Steady Beats from Digital Music Forum East

The music indus­try has been in tur­moil for a decade and the long­ing for the old days of fat prof­its and con­tent con­trol was pal­pa­ble at a gath­er­ing of indus­try types at the Dig­i­tal Music Forum last week in NYC.

We’ve got two clients, Amal­gam Dig­i­tal and JamHub, in the music space that are in the mid­dle of this swirl of cre­ative destruc­tion.  Amal­gam Dig­i­tal is at the fron­tier of bring­ing expe­ri­ence and social aspects of music into the equa­tion of online con­tent dis­cov­ery and com­merce. Many vision­ar­ies describe the future of music and par­tic­u­larly rev­enue as being more “experience-based.”  Unfor­tu­nately for the indus­try that means that fig­ur­ing out how to scale rev­enue and prof­its again won’t be easy.

What fol­lows is a sum­mary of the key points that came out of the pre­sen­ta­tions and dis­cus­sions at the event.  Some of these points were also touched in in our Novem­ber Thought Leader Inter­view with music exec­u­tive Jef­frey Epstein (PDF).

1. The core busi­ness of records con­tin­ues to wane. The shadow of Nap­ster – now a decade old – hangs over the major labels and the indus­try in gen­eral. One pan­elist noted astutely that suing your cus­tomers is not a viable long term strat­egy. Some 20 mil­lion music buy­ers have been lost over the past five years. Legal dig­i­tal down­loads at $0.99 or $1.29 is not a panacea, as once thought.  Less the one-fifth (23%) of peo­ple with access to the inter­net pur­chase dig­i­tal down­loads.  The music indus­try longs for a revival of the record busi­ness but still hasn’t a clue as to how that might come about.  Even as the indus­try tries to adjust to the dig­i­tal world it keeps evolv­ing, and now the migra­tion of music into “the cloud” forces another shift on the industry.

2. Music is migrat­ing to the cloud but few know what it will mean. A sub­scrip­tion model is an obvi­ous path, but many indus­try exec­u­tives remain skep­ti­cal. Stream­ing music is still a for­eign con­cept to many con­sumers, although smart­phones and the emer­gence of Pan­dora (which is giv­ing Muzak a run for its money) are quickly edu­cat­ing the pub­lic on stream­ing music tech­nol­ogy.  Cur­rently, only 5% of Inter­net users sub­scribe to a music ser­vice. This works out to a per capita spend of only $2.

Christina Collo, Direc­tor of Music Rela­tion­ships & Strat­egy for Microsoft, noted that there was some mod­est suc­cess with their music sub­scrip­tion ser­vice.  Microsoft offers sub­scribers the abil­ity to down­load 10 MP3s per month as part of a $14 monthly sub­scrip­tion. In a pri­vate con­ver­sa­tion dur­ing one of the breaks, Christina told me that most sub­scribers do not down­load the allot­ted 10 per month.   The Microsoft model is intrigu­ing and they may be on to some­thing, which is say­ing a lot because Microsoft is not very asso­ci­ated with inno­va­tion, espe­cially in the music space.

Not sur­pris­ingly, there was a lot of buzz about Spo­tify.  The com­pany has been sign­ing up major labels to launch a ser­vice in the U.S. – recently, Sony and Citibank-controlled EMI – and there are rumors of a pend­ing deal with Uni­ver­sal.  How­ever, many indus­try observers don’t think a U.S. launch of Spo­tify is immi­nent. Spo­tify is report­edly rais­ing $100 mil­lion at a $1 bil­lion val­u­a­tion.  Some indus­try vet­er­ans were won­der­ing if Spo­tify is worth $1 bil­lion (the val­u­a­tion works out to roughly 7–8 times last year’s esti­mated sales, which seems lofty for a music com­pany, but not for a social net­work­ing enterprise).

There was a con­sen­sus that Apple will launch a music ser­vice later this year. Apple acquired Spotify-like Lala.com last year. Many were con­cerned about how Apple’s recent sub­scrip­tion announce­ment would impact iTunes and its music ecosystem.

