Developments and business models in the music industry @ Noorderslag 2012


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Market developments and business models in the music industry . Who benefits? Who suffers?

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Developments and business models in the music industry @ Noorderslag 2012

  1. 1. Market developments and business models in the music industry Who benefits? Who suffers? Eurosonic-Noorderslag, Groningen, January 12th 2012 Andra Leurdijk & Ottilie Nieuwenhuis
  2. 2. 2
  3. 3. Main questions How have digitisation and the internet affected the value network and business models in the music industry?  Who benefits? Who suffers? 3
  4. 4. Creation & production Recording, mixing, mastering, editing and producing is no longer attached to time and space Lower production costs Artists can be more autonomous 4 Surroundings of the Nilento recording studio in Sweden
  5. 5. Distribution costs declining to zero 5
  6. 6. Consumption 6 More choice, easier search and access, personalisation Listen anywhere and anytime to favourite music, adjusted to a personal profile More active role in sharing, promoting, distributing, reviewing and remixing music
  7. 7. New value chain music industry: new roles & more playersDigital E-retailers Telco’s ICT companies, online service providers Artists Concert Promotion Companies Consumers Traditional Players New Players Physical Record companies Media (Radio, A&R) Physical retailers Creation Marketing, Promotion Distribution Consumption Production Editing Consumers 7 Record companies Device Manufacturers Artists
  8. 8. Development in global consumer sales for physical and digital recorded music (2005 – 2015*) Source: PWC, 2011 - 5,000 10,000 15,000 20,000 25,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Digital recorded music Physical recorded music *Figures 2011-2015 are expected sales for recorded music 8 Rise in digital sales does not compensate loss in physical sales
  9. 9. 0 100 200 300 400 500 600 700 800 millionUSdollars loss in physical sales 2006- 2010 growth in digital sales 2006-2010 Source: IFPI Change in physical and digital sales Change in US Million dollars United Kingdom Germany France Spain Italy Nether- lands Switzer- land Belgium physical sales -684.6 -288.1 -484.9 -208.4 -205.6 -55.8 -83.3 -44.5 digital sales 245.7 104 70.5 18.5 11 12.4 18.3 3.5 difference -438.9 -184.1 -414.4 -189.9 -194.6 -43.4 -65 -41 9
  10. 10. 7 13 18 28 10 6 12 6 Operating income Royalties - artist Royalties - composer Acquistion costs Marketing and promotion Selling, General & Administrative expenses Sales and distribution Manufacturing New costs: digital storage, network capacity, security software, DRM Changes in cost structure of the music industry 10 Source: Aris & Bughin (2009) based on McKinsey analysis Decreasing costs: distribution, trans portation, storage and shops Unaffected costs: acquisition, creati on, promotion, roy alties
  11. 11. The ‘full’ picture: three main revenue streams 11 Music Publishing Sound Recording Live Performances
  12. 12. Sales of performance rights 12 0 20 40 60 80 100 120 millionUSdollars 2006 2010 Source: IFPI RIN (2011) Digital performance rights in the US rose 60% in 2010 to $249 million (PWC, 2011).
  13. 13. Business models Services Options for users Single song downloads Users download and buy single songs at fixed price per song. Membership Users pay for limited download quota per month or other fixed period. Membership ‘all-you-can- eat’ Unlimited access to catalogue. Users get temporary license to listen to music. Ad based model Music is streamed, users are unable to make own playlist (but do have ways to personalize by liking or disliking played songs. Bundling Access to music catalogue in combination with other media products, such as mobile phones, iPods or in combination with mobile subscriptions Cloud Services Users can download music and store this in a personal box ‘in the cloud’ 13 Few large and successful ones Many failed initiatives Many still trying
  14. 14. Streaming services: the new hope for the future?  Spotify: streaming service and online music store  Freemium and subscription model  Facebook account needed to sign up 14 Subscription model Price / Month Description Spotify (Free) 0 Online ad-supported desktop version Unlimited 4,99 Online ad-free desktop version Premium 9,99 Premium service, mobile and offline Single tracks 10 tracks 15 tracks 40 tracks 100 tracks Price €1.59 €9.99 €12.99 €30.00 €60.00 Price per track €1.59 €0.99 €0.87 €0.75 €0.60
  15. 15. Spotify: main challenges 15  Since the introduction of the Spotify-Facebook partnership (September 2011), the number of users grew from 3,0 million to 7,4 million monthly active users (November 2011) In 2009, the service lost 16,6 million pounds, in 2010 this loss amounted to 26,5 million; mainly due to high expenses (royalties)
  16. 16. Lessons so far…… Economies of scale still matter Feasibility relies on favourable license deals or joint ventures with major record companies. Main service providers often have another, different core business Connection between music services and social media becomes increasingly important for talent spotting, distribution, marketing and sales of music 16
