Decline, Yes; Demise, No
We are 10-plus years into the digital music age, and recorded music revenue has continued its decline. The illegal downloading of music prospers seemingly unabated. Licensed digital music services have taken hold with listeners but have not picked up the slack in lost sales. For traditional record labels, this is a challenging and cathartic time; but for music fans, it is also an age of great abundance.
Recorded Music Sales Still Declining
Compared with 2009, 2010 total music sales slid, and albums took the largest hit. According to “The Nielson Company & Billboard’s 2010 Music Industry Report,” total album sales—including CDs, LPs, and digital albums—declined 12.7 percent compared with 2009. The news for recording sales isn’t all bad, though. When the calculations track equivalent albums, for example, the decline is somewhat lower: 9.5 percent.1 Digital downloads also showed a slight 1 percent increase in the fourth quarter with the release of the Beatles catalog, Taylor Swift’s Speak Now album, and the success of the music from the hit Fox show Glee.2
In a retro glimmer of hope, 2010 vinyl sales increased 14 percent over 2009 figures. While overall album sales declined, physical CDs are still the dominant album format in certain markets.3 For direct-to-fan sales, 2010 was a big year, but the trend has yet to significantly affect download numbers. Taken as a whole, these figures reflect ongoing industry shifts, where the market is in a state of transition and realignment.
According to Eric Garland, the founder and CEO of BigChampagne Media Measurement, three factors have led to the decline in the perceived value of recorded music:
1. Mass communication has shifted from a one-to-many relationship (e.g., TV and radio) to a many-to-many experience (e.g., the Internet and social media).4 As a result, the music business has lost its monopoly over broadcast and the listener’s attention. “The reach and influence that created a Michael Jackson has been diminished. … It’s not over, but it’s on its way down.” Garland says.5
2. The record industry has lost what Garland calls the “forced bundle,” better known as the album. In the golden age of music sales, the cost of becoming a superfan and acquiring the song you loved was $12 or $15. Today, that cost is effectively zero, requiring nothing more than a YouTube refresh.
3. “The shift from music as a product to music as something we merely access, listen to, participate in” is a third factor, Garland says. In increasing numbers, we may not own or purchase music, but rather merely access it from an online location. This change in consumer behavior further fuels the perception that the value of music has been degraded.
While previous generations had powerful emotional connections with particular songs (that first dance from your wedding, for example), the experience of music today has changed dramatically. “This is profound.” Garland continues. “A song, and your relationship with that song over the course of your life, is worth a lot less than a cup of coffee at Starbucks.”6 Listeners have greater choice about what they hear and when they hear it. Music can be “time-shifted” in a way that was not possible when we were glued to the radio.7 This unlimited access to music on multiple devices has created a sense that all music is available anytime, anywhere.8
The music industry has many unique business rules, but the underlying forces that have thrown record companies into a tailspin have affected the entire media world.
In his book C-Scape: Conquer the Forces Changing Business Today, Larry Kramer—the former president of CBS Digital Media Group and a veteran journalist—describes the increased choice and entitlement of digital consumers. To succeed in this marketplace, he says, media businesses must do two things:
1. offer consumers the increasing range of choices they expect; and
2. closely observe consumer choices based on consumers’ profiles and adjust offerings accordingly.9
The record business hoped that a new centralized model of recorded music sales would take hold and save the industry. But instead, according to Kramer, the future of media businesses will be an ever-changing mix of niche offerings.
“I believe the answer will again be a patchwork of partial solutions specific to the kind of content being delivered and the habits and preferences of the particular audience that wants it,” Kramer predicts. “In the future, there will be no one solid and rational system, but rather a collection of improvised arrangements based on lucky alignments of buyers’ and sellers’ needs.”10
Curation and Personalization
Despite the general downturn in music sales, niche markets that respond to consumers’ needs continue to perform well. The record-store culture is all but gone, but independent retailers such as Amoeba Music continue to thrive by providing curation and personalization, which are both key needs of music buyers living in an age of information overload.11 Kramer identifies curation as a key consumer need and cites the explosive growth of “curated” online media aggregators such as the Huffington Post.
“Now, with the explosion of amateur media—blogs, online discussion forums, social-networking sites—we have moved from information scarcity through information abundance to information overwhelm. Even as traditional media sources decline, the same explosion of choice that threatens to kill them off has intensified our need for the human guidance that those forms used to provide.”12
The sheer volume of music available to listeners is staggering. “Today, you can discover in seconds how nearly any band in the world sounds, assuming it wants to be heard,” writes Eliot Van Buskirk, a former technology columnist for Wired.com.13 Hardware and software can help personalize and manage information overload. Facebook organizes the Web for us, traditional music criticism shifts toward music curation, and devices such as the iPad curate functionality.
With something as emotional and personal as music, a recommendation from a trusted source carries enormous weight. This is one of the key principles of direct-to-fan marketing. Social media tools make it easy for fans to share their enthusiasm with followers, immediately separating a band or a piece of music from the white noise of the Internet.
