Music’s new frontier

Andrew Harris 08/06/11 ( Sydney Morning Herald)

Clearly at a crossroads, the music industry is looking increasingly at the mercy of what has been blamed for its demise over the last decade: technology. And as new business models for music delivery continue to emerge, it is apparent that music’s future is linked to new technologies and devices.

But with record labels now embracing new platforms such as Apple’s iCloud Match service, what does this future hold for artists who have largely been ignored while the greater music industry unsuccessfully tried to hold back the digital tide?

Some artists are already embracing technology to create new and innovative approaches to reach listeners with their music, but to set the scene for what lies ahead for artists it helps to first look at the past – and also how new business models in the music industry are evolving.

A tale of two industries: rise of the gadgets

 The fortunes of the music and technology industries over the last decade are in stark contrast, and highlight how consumer spending has shifted away from music towards gadgets.

The numbers of Universal Music and Apple, the two largest companies in each industry, tell the story: Universal has seen its revenue shrink from US$5.7 billion in 2005 to US$4.7 billion last year, while Apple’s iPod revenue alone grew from US$4.5 billion in 2005 to US$9.2 billion by 2008.

But it’s not just devices. Music is also struggling in the fight for consumers’ wallets as they populate their new devices with digital content and applications.

It’s highly likely that many customers would spend $10 on a couple of new apps for their iPhone without a second thought, but probably think very hard before handing over the same amount for digital music. In fact, many would choose to download the album from a BitTorrent site for free instead.

Indeed, last year the popular Angry Birds app had around 50 million sales compared to 17 million digital track sales from Lady Gaga, the world’s top-selling digital artist during the same period. Third-biggest seller, Eminem, had around 10 million sales – about the same number of downloads for the app of social networking player FourSquare.

But with services like iCloud empowering mobile devices, the music industry could be poised to ride the wave of popularity of this growing number of mobile devices and apps. The increasingly familiar and streamlined user experience of buying and accessing content via apps on these devices could gain momentum in the music industry in the coming years, possibly delivering a new revenue stream to the industry.

Although iCloud undoubtedly marks the beginning of a move towards this type of model, there are already a number of smaller players looking to push beyond today’s traditional digital download model. For all the hype, however, their business models still look a long way from proving their ongoing viability.

Still dark clouds in the digital sky

 Last month, leading US internet radio player Pandora’s high-profile IPO placed a value of around US$3 billion on the company at the end of its first day of trading. Similar to the price many analysts expect record label EMI – who own The Beatles and Pink Floyd catalogues – to sell for later this year, it highlights the optimism surrounding new digital music services.

But a reality check is needed. EMI had estimated revenues of around US$2.6 billion last year – around 50 times yet-to-be-profitable Pandora’s US$55 million revenue during 2010. Warner Music, who had around US$3 billion revenue last year, was also sold earlier this year for just over US$3 billion. Much of these new models’ future success is tied to converting advertising-funded free users to subscription-based users, however this is proving difficult.

Even though Pandora boasts over 80 million users in the US, each user generated the paltry sum of less than 20 cents per month during 2010 – half of which was needed to pay the licence fees for the music they streamed.

Although an unlimited ad-free subscription service is offered for US$36 per year, in the last three years the company is yet to make a profit – and it does not expect to do so before the end of 2012. Over 90 per cent of the company’s revenue still comes from its advertising-based free service, with only US$5 million from subscriptions.

Pandora’s financials are far from encouraging, particularly in relation to its astronomical valuation.

But many see models like Pandora’s as an interim step, with the endgame an ad-free unlimited jukebox service that streams all the songs you can imagine to any device for a fixed monthly fee.

Although Apple, Google and Amazon have not yet embraced this model, so far preferring to offer cloud-based locker services for music you already own, these services are already available from a number of players in the US and Europe.

Rhapsody, MOG and Spotify all offer subscription plans ranging from US$7-US$15 per month, delivering on-demand streaming of over 10 million songs to computers, smartphones and tablets (including both Android and iOS).

The companies are also extending into internet-enabled TVs, Blu-Ray players and even cars (MOG will be available on all MINI vehicles in the US later this year through a deal with BMW).

Like Pandora, however, these companies are still not delivering annual operating profits – and their subscriber base is still predominantly made up of free users (only 1 million of Spotify’s 12 million users currently pay for service).

Although their recent iCloud offering appears less ambitious than existing streaming offerings, Apple will probably continue to dictate the music industry’s future direction.

With huge device profits to subsidise their iCloud platform, a trusted and streamlined user experience and over 225 million iTunes accounts already in existence, Apple might stand to succeed where others might not.

But even if the future business environment and landscape looks uncertain, some artists are beginning to embrace technology.

Just as video gave music a new direction with the advent of MTV in the early 90s, the interactive, visual and social possibilities of new technologies and devices could foster new artist innovations.

