Thursday, 7 August 2008

Music Business 2012: An Alternative Market Forecast Courtesy of David Bowie

“It’s the beginning of nothing.
“And nothing has changed.
“Everything has changed”
So say a few profound lines of the lesser known, but excellent, Bowie song ‘Sunday’ (from the ‘Heathen’ album). Listening to this song recently got me thinking about the whole music space once again (note to self, I should really stop doing this). Just for the pure fun of it, let’s use Bowie’s lyrics to de-construct & re-build the entire music business in an alternative forecast.

First, “It’s the beginning of nothing”...

Majors are wrestling with the angels, technology upstarts with silver bullets (there aren’t any) proliferate, Live Nation is vexing everyone by signing big “360” deals (still, for now). Publicity stunts over how new albums are released just get more & more ridiculous with honesty box payment options, free songs and now whole albums down to 49p. Ultimately this is of course assisting music’s destiny towards being free (according to economists & futurologists on the web anyhow). Meanwhile industry bodies seemingly make late headway with solutions over file-sharing (though according to said economists and futurologists, none of it now matters that much, sadly). Hell in a handcart we go then, but hang on...

“And nothing has changed”...

Come again? We know that music consumption habits have transformed for good. Access to music is ubiquitous & largely free, when it used to be scarce and fiercely ‘gate-kept’ for sale only and even then at our risk since we couldn’t even listen first. No one’s bothered about keeping a music collection now, because a) music is too plentiful to make sense to own b) the music had DRM on it when we bought it and we’ve lost it since in a hard-drive crash or c) it didn’t have DRM on it, because we got it free from somewhere so who cares, or d) it’s still free on the web somewhere, so if we did want to get it back, we could, but probably won’t as a) universally applies.

But the majority of music consumers still hear about music first on the radio, still buy albums in HMV or on Amazon and very occasionally, actually take time to listen to recorded songs – usually while on the move or doing something else. Just like we always did.
So has anything really changed? Of course, but so-called radical shifts in music demand patterns have happened so gradually as to give the supply side plenty of time to regroup, assess, experiment, and transform. After nearly ten years of this, the industry that brings us all our music has changed beyond all recognition, right? Right?

We all know that the value chain which brings us music is totally broken and the only valid economic route is for artists to go ‘DIY’. Some people out there are positively praying that this is true because they hate the incumbent music industry institutions so much.

But hang on though. No major has gone under, yet. Some recently announced increased revenues, profits or both, and most have been making various strategic acquisitions. And most still sign new bands week in, week out. As for superstar artists, look at Coldplay – how huge are they? Digitally, physically, live, every which way, huge (and their album is actually quite good so people want to hear it, buy it, own it and even keep it). Meanwhile many indie labels are doing really quite nicely thanks very much, operating pretty much as they’ve always done.
So yep, nothing rally has changed, enough. Right?

Wrong - “Everything has changed”...
All the fundamental, tectonic plates have shifted – no doubt about it. We are now just waiting for a series of little shocks to happen that will really shake, rattle & roll (sorry) the foundations of the business of music. And we all know now how this happens now thanks to Malcolm Gladwell – tipping points.

If I was making forecasts, which I’m not, I would do so by applying tipping point theory. I’m no futurologist, mind. Then again, I’ll bet you some change that one or two or maybe even three of the following tipping points will happen over the next 3-4 years. And when they do, especially in combination, everything will change, and quickly.

Here are my five music business tipping points in chronological order (if indeed chronology applies to a forecast). You will probably have a few more of your own to add.

Tipping Point 1: A major global superstar artist goes entirely digital, no more CDs
Ø Mostly likely to: Radiohead
Ø Why: The band already got half way there with In Rainbows. They are free agents commercially and they are digital trailblazers. Eco concerns over CDs
Ø Pioneers: Lots of other bands who don’t matter enough to tip the scales
Ø Impact: A forced shift in consumption habits among those consumers who have yet to go digital for whatever reasons. The band builds a completely effective direct relationship with its massive global fan base. Many major acts will follow suit, even those on label contracts insisting this is the way they want to go
Ø When: 2008. The band will get on & start releasing digital only tracks, EPs & projects more or less straight away

