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