In sum, we are in the early stages of see­ing music migrate to the cloud. This move­ment is likely to accel­er­ate in the months ahead as Apple, Spo­tify and Google roll out cloud-based music sub­scrip­tion ser­vices in the U.S. this year.  Another com­pany to keep on the radar screen in the cloud space is Rdio, which was founded by the guys that launched Skype.   Rdio is mar­ket­ing their cloud-based ser­vice as “unlim­ited music, any­where” and cur­rently is offer­ing two sub­scrip­tion pack­ages priced at $4.99 and $9.99 per month.

In terms of hard­ware devices enabling music any­where, Sonos was at DFME mar­ket­ing their prod­uct.  The Sonos player is a Bose-like sys­tem that enables music play­ing in any room through wire­less stream­ing.  Users can con­trol the Sonos unit through a smart­phone, lap­top, iPad or tablet device. The Sonos sys­tem seemed attrac­tive, but a lit­tle pricey at $400 per unit.

3. Most are toy­ing with social media and wait­ing to see how it will impact music. There are one bil­lion peo­ple using social media.  Face­book has over 500 mil­lion users and is sport­ing a $50 billion-plus val­u­a­tion; Twit­ter has over 200 mil­lion users, and LinkedIn is doing an IPO.  Der­mot McCor­mack, EVP of Dig­i­tal Media at MTV, noted that his com­pany is lever­ag­ing all the social net­work­ing tech­nol­ogy in a big way to pro­mote artists and engage fans.  There was lit­tle talk at DFME about MySpace, which has fallen off the map and is report­edly up for sale.  It remains to be seen whether Apple’s Ping will emerge as a mean­ing­ful music social net­work in the future.  Every­one is eagerly wait­ing to see what Google does in the social music media space. YouTube is a major force in music today, with some 60% of fans lis­ten­ing to music via YouTube.  Wired­set CEO Mark Ghuneim noted that if peo­ple clicked on the ‘buy’ links on YouTube videos and Face­book posts, we’d all be rich men.  His com­ment res­onated well with another pan­elist who observed that “peo­ple play what they don’t buy and buy what they don’t play.”

4. There’s some renewed inter­est in financ­ing music star­tups. John Boyle, CEO of the BAM Group, noted that VC money is com­ing off the side­lines. He said that val­u­a­tions and return expec­ta­tions are lower, and invest­ments are more diver­si­fied than pre­vi­ously. Ven­rock VC David Pak­man said he is focused on social music invest­ment oppor­tu­ni­ties. He also men­tioned he thought there was a multi-billion dol­lar oppor­tu­nity in a streaming-based adver­tis­ing ser­vice. Sev­eral pan­elists men­tioned Pandora’s forth­com­ing IPO and thought that the com­pany had a lot of upside in the months ahead.  A suc­cess­ful Pan­dora IPO will spur more pri­vate invest­ing in the music space.

John Boyle stated that he thought 2011 would be the year when com­pa­nies in many of the music ver­ti­cals that have emerged over the past sev­eral years would begin to gain trac­tion in the mar­ket.  John didn’t vol­un­teer any names regard­ing who might be the key com­pa­nies to watch in each ver­ti­cal. Read­ers are encour­aged to check out the appen­dix of our inter­view with Jeff for more infor­ma­tion.   We will be closely watch­ing the evo­lu­tion of the var­i­ous music ver­ti­cals in the months ahead for signs of emerg­ing winners.

Con­clu­sion

While many peo­ple in the music busi­ness like to blame their woes on tech­nol­ogy and tech­no­log­i­cal change, the indus­try has itself to blame for many of its prob­lems. This comes through loud and clear in the movie Before the Music Dies.  This a great film and a “must see” if you are involved in this space.

There are quite a few com­pa­nies beyond the music com­pa­nies them­selves with major stakes in how the reshaped indus­try looks in a few years.  In addi­tion to pri­vate com­pa­nies like Pan­dora, Spo­tify, and Sound­Cloud we know that Apple, Google, Ama­zon and Microsoft will all be vying for a piece of this mar­ket.  Mostly lost in the shuf­fle is Real Net­works (RNWK) which has lan­guished for years.  Is there any chance they can reemerge in this space?

Related arti­cles

• Rdio + Sonos = The Per­fect Mar­riage (techcrunch.com)
• Does Spo­tify Need $100M To Crack Amer­ica? (gigaom.com)
• Spo­tify Ties Up With Log­itech (techcrunch.com)

Tagged as: Amalgam Digital, Apple, iTunes, Mark Ghuneim, MySpace, Sonos, Spotify