Retail & Vinyl

When iTunes Becomes Obsolete

Trackswell-logoGuest post by Bryan Kim (@freshbreakfast), Director of Business Development at Tracks.by.

The following chart is sourced straight from the RIAA year end sales report. It is released every March, and it is the reason you read about the year-over-year triumphs of digital downloads in the face of plummeting CD sales. It is the reason everyone knows that the physical format is dead, the music industry was slow to respond to P2P, and the industry-wide contraction was their price to pay… yada yada yada, I’m not here to beat that dead horse (yet).

It’s not the #s that interest me; they’re all predictable data points continuing a decade long trend. No, I’m more interested in the format of the chart. Ever since about 2004, the RIAA has formatted their year end sales summary in the same binary digital / physical layout.

Itunes-chart

It’s a false dichotomy. Digital downloads share a lot more in common with physical media than the music industry might hope for. And that’s bad news for the major labels in general. Here’s why:

1.) “Units” Are Becoming Obsolete Even if it’s delivered over TCP/IP, the selling and downloading of song files is a vestigial consumer behavior leftover from the physical media era. Consumers are still transitioning out of the idea of “owning” their music, and downloads happened to be that natural and convenient next step in the “digital” age.

But the clouds are forming, and the storm is bound to rain (apologies for the blatant metaphor). Between Youtube, blogs and Spotify, you can already find just about any song you could possibly want to hear. Anecdotally I hear more and more kids who can’t be bothered to download anymore – the gratification is so much more instant on YouTube. Increasingly, the main value of buying or pirating an MP3 these days is that it’s a mode of cataloguing a personal music library (and sloppy one at that). Even this distinction is eroding under the increasing maturation of cloud music.

And so it follows that…

2.) Digital downloads will plateau in 3-5 years It’s easy to ignore the impending free fall that’s going to happen in the record industry. After all, digital download revenues continues to see double digit year-over-year growth. In fact, in the next year or two, we should see digital download revenues top CD revenues for the first time. At about which time we should expect the industry press echo chamber to renew the hopeful charge that people can and will continue to buy music.

But again, both pirated and legal downloads will continue to drown under the clouds. Given the quickening advance of the clouds and the generational turnover of music’s primary consumer (i.e. young people), my guess is that the legal digital download market will peak soon after it laps the CD in overall revenues.

When digital downloads peaks, that’s when the recorded music industry will truly trip into a free fall of diminishing returns. And sure, the subscription model has yet to hit its hockey stick, and we haven’t seen the full potential of digital performance royalties (i.e. internet radio). But even if overall streaming revenues match “moving units” revenue, the transactional structure of those models are fundamentally worse for the record industry, because….

3.) When Plays Replace Products, Labels Lose Leverage With the recent successes of Spotify, you’re starting to find more stories like this, this and this, that attempt to calculate the amount of subscription plays it takes to equal a download purchase. The most optimistic scenario has a paid subscriber listening to an artist’s song anywhere from 25-60 times to equal the takeaway from 1 paid download. With only 1.3 million paying subscribers in 2011, most subscription listens come from free users, who need to play a song anywhere from 80-300 times to equal the takeaway from 1 paid download.

Sure, these numbers are in the realm of possibility for any given addictive song, but that’s not the point. CDs and paid downloads meant you had your fans pay up front, thereby guaranteeing an inflated threshold per piece of “sold” content. This transactional dynamic is inherent when you’re moving units, physical OR digital.

When we get to a sophisticated access/subscription model, artists and right holders aren’t charging their fans directly for a discrete product, but instead pandering for their plays.

This is a significant shift, and undermines much of how labels have been operating over the decades. Labels are in the business of selling product directly to consumers. The digital download is an extension of that. But when the imperative is plays, the leverage and interests of right holders changes. The threshold value of any piece of recorded content, lowers. The play becomes conceptualized as currency, and other connected actions from fans — like social media favors, emails, and perhaps most importantly, as traffic bait for direct-to-fan products — are suddenly a lot more attractive objectives for any given song launch.

Point being, right holders will be less interested in guarding their songs for sale when selling is not the point.

And So…

All this is not to say that the music industry as a whole is doomed. My ultimate point is that when recorded content becomes un-productized, it ups the viability of other types of direct-to-fan products.

Currently, “direct-to-fan” in the music industry primarily means they’re going to email fans to buy the next album. That’s a superficial application of direct-to-fan.

I want to save my hypothesis on what the next “music industry” product will become for future posts, but I think it helps to think about some of the more creative tiers of support you’re starting to see from artist Kickstarter projects. Think tiered, high margin products that emphasize some sort of direct, relationship-based access to artist. These are the types of authentic “experiences” you can sell online, without worrying about piracy (short of cloning the artist). It’s this sort of fan based patronage that may fund a veritable renaissance of artistic creativity in the 21st century.

