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The UK’s Official Charts Company recently announced that paid downloads look set to reach 170 million by year end. This may look impressive at first sight but the numbers only equate to 1 album per UK iPod owner. Even growth isn’t where it should be: 170 million download sales would represent 14% growth on 2009, which is solid enough but not for a sector which is supposedly in the early stages of development. If paid downloads were a mainstream sector in early stages of growth (which they should be if they are the future of recorded music revenues) then growth should be closer to the 25%-30% range now. And this isn’t a UK-only problem, it has direct relevance for all of Europe’s big music markets and of course to the US.

So what’s happened?

The pervasive presence of the iPod.

The digital music market’s core problem is also its core asset: the iPod. Apple accounts for the majority of paid downloads, in some markets with 75%+ of sales. Despite commendable efforts from Amazon and local indigenous players such as Music Load (Germany), Virgin Mega (France) and 7Digital (UK) Apple’s soaring market share remains intact. The simple fact is that the download sales are an extension of iPod sales, effectively monetized CRM.

New iPod owners become harder to find.

One of the key challenges posed by the dominance of Apple (and there are a few) is that fluctuations in iPod sales manifest themselves directly in download sales. iPod sales have flattened out (Q1 and Q2 2010 are below the same quarters in 2009) and crucially the share of sales that are replacement is soaring, which in turn is slowing the growth of the installed base. Assuming a modest two 3rds of iPod owners replace their devices after 2 years, the growth in the installed base in 2009 was just 13%. (If you assume 100% replace the installed growth base rate is zero). This all matters because the fewer new iPod owners there are, the fewer new iTunes customers there are.

Relying on sales per buyer is a big ask.

So the dynamic growth music companies need has to come from increased sales per buyer. And this is happening, but only to a degree. Sticking with our 66% replacement rate assumption, the average number of download purchases per iPod grew from 16 in 2007 to 24 in 2008, dropped back down to 14 in 2009 and are so far mapping to about 20 in 2010. What is needed is major growth in digital music customers not just the existing ones spending more.

When Apple looks beyond music.

The final piece of the puzzle is that Apple’s sights are now set on much bigger horizons than the comparatively narrow confines of music. In the days when their devices had monochrome screens music was the killer app. But now in the days of the iPhone and iPad music has been shunted aside by downloads of all other kinds of apps…3 billion of them. Music no longer powerfully demonstrates the capabilities of Apple’s devices.

Innovate the product, control the future.

Apple can absolutely be as important a driving force in the next chapter of digital music’s growth as it was in the first.  But only if labels, publishers and artists alike engage Apple and other device manufacturers are product innovators. Until we have a series of new music products that utilize all of the creative assets of a device such as the
iPad, download sales will rapidly lose relevance. And as well they should. The paid download was a transition technology and no more. It was useful for bridging the divide between the analogue and digital ages but it has run its course. But until new music products arrive the slow demise of the download will also be the slow demise of digital revenues.  Streaming services, apps and the rest are all parts of the puzzle. But the music industry needs a new killer premium music product to pivot around.

It is time for a new generation of music products to herald in The First Golden Age of Digital Music


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About Author

Research Focus Mark serves Consumer Product Strategy professionals. He is a leading expert on music and digital media. Mark came to Forrester through its acquisition of JupiterResearch, where he ran Jupiter's European research and data teams. Prior to joining JupiterResearch, Mulligan spent five years working in media consultancy and market research managing projects and delivering international projects. Previous Work Experience Mark came to Forrester through its acquisition of JupiterResearch. Mark joined Jupiter in May 2000. He regularly appears on TV, radio, and in the press, commenting on the European music industry, including BBC television and radio, ITV, CNN, BusinessWeek, The Economist, the Financial Times, The Guardian, and The Wall Street Journal Europe. He frequently speaks at conferences such as Popkomm, In the City, London Calling, and Midem. Mark was also a recording artist.

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