The future of the music industry

The Economist laments the death of the music industry as we know it:

the results from 2007 confirm what EMI’s focus group showed: that the record industry’s main product, the CD, which in 2006 accounted for over 80% of total global sales, is rapidly fading away. In America, according to Nielsen SoundScan, the volume of physical albums sold dropped by 19% in 2007 from the year before… More worryingly for the industry, the growth of digital downloads appears to be slowing.

So perhaps it’s time for the industry to develop a new business model, but what are its options? Well this is a great example of a two-sided market. Record companies serve not just the consumer, but also the artists. However, the complication in pricing is that there are strategic complementarities between the two sides of the market: when there are better artists the value of the company rises and increases the profit that they can make from consumers. This is why record companies pay artists and charge consumers. By attracting the best artists with subsidies they can then charge more to consumers.

The competing goal is for companies to have large networks of consumers in order to attract good artists through the promise of good publicity. The easy availability of music on the internet has made consumers far more price sensitive and reduced the attractiveness of the recording companies to artists. The companies have made music available on the internet, but have yet to really change their pricing model to reflect the increased consumer price elasticity.

One option would be to decrease the subsidy paid to artists and also decrease the price charged to consumers. Shifting the burden of paying for the company’s platform towards artists would increase the consumer base, but risks driving away musicians. Unfortunately for the companies, the artists with readily available alternative means of distribution are those who already have a high profile and add the most value to the label (eg Radiohead). Reducing their wages may decrease the value of the label more than it increases the consumer base. However, those groups that have released online have typically not done so for the greater profits, but rather as a political statement. If music were very cheap for consumers then paying a record label to release your album and garnering the increased publicity may be well worth your while. Releasing cheaply on the net would also make less of a political statement if music were very cheap for consumers and is unlikely to reach a broad market unless you’re already a star.

It may also be, as The Economist points out, that labels need to horizontally integrate and promote their artists through tour events and other appearances. Since there is no substitute for live performances, demand is far less elastic in this area. That would allow the label to subsidise the artists in the recording side of the industry to some extent by taking a cut of the ticket revenues.

While not an easy problem by any means, it is clear that the changes in the availability of substitute means of obtaining recordings have changed the music industry forever. Perhaps record companies as we know them won’t be around for much longer and entirely new platforms for sustaining the music industry will soon arise.

2 replies
  1. Ed Zuccollo
    Ed Zuccollo says:

    Interesting post, thanks for writing about this!
    It is obvious that there is a need for change like you say, but what form will it take? I think that record companies need to treat this as a challenge, rather than an end to physical sales, and need to be very creative for CD sales to stop declining. CD sales will never die out completely because there is a certain culture associated with going out, buying a CD, and having the hard copy. This needs to be made more special and marketed as such so that digital buyers are missing out on something that they want – whether it be an attractive packaging (a CD I saw recently contained little cardboard cut-out animals, also the Tool album 10,000 Days has a pair of stereoscopic eyeglasses to view a series of images in 3D) or a limited edition freebie of some sort.
    Die-hard fans of certain artists will almost always buy the CD, and sometimes hunt down the vinyl copy at collectable prices. This alone won’t make up enough sales though, maybe merchandise will play a bigger part? Not sure. CDs are still being bought at live shows too – after the show when people are in money-spending mode and amped they tend to buy them more readily I think.

    Artists are promoting themselves more on MySpace and Facebook now, which is great for worldwide exposure (if you can be bothered spending enough time on it!) which you wouldn’t get otherwise. Playing live to people as much as possible is a great way to get yourselves out there too – but if labels aren’t giving good deals in reaction to the declining consumer market then the artist will need to put in all that work themselves to ensure they get exposure.

    By the way – don’t forget to check out my MySpace and my funk band Harbour City Electric 😉

    I’m tired now and need to make a bacon avocado tomato sandwich, so won’t start ranting about anything else just yet, although there is a lot.

  2. Nat
    Nat says:

    I thought you might be interested in this site

    They offer free mp3 downloads from upcoming and established artists and make money by having sponsers such as NOKIA and PUMA.

    I think there is a huge possibility that record labels as we know them will not exist in the near future, its so much easier for upcoming artists to promote themselves nowdays (eg Lilly Allen and Kid Sister through Myspace)

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