The CD is dead! Long live the music download?

The economic crisis exacerbates the recession in the music industry. Recorded music sales have been in sharply decline for years. Digital music offerings on the Internet and via mobile phone cannot compensate for the losses. One reason: The wrong licensing policies of the record labels.

The music industry cannot escape the general economic and financial crisis. In 2008 a dramatic slump in sales of recorded music for nearly all markets was reported. But the economic crisis only reinforces a downturn in the market for recorded music that begun already in the late 1990s. Thus, in the largest music markets the CD unit sales dropped in the period from 2000 to 2008 between 35% (United Kingdom) and 59% (USA). This recession, however, is a symptom of a paradigm shift from music delivered in form of a physical product to music as a service delivered in form of online and mobile music offerings.

The digital market cannot compensate for losses in the recorded music segment

For now, however, the market growth in digital music (downloads, streaming, ring tones etc.) is unable to compensate for the losses in the recorded music segment. Despite or perhaps because of the economic crisis, the business with MP3s & Co is unstoppable. In the U.S. the share of digital music sales was as high as 39% of total sales in 2008. And the major music companies highlighted in their most recent annual reports an impressive growth in non-physical music sales. At Atlantic Records, a subsidiary of Warner Music Group, digital music sales surpassed the CD-sales for the first time in 2008. But the growth in digital sales can not compensate for all music majors’ losses in the CD segment (see e.g. Universal Music Group). 

	Physical sales		Digital sales
	Revenue Change 2007/2008	% Change	Revenue Change 2007/2008	% Change
Universal Music Group	– EUR 560 million	– 18%	+ EUR 197 million	+ 31%
Sony Music Entertainment *	n.a.	– 41%	n.a.	n.a.
Warner Music Group *	– US$ 117 million	– 5%	+ US$ 165 million	+ 38%
EMI Music Group **	– GBP 26 million	– 8%	+ GBP 30 million	+ 38%

Source: According to the annual reports of the music majors; *  last quarter 2008;  ** second half 2008

 

Music service providers operate at a loss

Despite the growing digital download market, the leading online music-portals can only benefit to a limited extent. Thus, despite the increase of the number of subscribers from 600,000 to 775,000, which led to year-to-year growth in revenue of 14%, Rhapsody subscription service suffered a loss before tax of US $ 11.8 million in 2008.

Why does the digital music business not yet generate a profit? This question was answered at the Billboard Music & Money Symposium in New York in 2009. Representatives from venture capital firms threatened to pull out their investments in online music start-ups because currently 80-90% of the revenues have to be used for licensing payments to the labels, which render any chance of increasing long-term profit margins impossible.

Wrong license policy of labels

Scientists at the Technical University of Darmstadt take exactly the same line. In a representative online survey in Germany, they demonstrated that the usual price of 99c for downloaded music is too high from the perspective of potential buyers. They calculated that the maximum revenue would be obtained at a price of 33c per download. Like the U.S. venture capitalists, they criticize the high licensing fees the labels currently demand, as this ultimately harms all stakeholders in the value network. They calculated that a maximum of 6,481 out of 10,000 respondents would be prepared to pay a fee of 33c, which corresponds to a turnover of EUR 2,184. At a price of EUR 1.39 only 397 respondents would download music, which would generate only EUR 552 in revenues. Thus, about three quarters of the potential revenue is “wasted.”

Sources:

Billboard “Sony Music Sales Drop 22%”, 29 Jan, 2009

Billboard “Rhapsody Revenue Up 14%”, 13 Feb, 2009

Billboard, “Music & Money: VC Firms May Pull Back On Music Investments”, Mar 05, 2009

IFPI Digital Music Report 2009

New York Times, Nov. 26, 2008

Strube J., Pohl G. und Buxmann P., 2008, „Preisstrategien für Onlinemusik“ in: Gensch, Stöckler, Tschmuck (eds.), Musikrezeption, Musikdistribution und Musikproduktion. Der Wandel des Wertschöpfungsnetzwerks in der Musikwirtschaft, Wiesbaden: Gabler Edition Wissenschaft, pp 187-203.

Tschmuck P., 2008, „Vom Tonträger zur Musikdienstleistung – Der Paradigmenwechsel in der Musikindustrie“ in: Gensch, Stöckler, Tschmuck (eds), Musikrezeption, Musikdistribution und Musikproduktion. Der Wandel des Wertschöpfungsnetzwerks in der Musikwirtschaft, Wiesbaden: Gabler Edition Wissenschaft, pp 141-185.

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