The Sky is Falling: Is the Record Industry Ready to Face the Music?

The Sky is Falling: Is the Record Industry Ready to Face the Music?
Filed in archive Commentary by Marc on June 14, 2006
This article integrates and concludes a series of postings over the past week on digital music trends.

Mitch Bainwol, Chairman of RIAA, recently told CNET "Digital sales are rising at a value that is larger than the decline in physical sales. We went through a pretty extraordinary time (recently). What you're seeing now is proof of that exercise. The promise of the digital marketplace is being realized. There's new optimism."

And now the truth.

A Pali Capital report, US Digital Track Trends Weakening, reports that while paid music download sales continue to grow compared to last year, they're actually declining week to week. This contrasts to last year when weekly sales steadily rose.

Ironically this is an industry that's been proclaiming the sky is falling due to a whole host of bogeymen - piracy, iPod copying, P2P, and so on. And now when the sky really is falling, they say it's not.

What's going on? Is the industry that out of touch with reality? Is RIAA so driven by public relations spin that it's permanently on the side of fantasy?

Perhaps it's just stuck in a permanent time warp, always several years behind. That would mean 2006 is the new 1999. The Internet boom and music sales have reached their climax, anything is possible, and the digital entertainment world was ready for something to pop.

Maybe it's all three. ... Let's focus on what we do know. The Pali report turndown is not a fantasy. It is not an aberration. It is a trend that has covered well over a quarter. It is real.

The short-term message is direct. The digital music hypergrowth of the past few years is over. The Apple phenomenon has run its course. The magical integration of style, simplicity, and software kickstarted the MP3 player industry in 2003, which in turn drove digital music sales. But 100%+ annual growth is not sustainable.

The Diffusion Group predicted this would happen a year ago. 2006 was called a transition year. MP3 player unit growth to new users would drop significantly to 35% with total penetration already reaching almost 50% of Internet households.

The digital slowdown is not good news for the recording industry.

The other part of the current digital music family - mobile, ringtones, paid P2P - capture an inordinate amount of headlines. But they are ancillary revenues with little effect on the overall business equation.

It's bad for music makers. Digital sales have risen to the point that it essentially offset the decline in CD sales in 2005. (Bainwol was right on that point. But it was for last year.) With digital's heady days behind it, digital will not make up for further hemorrhaging. It certainly is not going to return music to its prior glory days.

This situation is great for Apple. It validates their razor blade strategy and underscores the music business's tantrums that they're losing power, as the real money is in the iPod.

It's bad for online music sellers not named after a fruit. You can ignore competition when the market is exploding. But as a market matures, you only gain market share by taking it from someone else. Branding and integration increasingly become critical to customer acquisition. Hmm, those are exactly Apple's core strengths. It will be difficult to take a bite of Apple without changing the game.

The long-term message is that the industry's problems can no longer be obscured by digital.

Does this spell doom for music? It depends on your definition of music. Independent artists are thriving through the Internet and P2P.

Big music though is another story. While the industry falsely blames others for its ills (1, 2, 3), the business continues to evolve due to a raft of causes, including a slow transition to a digital world, boring music, rapacious pricing, a media glut, an obsolete format (the album), poor marketing, restrictive licensing and business practices, and a shrinking percentage of consumer entertainment mindshare and dollars.

For ten years the industry has resisted this change.

Tactically it's been a success. Friendly legislation like the DMCA has been passed and exported to most of the world. The U.S. Supreme Court has ruled on the music industry's side. Companies and even industries have been forced out of business. Legitimate music is only available under tight DRM controls.

Let's check the results snce the music industry partied in 1999. The number of artists represented, down. Revenues, down. Profits, down. An entire generation of consumers has now been lost and disillusioned. How is that all working for you, Hollywood?

Digital is not a simple format media transition, like going from albums to CDs. The digital and online worlds increasingly and fundamentally change how entertainment is consumed, stored, and distributed. Technology has swamped the entertainment industry's pretense of control despite its best efforts. Today there are ubiquitous MP3 players, storage on keychains, phones, and soon in cereal boxes, and decentralized and dark P2P networks. Computer hard drives can hold one hundred thousand songs, the equivalent of an entire label and a magnitude more than anyone owned on CDs, much less vinyl, a decade ago.

There never was any doubt about the decline of the music industry to objective observers. The predictions were issued several years ago. Since then, industry cutbacks, layoffs, and consolidations have been ongoing. Labels are focusing more on management, multi-channel merchandising, and Internet marketing. But those efforts are reactive and incremental.

It took the major labels five years just to allow online stores to sell digital downloads and subscriptions. The industry will have to move much faster with real transformation if it is to salvage any semblance of its former great self.

Otherwise the only question is how fast the sky will fall. Will the industry face the music of past years of failure?


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