Digital Marketplace Rockin’ the Music Industry

April 24, 2015

In a recent interview in Esquire magazine, KISS front man and all-around-entrepreneurial rocker Gene Simmons declared in his typical blunt and direct style that “rock is finally dead.” The “murderer” in his mind was  the advent of free or near-free music steaming. Rather than aspiring bands piling into a beat up van to hone their craft and build up a fan base by touring the country to dive bars like they did in years before, all a band has to do today is upload of a song with enough “viral” quality to it to get noticed. In the KISS Demon’s mind, this is the easy street for those less talented and without the chops to really make it in the industry. But is the Internet really to blame?

There is no doubt that the Internet has been a canvas for innovation, competition and severe disruption for many industries. The news and publishing industry has famously suffered under the weight of free and easily accessible information. Storied print magazines and legendary newspapers have ceased operations, taking a lot of journalists’ careers with them along the way. Likewise in the music industry, the old rules no longer apply. Instead of carting around racks of vinyl LPs, cassettes or CDs, entire music libraries are now portable in your pocket, along with your phone, e-mail and camera.  Fans want music streamed to their mobile devices fast and free, and in many cases, they can find it.

Thus, the question for the music industry is how to reconcile the need to generate revenue with fan bases that do not want to pay for recorded albums.

Studio-recorded albums are not on the way out, but their format is. Today, revenue streams break fairly evenly across three types of delivery: downloads net 37% of revenue; physicalsales, 32%; and streaming, 27%. Physical and download sales have been falling and streaming revenue rising. This is the predictable evolution of media formats; in just a few decades, music formats have moved from vinyl to 8-track to tape to CD, and each evolution stamped out its predecessor. Today, the writing is on the wall. In 2014, the U.S. music industry brought in $1.85 billion on CD sales but brought in $1.87 billion on streaming, the first time streaming revenue has exceeded CD revenue, according to the Recording Industry Association of America. Think about it. When was the last time you actually went into a store and bought an album?  For that matter, when was the last time you remember going into a music store?  I bet that timeframe is even longer!

The truth is the next evolution of music delivery is streaming and the land of ABBA is a good place to see how it is happening. 

Spotify, a Swedish company, is what the future looks like: streaming subscriptions. To be sure, this media type is devastating CD sales. In 2014, revenue from CD sales dropped 33.8% in Sweden, and streaming revenue did not make up for the drop in sales. Yet, the transition is unrelenting, as the streaming format grew as a share of the total market from 71% to 80%, revenues rising 10.8% in 2014. There is simply no question that CDs are on the way out. In the competitive landscape of any industry, businesses must embrace change or be left behind.

Leaders in the streaming game include Spotify, Pandora and Rhapsody. Focused on growing a subscriber base, these companies are competing on the margins of profitability, offering free service in a bid to exemplify their product and convert free users into subscribers. This kind of competition in the digital landscape has major ramifications for the shape and strategy of the music industry, and in the flux of change, music labels and other businesses in the music field must adapt.

 

Resisting the Inevitable

The United States is the world’s largest music market. Last year, the worldwide industry netted $7 billion from American consumers, dramatically less from the peak earnings in 1999 at $20.6 billion (inflation adjusted). By every measure, the music industry is earning less. Now artists and the legions of music industry folks behind them are striving to find a way to boost that revenue. Pop and country music star  Taylor Swift acknowledged the changing nature of the music industry in a Wall Street Journal op-ed, noting that artists today will land record deals because they have fans, rather than building a fan base after a deal. She offered a warm-and-fuzzy sentiment while simultaneously pulling her music from Spotify because she didn’t think they were paying enough for her work or those who aided her in its production.

Now before anyone thinks that these are hard times for Taylor Swift, they aren’t. Swift’s net worth is about $200 million. Joining her in her criticisms of the music industry’s business practices is Jay-Z, who has also been vocal about the need for artists to earn more and have greater control over how their music is distributed.  He’s not under any financial duress either, given he’s  worth about $650 million. These and other artists’ complaints about the state of music revenue may seem to ring a bit hollow; however, this is an industry-wide discussion. An artist collects only a portion of music sales. The rest is needed to fund the infrastructure (human and physical) that makes that music possible. The audio technicians who fine tune levels, the marketing teams that promote it, the night janitor who cleans the studio—there are thousands of professions impacted by the dramatic disruption of digital data and music streaming.  

In the U.S. and global market, what music giants are doing is attempting shape how the industry is changing, which is a perilous road to walk. The titanic forces of the free market are not easily swayed, the power resting largely with the consumer. Stomping one’s feet in a tantrum of “I should be paid more” is not going to change anything, in part because the very business model that artists and labels say isn’t yielding enough value is actually succeeding, despite pressure from the hesitant-to-adapt music industry.

About 30% of Spotify’s 50 million regular users are subscribers, and 80% of those began as free users. Pandora boasts fewer than 2% paid subscribers but that number too is increasing. Of course, Pandora is challenged with royalty rates for subscription listening jumping 53% in five years. In the plainest terms, subscription costs rise because artists and labels keep demanding more money. Merlin CEO Charles Caldas said, “‘Free bad, paid good’ is an incredibly blunt and stupid way to look at this."

