Has The Music Industry Been Asking The Wrong Question?

July 13, 2013 — 3 Comments

The Long Road Back; Has The Music Industry Been Asking The Wrong Question?
By: Ed Nash

Recently the music industry reported its first revenue increase in music sales since 1999. Though this news is certainly welcome, it is also long overdue. In the late 1990’s it became apparent that physical music media (CD, Cassette, Vinyl, DAT) would lose badly in their effort to rule the music market as a primary distribution method. This realization led to massive innovation within the tech sector, which (of course) was promptly hamstrung by recording industry navel-gazing. Nevertheless, a new model began to emerge, and finally fourteen years later we’ve seen an uptick in revenue. Had the recording industry embraced the new paradigm with the same vigor the tech sector brought to music distribution, we might have seen this growth much sooner. But while the majority of the entertainment industry has seen increased revenues, the music industry has been lost in search of an answer to the wrong question, “How do we sell more music?”

The Long Road Back

While the entertainment industry has been seeing increased revenues, the music industry has been lost in search of an answer to the wrong question.

Granted, this latest news is a glimmer of hope; it is evidence that the music industry is finally beginning to embrace the realities of the changed market. While the record labels ask us to believe that the digital revolution was the downfall of the music business, the actual numbers tell a different story. According to the International Federation of the Phonographic Industry, the global music industry has actually seen substantial growth over the past several years. Michael Masnick, founder of Techdirt, released a fascinating report in 2012 pointing to evidence that the overall entertainment industry grew by 50% in the past decade. Additional data from PricewaterhouseCoopers and iDATE shows that “…from 1998 to 2010 the value of the worldwide entertainment industry grew from $449 billion… to $745 billion.” Quite a contrast to a decade of dismal reports regarding music sales – apparently the digital revolution didn’t kill the music industry; it killed the status quo business model. The latest sales figures are indicative of a turnaround, albeit a long one. A robust future for the entertainment business is hindered only by continued resistance to inevitable change.

But how did we get here, and why has it taken so long to begin to improve?

Before 1982 and the dawn of digital music, record labels operated with a decades-old distribution model. They were not simply selling music; they were selling music contained within analog media. The nature of analog media meant that copyright violators could only distribute audibly inferior analog copies, which, if re-copied, resulted in further fidelity loss. It wasn’t possible for music to go “viral;” it was bound by the limitations of the physical media.

Upon the introduction of the Compact Disc in 1982, digital music began its inevitable rise to dominance. As a digital medium, when one CD is copied to another, the result is a digital clone of the original. It became theoretically possible for every person on earth to own a perfect copy of a recording of which only one copy had ever been paid for. Fast-forward to 1999 when mpeg compression made music easily sharable via the web as MP3s. By 1999 the doomsday prophecies of 1982 looked like understatement when digital technology rendered physical media not only obsolete but impractical. By 1999 it wasn’t just cheaper to steal music; it was easier.

Before illegal downloading became rampant, the music industry’s distribution model was based on the economic principle of scarcity – possessing only a finite amount of physical product. A few major labels signed a few artists who offered occasional records, leveraged airplay from radio, and sold products to those who could afford the luxury from brick-and-mortar retailers. The pre-digital-download music industry had a much simpler model: only we have it; the public wants it.

But by 1999, the availability of illegal mp3s began to disrupt the concept of music as a scarce commodity. For a large percentage of tech savvy music lovers, the music industry had entered a period of abundance – post-scarcity. Easily obtained, free product decimated music sales. And while change was imminent, its direction was not obvious. The major labels watched sales dwindle, hoping the cat might just wander back into the bag on it’s own – essentially doing nothing to adjust the value proposition in response to the marketplace.

The music industry was completely caught off guard. As I wrote in a WSJ piece just after his death, Steve Jobs was the first to successfully adjust the value proposition by introducing unheard-of convenience to legal music sales through the iPod device and the iTunes Music Store. But it has been ten years since Jobs brought us the iTunes Music Store, and the record labels have only now begun to visibly claim the digital marketplace as their own.

A marketplace needs a product; with the iPod, Steve Jobs introduced new physical product (the devices themselves) that gave otherwise-restricted access to a new virtual marketplace which made the legal consumption of digital music easier and more satisfying than stealing it. Jobs was ahead of his time in understanding that the public bought his products for the compelling interaction made possible through enhanced access to digital media. It has taken a while, but the industry is shifting to see things more clearly from this perspective. Edgar Berger, President & CEO, International at Sony Music Entertainment recently remarked on the shift: “At the beginning of the digital revolution it was common to say that digital was killing music,” Berger stated. “Well the reality is, digital is saving music. I absolutely believe that this marks the start of a global growth story.”

Is music itself still valuable? Absolutely. Pollstar reported that revenue from concert tickets in the US increased by over 300% between 1999 and 2009. But will the profitability of recorded music continue to increase? In a word, yes. However, it is contingent upon the industry continuing to provide an enhanced value proposition for recorded music product – just as the entertainment industry has provided for nearly every other commodity within it.

People love music – that’s not going to change, but if the music industry is to regain momentum, first we must embrace technology and the opportunities that it brings. We must stop focusing on the small portion of the population who will never be willing to pay for music, and instead focus on adding value for those who will. In many ways, the music itself is already viewed as a benefit of the delivery mechanism, not necessarily a product in it’s own right. — love it or hate it, there’s no use fighting it. Use it. If you need proof of concept, look no further than your mobile app store where forward-thinking artists and labels offer enhanced music experience through free mobile software. Adding clear value attracts market share growth. It’s no longer just about selling music; it is about serving your fanbase.

We will never return to a scarcity model when it comes to music access, but innovation in the distribution and consumption of digital media gives us the opportunity to create scarcity of enhanced experience. When “always leave ‘em wanting more” isn’t an option, give them more satisfying access and then ask them how they ever lived without it. Now, that’s the right question.

Ed Nash is President of Altius Management based in Nashville, TN.

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3 responses to Has The Music Industry Been Asking The Wrong Question?

  1. Well stated. I think Jobs understood what was coming but also hamstrung the industry and limited its growth at the same time. The reason music providers wanted to work with Apple was because its AAC format allowed for DRW (Digital Rights Management) where mp3 did not. Its the reason that Microsoft came up with, albeit waaay late to the party, WMA which was touted as an improvement over MP3, but also included digital rights management to entice music producers to work with them. If music producers and providers had stuck with a non-proprietary format like mp3 I think we would have seen much more innovation much faster and the drought would not have lasted this long.

  2. Great post. One of the more concise drill downs of the real world I’ve read.

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