Reports on the Digital Music Revolution
Research Information
From Discs to Downloads, Forrester Research Inc., August 2003 (20 pages; US$895).
Report Summary
IFPI Online Music Report, International Federation of the Phonographic Industry, January 2004.
Table of Contents
Digital Music
For all the importance of data regarding the evolution of digital music, at US$895, there is no way I could make the cover price of “From Discs To Downloads”, but I was definitely curious to know what they had discovered that was worth the cost. So I took the trouble to find out.
It’s the original research data that makes it so valuable. I guess a survey of the downloading and cd burning habits and attitudes of close to 6,000 online users can give invaluable insights to us all during this digital musical revolution.
Obviously very useful info for a lot of people making delicate decisions. I managed to make do with the overview from the Forrester website, plenty of google-able commentaries, and some media interviews with chief analyst, Josh Bernoff. Plenty enough information out there to grab the salient thrusts and copy some of the detail to share with you. The digital music revolution affects us all.
The report from the International Federation of the Phonographic Industry came out in January and is available online – irony of ironies – as a free downloadable *.pdf file.
“The music industry’s internet strategy is turning the corner, with new legal online music sites spreading fast and the campaign against illegal music file-swapping making a clear impact across the world.” Jay Berman, Chairman & CEO, International Federation of the Phonograph Industry.
The two reports, with barely five months between them, offer a crucial snapshot of the music industry during Stage Three of the digital music revolution.
Stage One
Stage One of the digital music revolution was the Age of Illegal Downloads. Music piracy had been on the increase since commercial digital audio in the form of CD audio and the invention of CD burners allowed cheap digital copies to be made. That increase had accelerated with the rise of the internet in the mid 1990s. By 1999, the year of Napster, according to Forrester the compact disc business dropped by US$2 billion, of which almost $700 million was down to file-sharing.
Whatever was going to happen to the music industry, the combination of the internet, digital audio and file sharing had let the genie out of the bottle. The death knell of the existing music industry was clearly ringing out for all to hear, and it couldn’t be unrung.
The call from the public could be heard. “Long live the digital music revolution.”
Stage Two
Stage Two of the digital music revolution was the Corporate Counter-Revolution, where whining and executive skirmishing gave way to boardroom executions. Where public awareness campaigns on digital music piracy were followed by the gathering momentum of what the IFPI calls, in one of its finest unguarded “Dirty Harry” moments. A policy of “robust enforcement”, but which only achieved full operational maturity when the music industry finally realised the way to beat piracy and potentially save the music industry was through providing legal download alternatives of digital music.
When that operational maturity gathered critical mass, we moved on to the third stage.
The chant grew. “Long live the digital music revolution.”
Stage Three
Stage Three of the digital music revolution is the Virtual Turf War that began to heat up last year. The fight for market dominance of media and digital music delivery systems into the future.
Forrester’s study happened while the combatants were lining up to jostle for early advantage in the contest to connect with the consumer.
And the consumer seems ready. Forrester reported 68% of their survey’s 12 to 22-year-old file-sharers saying they’d go legal if there was a chance of getting busted. The analyst’s reason that they are ready for downloads at reasonable prices and forecast online business of $270 million for this year. Three years from now, they say, digital music sales could be $1.5 billion. In five years, a third of all digital music sales will be from downloads.
They say contenders in the turf war need high product awareness and availability, together with ease of use and functions integration, in order to survive the contest, and predicted Apple’s early lead on that basis.
Right now, Apple iTunes for Windows is the one to beat while other services warm up on the sidelines getting ready to take them on.
Rhapsody is preparing a renewed challenge and Sony’s Connect comes off the blocks in April, with Hewlett-Packard, Microsoft, Amazon, MTV, Coca-Cola and many more set to join the fray through the year.
The chant continued. “Long live the digital music revolution.”
According to Forrester, 2004 is consequently set to be the turnaround year when music companies will see the end of declining sales, the beginning of growth and the promise of increased profitability.
“2003 was the year we proved that consumers would pay for digital music – it is absolutely clear there is a market. This has injected a huge confidence-booster to labels, to investors and everyone who is looking at it as a business to get into.” Ed Averdieck, Sales & Marketing Director, OD2 (European online music distributor)
The IFPI report is equally gung-ho about the immediate promise of Stage Three – they expect sharp growth in the European online music market with parallel developments in Canada, Asia-Pacific, Australia and Brasil.
Other aspects of the report include a run-down on the industry responses of Stage Two and a commentary on the subsequent business models currently evolving during Stage Three.
Digital Rights Management and Copy Control Technologies
They describe viable online legitimacy as an “incomparably more complex undertaking than the setting-up of unauthorised distribution models” and talk about the complex technical requirements of Digital Rights Management (DRM) and Copy Control Technologies (CCT).