Tipping Point 2: A record label realises that its global direct-to-consumer business is directly more profitable than with music retailers, and subsequently largely dispenses with low margin wholesaling
Ø Most likely to: Nonesuch
Ø Why: This label has cracked the code for a valid future model for selling recorded music – aim firmly at a high value music segment (in this case 35+ discerning music buyers with eclectic, sophisticated tastes) and offer them a simple, good value product conveniently and consistently (digital and physical albums for one price direct from the label site)
Ø Pioneers: Mute tried, Blue Note really should have made it work
Ø Impact: The model will catch on. Topic, ECM, Mute, Domino will all do the same thing with considerable success. It will be attractive to artists who want to join the stable of their respected peers. Majors will get a shift on to make each label in their portfolio take a similar approach, but do to organisational constraints this will take a long time to happen
Ø When: Nonesuch from 2009, other indies from 2010. Majors might get ‘round to it eventually

Tipping Point 3: A new-entrant retailer really shakes up the consumer offer by aggregating the widest possible group of music assets for sale in one place, at amazing prices
Ø Mostly likely to: Amazon
Ø Why: The retailer already sells everything (at amazing prices) and has at least got started with its music offering. This has to be digital to be a profitable model
Ø Pioneers: ShockHound
Ø Impact: Will radically increase the average revenue per music fan of an artist (ARPU), since they can pre-order, pre-pay or subscribe to music, merchandise, tickets and a whole menagerie of exclusives
Ø When: from 2010, unless Amazon gets fed up with the complexities and bails on music

Tipping Point 4: A major label gets multi-right portfolios (previously known as 360 degree deals) working effectively as a standard model
Ø Most likely to: Universal
Ø Why: Combination of savvy, market power and momentum. Universal is busily acquiring the capabilities to both create and (critically) service multi-right contracts, with recent forays into management and merchandising through acquisitions of Sanctuary and others. If not through ownership, Universal’s market power will achieve this through partnerships with service companies in other industry sectors
Ø Pioneers: EMI, Live Nation, Nettwork
Ø Impact: The major label/‘music company’/’Dream Factory’ finds a way to survive, effectively sweeping aside all notions of disintermediation. Sony Music Entertainment could follow, Warner & EMI less certain
Ø When: From 2010

Tipping Point 5: ‘Total Music’ takes hold
Ø Most likely to: iTunes
Ø Why: Consistently innovative around consumer convenience, ease of use, style
Ø Pioneers: Nokia Comes With Music, SkyTunes
Ø Impact: Not as great as current thinking would suggest. Even though a large swathe of consumers will subscribe, there will be plenty of other consumptions models. Debates about music through ISP’s at last swept aside by those services with strong brand equity and service provision experience in music
Ø When: From 2011

Overall forecast by 2012 – generally positive but with plenty of casualties along the way.

All derived from one of Bowie’s bleakest, most depressing songs.


AZ said...

Hi Keith,

This was a great read. I believe your Tipping Points are spot on. From an SEO and analytics standpoint, we are preparing for this tectonic shift in the business.

Glenn said...

tipping points 1 and 2 are somewhat related. the artist/label is telling consumers where they can purchase their music and in what format(s). is that going to happen? maybe. is it a good idea? not necessarily.

the lesson of digital music has been that companies and artists will not succeed if they dictate the terms of purchase and consumption. failures of drm, anti-piracy campaigns and cd copying protection have offered ample evidence that labels cannot will consumers to act as they would like them to act. better to go where consumers go and offer them products that match their expectations.

going all-digital can be done but if some consumers want physical product the artist/label is not properly servicing the customer. bad idea. an exception would be a band like nine inch nails that has a broad fan base and has become beloved by the tech community (they very people who can live without a cd). at the very least, an artist will need physical product to sell at live shows. concertgoers are not smitten by download cards.

as for labels like nonesuch going direct to consumers, that plays into the common belief that success is best measured by gross margin. it's not. success is best measured by net profit.

the venue of purchase will dictate success. take out itunes and sales will drop. take away the cd and sales will drop further. i would rather have two-thirds of $1,000,000 than 100% of $200,000. that is the problem facing selling only direct-to-consumer. again, companies need to go to the consumers, not try to make the consumers fit to their expectations.

for direct-to-consumer sales, the best strategy would be to offer pre-sale or exclusives at the artist or label site, *and* offer in a wide release (maybe stagger the two). this will replace some lower margin purchases at retail with higher margin direct-to-consumer purchases while capturing as many sales as possible.

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