The worsening woes of the (recorded) music industry

From the Guardian‘s inestimable Charles Arthur comes a must-read post on the gloomy future of the record industry. Because it’s so good, I’ve re-posted here in full:

Bad news for the music industry. And it comes in threes.

First, Warner Music (which might be thinking of buying EMI from Citigroup?) reported its numbers for the fourth calendar quarter of 2010(which is actually its fiscal first quarter). Oh dear. Total revenue ($789m) down 14% from 2009, down 12% on constant currency basis (ie allowing for exchange rate fluctuation); digital revenue of $187m was 24% of total revenue (yay!), up 2% from last year (oooh), but sequentially down by 5%, or 7% on constant currency.

Operating income before depreciation and amortisation down 20% to $90m, from $112m a year ago. All of which led to a net loss of $18m, compared to a net loss of $17m a year before. In other words, things are still bad there. And it’s still got some heavy gearing: cash is $263m, long-term debt is $1.94bn. Warner might want to buy EMI, but it would put a hell of a strain on it. And the music business isn’t exactly looking like a place where you’d want a bank putting your money.

Second, Fred Wilson, a venture capitalist who spends upwards of $60 per month – and by his estimate around $2,000 annually – on music and music subscriptions was forced to turn pirate in order to get hold of the new Streets album:

“searched the Internet for the record. It was not even listed in iTunes or emusic. It was listed on Amazon US as an import that would be available on Feb 15th, but only in CD form. I’m not buying plastic just to rip the files and throw it out. Seeing as it was an import, I searched Amazon UK. And there I found the record in mp3 form for 4 pounds. It was going to be released on Feb 4th. I made a mental note to come back and get it when it was released. I got around to doing that today. I clicked on “buy with one click” and was greeted with this nonsense “

Which was Amazon saying that because he wasn’t in the UK, he couldn’t buy it. Unable to find a VPN that would let him masquerade as a Briton, he took the next step:

“So reluctantly, I went to a bit torrent search. I found plenty of torrents for the record and quickly had the record in mp3 form. That took less than a minute compared to the 20+ minutes I wasted trying pretty hard to buy the record legally.

“This is fucked up. I want to pay for music. I value the content. But selling it to some people in some countries and not selling it to others is messed up. And selling it in CD only format is messed up. And posting the entire record on the web for streaming without making the content available for purchase is messed up.”

Well, you could argue that an inability to actually wait for the few weeks, perhaps a month, before he could hear the songs via a licensed US label was what’s messed up. Is there no other music in the world that he can hear first? Nobody else? True, it would make sense if contracts were signed so that everything happened at once. But the record industry is still rather like the book industry: because it generates most of its money from physical things, it organises itself around those things.

And finally to Mark Mulligan, music analyst at Forrester Research.Writing on the Midem blog, Mulligan points out that “Digital music is at an impasse” because “it has not achieved any of its three key objectives”, specifically:

1 – to offset the impact of declining CD sales
2 – to generate a format replacement cycle and
3 – to compete effectively with piracy.

Mulligan notes that

“the divergence between emerging consumer behaviour and legitimate music products is widening at an alarming rate. And consumers are voting with their feet: Forrester’s latest consumer data shows digital music activity adoption is flat across ALL activity types compared to 1 year previously (in fact the data shows a slight decline).”

The hope on the part of the music business that the iPod, and the iTunes Store, and then digital music stores of all sorts, would be its saviour has turned out to be false. As Mulligan notes,

“all music activity is niche, except for video. Just 10% of Europeans and 18% of US consumers pay for digital music. Only music video has more than 20% adoption (and only in Europe at that): YouTube is digital music’s killer app.”

(If you are, or know, any young teenagers you”ll know that this is absolutely true. YouTube, and of course in Europe also Spotify. The problem with Spotify being, in the eyes of the record companies, that it simply doesn’t pay them enough. Whereas in Spotify’s eyes the record companies have for too long demanded too much.)

Mulligan adds that the “transition generation” – the 16-24 year-olds – aren’t the future. Instead, the future lies with the 12-15 year olds.

“In fact, when you look closely at the activities where 16-24’s over-index [do more than other age cohorts], you can see that their activity coalesces around recreating analogue behaviours in a digital context. The 16-24’s started out in the analogue era. They are the transition generation with transitional behaviours.

“The 12-15 year olds, though, don’t have analog baggage. All they’ve known is digital. Online video and mobile are their killer apps. These Digital Natives see music as the pervasive soundtrack to their interactive, immersive, social environments. Ownership matters less. Place of origin matters less. But context and experience are everything. The Digital Natives are hugely disruptive, but their disruption needs harnessing.”

