The music industry has been undergoing drastic changes since the advent of widespread digital distribution of music. Firstly, the new technology has changed the way people perceive music. Especially the younger generation does not associate it with a physical and tangible album anymore, since the music is easily streamed in real time, wherever we are. Secondly, the effective strategies in the music industry became quite ambiguous and peculiar. In general, the economic value of any creative product is difficult to subjectively evaluate, but it seems that the Internet has complicated this problem even more. By now, society has developed an extremely entitled culture, where any kind of art is seen as communal property which should be distributed for free. How to tackle these problems? About these changes, opportunities and threats of the music business, I spoke with dr. Joris Ebbers, the coordinator of the Entrepreneurship and Management in the Creative Industries (EMCI) track in the Master of Business Studies at the University of Amsterdam.
If you were to compare the business model of music producers and record labels in the ’90s and now, what are the most crucial differences?
When comparing the music industry of now with that of the ’90s, we can see that the business model has been reversed. In the nineties, the typical marketing practice was to first record an album, and then go on a concert tour to promote it. Often times, such tours were not profitable, but this was not their purpose. Concerts served as a supporting marketing tool and were aimed at creating awareness of a new album release. Nowadays it is quite the contrary. Artists get most of their revenue from live performances, and the sale of the album has become less important. When looking at the selling ticket prices from ’90 and now, it can be noticed that prices have increased by almost 400%, while other consumer goods have risen by 150%. Even though the concert prices have been gradually stabilizing, the general trend of moving from ‘album selling focus’ to ‘live performance focus’ can be easily observed.
In the age of online platforms such as YouTube, it seems that it became much easier for beginning artists to promote themselves and be less dependent on the big record companies. Is that the case?
I think that the answer is yes and no. On the one hand, it is getting more difficult to stand out now, since everyone can upload anything to the Internet and the music market is very saturated. More people have the opportunity to try, so the competition has grown. On the other hand, small artists have more power to create their own success. They can build up their group of fans without any help of management companies, and prove or defend the quality of their music. In the past, one needed a lot of luck to be picked up by a record company. Now, it is less about luck and more about being a self-manager and actively exploit all the free promotion channels that the Internet offers. Therefore, it is easier now to set the first step into a career by building one’s own platform, showing that the audience actually likes the music, and then eventually wait to be noticed by a music label company to boost the success further. Also, management companies have slightly changed their practices. For example, big record companies often form alliances with small, local companies, which do some research and development for them. These small companies are better fitted for the market, and it is easier for them to focus on searching for new talents. Another strategy for the smaller record management companies is to independently search for talents, grow them to a recognizable name and, eventually, team up with a bigger label company that takes these talents to the next level, making a star of them. Generally, the role of music label companies is still very important. Since anyone can publish on the Internet nowadays, it becomes difficult for consumers to find out what they like. These labels filter out artists and help in promoting them. For instance, one of the owners of a small label management company in Amsterdam who works in a electronic dance industry, has told me recently that his role became even more important. He introduces new artists to DJs who choose some songs they like. Subsequently, through these DJs regular consumers pick up these songs. But because the label manager has a network of DJ that he always feeds with music and he knows thier music taste, it is more likely that some of these artists will be indeed picked up by these DJ. Therefore, DJs are becoming important selectors in this dance music scene and then this process is being filtered by the labels managers. Therefore, there are usually many filtering and selection layers in the music industry, but the label management still has a very important role.
But do consumers really need all these filters? Can they not just select the music specifically suited to their tastes? Does the Internet offer more freedom in that?
