It’s all about the music (business).

By: Anno Domini.

“The times they are a-changin’” Bob Dylan once sung, and so too is the face of the modern music industry. When we refer to the ‘music industry’, we are in fact talking about a vast number of individuals and organisations selling compositions, recordings and performances of music including artists, managers, record labels, licensing companies and live music presenters. While the industry has a great diversity in products and therefore appeals to a wide range of consumers, a recent report by the International Federation of the Phonographic Industry (IFPI) suggests that the greatest purchasing power is concentrated in the 45 and above age group, accounting for 33% of revenues, followed by the 40-44 age group with 11% (IFPI). In the under 30 categories, principally targeted by record labels, there is a revenue distribution of 10.9% for 15-19 year olds, 10.1% for 21-24 year olds and 8.3% for 25-30 year olds. The balance of male to female consumers is balanced at 48.5% to 51.5%. The sources of revenue stem primarily from record stores (30%) followed by other retail stores such as supermarkets (28.4%) and the Internet and digital downloads (28.1%).
 

Developments in the music industry

It’s a familiar story that this industry is in a state of decline, recording a fall in revenues of 3% in 2011 to $16.6 billion (USD). The world’s two biggest markets, the United States and Japan, account for 80% of that loss. This can be linked largely to the loss of physical (album and single) sales of 8.7% globally, which record labels are blaming on illegal downloading and file sharing. However, while some revenue sources are declining, there are also key areas of growth. The sale of music through digital channels rose by 8% to $5.2 billion, concluding a ten-fold increase since 2004. This has been particularly prolific in the United States, where digital sales account for 43% of the entire market, and more than 30 countries world-wide have seen double-digit digital growth rates including the UK, Europe’s biggest music market. 2011 was a significant year in the development of the digital music business and a continued expansion of subscription-based services and legal services to new markets as well as a revolution in portability means that the outlook is brighter than it has been for a long time. In line with this, the music industry is shifting away from hierarchical business models, where record labels control every aspect of musicians’ careers, towards more distributed, independent models, where artists take their careers into their own hands and bypass conventional channels to reach customers directly. Artists now are actively involved in all activities from music production through to distribution and promotion. Amateur musicians have embraced the Internet as a cheap, user-friendly viral marketing platform for their music, reaching millions through the means of social networking websites such as Facebook and Twitter.
 

Towards a digital business model

It is clear that record labels are based on an increasingly outdated business model relying on investment into recorded music and recoupment through recorded music sales. Yet new sources of income in the digital realm remain largely untapped. Almost every innovative means of monetising music has come from outside of the industry. There are over 400 legal online music services globally ranging from download stores such as iTunes, to streaming services such as YouTube. For the first time, download figures are now shooting beyond the 500 million a year mark. In a similar vein, music performance rights generated through third party organisations are gathering increased revenues through expanded online networks, reflecting a continued upwards trend since 2003. It seems that the music industry is moving largely from a transaction based business to a usage and licensing business.
 

Where do we go from here?

As the music industry struggles to restructure, new ventures are setting the pace and taking advantage of the new digital landscape and changing customer needs. The record labels need to learn how to embrace the rise of the amateur musician and online licensing and file-sharing rather than demonising it, as it has been proven time and again that individuals sharing files ‘illegally’ are also more likely to purchase music online. The shift of power away from the few incumbent lumbering giants will be healthy in diversifying the music industry and offering the consumer more choice and more music which in turn could mean more revenues spread across a wider competitive field. Now more than ever, there are unprecedented opportunities for artists, producers and businesses to get their foot in the door and make an impression with original ideas, high quality output and a globally social outlook. Perhaps the times then, they are a-changin for the better!