The Impact of the Internet on the Music Industry
This is a continuously-in-progress article about the internet and the music business. It's a fast-moving field, so I'm trying to keep the posts up to date.
Industry Sales are Going Down and Down
Record companies' revenue from digital music sales rose 40 percent to $2.9 billion over the past year, according to a 1/24/08 Associated Press article in the New York Times that quotes the International Federation of the Phonographic Industry. (IFPI). The IFPI estimates that digital music sales are 15% of the total music market, which would make the market size about $19 billion. CD sales fell 11 percent between 2005 and 2006 and are likely to drop further. However, CD sales are not dead. They made up about 77% of the market in 2009.
Atlantic Records reported in November 2008 that - for the first time - more than half of its revenue came from digital products.
The IFPI's 2008 Digital Music Report is a good source for information about the digital music market.
The Japanese market and ringtones are an important driver of sales, according to the article.
Major Labels Don't Make Much Money
Sony BMG Music Lost Money in 2Q 2008
Sony BMG music entertainment's second quarter revenue fell from $851 million in 2007 to $762 million in 2008, a fall of 11%. Income fell from $8 million in 2007 to -$45 million in 2008, due to "the continued decline in the worldwide physical music market not being offset by growth in digital product sales."1
Vivendi's Universal Music Group Made a Profit
For the three months ended September 30, 2008 UMG's revenue dropped slightly to 1.098 Billion Euros from 1.170 Billion Euros in the same period in 2007. However, earnings in the same period increased to 149 million Euros, up from 115 million Euros. This increase doesn't seem to reflect dramatically new profitability in the music business, but rather "the inclusion of BMG music publishing in the results, as well as credits from the downward value of compensation schemes linked to equity value and increased license income."2 In other words, they're paying people less.
UMG owns Island Def Jam and many other labels.
Warner Music Makes Money Before Amortization
Quarterly earnings report for quarter ended June 30, 2008. WMG is publicly traded, so its financial information is more detailed than its competitors, which are business units of much larger corporations.
The Music Industry and Governments are Maintaining Serious Efforts to Combat Digital Piracy
According to the NPD group, people paid for only 42% of the music they acquired in 2007. The IFPI is trying to combat piracy by taking legal action against file sharing sites and by encouraging Internet Service Providers to shut down offenders. As of April 09, France is close to passing a law to ask ISPs to disconnect people who share music illegally. Swedish-run file sharing site Pirate Bay was convicted of illegal file sharing on April 17, 2009, but will appeal the ruling. Limewire was found to be promoting copyright infringement by a U.S. court in 2010.
An increase in music sales in Sweden in early 2010 may show that a combination of stronger copyright enforcement and availability of legal services may be effective in combating piracy. Still, the jury is still out.
Publishers are also trying to collect from sites that publish lyrics. Some of these now license from music publishers; others have shut down.
Limewire recently lost a court case brought by the Recording Industry. Music publishers have joined the lawsuit. In late 2010 the U.S. Federal Government was shutting down web sites, although bittorrent was still up because it is distributed.
The Music Industry
It's useful to know how record labels work.
Future of the Music Industry
The Freakonomics blog at the New York Times hosted a "quorum" of industry experts discussing the future of the music industry on 9/20/07. Most of the contributors were glum about the prospects.
iTunes has become the dominant online retailer for music. That annoys the record labels, who would like to see more competition to reduce iTunes's power. As of February 2008 record companies were increasing backing Amazon's online music store to try to promote a competitor to Apple. AC-DC are selling their music via Verizon only for the first eight months of digital release.
A March 2008 article in Billboard suggests that Apple's music sales business is profitable, but not hugely so, due to high advertising expenses.
Finally, the obvious! In early April 08 MySpace announced it would create a portal for selling music directly from MySpace. If people discover a band on MySpace, why should they go to iTunes to buy its music?
In March 2011 Amazon launched a cloud player, which allows you to store your music online and play it from a web page. It's an alternative to the iTunes model, where the music is tied to your personal computer.
In the days of physical product, distribution was about warehousing, managing returns and store promotions. In the digital age it is more about marketing the product.
Labels only support a fraction of bands. Web sites exist where you can contribute capital to a band. But now pretty much anyone can start a record label, although it helps if you're well-known.
