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 Predicting
the Future
of the Music
Industry
Copyright 2006 by Keith Holzman,
Keith
Holzman Solutions Unlimited.
All rights
reserved.
Back to The
Academy
A great deal has happened during the first five years of this decade
that has had an impact on the music business. So I thought I'd take
this opportunity to look into my somewhat hazy crystal ball and
attempt to predict the future and how it may have an effect on our
industry.
Physical
Product Sales...
Sales of physical product -- basically CDs -- has continued to
decline. After a slight up-tick toward the end of 2004, CD sales fell
seven percent in 2005 to a total of 619 million units. This makes
four out of five years of weakening sales. That's a trend that's
unlikely to change, and may in fact, accelerate for the remainder of
the decade when CDs are likely to have become a commodity only for
specialized markets and customers of niche product.
The number of multi-platinum albums also declined -- 19 percent, from
240 to 194 -- another downward movement that's likely to continue.
Legal
vs. Illegal File Sharing...
In contrast, simultaneous P2P file sharing levels increased more than
23 percent globally, and 42 percent in the U.S. from 2004 to 2005,
according to information gathered by Big Champagne. This is a trend
that will increase markedly, despite attempts by the industry and
many governments to put a damper on it. It seems that for every site
that gets shut down, one or two new ones pop up, a cancer that's
spreading way too fast to be easily controlled.
The one piece of good news is that legal sales of individual tracks
steadily increased during the last year, especially in the final
months. Paid sales amounted to 352 million tracks, which is more than
twice the number in 2004. In fact one song, Gwen Stefani's "Hollaback
Girl," was the first single ever to sell a million downloads.
The question is whether legal downloads will ever outstrip illegal
ones, and this is something I don't think will happen until every
major nation puts teeth into its laws and stamps out the illegal
trading of music and other intellectual property. And that's not
something that will not happen easily or quickly, if at all.
Music
Subscription Services...
Complicating the legal download situation is the proliferation of
music subscription sites. These allow users to download an enormous
quantity of music -- all of which will remain on their hard drives so
long as they continue to pay the monthly subscription fee. However,
if
a user misses a single payment, none of the music will be accessible
and would have to be downloaded again if the subscriber wishes to
continue. It's hard to know what this will mean to record labels, but
I suspect that royalty paying will be fraught with problems, and that
indie labels will receive little compensation for use of their
intellectual property.
On the other hand, per-song downloads, such as from Apple's iTunes
Music Store, provide an audit trail that should enable property
owners to be appropriately compensated.
The majors have placed a great deal of pressure on Apple to allow for
variable (read increased) pricing per download. I suspect this is
something that will happen eventually, not just at Apple, but at all
the legal download stores. Another suggestion floating through the
ether is that downloads may eventually be priced based on their
demand -- the higher the demand, the lower the price. Wouldn't that
be a nightmare for the online stores, but also for label accountants
and auditors! In any event, New York State Attorney General Eliot
Spitzer is looking into the legality of the most favored nations
clauses in current agreements between the majors and the online
sellers. What is most likely to happen, and not very far in the
future, will be that prices of some tracks will be reduced, while
other will rise.
Distribution,
Retail Sales...
A concomitant of the decline of CD sales is that distributors will
find it more difficult to be profitable, resulting in the demise of
the weakest ones. This will, have an effect on all labels, but
especially independents, who are always last in line to get paid.
Paralleling distributor problems is the recent closing of quite a few
influential independent record retailers throughout the country,
especially in New York and Los Angeles. This will put additional
pressure on indie labels to get their music to their fans. I suspect
that music retailers -- both chain and independent -- will continue
to suffer sales declines, and will be forced to sell more non-music
commodities, or cease operation.
Technology...
Technology will continue to have a great impact on music listening
and purchases. Many distractions impinge upon people's leisure time
-- video games, television, and movies, for example. Time-shifting
via DVRs (digital video recorders such as Tivo and Replay) has
enabled us to watch what we want, when we want, whether on a huge
60-inch flat panel TV, or a 2.5-inch, 320 x 240 pixel iPod.
While technology is always progressing, we're in a transitional
period at the moment. So here, then, are a few technology-related
predictions.
Digital Radio over satellite -- Sirius and XM -- will continue to
find new subscribers, but it will be a long time before it finds a
significantly large audience to sustain profitability.
HD (High Definition) Radio will replace most conventional
"terrestrial" listening during the next five years. Conventional --
analog -- listening will decrease, once there are a significant
number of HD receivers and radios in use. In fact many stations you
probably listen to regularly in analog are already transmitting high
fidelity digital transmissions, piggy-backing on the same frequency
as the analog signal. Audio quality is much superior, particularly
for FM, and there will no longer be the problems with multipath that
we have now.
Quality of audio will both increase and decrease at the extreme ends.
In other words there will be substantially improved sound for the
"golden ears" set due to high definition DVDs, with their enhanced
audio, frequently including surround sound capability, as well as HD
Radio as discussed above. And don't count out DVD-Audio or SACD as
excellent carriers of quality audio. They may yet find their
audience.
On the other hand, many people have become inured to the poorer
quality of MP3 downloads which use compression to save space and
transmission time, as well as satellite radio which also transmits a
compressed signal. These people are likely to become accustomed to an
inferior quality of sound.
Many younger people will experience hearing problems as they age
because they spend so much time listening to music at extremely loud
levels at concerts, and also because they listen to their MP3 players
at too loud a volume using poor-quality earbuds or earphones.
There will, in the next two to five years, be an agreement to end
disparity and agree on standardization of DRM (Digital Rights
Management) replacing the many competing and non-complimentary
versions currently in use.
Major
vs. Independent Labels...
I see a further consolidation of the majors until such time as they
implode because of generally poor quality of releases, enormous size,
inefficiency, and lack of artist development.
However, I predict a bright future for adventurous independent
labels. These are labels who release quality music for their specific
constituencies or niches, and who make increasing use of new
technologies and inventive use of the internet in marketing to their
audiences, while traditional avenues for marketing and retail
decline.
Bold indie labels will make album graphics, lyrics and notes
downloadable with purchase of music from their own websites.
Finally, aging Baby Boomers are particularly likely customers because
they'll have more time and disposable income, and they don't think of
music as being "disposable," as do way too many of the younger
set who think music is theirs for the grabbing. The Baby Boomer
generation is more accustomed to buying CDs to keep in their
collections, than they're used to downloading.
Do you agree with my predictions? If not, feel free to submit your
own thoughts and I'll consider publishing them in a future
newsletter.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Copyright 2006 by Keith Holzman, Solutions Unlimited. All rights
reserved. Adapted from "Manage for Success," Newsletter #57,
January 2006.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Keith Holzman is the principal of Solutions Unlimited, a management
consultant specializing in the recording industry. A trusted advisor
and troubleshooter, he is a seasoned music business senior executive
with extensive experience in all aspects of running a label. He was
President of ROM Records, Managing Director of Discovery Records,
Senior Vice President of Elektra, and Director of Nonesuch Records.
He publishes "Manage for Success," a free monthly email newsletter
devoted to solving problems of the record industry. You can subscribe
at his website <http://www.holzmansolutions.com>. Keith is a member
of the Institute of Management Consultants and has served as a
panelist for the National Endowment for the Arts, and as a board
member of many arts organizations. He can be reached at
mailto:keith@holzmansolutions.com.
Keith is also the author of the recently published "The Complete
Guide to Starting a Record Company" available both as a 235-page,
printed spiral-bound book, as well as a downloadable E-Book.
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