So why does this matter, asks Mulligan? Because

“current digital music product strategy is built around the transition generation with transition products to meet their transitional needs and expectations. Neither the 99 cent download and the 9.99 streaming subscription are the future. They are transition products. They were useful for bridging the gap between analogue and digital, to get us on the first step of the digital path, but now it’s time to start the journey in earnest. We’d be naïve to argue that we’re anything close to the end game yet. But the problem is that consumer demand has already outpaced product evolution, again.”

It’s time, he argues, for the music companies to deal with the world as it is, rather than as it used to be or as they liked it. Many in the business will tell you that that is exactly what they are doing; and nothing that Mulligan says in any way detracts from the (real) efforts that are being made by many record executives, who are not as clueless or uninformed as many would like to think. Instead, they’re frequently dealing with institutional and sector-based inertia that’s hard to get moving. Plus if Simon Cowell can discover a singer on a talent show and propel her to the top of the UK and US album charts (the first British act since the Beatles to achieve that), selling millions of CDs, well, is his strategy so wrong and everyone else’s somehow so right? Realities like that give even the most digital executive pause.

Back to Mulligan, who points out that

“the digital natives have only ever known a world with on-demand access based music experiences. …And the experience part is crucial. In a post-content-scarcity world where all content is available, experience is now everything. Experience IS the product. With the contagion of free infecting everything the content itself is no longer king. Experience now has the throne.”

So what’s needed? He thinks future music products need “SPARC” (no, not the Sun processor architecture). Digital music products, he says, must be:
• Social: put the crowd in the cloud
• Participative: make them interactive and immersive
• Accessible: ownership still matters but access matters more
• Relevant: ensure they co-exist and joint the dots in the fragmented digital environment
• Connected: 174m Europeans have two or more connected devices. Music fans are connected and expect their music experiences to be also.

His parting shot: “Music products must harness disruption, that isn’t in question. What is, is whether they do so quickly enough to prevent another massive chunk of the marketplace disappearing for good?”

I think Warner may have answered that already, actually.

My commentary: after reading this, if you were a music industry executive you’d probably want to slash your wrists. But things may be both worse and better than it seems  for the big music publishers. Here’s why.

Firstly, experience can be excluded, branded and sold. The predominant form of musical experience today is not the download but the live music festival or concert. Large multinationals are already aggressively into this space (think LiveNation) and we should expect this to continue. Secondly, experience can be a good as well as a service: that is, really well produced and packaged vinyl can be an experience (although only a niche experience – but then again, all music is niche now anyway). Finally, certain aspects of the music market are not being disrupted in the same way as downloadable songs – for instance, royalty streams where the end customer is large enough to warrant legal pursuit by collection agencies.

On the other hand, in some ways, things really are as bad if not worse than the Forrester report suggests. Free music is not going away, and today’s teenagers really don’t expect to pay for it. That battle is over. So the future for recorded music may really be truly non-excludable and free. That’s a challenge that no-one in the industry seems willing to face up to, even those advocating streaming or subscription models. Finally, the recent history of the music industry suggests that music publishing executives – indeed, musicians themselves – struggle to understand the new paradigm, even twelve years after Napster.

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The long-tail of publishing

The following post first appeared on the website of The Wheeler Centre for Books, Writing and Ideas, on October 4th 2010.

When was the last time you bought a CD?

If you’re like most young Australians, the answer is: a while ago. The advent of digital file sharing technologies has completely transformed the music publishing business. Since Napster was invented in 1999, CD sales have plungedmajor record labels are struggling – butconcert and festival attendances have boomed.

Now it’s the publishing industry’s turn to feel the destructive gale of technological change. A recent article in the Wall Street Journal is only the latest of many to chronicle the declining fortunes of traditional book publishers, particularly in fields like literary fiction:

From an e-book sale, an author makes a little more than half what he or she makes from a hardcover sale. The lower revenue from e-books comes amidst a decline in book sales that was already under way. The seemingly endless entertainment choices created by the Web have eaten into the time people spend reading books.

 

Publishers and authors face declining revenues and profits in the digital world. Source: LJK Literary Agents, Wall Street Journal

 

The sea-change in the publishing industry illustrates the new economics of digital distribution. It’s a phenomenon dubbed “the long tail” by Wired editor Chris Anderson. (Anderson borrowed the term from technology economist Erik Brynjolfsson).

The long tail is illustrated in the image below. The “tail” is simply the long rightwards sloping end of the curve. Inside the long tail are all the unpopular and obscure titles that never used to get published – but that can none-the-less sell in small numbers online. Aggregated together by a business model such as Amazon’s, this vast global back-catalogue can add up to real profits. In a nutshell: falling costs of publishing and distribution have allowed an avalanche of content to find new audiences. They are small audiences, but they are real.

 

MIT economist Erik Brynjolfsson analysed sales data from Amazon and found that 30-40% of Amazon book sales are titles that wouldn’t normally be found in bricks-and-mortar stores. Source: Erik Brynjolfsson, Jeffrey Hu and Michael Smith (2006) “From Niches to Riches: Anatomy of the Long Tail.”