Stupid or not, music powerhouses are demanding more. Universal Music Group (which produces pop leaders like Katy Perry, Rihanna and the regrettable Justin Bieber) is putting pressure on Spotify to drop its free service, as it argues that the company is not sufficiently converting users to subscribers. Universal has leverage, as it is commencing negotiations with Spotify to renew access to its recordings. Currently, Spotify pays at most a meager $0.0084 per play, and after the music label takes its portion, the artists themselves only earn $0.001128 per play. With increased subscriptions, this amount could rise, making up for lost sales amidst the steady death of the compact disk. Yet, subscriptions inevitably rise when the established music industry keeps arm-twisting for larger royalties. This challenges the profitability of innovative music platforms, potentially slowing their growth.

Of course, true to form, legislators are trying to meddle with the forces of capitalism, which they seldom fully understand. A new bill being considered, the “Play Fair Pay Fair” act sponsored by Rep. Jerrold Nadler (D- New York), would force radio stations to pay royalties to artists. Radio stations, which like their musical counterparts are having their own financial challenges, already pay songwriter royalties. The problem with this legislative approach is that even as Americans continue to listen to the radio, it is not necessarily for the music. Slacker, the Internet radio mobile application, says listeners want talk radio, not music.  Recently the National Association of Broadcasters told Congress:

"It is disappointing that this bill retreads years-old policy positions rather than advancing the copyright dialogue through policies that help grow the entire music ecosystem…NAB stands ready to work with Congress on a balanced music-licensing proposal that promotes innovation and recognizes the benefit of our free locally focused platform to the benefit of artists and listeners."

Well said. Bills like “Play Fair Pay Fair” are ultimately not going to make a difference in the massive disruption occurring in the music industry. The only path forward is adaptation and competition. The old structures are falling, giving way to an uncertain landscape.

For fans of the free market, it is an exciting time. Who will win out? And will it be enough to resurrect Gene Simmons’ beloved murdered rock and other genres?

 

Accelerating the Disruption

Earlier this month, I traveled to Nashville, TN for an event on how data-driven innovation is impacting business in the “Music City.” The event, hosted by the U.S. Chamber of Commerce Foundation, in conjunction with the U.S. Chamber’s Center for Advanced Technology and Innovation and the Williamson County Chamber of Commerce, featured local leaders in healthcare, entrepreneurship, financial services, nonprofit engagement and the music industry, discussing their role in the hyper-competitive, hugely innovative data-driven economy.

As seen everywhere around the country (and the world), the enormous volume of data generated every day is impacting every industry. IBM’s Watson system is already changing the healthcare industry, supporting how medical professionals assess ailments and determine care. Predictive analytics are giving weather forecasters and first responders the ability to anticipate and prepare for severe weather. The music industry is no different.

One of the groups represented at the event was Project Music Nashville, the first technology accelerator for the music industry. A product of the Nashville Entrepreneur Center (in partnership with the Country Music Association), the accelerator offers a 14-week boot camp and mentorship program with $30,000 in seed funding for the participating new businesses and entrepreneurs. There are eight companies taking part in the newly formed accelerator, funded and mentored by nine investment partners. Among these innovators and entrepreneurs are: DART, an online distribution platform for classical music, empowering new artists; Jammber, a collaboration platform and digital record label; and On The List, a company providing perks tied to event experiences.

Imagine this… a business model where concertgoers can download a copy of an album, or even the performance that they just saw, so that they  can listen to the event artist on their drive home from the event.

Innovative ideas like these create new, competitive revenue streams for the music industry. On April 23, the Project Music teams will present their ideas to investors in hopes of securing funding for their businesses.

This is the kind of free-thinking, exploratory entrepreneurship that will allow new artists and companies to compete in the fast-changing music industry. Big labels striving to squeeze every last dime out of new media formats and delivery platforms are looking to the past, trying to shape the commercial landscape to their preference. That’s not how the free market works. The most competitive and successful businesses are those that cater to their customers, which is precisely what Project Music Nashville and groups like it are striving to do.

While Gene Simmons and other veteran rockers may be wistful for the days where artists piled into a beaten up  van to play dive bars in hopes of selling a few copies of their latest release along with a couple of T-shirts (while grabbing some groupies’ phone numbers), the music industry is still alive and well. It’s just not what it used to be and probably won’t be ever again.    

But no industry or art form is ever the same after new technology and new means of distribution are introduced to it. That is especially true in the era of data-driven innovation.  New digital tools and information and the enormous power of data have created an era where barriers to entry for artists of superior (as well as inferior) talent are extraordinarily low. Anyone with a good idea and (depending on your musical taste) decent tune is just a YouTube video away from fame and fortune.

While an artist’s and label’s control of music and brand may have diminished, and they cannot earn in the same way they used to, their reach, connection,  immediacy and impact has never been faster or stronger.  That’s the peril and promise of the private sector and it rarely, if ever, takes prisoners.