The Music Industry in 2011

More than ten years have passed since the debut of Napster shook the record industry. The file-sharing software gave music listeners access to an immense diversity of music for free, causing a shift in industry power from record labels to consumers. The popularity of MP3 files increased even more with the success of the iPod. Even before Napster, recorded music sales were dropping year after year, due to discounts that labels were given to wholesale prices globally. Those numbers dropped even further when the demand shifted to the free content available on the Net. After the panic, artists and the music industry started to understand the opportunities that the Internet was offering, and started to migrate to new models of marketing and distribution through the online world. Still, adaptations are a necessity in the legal system to guarantee the functioning of the creative process. The fight against piracy continues but hopefully a new business model that takes advantage of the “feels like free” system will drive people to a legal form of consumption that not only will attend the demand for lower prices, but will help elevate the value of music back to a sustainable level.

In 2003, with the intention to provide legal content for their successful iPod, Apple developed the iTunes Store. The iPod had become the worldwide standard media player but the lack of legal content was the main issue that the company had to face. After forming agreements with all the major record labels, the digital retailer store was a booming success and is now responsible for more than 70% of the digital sales and the biggest retailer store in the overall music market, accounting for 25% of the market share, accordingly to IFPI (International Federation of the Phonographic Industry).

Before the online-based sales of music products, in order to get access to one specific song the listener had to buy an entire album. That meant that to buy one song, one had to pay for the ten (or more) other songs that came with it. One of the major changes that happened with the iTunes Store was the commercialization of single tracks- making it cheaper for listeners to buy their favorite songs. The number of units sold increased significantly but the sales performance of the recorded music products dropped radically.

When the iTunes Store first opened, prices were fixed at $0.99 for a single-track and $9.99 for an album. Being the most prominent store in the online environment, major record labels started pressuring them to reconsider this pricing structure; maybe not every song was worth the same to costumers. The concept behind the argument is the price elasticity of demand. To maximize revenues the labels defended that hit songs could be sold at higher prices without loosing significant demand and deep catalog songs had to be sold at lower prices, driving interest for more people to buy them. In 2009 Apple accepted the claim and introduced a three-tier system, with variable prices of songs at $0.69, $0.99 and $1.29. The labels could raise revenues, and the system could help redirect interest to album sales, as they became cheaper. Higher quality files, bundled with bonus features such as animated lyrics, artist photos and liner notes were part of other new ideas to help boost album sales. The iTunes LP was a line of albums that offered these premium contents to fewer people at higher prices, in effect aggregating the old visual experience of the physical album into a download.

Apple’s agreement with major labels stated that 33% of the income is kept by the iTunes Store, similar to traditional values of physical distribution. The remaining 67% goes to the labels that split it with artists as traditional CD sales. When all is said and done, the artist usually ends up with around 10% of the price of a download. Labels get away with this by wording contract agreements to consider such downloads as sales of song copies and applied traditional accounting schemes. Now there is a current of thought that argues that iTunes Store downloads are licenses and not distribution of products. In fact, recent court decisions are adopting the argument of licenses, applying a 50/50 split between labels and artists, which is devastating for the former but great for the latter.

Free Music and the Record Labels
Even with digital channels being responsible for more than one quarter of the overall music sales in the world, the fight against piracy and illegal file sharing is still running. Accordingly to BMR – the UK’s umbrella organization representing the industry of the British music industry, just 37% of listeners download music legally. The majority is still taking advantage of illegal file sharing, and the difference for the digital market of less developed countries could be even bigger. As expected, in their study, BMR also identified that the main reason for downloading music illegally is that it is free and it saves money.

Digital retail stores are competing with free content spread on the web. To prevail in this new scenario, legal business models have to take advantages of gratis opportunities and not just look at its downside. For some futurists, it is important to give away control of their works in exchange for attention, thus affording them an expanded consumer audience. Just like word-of-mouth, file sharing could be viewed as a marketing tool for people to discover new music; if they like what they hear, they will seek more and different product by that artist.

With very few marginal costs in online distribution, it is easy to give away songs for free in an effort to reach a small segment that is willing to pay for premium content. This is the idea that inspired business models like Topspin. The company provides a structure with powerful marketing and selling tools with which the artists can develop a profitable relationship directly with the fans after giving away a couple of songs for free.

With the decreasing power of record labels, artists will start to organize themselves as small businesses, benefitting from the social media networking tools that allow a direct and two-way relationship between artists and fans. Inspired by that direct relationship, companies like Artist Share are now offering artists the opportunity to raise money for projects through fan funding. The idea is to build a sustainable environment that remunerates artists in their creative process. With this model, fans can contribute with all sorts of monetary values in exchange for access to the artist’s creative process—at audio sessions for album credits, in the production of videos, sheet music, and other. It is a sustainable system that affirms that the true value of music lies on the artist’s creativity.