 

What this means for writers is beginning to emerge. The long tail contains nearly everything that isn’t a commercially-viable proposition: in other words, most writers, bloggers and poets. But these new technologies can also help once-obscure writers and bloggers to connect directly to audiences, and even allow them to make a modest but sustainable living from their craft. As technology writer Kevin Kelly has observed, artists and writers may only need “1000 true fans” to build a career, and cheap and easy access to blogging engines globally makes this easier than ever before.

The ability of technology to put publishing in the hands of writers won’t create many superstars, but we’re already seeing its potential to allow amateurs to reach meaningful readerships and journalists, academics and other literary professionals to add second strings to their bows. Increasingly, writers are making money the way musicians are: bymonetising their speeches, presentations and merchandise. Theinter-connectedness of blogs, which rely on many reciprocal links between a community of interest in a particular niche, help this process.

Bottom-line: the long tail economics of blogging might be unsettling for writers and publishers used to the old models, but it’s a trend that’s here to stay.

Illegal downloading in Australia

A snapshot of illegal downloading in Australia. Source: CoreData/news.com.au

CoreData and news.com.au have teamed up to survey more than 7,000 Australian consumers about their illegal downloading habits.

While we don’t know the full methodology, the survey is one of the largest and certainly the most current snapshot of consumer behaviour in this field.

And, for those of us who have been following the technology-related troubles of the cultural industries since Shawn Fanning invented Napster, the results should not surprise:

Most people who illegally download movies, music and TV shows would pay for them if there was a cheap and legal service as convenient as file-sharing tools like BitTorrent.

[…]

The survey canvassed the attitudes of more than 7000 people who admitted to streaming or downloading media from illegitimate sources in the past 12 months.

It found accessibility was as much or more of a motivator than money for those who illegally download media using services like BitTorrent.

More respondents said they turned to illegal downloads because they were convenient than because they were free, when it came to all three types of media covered by the survey — TV shows, movies and music.

And more than two-thirds said they would pay for downloads from a legitimate service that was just as convenient if it existed.

The hypothetical legitimate service was described as giving users access to TV shows, movies and music they wanted, when they wanted them, without ads or copy protection.

This survey is more evidence, if any more were needed, that the key barrier to a paid content future remains industrial competition and the strategic errors of big cultural businesses, rather than the rampant illegality of ordinary consumers.

Of course, some will protest that consumers are simply lying in such a survey.  But a more convincing explanation is that the cultural industries are yet to give consumers exactly what they want, and that this explains the slow uptake in digital content payments. It’s also another example of the problem of rivalry and excludability in the content industries: compare the prices Australian consumers say they are prepared to pay for downloaded movies (approximately $2 dollars) to the average admission price of a cinema ticket here (as high has $17 for a first-release movie). You don’t need an MBA to see the revenue gap there.

Can studios and record labels make money on prices like these? Of course they can, especially if new business models are created. But that’s not what Big Content will tell you. They’ll use data like this to lobby for more stringent industry protections, in the form of draconian copyright legislation and other anti-competitive regulations.

The philosopher in the business school

Alladi Venkatesh. Source: Paul Merage School of Business.

One of the supplest minds I’ve yet encountered in my cultural research is Alladi Venkatesh (not to be confused with his more famous name-sake, the sociologist Sudhir Alladi Venkatesh, author of the justly celebrated Gang Leader for a Day). Venkatesh’s research ranges across many of the fields I blog about here, including cultural economics, cultural studies, aesthetics and even semiotics. His breadth of reading is constantly surprising, typically bringing insights from many different academic traditions to bear on the questions he researches.

And yet he’s not a philosopher or cultural sociologist. He’s a Professor of Marketing at the Paul Merage School of Business at the University of California, Irvine. He’s also Associate Director of CRITO – the Center for Research on Information Technology in Organizations – and the principal investigator of Project Noah. As his bio records, his research focus is on the impact of new media and information technologies on consumers/households. But that doesn’;’t begin to scratch the surface of his work, which pokes its nose into all sorts of fascinating areas.

Today we’re going to take a look at one of Venkatesh’s recent publications in the journal Marketing Theory. Entitled “Arts and aesthetics: Marketing and cultural production”, and co-authored with Laurie Meamber, it’s nothing less than a wide-ranging review of the literature in many of the fields we cover in this blog – all from the perspective of marketing.

As the paper’s introduction explains,

The purpose of this article is to discuss the notion of cultural production within the context of marketing. The position taken is that aesthetic meanings associated with cultural practices are related to the way in which individuals and organizations negotiate commerce and consumer culture. The main contribution of the research is to enlarge our understanding of the cultural production processes as they pertain to marketing and consumption of aesthetics. In this context, we also examine how emerging developments in postmodern aesthetics and posthumanism have augmented new ways of thinking about related issues.