Singing their own appy song

 Kristin Hersh, solo artist and founding member of alternative rock band Throwing Muses, is one artist that is exploring how new technologies might deliver an enhanced experience to listeners.

Moving beyond the traditional CD and download formats, her latest release, Crooked, is available as an app for the iPad, iPhone and iPod Touch. In addition to including the album in high-quality lossless digital format, the app also includes a range of visuals, artwork and audio commentary.

Additionally, it includes lyrics and an essay written by Hersh specifically for each song, exclusive interactive content, video content and a forum where fans can interact with her via both text and live web chats. Available for just $2.49 with a single touch on the screen, it’s hard to imagine anybody choosing to pirate the audio-only version via a BitTorrent site instead – let alone pay $16.99 for the album as a lower-quality traditional download at iTunes.

Although the app was released around nine months after the digital download version of the album, it has proven to be popular.

“Since the app release we’ve sold more apps than album downloads,” says Hersh, adding “although numbers are still coming in, we’ve sold a couple of thousand already”.

She estimates that to date the app has accounted for around 20 per cent of digital content sold.

Artists are discovering that apps can extend the boundaries of the traditional album format, offering a more interactive experience for listeners.

Although Brian Eno is probably best known as the producer behind David Bowie, Talking Heads, U2 and Coldplay, his own music apps – called Bloom and Trope – offer an interesting direction in the intersection of music and technology.

Described as “part instrument, part composition and part artwork”, Eno’s apps allow the listener to create music by tapping the imagery on the touchscreen of their device. The app can also automatically generate music if left idle.

Eno developed the app in collaboration with software designer and musician Peter Chilvers, who believes the portability of the iPhone adds to the appeal of the app: “Historically, it’s been very difficult to release music in an interactive form – sitting down at a computer has never been a satisfactory way to experience music – but as a portable high-powered computer with headphones, the iPhone is an ideal platform for generative art.”

Although Chilvers would not provide exact sales figures, he said they were “very pleased with its success”. Conceivably, it’s possible that the $5 apps have achieved downloads upwards of 20,000, given around 3000 user comments have been added to the app’s iTunes page.

While many may might view music’s move into apps as somewhat of a gimmick, the interactivity and video capabilities of devices like the iPhone and iPad – including the willingness of users to pay for content with these devices – offer artists the chance to move beyond the traditional CD and digital download model.

Artists are doing it for themselves

 Technology aside, Kristin Hersh is also pushing the boundaries of the traditional music business model. Through her Strange Angels group, whose members fund her recordings via a range of paid subscription options available through her website, she has taken the traditional album-based subscription model to a new level. Subscriptions range from US$30 per quarter for a basic package up to as high as US$5000, with the top subscription level giving an executive producer credit on her album, along with other perks such as free concert tickets and recording studio visits.

“We have subscribers at all levels,” explains Hersh, “with the kind of distribution you’d probably expect — a very few at the very top and more as you drop down the level of offering though the US$1000 and US$500 levels. Most of our supporters are in the US$10 per month category”.

The idea for the model stemmed in part from community-supported agriculture models.

“We’d heard some great stories about a farmer who wanted to grow these beautiful heirloom peaches. He couldn’t afford to grow them without some assurance that he had buyers, so he went out and signed up people in his community,” explains Hersh. “They promised if he’d grow the peaches, they’d buy them in advance. That seemed to be just what we needed to do.”

Although the funding covers recording, mixing, mastering and production costs, the fan contributions are not yet enough to earn Hersh or the band members a living. “We have not yet been able to afford to hire a publicist, for example,” said Hersh.

Independent approaches such as Hersh’s look set to benefit further as new devices open up wider independent distribution possibilities for artists. Even if the record labels are trying to hitch a ride with Apple by taking a cut of future iCloud subscription revenues, artists are increasingly looking towards cutting out the middleman completely.

Open internet platforms such as Bandcamp allow artists to reach fans directly, providing the possibility for them to offer a wide range of physical and digital products that they can choose and price themselves. For example, a high-quality lossless format digital album download can be offered for $15 alongside a lower-quality MP3 version for $5, or even free.

These platforms are also increasingly being taken into the smartphone and tablet world via iOS and Android Apps. And the closer artists get to listeners, the larger share of revenue they can retain – or offer listeners much more for less.

Eventually, it’s easy to see how artists will be able to develop their own apps to provide fans direct access to all of their digital content via a range of devices. A direct annual subscription to an artist via their app could deliver all of their content as it becomes available – directly to you without the need of any third-party stores or aggregators.

Although technology is bringing artists closer to their listeners, music isn’t going to be completely relegated to the touchscreen of a gadget just yet. The tangible physical product looks set to play an increasingly important role in the future – both with and without the assistance of technology. Indeed, quality products, live performance and licensing still have an important part to play in the digital future.