  17. 17. Who suffers? Who benefits? Artists Record companies Retailers Consumers New intermediaries 17
  18. 18. Conclusion / Discussion How much do indies and artists benefit from the new intermediaries? Will the music industry increasingly depend on new aggregators / intermediaries such as Apple, Facebook, Amazon? Should these new intermediaries invest in original music production? 18
  19. 19. Thank you! 19
  20. 20. REST slides 20
  21. 21. Business models: strong and weak points Single song downloads:  A large catalogue is required  DRM is required to prevent piracy Membership ‘all-you-can-eat’  Large numbers of users are required to be successful  Cooperation with social media can add members  Relies on favourable license deals or joint ventures with major music companies 21
  22. 22. Business models: strong and weak points Cloud services:  Large amounts of storage capacity and bandwidth are needed  The stored content needs to be well secured  DRM is required to prevent piracy  The software needs to be compatible with different types of devices (or vice versa) 22
  23. 23. 23 Strengths Weaknesses Opportunities Threats Production Large variety of national artists and vibrant popular music cultures Music industry leans towards strong promotion of big stars Talent scouting and talent development remains a professional skill needed by many musicians in order to succeed in the market Lower costs for production tools, enable SMEs to enter the market and for artists to manage (more parts of) music production themselves Uncertainty about who will finance investments in music production Aggregation & distribution One of the successful new online distributors located in Europe Few national artists are sold outside their country of origin Music retail shops closing down Establishing links between online music service providers and social networks, mobile phone operators and device manufacturers for promotion and distribution of music More options for less well known artists to reach (niche) audiences Legacy distribution models through record companies and retail increasingly under pressure Business models A lot of experimentation with new business models Music industry slow to respond to digital innovations and the changes in business models this requires Increasing willingness to pay for digital music Contextual services, offering extra features, are a USP for music providers Development of revenue sharing deals or license contracts which are beneficial for artists, record companies Decrease in overall revenues for music industry
  24. 24. Number of firms, employees and labour productivity in EU 27 music industry, 1995-2007 24 1995 2007 Number of firms 4,982 11,833 Number of employees 15,407 21,023 Average number of employees per firm 3,09 1,78 Labour productivity 44,8 67,3 Source: Eurostat Labour productivity is the amount of goods and services that a worker produces in a given amount of time.
  25. 25. The European music industry Share of EU members states in total value added of the music publishing industry in EU27 (2007) 25 France 27% United Kingdom 23% Germany 17% Italy 6% Sweden 5% Netherlands 4% Other countries 18% Total value added in 2007: 943 million euro Source: Eurostat
  26. 26. Sales of performance rights 26 0 20 40 60 80 100 120 millionUSdollars 2006 2010 Source: IFPI RIN (2011) Digital performance rights in the US rose 60 percent in 2010 to $249 million (PWC, 2011).
  27. 27. Sales of performance rights 27 0 20 40 60 80 100 120 millionUSdollars 2006 2010 Source: IFPI RIN (2011) Digital performance rights in the US rose 60 percent in 2010 to $249 million (PWC, 2011).
  28. 28. 1. Consumers surplus, because access to large amount of music 2. Wider platform for artists Leading to a raise of interest in live performances. 28 Source: OECD (2010), WAN (2010) Positive effects of filesharing
  29. 29. Impact of digitization Decline of physical music since the late nineties Music consumption shifted to online Traditional business models are disrupted Overall decline of revenues But also: Cheaper and easier availability of digital music on different devices for consumers More possibilities for artists to produce and distribute their music, independent of intermediaries 29
  30. 30. Eurostat definition of sound recording and music publishing 30 Sound recording Music publishing Related activities Production of original (sound) master recordings (tapes, CDs) Sound recording services activities in a studio or elsewhere Production of taped (i.e. non-live) radio programming, audio for film, television etc. Acquiring and registering copyrights for musical compositions Promoting, authorizing and using these compositions in recordings, radio, television, motion pictures, live performances, print and other media. Distributing sound recordings to wholesalers, retailers or directly to the public* Publishing of music and sheet books Not included: Reproduction from master copies of music or other sound recordings, see 1820 wholesale of recorded audio tapes and disks, see 4649 Live performances * Units engaged in these activities may own the copyright or act as administrator of the music copyrights on behalf of the copyright owners.