The Music Industry Tips...Over?
by guest blogger Kevin Laws
In 2004, paid online distribution finally reaches the tipping point and gets full industry support - too late to save the big music companies.
The music industry has been resisting online distribution for over a decade because of pressure from retailers. However, during the same time period Wal-Mart and other big chains radically weakened traditional music retailers and distributors by carrying only top hits at very low prices. In 2004, the incentives have finally swung: pleasing off-line retailers will take a back seat to pushing online services.
The shift to online music services will happen very quickly now, but still too late to save the big music companies from filesharing.
Attack of the Clones
Though there were other paid services before iTunes, that was the one that finally got the industry's attention and generated millions of dollars of paid downloads a month. Since iTunes, Napster 2.0 launched (headed by a friend from my music consulting days), and a whole host of mega-companies have announced intentions to enter the space: Wal-Mart, Sony, Microsoft, Dell, HP, and even Coca Cola (targeting Europe).
At the same time, traditional retailers are fast fading in the eyes of Hollywood. The recent piece on channel conflict was titled "Tower vs. IBM" for a reason. Tower Records has been leading the charge against distributor support of online distribution, closely followed by Musicland (owner of Sam Goody and other chain stores). Musicland was just sold to private equity firm Sun Capital for the princely sum of $0 last June. Tower Records is on the brink of bankruptcy, and it looks as if Sun Capital will buy them also.
So the for-pay online distribution industry is set to explode at the same time as the traditional retailers have finally imploded. The timing of the two events is no coincidence, and the studios are finally turning their attention towards how to be successful in the online world rather than fighting it on behalf of their retailers.
But is it too late?
Better late than never, the old saying goes. However, the industry may have been held up by their retailers and fear of the unknown for a few years too long. By sabotaging legitimate paid services, millions of otherwise law-abiding consumers now use free file-sharing services. The inconvenience and cost of distribution for the old channels was just too much compared to the proliferating devices for playing digital content. Even my parents (the ultimate harbinger of mass market acceptance) recently purchased a home media PC to put their music collection in digital format.
Kazaa and eDonkey/Overnet have now both surpassed Napster's peak user count and their growth is increasing. Both have far more users than any of the paid services and are growing faster. As a group, free music download services are by far the number one search terms.
More importantly, the all-important standards battle is now stacked solidly against the industry. Every device that plays digital music plays MP3 files. At most, they will support one of the proprietary formats (iPod supports iTunes, Tivo supports Windows Media, etc.). This means that if you want to have music supported on all devices, you need it in MP3 format. None of the download services allow that, so even if you were willing to pay the money, you can't buy what you need.
Ultimately, the weakened industry will be forced to provide what consumers demand. One option is to establish a new standard that all hardware vendors will support, which they already failed to do with SDMI. More likely, they will finally by forced to allow MP3 downloads which will immediately appear on free file-sharing networks. It's a catch-22 for the industry, and a situation they wouldn't be in had they not been restrained by their retailers.
The industry tips...over
The music industry has finally reached the tipping point and are now able to focus on promoting digital distribution. Unfortunately for them, they arrived at that point about six months after the file sharing services also reached their tipping point and are growing faster than the RIAA can control.
The industry is now restructuring itself outside of the big music companies. As we predicted last year, concerts and endorsements are replacing music sales as a source of artist income. While the industry's sales have been declining, concert revenue continued a second straight year of over 15% growth.
So the music industry is tipping, but far too late to save it from the free services. The most poignant aspect for the music companies is that it didn't have to be this way -- there was an alternative, one that the movie industry will likely adopt.
Coming Soon: How the movie industry will avoid the same fate
Update: Here's a word of mouth report on how a major indy label is responding.