Arcade Fire owns its own music, instead of giving the rights to a music label. The band is "indie" in the sense that it's not signed with a major label, but it reached number one. Does that disqualify a band from being "indie"? I don't think so. Indie may mean "struggling and obscure" to some, but to me it refers to the business model.
Music blogs are a major promotional tool, used by Kanye West and other big names. Artists and labels "leak" tracks to those sites. But there's a fine line between authorized leaking and illegal publication: some sites have been shut down by the government.
The Sydney Morning Herald (1/17/08) has a story on the chaos at EMI - Rebellion at rock'n'roll headquarters. The Wall Street Journal had a similar story on 1/22/08. According to the stories, artists such as Madonna and Paul McCartney are leaving traditional record labels and signing with non-traditional firms that offer new forms of promotion and distribution. McCartney's deal offers distribution through Starbucks. That's not such a bad idea. Starbucks now offers the ability to buy digitial downloads wirelessly while in the store - see (9/24/07) Starbucks to give away free iTunes music.
Many artists - particularly in niche genres such as jazz - have started their own labels. They distribute their music digitally in MP3 format via the internet and promote themselves via blogs. One example is Greenleaf Music, set up by jazz musician Dave Douglas.
The traditional sources of revenue for music publishers were unit sales and royalties. Royalties were paid primarily by radio stations. Now streaming audio sites replicate the service provided by radio stations on the internet, and most free-to-air radio stations stream online.
Royalty payments for online music streaming have been a source of dispute. Music streaming service Last.fm now pays royalties directly to unsigned artists. However, as of Feburary 2009 there was still no royalty deal for streaming music sites. According to the New York Times Bits blog, the Copyright Royalty Board has mandated that audio streaming sites pay 0.19 cents per song, but the sites claim this amount would put them out of business. Simulcasters "agreed to pay 0.15 cents this year , rising to 0.25 cents in 2015." Spotify reportedly pays between $0.006 and $0.0084 per play - that is, less than one cent per play. That's why Taylor Swift pulled her music from Spotify in late 2014. You can find more information at Spotify Artists.
Music labels started showing flexibility in 2009 in licensing agreements with startups such as imeem, making services more viable than before.
It's now possible to get licenses for private use of songs through Rumblefish.
Note that performers don't get royalties from songs broadcast over the radio - only the publishers get paid. People are lobbying to change that. It is also hard to collect payments from clubs and other small businesses.
According to this August 2009 Guardian article, "young people don't care about copyright." However, the article cites a survey that suggests that these same young people would pay for a subscription service, with a flat monthly fee for unlimited downloads.
This November 2009 Guardian article argues that "fremium" models such as we7 and spotify— where people can listen to free streaming music — offers a viable alternative to illegal downloads3. The question for the artists and record companies is how much money they make from streaming. The article argues that single sales do not suffer because illegal downloaders would never have paid for the music anyway. Spotify launched in the U.S. in 2011.
Spotify is available as an iPhone app in Europe but not yet in the US (as of November 2009).
Using Music to Sell Products
Island Def Jam and Procter & Gamble have joined forces to create a new hip-hop label that will promote a P&G brand called Tag Body Sprays! This is a great example of music labels moving beyond selling recorded music to selling attention - based on the celebrity of marketable artists.
More artists are licensing their songs to marketers.
360 Degree Deals
The New York Times (11/11/07) described a new type of contract structure the record companies are using with bands, called 360 degree deals. In these deals labels get a share of multiple streams of revenue - not just music sales but also concerts and merchandise - in return for more up-front investment in the artist. Jay-Z is reportedly going to sign with concert promoter Live Nation for around $150 million. Live Nation acts like an investor in a business, and receives a share of all of the revenue generated by the artist.
Ad-supported music streams music free from a web site and pays the artists a portion of the site's ad revenue. That model is used by a recently launched (as of 3/11/08) music blog called RCRD LBL.
FreeAllMusic.com offers free music downloads but forces users to watch ads.
Online Music Marketplace
AmieStreet is an online music marketplace that uses social networking to recommend songs and user demand to set prices. As more people buy a song it's price increases, up to a maximum of 98 cents.
At the 2008 South by Southwest music festival musicians debated how they would get paid. Billy Bragg wrote a New York Times op-ed on 3/22/08 where he complained that social networking sites were exploiting musicians without paying them.
