Digital finally overtakes physical in US music market

It’s a moment that many industry observers have predicted for the best part of a decade: the US music market is now more digital than physical, by volume at least. Yet commoditisation increasingly demands entirely new strategies in order to monetise digital music.

According to figures from Nielsen SoundScan and Billboard magazine, digital music unit sales accounted for 50.3% of all music purchases in 2011, the first time that threshold has been crossed in the world’s largest music market.

The US is more advanced in digital than most of Europe. In the UK digital albums still account for less than a quarter of the market, although downloads of individual tracks far outstrip CD singles.

One in three albums is digital in the US, while Americans bought 100m more digital tracks overall in 2011 than the prior year, up over 8%.

But in spite of the digital growth, there are signs that the decline of CDs is slowing. Total album sales were up for the first time since 2004 and physical album sales fell 5% in 2011, significantly less than the 19.5% decline reported in 2010 over the prior year.

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Digital music at an impasse

I have earlier written about how the music business now seems more doomed than ever. Stagnating demand for live concerts appears to have stopped offsetting the decline in CD sales. Sale of digital music is far away from being compensation enough, as it’s growth halved last year despite increased action on behalf of governments to tackle digital piracy globally. To look at the future of digital music more in depth, I turn to the wise words of Mark Mulligan, a 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.

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Dead meat? The decaying prospects of the music business

Innovative enough for ya?

Are you yearning to see Robbie Williams rejoin his bandmates in Take That this summer? More than 1.3 million are. Demand for the tour is so colossal the tickets were gone in a couple of hours. Ticketmaster, only one of the ticket agencies selected, received 20 million page views that day – far in excess of the number seen when tickets for Michael Jackson’s planned comeback went on sale a couple of years ago. Plenty of Take That tickets are for sale online – at up to five times the original price tags.

Indeed, the music business is still a big boom for the hottest acts. The past few years since online illegal file-sharing became rampant, live concerts, the sale of songs to advertisers and the sale of all sorts of merchandise, have not done a bad job of offsetting the decline. Will Page of PRS for Music, which collects royalties on behalf of writers and publishers, has added up the entire British music business. Although the sale of CDs and records have since 2001 slid by 40 % in Britain, he reckons the music business in total turned over £3.9 billion in 2009, 5% more than in 2008. It was the second consecutive year of growth. The longest, loudest boom is in live music. Between 1999 and 2009 concert-ticket sales in America tripled in value, from $1.5 billion to $4.6 billion, pretty much mirrored by the British trend.

However, trouble seems to lurk below the stratosphere. The way the music business has adapted to disruptive online piracy does now show significant signs of being insufficient to counter stagnation or decline. The research firm Pollstar estimates that the 50 biggest worldwide tours grossed $2.93 billion last year – 12% less than in 2009. StubHub, a large website on which tickets are traded, says the average concert-ticket price dropped by 18% between 2008 and 2010. The head of Live Nation Entertainment said last year that 40% of seats routinely went unsold. Another sign of decline is that some labels seem to be abandoning A&R (talent scouting and artistic development).

Bands appear to have pushed average ticket prices about as high as they can go, and tested the limits of supporters’ appetites with long tours.

The rise of digital music is scant compensation. Growth in sales of digital music halved last year despite increased action on behalf of governments to tackle digital piracy globally. Some say pricing of tickets in live music is a main problem, though airline-type pricing and methods where prices float with demand is being experimented with.

The lack of innovation in the music business to tackle declining CD sales may partly stem from the current structure of the industry. The power in the music business is perhaps too spread between too many different types of middlemen who are fighting for their share of the pie. Record companies are working against change, because they don’t see themselves as important in suggested business models.

This problem of dispersed power and insufficient leadership is seen especially in the marketing and branding of not-so-famous bands. So many different players are involved in this that the outcome is often very inconsistent – hence inefficient in engaging the crowds. The musicians themselves, the music management agency, the record label, the booking agent, the producers, different designers, venues and promoters etc. are all very much involved in shaping the perceived brand of a band as a whole. In contrast to the case in most other industries, an authority at the top strategically guiding the entire marketing process is lacking.

Innovation and substantial change in business models is needed if the music industry is not going to shrink significantly over the next decades. As I have suggested before, what looks most promising is collaboration between musicians and brands with marketing agencies acting as intermediaries (not record companies). This is well exemplified by the band OK Go and its viral video hits online. In essence: don’t sell music, use music to sell.

However, it is easy have ideas and to see the main problems; the hard part is finding the creative solutions and executing them successfully.


Read a later post on the future of music: Digital music at an impasse

Can we see the future of the music industry in China? I hope not.

We could read in the latest Economist edition that the worse-case scenario of the music industry has already come to pass:

Chinese consumers “won’t pay a penny” for recorded music, says Gary Chen. The music promoter turned digital entrepreneur ought to know. In 2006 he launched, a website which offered a choice of à la carte music downloads and monthly subscriptions. Its prices were low—but not low enough. Chinese music fans were raised on knockoff CDs and are now accustomed to getting hold of music for nothing on file-sharing websites. China will soon have the world’s second-biggest economy, but its legitimate music market is tiny (see chart). So Mr Chen changed tack. Last year Top100 began to offer Chinese internet users free MP3 music downloads, supported by advertisements. This year Mr Chen reckons he will sell about 10m yuan ($1.5m) in advertising. That would be a trivial sum in America or Britain. In a country where sales of recorded music amounted to just $75m last year, it is not at all bad.”

In the case of the monetisation of music, looking to China could be a bit like looking into a crystal ball. At least, the development of the Chinese music industry is certainly worth keeping an eye on. Here, because of the rampant piracy, they may be forced to innovate to make money off of their music. This means China might function as a test market, a place where music business models are experimented with, tried and tested, before the music markets of the West are desperate enough to do the same. Hence, perhaps they’ll find a solution that works and that can be replicated in Europe and US?

The British music business, on the other hand,  was recently reported to have finally begun growing again. However, this growth is almost only on the back of spectacular live concerts, merchandise and new, innovative partnerships between brands and artists. This probably points to the future of the music industry. Through marketing agencies (not record companies) or the likes, acting like middlemen, the musicians will create a range of different revenue streams by tapping into their enormous abilities to affect and inspire people. These channels musicians have into people’s hearts and minds are a match made in heaven for branding and advertising purposes. This is well exemplified by the band OK Go and its viral video hits online. They have been sponsored by for example the insurance company State Farm, in a case where the record company EMI were the ones fighting evolution by limiting the possibilities of online sharing. Don’t sell music, use music to sell.