May 23, 2008

Artists look for new revenues—think ads—as total recording sales dip.

Even as legitimate music downloading is increasing, the music industry is still searching for business models to reverse its declining revenues. This is making things more complex both for consumers, who need to stay current on which music formats and players work together, and for musicians, who have to consider far more revenue streams than just CD sales.

It was not supposed to be like this. The industry had staked its future on the hope that the legitimate download business would make up for falling CD sales. From the standpoint of audience engagement, this scenario has played out favorably.

More people than ever before are buying music, and the balance is shifting decidedly toward downloads and away from physical formats.

Despite the audience in the downloading sector, the revenue math has not added up for the music industry. Per-capita music spending in the US is trending downward, offsetting the increases in the number of music buyers, according to eMarketer calculations based on data from Bridge Ratings and the US Census Bureau.

Annual Music Spending per Capita in the US, 1980-2006

Estimates of per-capita music spending are not yet available for 2007, but there is little reason to expect a reversal of the downward trend that has continued since 1995.

eMarketer senior analyst Paul Verna contrasted digital music with photos, and said the array of music formats, players and vendors has hindered sales growth.

"One of the things that's driven photo sharing is its simplicity: There are only a handful of widely used file formats, and they are compatible with virtually every editing and sharing program," Mr. Verna said. "On the other hand, you have the music industry, which has been a rat's nest of restrictions and incompatibilities." He added that Apple had been a double-edged sword for the industry, with a closed loop that works fantastically for iPod users but leaves many frustrated consumers outside of that system.

Additionally, most of the content on the fledgling, ad-supported "free" music services is protected (or hamstrung, depending on one's point of view) by digital rights management—yet another roadblock consumers must negotiate when choosing music formats and vendors.

Because of shrinking recorded music revenues, people in the music content loop now consider every possible source of income: exclusive retail deals with companies like Wal-Mart and Starbucks; licensing music for commercials, movies, TV shows and video games; complex brand sponsorships; ringtones; and anything else that might make up for flagging CD sales.

"There's a wide range of distribution channels and many formats," Mr. Verna said, "but very few deliver good bang for the buck, so you have to get many going at the same time. The concept of 'selling out' doesn't even exist anymore."

He added that, in the current industry climate, fewer musical artists make much money from recordings—except for top-tier hit-makers and those who write their own material and get it licensed broadly.

These trends are reflected in the increasingly fractious relationships between artists and labels. Big music deals have become a rare breed, and the ones getting attention, like Live Nation's signing of Madonna, have less to do with selling recorded music than with leveraging a brand. Concerts, merchandise and other music-related sales used to bring ancillary revenues, but now they are the core product, at least among upper-echelon artists.

As the music industry adapts to this new landscape, it will find itself with consumers who are tough to impress. "Music still moves people, but people expect it—it's just there," Mr. Verna said. "The days of die-hard fans hunting down rare imports are long gone. Despite format, player and vendor restrictions, consumers can now get anything they want if they know where to look."

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