The resurgence of the music business is tied to the industry’s embrace, finally, of new digital distributors.
Case in point: adding to YouTube, which is more MTV now than MTV as a distribution platform for music videos, Google is in talks to launch a Spotify competitor that would be distributed, among other places, through the Nexus handsets and tabloids, as well as through the Android OS more generally. As the FT notes:
Advertising executives also speculated that by scrutinising consumers’ listening habits, Google could build a valuable database for advertisers.
“It will be another piece of the puzzle for understanding consumers,” said Christophe Cauvy, European head of digital at advertising agency JWT. “This will be very interesting for brands where purchases are emotionally or status driven.”
For a decade and a half, recorded music has been the poster child for an industry that resisted and, consequently, was decimated by the Internet.
Now, finally, according to Doug Morris, current CEO of Sony Music and the past CEO of other mega-labels such as Warner and Atlantic, the recorded music business is back, having finally made the transition to digital. Profits are up, and there is still a place in it for the suits at the labels:
Now Morris says the profits are returning and the thrill is back. “The industry is transitioning itself into something that will be very valuable, unless we screw it up,” he says. “There’s big money coming in from videos. Huge money. There’s a transition from ownership to access personified by something like Spotify. We’re making a lot of money from this explosion in Internet radio, the Pandoras of the world. You can see Apple getting ready to get into it.”
What’s more, the cost of distributing digital music is lower than CDs or vinyl albums. “It’s a better business,” Morris says. “The margins are higher.”
The numbers support him. Industry analyst Alice Enders expects annual music sales in the U.S. to hover at around $5.5 billion over the next three years as declining physical sales are replaced by the digital variety. That’s a relief for an industry that was in free fall for the past decade. Moreover, Enders argues that guys like Morris are more relevant than ever. “I think the suits win out in this transition,” she says. “This is a much more complex business than people often realize. You have to find artists and keep the right ones. But you can’t waste money like you could 10 years ago. You have to control costs with an iron fist.”
One business model for Internet radio is advertising — the model that, in one form or the other, has monetized many of the Internet’s biggest successes including Google and Facebook. A couple of interesting metrics and challenging dynamics are touched on in the WSJ today in making that model work for Internet radio.
In terms of market numbers, radio advertising is expected to come in at $16.3 billion this year. In contrast, online audio streaming ads are $550 million (with $225 million of that accounted by Pandora). Online audio streaming has not decimated the radio business, the way online advertising undercut classified ad spending.
In terms of dynamics, unsurprisingly, the radio industry is using its intermediaries to undermine Internet radio. Arbitron — the ratings relied on by advertisers — doesn’t measure online radio, making it hard for Pandora and others to sell their inventory by providing a third-party “apples to apples” measure of effectiveness to advertisers in the form that they are used to. Pandora is turning to another firm to generate such ratings, demonstrating that business model disruption often involves building up one’s own market infrastructure to reach the customer.
Turntable.fm has lifted off with ferocity, addicting those with early access while motivating others to find a way through the velvet ropes into the virtual club rooms.
What characteristics of turntable.fm proved to be the booster fuel, enabling this type of launch buzz and engagement?
- Many of us secretly or not so secretly, have a desire to be DJs, so this concept for sharing music is compelling: a context where the DJ and other users are anticipating what song will be pulled out of the milk crate and whether the selection will drive forward the ongoing mix.
- There is a gaming element (winning points gains you better avatars).
- There are social elements (get your friends and work colleagues in, along with meeting new people based on musical taste).
- Related to both the social and gaming aspects is the quest for social approval for the user’s mix skillz and general musical taste.
- The combination results in intense engagement providing an opportunity for music discovery, giving at least a glimmer of hope for a business model to be built on this. (If the labels cooperate, historically not a given, so this is a big if.)
Any lessons here for other concepts? Something sports-related could share these characteristics with the right implementation. Perhaps something around fantasy sports and real-time play calling during live sporting events.
The question with all rocket launches is whether the rocket reaches orbit or does it come crashing back to earth? If we are still talking about turntable.fm a year from now, and we very well may be based on early returns, we will have some more lessons to draw about keeping something from being a passing fad and creating something more durable.