The broad research question underlying the article is: Is it possible to view marketing as providing both a context and an institutional framework for the cultural production system in the contemporary postmodern world? If so, what does it entail in terms of our conceptualization of the elements of the cultural production system and their specific relationship to the institution of marketing?
Specifically, the following research questions will be addressed:
1. What is cultural production and who are the actors involved in it?
2. What are the current approaches within the field of marketing for the study of the cultural production system?
3. What are the significant developments in the area of cultural production that marketing should be concerned with in considering cultural products?
4. What is the role of aesthetics in the cultural production processes?
5. How do the new epistemologies based on postmodernism and posthumanism influence the cultural production processes?
6. What, finally, are the implications of the cultural production processes for individuals, organizations, and consumer culture?
The paper lives up to all of these aims, and in the process delivers a tour-de-force introduction to this fascinating intersection of fields. Recommended.

Is this what the new business model for popular music looks like?

The New York Times today documents the green shoots of a new model of music business, spurred by the Polyphonic not-label.

It’s not really a new model at all; instead simply a sensible combination of existing ways to make money.

Under the Polyphonic model, bands that receive investments from the firm will operate like start-up companies, recording their own music and choosing outside contractors to handle their publicity, merchandise and touring.

Instead of receiving an advance and then possibly reaping royalties later if they have a hit, musicians will share in all the profits from their music and touring. In another departure from tradition in the music business, they will also maintain ownership of their own copyrights and master recordings — meaning they and their heirs can keep earning money from their music.

“We are all witnessing major labels starting to shed artists that are hitting only 80,000 or 100,000 unit sales,” said Adam Driscoll, another Polyphonic founder and chief executive of the British media company MAMA Group. “Do a quick calculation on those sales, with an artist who can tour in multiple cities, and that is a good business. You can take that as a foundation and build on it.”

Exactly. Music business academics have long predicted the death of major music labels, because artists can no reach consumers directly through the internet. And, course, artists are. But that hasn’t meant the immediate detah of the label concept, in part because labels were in many cases merely investment holding companies anyway, and in part because labels still employ and/or contract to a pool of expertise about music marketing, distribution and concert promotion – as the artricle itself admits:

Even the major labels themselves are demonstrating new flexibility for musicians who do not want to sign the immersive partnerships known as 360 deals, in which the label manages and profits from every part of the artist’s business.

In late November, for example, EMI took the unusual step of creating a music services division to provide an array of services — like touring and merchandise support — to musicians who were not signed to the label.

The Polyphony model, therefore, is a sensible way of re-organising music industry capital that takes advantages of the diversified risks of a large artist portfolio, but can still capitalise on the hits and modest successes.  It’s still going to require a lot of clever hit curation. But if Polyphony can’t do that, it shouldn’t be attempting this model.

How do US college students find out about new music in the digital age?

From Crooked Timber‘s Eszter Hargittai and Steven Tepper from Princeton’s Centre for Arts and Cultural Policy Studies comes a fascinating paper in Poetics: “Pathways to music exploration in a digital age” (Poetics 37 (2009): 227–249).

This paper is several things in one: a lively introduction to the literature on this topic (particularly the sociology of taste), a presentation of novel data, and a stylishly-written discussion of an important topic which contains many minor gems (my favourite was the description of The Wire magazine as “an expensive British magazine for eclectic rock aficionados.”

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Malcolm Gladwell reviews Chris Anderson’s Free

This blog tends to delve into the academic literature of cultural policy a fair bit, so it’s occassionally useful to zoom out and look at the big picture issues that are shaping our culture and lives.

Chris Anderson’s Long Tail theory continues to be one of the most influential descriptions of these issues and tredns, while Malcolm Gladwell continues to be one of the greatest communicators in non-fiction in any genre today. So Gladwell reviewing Anderson is something of a tech-trend-big issue detah match:

“Free” is essentially an extended elaboration of Stewart Brand’s famous declaration that “information wants to be free.” The digital age, Anderson argues, is exerting an inexorable downward pressure on the prices of all things “made of ideas.” Anderson does not consider this a passing trend. Rather, he seems to think of it as an iron law: “In the digital realm you can try to keep Free at bay with laws and locks, but eventually the force of economic gravity will win.” To musicians who believe that their music is being pirated, Anderson is blunt. They should stop complaining, and capitalize on the added exposure that piracy provides by making money through touring, merchandise sales, and “yes, the sale of some of [their] music to people who still want CDs or prefer to buy their music online.” To the Dallas Morning News, he would say the same thing. Newspapers need to accept that content is never again going to be worth what they want it to be worth, and reinvent their business. “Out of the bloodbath will come a new role for professional journalists,” he predicts.

You can read the rest of the review at The New Yorker.