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Rise of digital music spells end of record label as we know it

Plummeting CD sales means that the record label as we know it is on the way out. And fast-rising digital sales are not enough to reverse the trend.

His Master’s Voice is fading fastYankee Group announced at the 2008 International Consumer Electronics Show on Tuesday that two fundamental shifts were driving the music industry – digitisation and direct-to-consumer transactions. As a result, US recording industry revenue has plummeted 25% since peaking at $14.6 billion in 1999. By year-end 2006, it had declined to $11 billion.

In 2008, according to the Consumer Electronics Association, games software will pass the $11-billion mark, confirming that computer games now represent a bigger content market than music.

According to the Yankee Group, both online and mobile digital revenue is growing, but is insufficient to offset declining CD sales. Over the course of the next several years, Yankee Group anticipates that music industry revenue will begin to stabilise in the US, though at a lower level than previously seen. By the end of 2007, digital music revenue in the US grew to $1.98 billion, and is forecast to reach $5.34 billion by 2012. However, artists will increasingly keep the lion’s share of this revenue as record labels become marginalised.

Said Michael Goodan, director of digital entertainment at Yankee Group, “It’s not just that the record labels are facing declining revenue; rather, the basic relationship between recording artists, record labels and consumers is in major flux. As bands retain ownership of their music, the record label’s role shrinks while the role of technology vendors and online music stores grow.”

Yankee Group predicts that within the US digital music industry, online music will grow faster than mobile music downloads and online single downloads will outpace album downloads or subscriptions. Despite wireless carriers’ best efforts, online distribution will continue to dominate the category, accounting for 80% of the industry revenue. Although the addressable market for music phones will have grown to more than 266 million, only 9% of mobile users will actively use them as portable music players.

Yankee Group also provides the following recommendations for record labels and mobile carriers challenged with developing consumer connection during this disruptive period, including:

  • Abandon DRM; embrace watermarking: Record labels can’t escape DRM, but by embracing watermarking, they will make it completely transparent to consumers.
  • Leverage Anywhere Consumers: Record labels should encourage consumers to become legitimate distribution channels themselves and enable them to profit from it.
  • Promote PC, not the phone: Wireless carriers must aggressively push the PC rather than the phone as the digital music distribution channel. The PC dominates music downloads.
  • While the latter may be a viable alternative in the United States, however, World Wide Worx research has indicated that it would be a disastrous strategy in Africa. The mobile device holds tremendous promise as a music access channel for the developing world. But the debate on the future of music is not a simple one, and it has only begun. Stay tuned…

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    The Big Change is a business strategy blog and newsletter published by Arthur Goldstuck, managing director of World Wide Worx, a leading technology research organisation based in Johannesburg, South Africa.

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