See me, feel me: quality still matters

 While the near-30-year-old CD looks set to continue its slow decline over the coming years, the format it was supposed to be the death of – the vinyl record – is growing in popularity.

In the US, annual vinyl record sales have more than tripled since 2006, becoming the preferred high-quality listening format for more and more listeners in recent years.

In Australia, the evidence of the increased popularity of vinyl can be seen in the growing range of the product at not just independent stores, but at leading retailers like JB HiFi, which have been expanding their range – and increasing sales – of vinyl in recent years. Sales of turntables have also been growing at many hi-fi retailers.

Unlike the flimsy 12-inch discs most would remember, today’s vinyl records are far superior, weighing in at up to 200g and pressed on virgin vinyl to offer an audiophile listening experience far beyond a regular CD. Many current vinyl releases also include a free download of the album in digital format – either MP3 or higher-quality digital lossless formats. Increasingly, it seems, the CD is becoming less relevant.

Even so, higher-quality physical digital formats could leverage increased broadband speeds to significantly exceed the experience delivered by lower-quality digital streaming and download offerings such as iCloud.

Neil Young’s ambitious Archives project, which is planned to cover 50 years of his work across five ongoing volumes, offers an example of how physical media can combine the best of both the physical and online worlds. Beyond elaborate artwork and packaging, the release is also available in Blu-Ray disc format, which offers far superior sound quality to what CD can deliver.

The format also allows for automatic updating of content via WiFi-enabled Blu-Ray players, using a process called BD-Live. As a result, whenever the discs are inserted into the player they automatically connect to the internet and check for new material, continually being added by Young to his Archives project. That material can then be downloaded for free to your local player and accessed at any time, via the interactive on-screen menu of your Blu-Ray player.

Obviously, it’s not just audio – video can also be incorporated into the offerings through the Blu-Ray player’s TV connection. The project is also compatible with Sony’s PlayStation 3 console, opening up a wide market for the offering.

The onset of fibre-optic speeds of 100Mbps from the national broadband network (NBN) will make processes like these lightning-fast. Coupling this with emerging in-home streaming (to internet-enabled TVs and stereos) will make this high-quality experience seamless. This will deliver the audio equivalent of HD video, leaving low-bitrate streaming offerings like iCloud feeling like the audio equivalent of a small-screen YouTube video.

Indeed, one thing the physical product has over its digital counterparts is that a listener can see, feel and hear the quality – and this can still make money for artists and labels alike.

Gil Matthews is probably best known as the drummer from Billy Thorpe and the Aztecs, but he has also built a solid business giving many classic Australian albums new life by releasing them as CD versions for the first time. Since 2005 the label has released around 60 titles, creating a business that has an annual turnover of around $250,000.

“Warner gave us whatever we wanted in return for a digital copy they could sell as a download,” says Matthews. “But time is the big problem,” he adds, stating “if we had a catalogue of 300 titles, this would be close to a million-dollar business”.

“There are an incredible number of titles we could be releasing if we had the time.”

Each release is a painstaking process, requiring Matthews to go back to the ageing master tapes – or even vinyl if tapes are unavailable – and restore them for the digital format.

“Sometimes it can take 40 hours alone to remove all the clicks and pops from the original source – it’s almost a labour of love,” says Matthews.

He estimates that each CD title breaks even after around 500 sales, and that all of the label’s titles sell consistently well all the time. Aztec’s attention to detail and quality has no doubt built a reputation for the label’s releases, although this comes at a price.

“Generic CDs can be made for 80 cents per unit, but we spend around $2.50 per unit for our titles, which include gatefold packaging and 28-page booklets,” says Matthews, adding “we sell them retail for $25 each and won’t discount them.”

Top-selling titles generate retail sales in excess of $125,000, while average-selling titles generate around $50,000. But even if Aztec are bucking the CD sales trends of recent years, they are also looking to expand to vinyl releases – “a natural next step”, according to Matthews.

“Vinyl is experiencing a resurgence. Our first release will be from Lobby Loyde’s Coloured Balls later this year,” he says, “but getting the unique soft texture of the original double-gatefold album sleeve has been very difficult.”

Clearly, an eye for quality is key to Aztec’s successful business model. “You can feel it and touch it,” he says, adding “it sounds twice as good as the original – there’s more life, it’s more in your face, but it’s still got that great analogue sound.”

Expected to eventually sell out at around $40 per unit sale – many expected in Europe – it will add nicely to the company’s already-growing revenue line. No doubt, more vinyl titles will follow.