Or not. Either way, we’ll find out when iTunes becomes obsolete.

 

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12 Comments

  1. Spotify represents an early stage template for legalized cloud based file sharing and the pitfalls and challenges that lie ahead. It also represents an opportunity for artists to step forward and demonstrate they have the power of choice and who they choose to do business with in today’s world.
    When fans can create playlists in the cloud and share them with their friends; the incentive to purchase music will drop, again, dramatically. Spotify’s record shattering low licensing fees and the resulting drop in sales will be a devastating 1 – 2 punch and many will not survive.

  2. Very interesting article. Every time I read about the vaunted power of the cloud and Spotify I think, “But you have to have access to a data plan or wifi connection.”. I’m sorry, but until I can get music anywhere I go (the subway, basements, non-carrier regions, the moon) I’ll be sticking with my iPod.
    I’m not sure about your view for the near future of major labels. They have already stayed dominant in changing times and they have the connections and the marketing prowess to ensure dominance. A bigger factor that could possibly upset this is the retention of their legacy artists. If enough of their roster reclaims the rights to their masters, then the majors could have a problem.
    Free album download at http://www.facebook.com/chancius

  3. Spotify (and its competitors) have the ability to make tracks available offline, so your moon trip is absolutely possible.

  4. Hmmm….interesting take. I think it’s way premature to think that the subscription model will surpass digital downloads. I think in order to survive the subscription model has to have a bigger audience. Ownership of good music is going to remain a constant and those companies and artist who have that ability will win from all sources because folks like myself have a subscription service and multiple players, and we want our own copies in our collections. Because we really have no filter for music right now a subscription model allows me to listen before I buy to in a sense see what’s out there and then buy what I think is important to me. Sort of like what radio was. I would also like to point out that the subscription services will eat each other in order to survive….ie XM/Sirius these companies want to change the landscape but competition is competition . Look at the labels….there was a cottage industry and then the small labels were bought up by the Conglomerates…now there are just 3 majors….

  5. It is funny to see people comment on a biz they don’t know.
    “Labels lose leverage with streaming…”
    Majors OWN streaming. Why do you think they love it!

  6. So, musicians should get ready because in the future the only thing they won’t be able to sell is their music….
    Making music takes time and effort. I expect that if consumers want to continue to listen to quality music they will eventually have to find a way for the artist who create it to make a living. In my mind, this means buying their music and not expecting to get everything for free in some kind of “promotional” loop that only ever makes lawyers and computer engineers any money. What form that will take remains to be seen, but it certainly won’t be a streaming fee that pays you 0.00003 cents.

  7. Bryan had you written this article in 1950 it would have been entitled, “When Radio Becomes Obsolete.” Spotify still hasn’t demonstrated as a company if their business model is financially viable and can turn a profit. From the way they are aggressively pounding on VC doors (and the endless stream of PR), my guess is the cash burn rate is incredible. Major labels own a minority share of Spotify, they won’t make any money unless Spotify goes public, but still they may come to regret the investment. My question is why so many pro-Spotify articles and editorials on this site. Who is pulling the financial strings of Hypebot and its writers?

  8. You’re the second person to claim that “Spotify must be paying Hypebot” when Spotify is one of the biggest news items in the music industry.
    I don’t write about Spotify. I find the whole topic kind of boring but it seems to fascinate everybody else. There are good reasons for that but if you don’t recognize that I don’t have time for Painting the Obvious 101.
    In any case, I’d love some Spotify money. Hmmm, maybe the boss is keeping it all for himself like the majors are doing with Spotity!
    Hey, so who do you think’s paying us for all the crowdfunding and EDM coverage of late? Cause obviously we’re the only ones on the web paying attention to Spotify, crowdfunding and EDM!

  9. Spotify is great for bands/musicians who intend to make their money from touring and selling merchandise. It can put your music in front of people much in the same way mp3.com and Napster did over a decade ago. It may not be great for musicians (or their heirs) controlling back catalogs or for musicians who shun public performance.
    To me, it’s the same as radio exposure. Plenty of fans are collectors and actually want a hard copy of an artists release. 30 years ago, anybody could use a cassette tape to record a song from the radio but fans still bought what they really liked. Look how vinyl sales have skyrocketed. It wasn’t too long ago, record stores got rid of vinyl for CD’s and now vinyl is what’s selling again. Why? Fans want that hard copy.
    I personally think artists should adapt to the availability of mediums and delivery platforms. It’s not an issue of one versus the other, it’s about effectively using what’s available.

  10. “When we get to a sophisticated access/subscription model, artists and right holders aren’t charging their fans directly for a discrete product, but instead pandering for their plays.” Thought-provoking.

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