From Ownership to Access
As the music-industry’s mantra shifts from music “ownership” to “access,” 2011 promises to be interesting. Sony has recently launched its Music Unlimited streaming service. Pandora Radio is preparing for an initial public offering, and we will likely see the rollout of new “cloud” offerings from Apple, Google, Slacker, and others. Two years after becoming the dominant online music platform in Europe, Spotify has yet to arrive on U.S. shores. After the initial euphoria of an enormously successful legitimate music service, record companies have moved with caution, Garland says. “Music companies have since learned that Spotify contributes to the death of the broadcast platform, the unbundling, and the decrease in the perceived value of music. Everybody’s iTunes library is infinite.”14
The immense popularity of YouTube as a music destination is another consequence that record companies did not anticipate. The number of impressions on YouTube by music listeners dwarfs all other online streaming services.15 The record industry has responded to this phenomenon by implementing VEVO, an advertising model delivering premium CPM (or cost per thousand impressions) rates16 for licensed music streaming. Although VEVO is a standalone platform, 90 percent of its views come from YouTube.
In yet another twist, the data clearly demonstrates that online music streams generate a mere fraction of the revenue of download sales. “The per-unit value of music plummets,” Garland says. “Popular and paid are now not only radically different things, but they travel in different circles.”17 Compared with Lady Gaga, Susan Boyle has a very small Internet presence, but Boyle wins in terms of total album sales. This example provides further evidence that recorded music sales differ in divergent markets. The question is, to what extent can low-paying Internet impressions drive sales of more tangible goods? This is another key idea in the direct-to-fan marketing camp. The Internet is viewed primarily as a channel for building a committed fan base that supports an artist in a variety of ways rather than as a source of primary revenue.
Touring revenue is in decline, and the general economic downturn has most certainly affected this revenue. While some large, established acts have successfully removed the middleman from the transaction and sold their music directly to fans, listeners continue to gravitate to popular, mainstream songs. Consequently, many developing artists are lucky to break even on the road.18
New Business Models
Aderra Inc. has developed a successful niche in the live-performance space. Founded by Ed Donnelly—a former professional musician, producer, and engineer, with many years of international executive experience in the high-tech industry—Aderra creates new revenue opportunities for artists. It records live shows and makes them instantly available to fans on custom flash drives and microSD cards before concertgoers leave a venue, for example. The company handles everything from live recording, editing, and music licensing clearances to mass duplication and online distribution. Aderra has recorded tours for a range of independent and major artists from OK Go to Willie Nelson.
“A few minutes after the end of a performance, fans are able to pick up a USB flash drive or microSD card with a recording of that concert.” Donnelly explains. “This includes a user interface similar to a DVD menu or micro-website, hosted on the USB drive itself. The graphical interface can display photo galleries and playback audio and video. We are able to stream exclusive live video of the performance back to that flash drive. We can extend the conversation between artist and fan by including materials that are a glimpse at life on the road, as well as additional things you wouldn’t be able to find in a retail location, [such as] behind-the-scenes stories, photos of the performance, even sheet music.”
Making an Emotional Connection
“Customers are not thinking of [these offerings] as buying recorded music.” Donnelly explains. “They are buying an experience, an emotional connection with the artist and the event. We tell artists that we know all the industry stats: recorded sales are tanking, and digital has not taken up the slack. We are capturing new revenue, but what is more important, the user interface allows performers to reconnect with those fans and send them new content. It is an emotional relationship between the fan and artist as opposed to just buying a silver plastic disc, ripping it, and throwing it in a drawer. What we are providing is that immediate connection at the peak of the fan’s emotional experience and connection with the performers.”
Aderra has a partnership with the iTunes Store and makes recorded performances available to die-hard fans that have missed an artist’s show as well as to casual music browsers. They can pick an entire concert or their favorite song. Audiophiles can find WAV or FLAC downloads through an artist’s website or secondary Web stores.
Multiple Revenue Streams
According to Donnelly, there are five primary revenue streams for performing artists today: recorded music sales, live performance, merchandising, sync licensing, and sponsorships. “Performers who make their living writing and playing music will need to rely on several streams of revenue rather than look at one main source,” he says. “Since the 1940s, that one big revenue generator was selling recorded music. Now, you need to look at an overall picture of the various ways that a performer can make money. Recorded music is still part of that. The trick is engaging fans and finding ways that they will participate with you and see the value in the other things that you offer.”
If handled appropriately, corporate partnerships can develop new funding sources for artists and create greater exposure. OK Go, one of Aderra’s clients, has tapped corporate sponsors for its quirky viral videos. Each year, mobile phone company Orange sponsors several charity concerts in the United Kingdom and France in venues with capacities of several thousand.
“We capture the show, and provide information about the charity and the volunteers, along with bonus interviews and backstage footage from the artist who performed,” Donnelly says. That is distributed to every fan as they leave the venue. In this case, the proceeds are going mostly to cover the cost of production and to the charity itself. That model works very well.”