The Internet indeed does create such an opportunity, but counterintuitively people still gravitate towards hits and blockbuster. Chris Anderson, in his book Long Tail: Why the Future of Business Is Selling Less of More, highlighted the idea that nowadays online merchandise is no more restricted by the physical shelf space, and therefore retailers are able to offer unlimited number of titles, covering the demand for niche products. Anderson thought that niche products might have been better fitted to the specific consumers’ needs and tastes, and would therefore be sold profitably. The theory of the long tail in a nutshell was that our culture and economy is increasingly shifting away from a focus on a relatively small number of ‘hits’ (mainstream products and markets) at the head of the demand curve, and goes towards a huge number of niches in the tail. However, the truth is that blockbusters became even more important nowadays. Even though people can choose from a wide variety of creative products, they mostly pick blockbusters. Consumers are overwhelmed with the amount of content that is accessible online, and they need a hint of what is good quality music and what is not. Hence, the 80/20 rule better represents reality. Recent studies discovered that, of the tens of millions of tracks available for sale on the web, 80% sold no copies at all — and that 80% of the money spent on the 20% that did sell went on just 52,000 songs. This proves the assumption that people still gravitate towards blockbusters and hits. The long tail theory has not taken into consideration a few important aspects, for example the phenomenon of collective social dynamics. People tend to buy very popular titles because of a need of belonging to a social community group, social interactions, or a tendency to imitate peer behaviour. Moreover, people usually think that popularity implicates a superior quality, and that way of thinking further empowers blockbusters’ success.
Global record sales dropped by nearly 40% since the year 2000, but at the same time, consumers seem not to decrease their music consumption (I would even say quite the contrary). Therefore, there is a huge music market need that is fulfilled now by illegal downloading or free online streaming. It seems like people do not value music anymore. How to make consumers willing to pay for something that is already available for free?
When people download music illegally, they indeed often do not pay anything directly. However, it does not mean that these people do not value music. In most cases, they are perfectly aware of the costs involved in producing a song, and that illegal downloading hurts artists (or at least album sales). On the other hand, music streaming companies like Spotify do offer free music in a legal way, but it is supported by advertising. These companies that want to advertise on platforms such as Spotify or YouTube are actually the ones who cover the cost. A similar situation can be seen at the radio stations; consumers have free access to the music played on the channel, and the artist gets the royalties payments in return. But the advertising companies that have their on-air ads are the ones that actually pay for it.
The trend of illegal downloading is decreasing, so people download music by illegal means relatively less than before. If we are to believe the data, the illegal downloading of music in the Netherlands has dropped from 32% in 2008 to 22% in 2012, so it can be considered a sizeable change. Moreover, less than 3% of people download more than 60 files, so the so-called hardcore downloaders are only a small group. It can be explained by many reasons. Maybe people just do not want to store the music on their computers and prefer to stream the music. Maybe it is more convenient for them to download music from iTunes for just a few euros than searching for it in other ways.
It seems like the Internet has caused mainly harm for the artists, since it is more difficult to protect their intellectual property now. But what are opportunities for artists in the Internet era?
The options for music distribution are more flexible nowadays. The artists make a choice on how they want to deal with their songs. They can just give them away for free, as U2 recently did on iTunes, or use a windowing strategy instead. If artists decide to give away their albums for free, they usually aim at getting more publicity, promoting the live concert tour, or bringing the fans’ attention to other aspects. For example, artists sign up exclusivity deals with a certain platform and agree to give away their songs for free there, hoping that this can bring a crowd and popularity to a platform. If artists decide on the windowing strategy, they strategically do not release their album on all available channels. They allow the most devoted fans (the ones with the highest willingness to pay) to consume first, and to let the rest wait. In the film industry this tactic is used very often. First, a movie is available only in the cinema, where ticket prices are quite high. Subsequently, after a certain period of time, the same movie is accessible in other ways, for example through digital streaming at home via Netflix, later on paid TV channels, and lastly on standard, ad-supported TV channels. In the music industry there are more ways available now. First, a whole album can be accessible only on iTunes, where artists get considerably higher margins. After some time, people can purchase only chosen songs seperately, and later on through a streaming service like Spotify. At the same time, artist launch one song on services such as YouTube, and this song serves as a sort of teaser to bring the attention to a whole album.
Can we say that in general producing music is not profitable anymore?
It is not that music becomes less profitable; it is just that the revenues of albums sales are constantly decreasing. Music is still very profitable nowadays, but a relevant, updated business model needs to be applied. The relevance of a business model depends on many factors, such as the status and popularity of a musician, the image they create, or the promotional strategy they decide on. I think that the biggest challenge for the future is to find a balance between marketing opportunities the Internet provides (free streaming) and the profitable sale of songs in the many different channels that are available . Of course those who want to invest in promotion can distribute their albums for free, build the audience base, and earn it back on the live performances in the future. Bigger stars have more power to sale their recordings profitably, but there is still no clear answer as to how to deal with that to make it optimally beneficial.