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

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

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. 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. Distribution costs declining to zero
5

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. 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. 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. 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. 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. The ‘full’ picture: three main revenue streams
11
Music
Publishing
Sound
Recording
Live
Performances

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. 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. 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. 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. 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. Who suffers? Who benefits?
Artists
Record companies
Retailers
Consumers
New intermediaries
17

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. Thank you!
andra.leurdijk@tno.nl
19

20. REST slides
20

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. 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
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. 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. 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. 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. 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. 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. 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. 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.