“We have done a series of shows with electronic performer Deadmau5 with sponsorship support from a clothing company. Each fan received a customized flash drive with a recording of the concert that included the sponsor’s catalog. It’s a model that we think works very well if there is a good fit between sponsor, artist, and fan. It has to make sense on all three fronts for it to be effective. Otherwise it can seem disingenuous and get in the way of that intimate fan-artist connection.”
Merchandising and licensing are important revenue streams that can strengthen the culture created by an artist’s fans. “If done correctly,” Donnelley continues, “merchandising is an important part of interacting with fans. It allows them to identify themselves as being part of your tribe.”
“Then you have licensing and placement. During the past couple of decades, vast amounts of video content requiring music have been created for cable, satellite, and now the Web. These licenses are territorial, so the same track could generate placement fees from North America, Latin America, the Middle East, and Asia.”
“You are leaving money on the table if you don’t have a bucket under every single revenue drip,” says Scott Sellwood, the senior VP and general counsel of RightsFlow, a New York City–based licensing and royalty service provider.19
Based in San Francisco and New York City, IRIS Distribution was founded to help independent labels reap the benefits of the digital music revolution. Today IRIS distributes more than 700 prominent independent labels to 400-plus online retailers, including Amazon.com, eMusic, iTunes, Microsoft Zune, Napster, Rdio, Rhapsody, Spotify, and Sprint Mobile.
“The structure of the music industry is changing so drastically that there are very few traditional roles left,” says Bryn Boughton, the chief marketing officer of IRIS. “The responsibilities are also changing within roles. For example, managers are taking on negotiating distribution and helping bands put together their own teams now.”
The company operates a wholly owned branded entertainment and music marketing agency, BlinkerActive, which specializes in music and brand integration. “While the technical side of what we do is important, we’ve always felt that our primary value as a distributor is in making a positive impact on sales for our clients,” Boughton says. “We’ve built our business on our marketing results and our customer service. As labels saw their revenue shifting from physical goods to digital sales, they began to allocate more of their budgets to help drive downloads and streams. Since retail marketing in the digital space means something different than in the old-world retail coop programs; they consulted us, and BlinkerActive was born.”
In March, BlinkerActive launched a music synchronization division and introduced Noise Clerk, a licensing platform for application developers. “Sync licensing is an increasingly important source of revenue for the music industry,” Boughton says. “While traditional placements still comprise the bulk of the revenue pie, people are experiencing music through applications at a rapidly growing rate. Most app developers are unfamiliar with the music space that can lead to subpar or illegal uses of music. We feel strongly that educating developers and making the licensing process simple and straightforward will foster the early-stage growth of this community while greatly benefiting music rights holders.”
Noise Clerk provides a one-stop online licensing service for app developers. Each purchase licenses the audio for a unique application for multiple Web and all-mobile platforms.
BlinkerActive music synchronization represents artists and labels exclusively for music licensing for film, TV, games, and commercial uses. The company proactively pitches to licensing decision makers, including music supervisors, music editors, producers, and ad agencies.
“IRIS began as an online digital distributor. Today, we also provide comprehensive marketing services and synchronization licensing. Based on extensive feedback from our clients, we continually explore new markets and opportunities for independent labels and rights holders,” Boughton says.
In 2010, we saw an explosion of direct-to-fan marketing tools and advice. Simply put, direct-to-fan marketing taps the many-to-many power of the Internet to strengthen authentic relationships between artists and their fans. This two-way conversation enhances music’s emotional experience for fans and gives artists continual feedback that helps them create offerings their fans really value.
It starts with great music and building a connected community around that experience. It continues when artists make it easy for fans to share their excitement and actively nurture the relationship with their audience.
Next, these relationships deepen when artists design product offerings that maximize value for both fans and themselves, such as recorded music, merchandise, tickets, a personal experience—whatever gives fans a reason to buy and strengthens the relationship. Ian Rogers, the CEO of Topspin Media, says that for artists using the company’s platform, the typical range of revenue per transaction is $50 to $60.20
Several technology companies—including Bandcamp, Topspin, Nimbit, and ReverbNation—provide support for this type of direct marketing. Generally speaking, each of these services helps artists by providing integrated tools with these kinds of capabilities:
1. facilitating conversations with fans and building a community;
2. providing tools for distributing and selling content and products;
3. managing ongoing relationships with customers; and
4. collecting and analyzing data.
These companies typically charge artists or labels a subscription fee and/or take a revenue share of products sold through their shopping carts.
New Challenges and Opportunities
In the coming year, the recording business will face continued upheaval as the traditional industry right-sizes itself and new markets develop. And as the traditional revenue streams dry up, independent artists have also begun to feel enormous pressure. The early pioneers of today’s recording industry were visionaries with a passion for music and the business savvy to bring that experience to a mass audience. For today’s visionaries, the challenge is solving the puzzle of the Internet and harnessing its power.