"Comes with Music"
The idea behind "Comes with Music" is that when you buy a phone or an internet service you get unlimited music downloads included in the price. The music companies get a proportion of the money from the sale of the phone or service. Nokia is a key driver of this business model in Europe. It's not clear how profitable this is for the music companies.
Direct Sales: Self-Produced Artists
Push Play is an unsigned band that promoted themselves on YouTube and with free concerts. Their self-released album sold 30,000 copies on iTunes. They managed to book the 2,100 seat Nokia Theater in Manhattan despite being unsigned.
The Bear Hands is one of many bands that uses MySpace to promote its music. The band distributes music via iTunes and CDs and merchandise via InSound, an Online Indie Store. They are not signed to an Indie Label. They self-produced a 4-song EP called Golden which sells for $6.99 in CD format and $3.96 on iTunes.
Direct Sales: Classical Music
Many symphony orchestras produce and distribute their own digital music products via iTunes or via live streaming.
Helping Artists Sell Direct
New ventures such as Polyphonic have been set up to invest small amounts in artists and help them market themselves and distribute music over the internet. I guess the point is that there are some economies of scale or scope that bands might find attractive enough to pay for, without wanting to pay as big a share as the major labels demand. There's no reason why there shouldn't be competition between different business models for intermediaries ("middle men").
UMG in talks with YouTube to put music videos in a special area of the site (March 2009). The [ music video site will be called Vevo and earn revenue from advertising] (licensing too?). The site is jointly owned by Universal, Sony and EMI.
The problem with trying to make money from videos is that record companies forbid embedding on blogs and other sites, which slows the viral spread of videos and reduces advertising effectiveness.
Tips from Iron Maiden
Iron Maiden say it is all about the relationship with the fans.
Firms and Business Models
|Company||Business Model||Comments||Last Updated|
|Napster||Subscription $12.95/mo; can also purchase songs for download||free streaming||3/29/08|
|Rhapsody||Subscriptions $12.99/mo for playing music in browser; $14.99/mo "music to go"; cannot burn tracks to a CD without purchasing tracks for $0.99||25 free songs per mo||3/29/08|
|RCRD LBL||Online record label; Mostly new artists, free downloads, ad-supported, shares ad revenue with artists||new and untested model||3/29/08|
|iTunes||Online retailer; $0.99 per download; tight integration with iPod; ease of use a key selling point||the 800lb gorilla of the industry, said to be considering alternative business models||3/29/08|
|Limewire||Peer-to-peer file sharing; sole income is from Limewire Pro; connects to Gnutella network||They say "don't share music illegally"!||3/30/08|
|eMusic||Subscription||Focuses on indie music; allows users to keep music after subscription ends||3/30/08|
|Pandora||Ads + sales commission from song sales||Article on Pandora||8/5/2010|
|Google Music||Business model unclear. Google is negotiating with labels to allow sharing and sales||Users upload their music to Google's cloud so they can listen to it anywhere, on any device. See article on Google Music||5/10/2011|
|Spotify||Advertising and subscription||Allows some free streaming but users pay to upgrade to reduce limits on songs||7/19/2011|
Free samples are increasingly part of music marketing, like this April 2008 sample from ColdPlay.
Radiohead released their album In Rainbows as a download from their web site. People could choose how much they wanted to pay, including zero! The band has not said how much money they made from this novel pricing strategy. They didn't make any money from me.
Record labels are trying to bundle their product to combat the trend toward buying digital singles instead of whole albums.
Direct Sales: Innovative Pricing
Radiohead bypassed retailers and sold its "In Rainbows" album direct to online customers for three months starting October 10, 2008, before releasing the physical product to more traditional retail partners. In Rainbows made news because of its innovative approach to pricing - customers were allowed to choose how much they paid. Most people paid zero, but the band claims the online sales still generated more revenue than its previous album release - perhaps due to the enormous free publicity. It's not clear if Radiohead will repeat this approach, and there has been no rush of other bands to imitate this model.
iTunes long set all prices at $0.99, but recently changed the pricing structure to allow three options: 69c, 99c and $1.29.
According to this article in the New York Times, social media are increasingly important in a song's success.
Top of the Charts
It's tricky to determine who really sells the most these days, depending on how you count streaming.