Digital Media Digest

We all know the music industry landscape is changing. For better or for worse? Depends on who you ask, of course.

Ask the Fans?

The fans have it better than ever. There’s a multitude of free music outlets or quasi-free music outlets like the following, that are willing to eat the cost or risk involved to aggressively pursue customer acquisition.

• Free.napster
• Lala
• Rhapsody (25 free streams)
• P2P (Limewire, Bit Torrent, etc.)
• Myspace

Even the A La Carte storefronts like iTunes are giving away tens of thousands of downloads a week on the homepage and various genre pages in order lure in the fans under the ruse of music discovery. For some, like Lala, the price of admission is an email address; for Myspace, the price you pay is having to endure ridiculous advertising and a cluster of irritating templates because no one really knows how to program a myspace page and even the ones who do steer far away from the format; with iTunes, it’s upsell: A movie rental, A radio single, The latest Album or Music Video, and the latest have-to-have early release.

Ask the Artists?

The Artists have new distribution channels opened up to them on a daily basis. They can interact directly with their fans from their mobile phones. They can immediately upload footage from the road to their web real-estate. They can manage their own album sales through major vendors like iTunes via companies like CDBaby or TuneCore. They can even sell directly to their fans from their social network of choice (iMeem, Myspace, etc.).

Ask the Digital Retailers?

Of those mentioned above, it’s hard to say what the digital retailers would say about the new landscape other than the fact that opportunity is rampant and there is a ton of fight left in all of the major digital retailers. Even though iTunes just crossed their 5 Billion Song benchmark and it would be easy to say that Apple has seen windfall profits because of it, let’s back-step for a few seconds. iTunes is the only profitable, legitimate music retailer that exists right now and even while controlling roughly 90% of the market-share, they still seem to be struggling to make a profit at all. Who’s really making the profits? Who would say that the music industry has benefited them the most? The Credit Card Companies. Let’s run the numbers:

• Single Song Download – $0.99
• Label Wholesale Rate – 68 to 72 Percent
• iTunes Estimated Revenue/Track – $0.29
• Credit Card Company – 15 cents/transaction + 2 to 3 percent
• iTunes Estimated Net Income/track – $0.11

11 cents/track is still Topline. Even with crafty accounting, and careful management of micro payments, it’s still not going to be much more than that and they haven’t paid the Label Relations staff, the Programmers, the IT team, the suits, or the electric bills…much less travel expenses and other necessary expenditures. It’s common knowledge that Apple makes it’s money on the hardware (the iPod), but what about companies like Napster, Passalong, Amazon, or Rhapsody who don’t have a successful hardware device and haven’t sold 5 Billion songs. Try to make a successful business from that. In spite of the challenges, it seems that all the players are still willing to duke it out until the very last blow. A few casualties of war, like SonyConnect, have already been taken to their grave, but the rest are still rounding up funding from somewhere and continue to press on.

Ask the Physical CD Retail Stores?

Ask them how in the world they plan on selling CDs that aren’t on the shelf. It only takes one consumer, one time to go into a store an come out empty handed before iTunes starts to look really good (especially considering gas prices). It’s a vicious cycle, where lack of innovation in a timely manner has caused much pain for the retailers and for the labels over the past 2 or 3 years. Protectionism has brought them nothing but further failures and a full recovery is out of the question at this point. Physical CD Sales are down 11% from this time last year and Digital is up 33%. Digital never could offset the drop of physical product and now that Digital Product gains are slowing down it’s looking more an more like the Industry as a whole will plateau at a point that is so much lower than ever expected…and this brings us to the labels…

Ask the Labels?

The labels have already suffered major blows to the headcount in 2008 and it doesn’t seem like the hemorrhaging will stop anytime soon. EMI is looking toward more shrinkage by the end of 2008, BMG wants out the Music Industry all of a sudden, and Sony, Universal, and Warner sure haven’t had it easy. In some ways, the loss of headcount is not necessarily bad. The labels have to trim the fat when and where necessary, and Digital Departments are able to pull in more revenue from more accounts with less people manning the ship, but that doesn’t necessarily mean that they shouldn’t ramp up the headcount in those areas, Most labels are struggling with quantifying the need and the value of Digital Employees. How many do you need? How effective are they? How much revenue or promotional value is coming from them versus the value being brought in by the Long Tail?  These are all valid concerns coming from the suits but the ones who are willing to invest the money right now will reap what they sow in the future when it comes to brand recognition, impact of catalog, and marketshare.