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Mark Mulligan: The Digital Music Impasse

What next for digital music? The vice president & research director at Forrester Research shares his vision...

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Mark Mulligan

In my previous post I asked whether we have come to the end of the road for downloads. As the paid download sector is the heart of digital music revenue, the logical next question is: has the entire digital music market reached an impasse?

Music product innovation remains stuck in first gear
Too many stores are chasing too few customers with the same undifferentiated product and catalogue.  Until the product itself is innovated a free download will always win over a paid download, however cheap the download.  And yet the market is woefully short of new recorded music products. iTunes Albums isn’t the answer (though combined with iTunes Pass and some iOS App innovation it might start to be).

Despite their mini-Renaissance, music subscriptions remain the domain of aficionados
The latest new wave of music subscriptions (rdio, MOG, Spotify etc) may all have trendy names that sound like they were born in the dot-com-bubble but it’s not just their names that are a throw-back.  They all offer the same premium rental model that Yahoo, Virgin, Napster, Rhapsody etc spent years failing to break out of a hardcore niche of early adopter aficionados.  Most people don’t like paying for renting music, especially when they can’t play it when and where they want.

Portable rentals aren’t enough
Of course Spotify have moved the conversation on significantly with their ‘offline streaming’.  And their reported 650,000 paying subscribers is positive news indeed, with portability crucial to why Spotify’s premium model will continue to grow.  But 650k is still way less than 10% of Spotify’s c. 10 million total users.  The fact remains that most of Spotify users don’t believe streaming music is worth paying for.  No one in Europe or the US has yet managed to break the 1 million paying subscribers mark (Rhapsody & Napster peaked at c.800k, Yahoo and AOL at c.400k).  Even if Spotify does break the 1 million mark, we’re still talking about a niche, high end value proposition.

Free is where the heat is
Spotify of course earned its spurs (at great cost too) via its free service.  Free remains the driving force in digital music, and not just illegal downloading.  Any idea what the number one digital music activity in Europe is?  Music video.  That’s right, YouTube as digital music’s killer app.  It is a sad indictment of digital music innovation when poor quality video with even poorer meta data leads the pack, but YouTube is inescapably the intersection of convenience, choice and (no) cost.

The music industry’s failure in the 2000’s was not to recognize quickly enough that free wasn’t just a problem that could be swatted away, but instead  a consumer usage paradigm shift.  Spiral Frog, Qtrax, Spotify, We7, Last.FM, imeem, Comes With Music are / were all early indications of the labels’ recognition of the need to fight free with free itself.

Start-up momentum is focusing on the periphery
Making free music pay is no easy task (as Spotify’s cash burn bears testimony to).  Couple that with Apple’s unremitting dominance of the download market and it should come as no surprise that the momentum of startup innovation and investment is shifting to the outer circles of digital music, to elements such as discovery (Soundcloud), creation (MXP4), fan funding (Pledge Music).  These sorts of startups have learned the lessons of previous generations and not burdened themselves with potentially crippling conventional licensing agreements.

Digital music innovation must be a partnership
More startups need pulling back into the core of the digital music business. We are in a potentially dangerous transition phase that needs urgent remedial action:

1.       Rights owners and startups need to share the burden of innovation (The BPI’s Innovation Panel is a welcome step in this direction)

2.       The financial barriers to entry need lowering

3.       Rights owners need to learn how to better help finance innovation and better participate in its profits.

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