I started off 2011 by declaring that the digital music market was facing an impasse. It is tempting to think that we’re beginning to get out of that impasse with the launch of cloud services from the big three of Apple, Google and Amazon, and with Pandora’s successful IPO. By and large though, we are still pretty much where we were. The fundamental problems persist:
- Consumer spending is not growing quickly enough due to a lack of compelling new services
- The 99 cent download model remains unproven outside of the iTunes ecosystem
- Small margins are discouraging investment and new services, driving market consolidation
- The economics of free don’t yet add up
We Are Not Ready For The Consumption Era
Anyone who hasn’t been on Mars this last decade and a half knows that the music industry is undergoing a transformation of seismic proportions. Not everyone though grasps what that change actually is. Tumbling revenues, stuttering download sales and the pervasive threat of piracy are the symptoms, not the causes nor even the effect. They are symptoms of a paradigm shift from distribution-to-consumption, from selling little shiny discs towards on-demand models. This should be a manageable process with pain levels kept at a tolerable level. It is not because we don’t yet have a portfolio of killer consumption-era products that generate large enough incomes for rights holders and – crucially – at the same time that generate large enough profits for the services.
Digital Music Doesn’t Do Enough for Either Side of the Value Chain
That tension between rights holder income and service provider margins is creating fault lines right across the digital music value chain. Pandora – one of digital music’s true success stories – had a very successful introduction to the stock market yet remains unprofitable despite having a big – and growing – installed, highly engaged user base. Pandora complains that rights costs are too high, while label execs complain that Pandora doesn’t pay enough. Similar arguments persist around ad-supported on-demand services like We7 and Spotify, and now the new wave of locker services.
The problem is that both sides are right: cloud services are not generating enough income for rights holders and profit margins are small at best, often negative. Worse still, free and nearly-free services increase consumer perceptions that music should be free in the digital arena, and the increased sophistication of the (legal) free services raise consumer expectations, but not willingness to pay (see graphic).
Business Models and Products Must Be Innovated
So how can the circle be squared without breaking the model entirely? The answer lies in pursuing two strategic imperatives:
1. Focus on subsidised, consumption-era products. On-demand services which feel-like-free to consumers but are paid for by third parties such as ISPs and car manufacturers who get a boost to their core products by bundling music with music. Think how small a fraction of the cost of a new cars’ price 2 years of Spotify Premium would be… There are plenty of companies trying to drive this approach (e.g. Beyond Oblivion, Omnifone, 24/7, Deezer and 7 Digital, even Spotify has given it a go). Now is the time to recognize that subsidised models are not an alternative approach, but the main thrust for the mass market consumer.
2. Build exciting new music products that don’t just repackage the analogue-era ones. But business model innovation alone isn’t enough. It will fix the financial tensions but consumers still need an exciting raft of new products and services that are designed for the consumption-era. 99 cent downloads are a digital sticking plaster for the CD business. 21st century music products must leverage ubiquitous connectivity, social tools, interactivity, multi-media and on-demand behaviour.
More people are listening to more music, across more devices than ever before. That is a fantastic foundation stone for future growth, but the challenge can only be met with consumption-era business and service innovation.
Mark Mulligan created a huge buzz at MIDEM 2011 with his “SPARC” presentation. You can watch that video – and now enjoy its slides – here. Formerly with Forrester, he is now an independent music industry analyst, whose blog you can check out here.