Digital Music: Down to the Crossroads

According to Yankee Group, “Ever since Shawn Fanning released the original Napster in June 1999, consumers have had a love affair with free, unrestricted music. On the other hand, record labels, artists and publishers expect to—and should—be paid for their efforts. This put the music industry and consumers on a collision course, resulting in lawsuits, restrictive formats, hard feelings and declining music sales.” The report goes on to state the extent of the decline, “According to the Recording Industry Association of America (RIAA), sales of physical recordings were down 15 percent in the United States in the first half of 2006, declining from $4.78 billion in the first half of 2005 to $4.06 billion in the first half of 2006. Yankee Group estimates that when the final results are tallied, sales of physical recordings in 2006 will fall 13 percent to $9.80 billion.” More recent research from eMarketer paints a similar picture. “The worldwide market for recorded music, live music and music publishing will reach $67.6 billion by 2011, growing at an average annual rate of 2.19 percent from the 2006 total of $60.7 billion . . . Sales of CDs, which currently account for 55 percent of the industry’s total revenues, will continue to decline sharply, falling to 29 percent of the overall business by 2011.” eMarketer suggests that if the music industry capitalizes on new revenue streams, including proper management of digital media, it can continue to be successful. This apparently is not the industry view.

Jim DeRogatis, writing for the Chicago Sun-Times, says, “As relentless, multi-faceted and scare-mongering as the War on Terror, the music industry’s War on Technology rages on, and the latest battlefield is Internet radio.” Though the spotlight is most often cast on music downloads, Internet broadcasting is a big business. BusinessWeek points out, “As much as 19 percent of U.S. consumers 12 and older listen to Web-based radio stations, according to a survey of 3,000 Americans released by consultancy Bridge Ratings & Research on Feb. 21. That’s up from 15 percent a year ago and indicates some 57 million weekly listeners of Internet radio programs.” Putting that in perspective, “More people listen to online radio than to satellite radio, high-definition radio, podcasts, or cell-phone-based radio combined.” The recording industry wants a bigger piece of this action; and an effort to get it they are seeking to change the way royalties are determined. Currently fees paid by Internet broadcasters for the right to present music are calculated as a percentage of the operators revenue, the industry wants to see this changed to a per song, per listener basis. Such a change, operators insist, could put them out of business. Of course there are those that disagree.

John Simson, executive director of SoundExchange, which collects and distributes royalties on behalf of the recording industry, wrote in BusinessWeek that large corporate Webcasters and their lobbyists are, “hiding behind a coalition that portrays itself as being a grassroots movement made up of small, independent Webcasters, when in fact large corporate Webcasters funded the coalition and are calling the shots.” He writes further that the last time royalties were negotiated, in 2002, “we had the same exact response: that this is terrible, it’s going to put everybody out of business . . . But the industry grew.” Indeed, revenue from online streaming music radio has risen to $500 million from $49 million in 2003. That is a lot of growth, but not enough to satisfactorily fill the coffers of the industry; the same can be said of digital downloads.

Though eMarketer suggests that, “Worldwide revenues [of Online Music] in 2011 will reach $7.5 billion, up from $1.9 billion in 2006,” the industry, very aware of the amount of illegal file sharing, is still attempting to generate more income from this arena. Frequently the method used to staunch the flow of illegal sharing is Digital Rights Management (DRM) which restricts the number of playbacks or devices on which a song can be played. Many consumers complain about DRM, but Michael Nash, Warner’s senior vice president of digital strategy and business development, quoted here from Forbes defends it, “No intellectual property business is going to cross the digital divide without figuring out how to protect its content and to ensure that transactions are associated with the acquisition of content . . . The music industry simply has to solve the content security problem or risk the obsolescence of its business model.” Thomas Hesse, president of global digital business and U.S. sales for Sony BMG, agrees with Nash, “We don’t want the whole world to be a college dorm. Because that’s what a no-DRM world looks like–it’s a world in which all product can just be cloned without limitation.” Yankee Group disagrees with that assessment, “So why use DRM? Industry executives will tell you they need DRM to protect their precious content. Is this true? In reality, DRM does little to protect content.” While Sony BMG and Warner Music show little sign of budging, some in the industry are beginning to question the value of DRM as well.

Amanda Marks, Universal Music Group’s executive vice president and general manager of digital distribution, referring to her company’s dropping DRM protections said, “if further tests prove that this provides us with a net positive sales result, by which I mean sales increase more than piracy, then we will try to work out a reasonable solution.” Fully on the other side of the fence from Sony BMG and Warner Music is EMI which will be selling its catalog unrestricted by DRM via both iTunes and Amazon.com. Wall Street seemed to think this a good idea, according to a report from the Xinhua News Network, “Shares of Amazon.com hit a seven-year high on Monday, after a Citigroup analyst hiked his price target following Internet retailer’s announcement it would offer online music without copy-protection technology.”

The digital music is at a crossroads, and according to Yankee Group, “To grow its revenue, the music industry must push the envelope and embrace more radical solutions.” Just as those who it is now fighting to control have already done.

A more complete version of this post, including links to market research, can be found at the website of Analyst Views Weekly.

More information on this topic can be found in the Electronic Content & Media section of the Internet & Information Systems Market Intelligence Center.

And in the following articles:

Amazon Faces the Music
Forbes, May 17, 2007
Does Amazon’s plan to sell music downloads provide some added momentum to the music industry’s transition to the sale of restriction-free music downloads? Yes. Will it provide some badly needed competition in a market dominated by Apple’s iTunes Store? Yes. But will Amazon, the undisputed champ of online retailing, swoop in and save the day for downtrodden record companies? Not a chance, at least not based on what we know so far.

Music Radio on the Internet Faces Thorny Royalty Issues
New York Times, May 14, 2007
Currently, Webcasters pay a percentage of revenue in performance royalties for music streamed to the United States to an industry-backed association called SoundExchange, which collects and distributes the money. But the Copyright Royalty Board has set new rates effective July 15 that change the structure so that Webcasters are charged each time a user listens to a song.

The Internet Radio Royalty Follies
BusinessWeek Online, May 11, 2007
Newly proposed bills that would rescind a decision to increase fees paid for recordings would benefit big Webcasters at the expense of artists and labels. The issue? Fair and reasonable royalty rates to compensate performers and record labels when their music is played via Webcasting (also referred to as Internet radio) and on satellite radio and cable audio music channels.

Old Media Turns Combative against New Media
Reuters, May 8, 2007
Leading media executives took a combative tone against Internet companies on Tuesday, suggesting that Big Media increasingly considers new content distributors like Google Inc. to be more foe than friend.

Yar! Why Web Pirates Can’t Be Touched
Forbes, May 7, 2007
Pirates don’t just plunder. In Sweden, it seems, they also believe in sharing. As the world’s largest repository of BitTorrent files, ThePirateBay.org helps millions of users around the world share copyrighted movies, music and other files–without paying for them.

A Fee per Song Can Ruin Us, Internet Radio Companies Say
New York Times, March 19, 2007
New-media companies and record labels are feuding again. But this time, it is the digital companies that warn they may be driven out of business. Several Internet radio companies are arguing that a recent decision by the Copyright Royalty Board, a three-member panel under the Library of Congress, would make it almost impossible for them to stay afloat.

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