A brief introduction is in order – I’ve been invited to be a guest contributor to this blog, so you’ll see my pieces pop up from time to time, principally on the intersection of music and technology, which is a pet topic of mine.
As the year draws to a close, it finally looks like commercial downloads of music over the Internet are growing some teeth, as the NPD Group figures below, quoted by CNET, demonstrate:
During the third quarter, there was an increase both in the number of people buying digital downloads and in the number of tracks sold, according to market researcher NPD Group. Legal music downloads were up 29 percent from the same period last year, and sites such as iTunes and Amazon MP3 chalked up an additional 2.8 million music buyers, to a total of 15 percent of Internet users.
However, a major thrust of the CNET story is that progress in the digital music market hasn’t been substantial enough to offset declining CD sales (down 19 percent in the third quarter), with NPD’s figures pegging overall third-quarter music demand at being down 2 percent year-on-year.
Statistics are fairly meaningless until you interpret them, and I think the key point to take away isn’t that digital sales are hurting CD sales, but rather that digital music vendors have to work even harder for customers while being content with smaller profit margins than yesteryears. It doesn’t take rocket science to figure out that the primary incentive to lure potential digital customers away from BitTorrent file-sharing is a better product. If I can get an entire album in a lossless music format (FLAC, Apple Lossless, WMA Lossless, WAV, etc) complete with album art, lyrics and liner notes from BitTorrent without paying a cent, why should I pay for the same album in an inferior lossy music format (MP3, AAC, WMA, etc) and not a shred of bonus content?
Add value, remove DRM (digital rights management, which handicaps music files), and customers will have more of a reason to part with their hard-earned cash. The top two digital music vendors in the US (and the world, presumably) are those that sell DRM-free music. Apple’s iTunes Store (which still sells some music with DRM) has been reportedly pushing to remove DRM from all of its offerings but the record labels are holding them back. Amazon MP3 has been completely DRM-free from day one. CNET reports that Amazon will still lag iTunes by a significant margin as the year wraps up, according to analyst estimates.
But Piper Jaffray financial analyst Gene Munster estimates that Amazon will sell 130 million tracks this year—a paltry sum compared with the 2.4 billion songs iTunes is expected to sell in 2008.
Again, I think the key things to take away is not that DRM-free is inferior to iTunes’ mixed approach, but that remaining DRM-free is the only way Amazon can hope to catch up with iTunes, which is precisely why the record labels refuse to let iTunes go completely DRM-free. Meanwhile, here in Singapore, which has no official access to iTunes or Amazon MP3 (you need prepaid cards or US credit cards), we’re stuck with digital music vendors that only peddle DRM-riddled music. Nokia Music Store, Motomusic and Geetunes deserve props for investing in Asia, which some people considered a hopeless market for digital media because of piracy. But they need to a lot better than the 192kbps WMA DRM music they expect to convert sceptics. The fundamental question is whethe or not a particular vendor’s offers more value than the free alternative. Expecting consumers to pay for the privilege of supposedly doing the right thing is wishful thinking.
Independent digital music stores like CD Baby (which is open to Singapore customers) offer DRM-free music, and are an alternative to Nokia, Apple, etc, but have relatively small catalogues, which means they’ll always be niche players, despite having the right idea.
The digital video market is faring better than the music market, and seems to be learning from its sibling’s mistakes. Reuters reports that Universal Music is making money from YouTube, which is especially relevant to the music industry because many people go to YouTube specifically to listen to music videos.
In an interview with CNET News this week, Rio Caraeff, executive vice president of Universal Music Group’s eLabs, said the largest of the top recording companies is bringing in “tens of millions of dollars” from YouTube.
“(YouTube) is not like radio, where it’s just promotional,” said Caraeff, who heads up Universal’s digital group. “It’s a revenue stream, a commercial business. It’s growing tremendously. It’s up almost 80 percent for us year-over-year in the U.S. in terms of our revenue from this category.”
“Doug Morris, Universal’s CEO, has led the industry to set up videos as a revenue stream. Since 2005, Universal has gone from making zero dollars on music videos to nearly $100 million.”
Universal Music seeing ‘tens of millions’ from YouTube
If media companies can learn to translate this kind of YouTube monetization to the digital music industry, revenues might finally eclipse those of CDs and we can move from lamenting lost CD revenues to bemoaning the decrease in audio quality in a market obsessed with MP3s, despite the very viable existence of alternative formats.
Here’s to hoping for a better year for the digital music market, amid recessions and cutbacks.
[...] Vote Digital music doing ok, but needs to drop DRM & add value [...]