then becomes: Can record companies even be profitable if consumers completely abandon physical CDs for services like iTunes or Rhapsody?
Or will the revenue generated by music sales and subscriptions simply be a way to offset some of the content production costs, while the record companies look towards other venues to generate revenue? That is, will music become more analogous to network TV, where consumers receive the content for free and the network generates revenue from advertising and other sources?
It's going to be interesting to see how the record companies adapt - if they develop value-adds that encourage people to purchase physical mediums (instead or in addition to digital downloads and subscriptions), restructure the economics of digital music or just alternate ways to monetize their content. It's not so much a question of how (or the speed) at which they adopted digital music, as it is a question of how you monetize a new business model that sells your product for a fraction of its previous cost.
Honda is a great company but they would go out of business if they had to suddenly sell 40% of their Accords for $100, which is effectively what has happened to the record companies.
Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article.
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This article has 13 comments:
As well, there is the other side of the equation: If everyone can (and does) create their own CD's, then does music really live up to its full potential? If every 14 year old can roll their own, isn't there a "dumbing down" of quality?
So on the marketing side and on the creative side there is a mass reduction of value that is essentially technology driven.
The question is, do we like to eat mediocre food? Even if it's cheap?
The problem as I see it is not that the record companies didn't accept new technology. It was that they demonstrated a total lack of imagination - artistically and technologically. This didn't just happen over night. Over the past 25 years, the accountants took over the shop at the big ones, so there was no vision for the future of music, no artist development, product development, investment in novel integrations - you name it. They were in it for the money.
Today it's even worse. There's very little new music product anymore. If there's a TV show, then a music product can be generated as an additional sale within the larger context of an "entertainment product." Due to the scale of large media enterprises, it's the only option. Sales must exceed 500,000 for music products, or it's not worth doing.
But music is not only a "product." It is an art form. And genuine artists are finding new ways of reaching people, while featuring their dedication to the quality of their work.
In the end, the differentiator will always be the quality of communication - live performance, song writing and record production. Artists are natural users of technology - finding new ways of integrating forms, ideas and creating products from those efforts.
So I'm hopeful that - over time - we will learn how to differentiate our products from the dreck. The key will be access to the artistic process/performances, and the pricing of that access.
30 years ago, most people had older cars and did work themselves, but now, most have newer cars.
30 years ago no-one had a personal computer with the ability to get digitised files of all types from out of a wire - now they do.
Owning a personal computer costs about $500 - $700 year, at least.
This money comes directly from Music, Movies, etc.
Music has always had a low priority - its just sound - and it is impossible for the Music Biz to suddenly give it 'added value' - if they coulda, they woulda.
Digitised files, easy sharing with friends, buy only the tracks you like, other things to spend your cash on.
Music is settling to its level, according to the wishes of consumers, and the competition for the consumer dollar.
Music, although I love it, just does NOT have the dollar value that the Music Biz thinks it does.
They have a business that is horribly anachronistic, but they wont accept that.
Too bad. Amazon, Apple, etc are the new music businesses - its only a matter of time before artists will go DIRECT to the digital file providers.
Then the game will be over for EMI, Universal, and the rest.
Eventually high quality sound files, exceeding that of all other files, will be available.
It still wont save a dying business.
When are the Beatles coming out in remastered digital? That is taking forever.
The labels have access to big media outlets to promote their artist but do so inefficiently. They can profit just fine if they stop wasting so many marketing dollars. If my label can profit beginning at 1500 sales, why can't theirs? If I can ramp up marketing spending based on a products performance why can't they? Of course the scale is different but the math is simple. Spend smarter.
recordingindustryvspeo...
The the new model for artists will be: give my recorded music to fans for free and let them support me in other ways (coming to my show, buying my merch, etc.)
The new model for labels will be that of a "digital label" whereby the "label" is used by the musician (that's a change!) to promote its music through the web.
There are, however, still plenty of profit avenues (think ad revenue) in the above model. Some smart people who are not afraid of change will make some serious money in the near future in the music industry.
The the new model for artists will be: give my recorded music to fans for free and let them support me in other ways (coming to my show, buying my merch, etc.)
The new model for labels will be that of a "digital label" whereby the "label" is used by the musician (that's a change!) to promote its music through the web.
There are, however, still plenty of profit avenues (think ad revenue) in the above model. Some smart people who are not afraid of change will make some serious money in the near future in the music industry.
The the new model for artists will be: give my recorded music to fans for free and let them support me in other ways (coming to my show, buying my merch, etc.)
The new model for labels will be that of a "digital label" whereby the "label" is used by the musician (that's a change!) to promote its music through the web.
There are, however, still plenty of profit avenues (think ad revenue) in the above model. Some smart people who are not afraid of change will make some serious money in the near future in the music industry.