They highlight the extreme competitiveness of the Stage Three arena, with services reaching out to secure new marketing routes through partnership deals with broadband suppliers, with the telephony industry, with computer hardware manufacturers, with other established market-segmented life-style brand identities, even with – if Napster’s deal with Penn State is anything to go by – academic institutions.
Ultimately, the future looks rosy and the empire shall continue to prosper. Long live the digital music revolution indeed.
Any bad news is left to the Forrester soothsayers.
They believe that the success of legitimate media services will serve to make music piracy redundant. Further, they say that digital music piracy and its cure — streaming and paid downloads — will drive people to connect to entertainment, not own it. And hence the effects both of digital music piracy and the services set up to counteract it, reason Forrester, will combine to make CDs an irrelevance.
On Demand
“On-demand services are the future of entertainment delivery,” said principal analyst Josh Bernoff, “CDs, DVDs, and any other forms of physical media will become obsolete.”
Of course, in the Forrester scenario where hard media is in jeopardy and the CD is preparing to meet its doom, this news also sounds a requiem for the record store.
The impact on independent distribution – also in the business of dealing with physical stuff – is something neither report considers.
Independent Artists and Small Labels
So what does it all mean for the little guy?
That’s the core issue here.
For the independent artist or small specialist label, the main thing seems evident to me is that, if you haven’t done so already, 2004 is the time to get practical. With a shrinking CD market and an explosion of online action, we need to find a way to access the promised land of download income streams.
For the little guy, independent digital distributors offer a way in.
They will need digital rights for the exploitation of your music, of course, and you will need ISRC encoding so those rights can be controlled and managed.
International Standard Recording Code (ISRC) is a digital fingerprint for each track. It provides the means to identify recordings automatically and allows effective management of your digital rights (DRM) and royalty payments. You will need it. You won’t be able to trade without it. Your digital distributor will likely be able to offer it. Expect to be charged on a per track or per CD basis.
Digital rights are what you will be trading in.
Once upon a time, such rights were usually intended to be subsumed under a broad generalist contractual ambiguity referring to something like “all media and formats, whether now known or hereafter devised”. Nowadays, though, with those previously un-named new media and formats for digital music and other digital media already re-defining the future of the music industry, the new-style agreements get more specific.
Talk with your lawyer and learn what you can.
My opinion is that these rights should be defined explicitly. Don’t go for the vague and woolly blanket ambiguities of the past. Whether tracks are available by individual sale or subscription, or any other method – make it explicit. If they are to be made available for paid download, or for streaming, or for listening-posts, or jukeboxes, or consumer electronics, or cellphones, or personal players – make it explicit. If there are to be allowable unpaid uses of your tracks or clips for promo purposes – make it explicit.
You should also expect an agreement to contain some clear statement about service delivery conditions and terms. That they use DRM encoding, for example, and that their download delivery is secure. And specifically how many burns and downloads (and to which devices) the consumer gets under their End User Licence Agreement (EULA).
Just pay attention to what Forrester and the IFPI have to say about how online business models operate and how they are competing to deliver what the customer wants. Recognise that whichever strategies they adopt, they will need digital rights before they can do it with your music.
But first, of course, you need to find yourself a digital distributor.
Finding The Right Digital Distributor
Here are some tips to help inform your choice:
What are their routes to market?
Digital distributors deliver content to online download services and e-retailers. So, which ones? And in what territories?
The IFPI report spoke of the competitive innovation in strategic partnerships geared to increase market penetration through deals with the cellphone industry, computer manufacturers, established brand-names and the like. What does your digital distributor have going on?
How well do they sell?
How many tracks in their library? How many tunes did they deliver in 2003? How do they do promo and where do they post sound-clips?
What level of data-gathering do they use, and how can it serve your interests in targetting the right niche consumers?
What is the background and career history of the company principals?
This is the way to pick up the most crucial intelligence. Here’s where to look out for the significant connections that enable those strategic partnerships reaching into the market. Specialist insider industry knowledge, networking contacts, marketing expertise, resources – figure out if they look to you like having the “right stuff” to establish good positioning in the digital universe.
One final comment...
Up-front, it is important to remember that all this nonsense takes place within the context of what I’ve called Stage Three of the Digital Music Revolution, where the industry is locked in the struggle for dominance and survival.
Clearly, everything about it is purely speculative, and no-one truly knows how it will shake out in the end.
Thus it is also my opinion that the preferred digital distribution agreement is one which reflects this horse-race of a reality by being non-exclusive.
Go for it.
Long live the digital music revolution!
And good luck.
Colin Lazzerini
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