In past years, artists got similar type of investment through record label advances. The old model was based in a recoupment system that often made it very difficult for artists to start generating revenues from the sale of their products. In the fan-funding model, 85% of all generated income goes directly to the artist. Maria Schneider – one of the most important contemporary jazz composers – won a Grammy for best large jazz ensemble album with a fan funding based project via the Artist Share website.

Monetizing the Cloud
Probably the most important growth trend of the music industry is streaming. The model is based on acquiring access to a large database of songs that can be played directly into users devices without file transferring. Free subscriptions are sustained by advertisements, while paid subscriptions allow users access to improved content such as higher quality audio files, expanded database, mobile capacity and offline usage, all commercial free.
Non-interactive streaming offers pre-made playlists that are configured to try match listener’s interests and tastes. It is a passive service that is authorized by blanket licenses for the use of the compositions from performance rights organizations (ASCAP, BMI, etc.) and a compulsory license for the use of sound recording issued by Sound Exchange. To keep the service legal, there are certain restrictions that companies like Pandora have to follow in order to avoid interactive streaming.

Allowing users to manage the database, choose songs and create playlists to share with friends requires a totally different form of licensing. In addition to the blanket licenses issued by PRO’s for the use of compositions, interactive streaming requires mechanical licenses and a license for the digital performance of the sound recording negotiated with each appropriate rights owner. These requirements make interactive streaming much more expensive to the service providers and it can be impractical to license all the content. In Europe, the Spotify model has been experiencing high levels of success. The company made an agreement with a Swedish Internet Service Provider that allowed the user to pay the premium subscription on their broadband bill. Recently they declared that two thirds of their income was used to pay licensing agreements and other rights to keep the service legal. Currently, Spotify is trying to arrange license agreements in order to make the service available in the US. With the company planning global expansion, they are aiming to turn illegal file-shares into users of their services.

Phones, Concerts, and Rights’ Collections
Expanding the opportunities for the music industry even further, mobile phones are becoming the easiest interface between users and the online world. These small portable devices are consistently getting cheaper and reaching all different social classes. Ringtones and ringbacks are helping artists to develop their marketing strategies as well as making revenue. A recent study made by Myxer -a broadband service provider- pointed out that almost three quarters of mobile phone users listen to music on their phone, via MP3, streaming or through the use of apps.

Despite this, Nokia recently shut down its unlimited download service, Ovi Music Unlimited (formerly “Comes With Music”) in more than thirty countries, leaving it available only in China, India, Brazil and South Africa. However, they are still exploring the Ovi brand, with applications and music stores as well as other services. Nokia also just announced a strategic alliance with Microsoft, in order to develop a new mobile ecosystem. Vodafone, the largest mobile phone telecommunications company of the world also has a music service called 360 Music, offering unlimited downloads for subscribers.

There’s no denying that the changes brought with the digital era have had a negative effect on record sales, but fortunately, the live music sector is still in constant growth. Concert ticket sales almost tripled in value in the last ten years and that only accounts for the public sector. Private sector events like weddings and corporate banquets make up a much more substantial industry and have been experiencing similar rates of growth. Consolidating both of these values would make the real figure for live music much bigger than it is being reported. Live music in the past was used as a marketing tool to sell recorded music, now it is becoming a vital source of income for artists. The live experience is enhanced with sophisticated venues and breath-taking productions that are driving price increases of tickets and also encouraging people spend more money in merchandising.

Digital advances are providing a better structure for the publishing sector of the music business as well. Sophisticated mechanisms of tracking song performances bring more evenly distributed royalties as well as increased revenue from collection. Issuing mechanical licenses is getting easier with new services RightsFlow, which handles all procedures involved with license acquisition online. Before the development of these tools, the process to obtain a license was very difficult and many times, independent artists didn’t get licenses because they didn’t know how.

Moving Forward

It is evident that the digital era has brought new forms of business to the music industry. New models will most likely survive best on the mantra that music is everywhere and that it should be free (or at least feel like it). The industry may be in somewhat of a slump, but value at the consumer level is increasing quicker than ever- in essence rebuilding a foundation for the business for the sake of sustainability and longevity. Never before have people had the unlimited access to music that they do now. Direct relationships with artists and fans will create a more democratic environment, as more artists will have opportunity to reach their listeners.

By Luiz Augusto Buff

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