Industry Trends

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Impact of the Internet on music distribution industry - Current trends

The distribution of music was once the exclusive domain of the major record companies, i.e. Warner AOL, EMI, Sony, Universal and BMG. However, a new business model is emerging that may fundamentally change the way music is distributed. Digital distribution of music on the Internet has altered the landscape of the music business. This has created both threats and opportunities to those in the music industry. Artists, labels, retailers, and consumers are all taking a closer look at the roles they will play. Although it is widely believed that consumers will be slow to adopt digital downloads over physical media such as compact discs, musicians, retailers, and independent record labels can position themselves to benefit from this emerging new business model.

Just exactly what are we talking about when we say digital music distribution? Recent technologies have made it possible to take music from a downloadable file and play it on a personal computer or handheld device. Today, finding music on the World Wide Web is as easy as typing "MP3" into a search engine. This simple process has presented a challenge to the recording industry. It also brings into question several legal ramifications including piracy and intellectual property issues. Industry groups such as the Recording Industry Association of America (RIAA) and the Alliance of Artists and Recording Companies (AARC) have filed many lawsuits on behalf of their members to suspend the unauthorized distribution of copyrighted music. The industry has also proposed the Secure Digital Music Initiative (SDMI) to standardize the process to protect artists and record labels in the digital domain. According to Kevin Conroy, senior vice president of marketing at BMG Entertainment, "The end goal for SDMI is to create a marketplace in which companies can all operate with a degree of security that people can be comfortable enough with so that we can actually create a commercial marketplace."¹ However, it is apparent that technology will always move faster than the law. More and more technologies are becoming readily available to foster the growth of music online.

Industry forecasts

According to Jupiter Communications, currently online sales of traditional CDs, tapes, and records account for just 1.1% of total music sales of $13.7 billion. This is predicted to grow to 14% by 2003, but, most of this growth will be cannibalization from existing sales channels. This excludes digital downloads which will account for just a modest 6% of online sales by 2003. One of the major obstacles facing digital music has been download time and speed. A recent Forrester's study indicated that 76% of Internet users would wait no longer than 30 minutes for a download. As bandwidth technology advances, shorter download times should help to increase the demand for digital music distribution.

Major label response

The major labels have been slow to accept models like MP3 and Napster. They have primarily focused on using the Internet to distribute traditional recordings such as CDs. They have also made equity investments in companies such as CDNow, MusicMaker.com, and others.

While consumers are demanding more customization of their music, the major labels have been reluctant to provide this since it would jeopardize album sales. Complete albums can fetch prices of $16 retail on average. However, the ease with which consumers can make near CD quality recordings of an album or song, and swap them with friends over the Internet has forced the hands of record labels.² While record labels have experimented with downloadable music, it has been primarily on a promotional basis. Recently record labels have joined forces with Internet content providers to position themselves for this resolution.

E-tailers

Another group of retailers has emerged in the Internet era. This Internet-only group has become popular as companies such as Amazon and CDNow continue to drive CD sales. However, the majority of these businesses are currently unprofitable. For instance, it is estimated that CDNow, given its cost structure, cannot break even until its annual sales reach about $1 billion. This is a long way from its sales of $147 million in 1999.³ Many of these e-tailers are hoping to form larger partnerships with record labels and other content providers. However, CDNow's recent failed joint venture with Time-Warner and Sony suggests that the major record labels are seeking to develop their own independent digital strategies.

Retailers' response

Thousands of traditional retailers have set up sites to allow them to capitalize on the advantages of the Internet. This includes larger outlets such as Tower Records, Barnes and Noble, as well as the smaller regional retailers. The Internet allows them to reach customers outside their geographical areas and creates awareness for their brick and mortar stores. It has also created problems. Often, small retailers lack the funds to properly market their sites and need the economies of scale available to larger competitors in order to effectively compete. However, the Internet does not spell the end of traditional brick and mortar retail shops. According to Jonathan Bulkeley, CEO of barnesandnoble.com "Sixteen-year-olds are not only going to Tower Records to buy music -- but to see other 16-year-olds. Fans of French literature don't go to Barnes and Noble only to buy French literature -- but to see other fans of French literature. Bookstores and music stores are also a social place." ⁴

Independent artists/labels

Digital distribution of music may provide independent artists and independent record labels with an opportunity to bypass the traditional gatekeepers, i.e. the major record labels. One recording artist remarked, "I love the freedom. You don't have to answer to A&R, you don't need anyone's permission, you can make your own music.... We don't have to play by anyone else's rules." ⁵

While digital distribution has yet to make any bona fide stars, the ability to directly reach their fan base has provided independent artists and labels with a promising promotional tool. According to e-tailers CDNow and Amazon, free downloads are helping to drive sales of full length CDs.⁶ In addition, creating awareness allows artists to more successfully tour and sell ancillary items. Artists typically earn most of their income from the sale of ancillary items such as T-shirts rather than directly from master and mechanical royalties. Finally, digital distribution provides unsigned bands with a forum for networking and an opportunity to attract the attention of the major record labels. A&R representatives are now going online to discover new music as an alternative to frequenting bars and clubs.

Notes:

^[1] Chuck D: 'Gotta Share the Tunes'
by Christopher Jones 12:40 p.m. Oct. 18, 1999 PDT

^[2] A Music Industry Death Knell? by Michael Stroud 3:00 a.m. Jan. 11, 2000 PST

^[3] Ex-Highflier CDnow Hunts For a New Deal Left by Time Warner, Sony, Firm Watches Reserves Slip By Martin Peers, 04/04/2000 The Wall Street Journal Europe Page 28

^[4] "Record Stores Keep on Spinning" Wired Chris Oakes

^[5] "MP3 Can't Beat Old School" Wired Andy Patrizio 11:45 a.m. Dec. 16, 1999 PST

^[6] "Give Away Tunes, Make Money?" Wired Jennifer Sullivan

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