But it’s not just reissues that are benefiting from a high-quality approach. The value of deluxe packaging is growing for new releases, particularly for independent artists. For their first releases after breaking from their record companies, Radiohead sold around 100,000 copies at £40 each of their deluxe release, while Nine Inch Nails’ Trent Reznor sold 2500 individually signed and numbered copies for US$300 each of his release. Both contained vinyl, CD and a variety of digital file formats. Clearly, quality still delivers value – to both listeners and artists.

Backstage festival passes

 A popular theory, however, is that the recorded product will be merely a free promotional tool in the digital future, with artists earning their living performing live. But at the big-revenue corporate end of the live music market, things are not looking so good. The biggest player in this market is Beverly Hills-based Live Nation, who control the majority of the big stadium, arena and amphitheatre shows globally. Although they generated over US$5 billion in revenue from artists including U2, Roger Waters and Lady Gaga last year, the company reported a net loss of around US$230 million for the year.

Notably, the only consistently cash-producing area in recent years has been from sponsorship – corporate advertising, that is. Comparing the performance of its segments, it’s easy to see why more and more big concerts are being brought to you by the likes of Blackberry (U2) and MAC Cosmetics (Lady Gaga): sponsorships delivered operating income of around US$110 million compared to an operating loss of US$55 million from concerts and ticketing.

But while those bringing you bloated mega-shows might be struggling, smaller players have been prospering, particularly in the local market.

Dave Chatfield of Handsome Tours has been bringing international acts such as Interpol, Fleet Foxes and Pavement to Australia for over 10 years. Although buoyant in recent years, he says the market has “become saturated and very competitive”.

“Generally the artists we’re touring are making money,” he says, but also cautions “it’s tough with new bands – putting money into a new act in the middle of summer is particularly risky”.

He also says that there is “an element of investment in acts that you believe in”, with tours not always offering a clear financial return in the first instance. Some artists are even willing to tour in return for the cost of their flights.

Although the gross revenue for a touring band varies significantly, Chatfield says that smaller tours taking in a music festival or two and some small 300-capacity shows in key cities such as Sydney and Melbourne might gross around $30,000, although he says his artists “typically receive guarantees of between $50,000 and $100,000”. But these guarantees do not usually cover international flight costs, and, of course, must be split between all members of the band and their touring party.

He also says that festivals are increasingly becoming a prerequisite for many touring artists, with fees generally starting at around $5000 for smaller shows, reaching as high as $100,000 and up per show for established acts at big national festivals.

“Festivals have to be there as the anchor – bands generally do not tour these days without festival slots,” said Chatfield.

Clearly, the prospect of earning a living on the back of regular festival performances looks like a long-term prospect for many artists. But one area that could offer a more immediate financial return for many emerging artists is licensing music to film, television, advertising and video games, also known as synchronisation or syncing.

Selling out

 In contrast to recorded music, licensing is providing solid revenue, cash and consistent growth for major labels.

Both Warner and Universal have been delivering operating margins of around 30 per cent in this area in recent years, compared to levels of at or below 10 per cent for recorded music. At Warner, revenue has grown by around 23 per cent since 2006 against a drop of around 20 per cent over the same period for recorded music revenues.

But it’s not just the big players experiencing growth. “Demand for music licensing is up, way up,” explains Ryan Wines, managing partner of US licensing house Marmoset Music, whose clients include Nike, Levi’s, Anheuser Busch, Google and HTC. He also believes independent artists are in strong demand because they are “generally more appealing to clients than the Lady Gagas and Led Zeppelins of the world,” and are also “more affordable, easier to work with and provide an opportunity for brands to be seen as taste-makers helping to break the next cool band”.

According to Wines, placement fees for emerging artists can vary significantly based on the brand, media channel, artist and reach of the campaign.

Although there are no industry-standard rates, he says national television broadcast campaign fees can range from US$25,000 to US$100,000, while films can range from as low as US$500 for a festival license from an independent film to “sometimes six figures” for big-budget films. Although licensing looks like a promising opportunity for many artists, Wines also stressed that supply is outstripping demand, sometimes leaving it “challenging to find fair compensation”.

Clearly, syncing could offer a much more lucrative way for emerging artists to earn a living than relying on album sales, with placements in a couple of television broadcast campaigns delivering the equivalent of around 10,000 digital album sales. With numbers like these, it’s no wonder many artists are looking to “sell out” ahead of chasing album sales.

But however artists plan to position themselves in the digital future, one thing is clear: technology is bringing them closer to listeners than ever before. As many artists are already discovering, this direct relationship opens up many possibilities on the back of new technologies, platforms and innovative approaches. And by offering listeners a quality product, fans might be willing to part with more of their money in the digital future than they have in the past.

But no matter how many bells and whistles are attached to music in the future, one thing should remain as relevant to artists as it did 50 years ago: the music must come first. And hopefully quality will still sell – whether it be a recording, a live performance or a film placement.



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