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January 22, 2010

Music Industry Meltdown:


Recasting The Mold
by Mark Mulligan
for Consumer Product Strategy Professionals

Making Leaders Successful Every Day

For Consumer Product Strategy Professionals


Includes Forrester research panel data and data from Consumer Technographics
January 22, 2010

Music Industry Meltdown: Recasting The Mold


by Mark Mulligan
with Laura Wiramihardja

Exec uti v e S u mma ry


The first 10 years of the 21st century may have been the decade in which music went digital, but it was
also a truly horrible decade for the music industry. By the end of 2009, US and European recorded
music revenues were just 42% of what they had been at the start of the decade down from 25.6
billion to 10.8 billion. The digital experience of the noughties was a rocky one, but the next 10 years
will be characterized by the innovation and experimentation that has risen to prominence during the
past few years. Brands and product strategists expect to invest more money in digital music in 2010 than
they did in 2009. Such investment will bring a welcome impetus to the music industry, but it will also
continue the value chain changes that will ultimately reshape the balance of power and recast the mold
of the music business.

tabl e o f Co nte nts


2 The Painful Digital Transition Of The Music
Business
4 Digital Music Business Models Are Playing
Catch-Up With Consumer Behavior
9 The Move To The Consumption Era Will
Realign The Music Industry Value Chain
12 The Future Of Digital Music Will Be A Rich
Tapestry Of Targeted Offerings
recommendations

16 Build A Series Of New Music Businesses


17 Supplemental Material

NOT E S & RE S OU RCE S


Forrester used data from its European
Technographics Media, Marketing, And Social
Computing Online Survey, Q3 2009 and the Q4
2009 Global Music Research Panel Online Survey
for this report.

Related Research Documents


Media Product Innovation: Building Products
That Thrive In The Media Meltdown
December 15, 2009
Music Product Manifesto: The Product Features
That Will Save Recorded Music
September 29, 2009
Music Release Windows: The Product Innovation
That The Music Business Cant Do Without
September 4, 2009

2010, Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Information is based on best available
resources. Opinions reflect judgment at the time and are subject to change. Forrester, Technographics, Forrester Wave, RoleView, TechRadar,
and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. To
purchase reprints of this document, please email clientsupport@forrester.com. For additional information, go to www.forrester.com.

Music Industry Meltdown: Recasting The Mold


For Consumer Product Strategy Professionals

the painful digital transition of the music business


In 2000, the recorded music industry was an elegantly simple business built almost entirely upon
sales of little shiny discs. Revenues were buoyant, the construct of the multimillion-selling artist
was still common currency, and most pertinent of all digital hardly featured in the equation.
After just 10 years of the 21st century, it is clear that those days are gone for good and that the music
industry will never be the same again. The 1990s were the recorded music industrys high-water
mark, with the CD at its height as a product. The CD now finds itself in terminal decline and with
no heir apparent, and 21st-century music revenues have declined year on year as consumers have
fallen out of love with the CD and struck up a whirlwind romance with free music. This is an affair
that has changed forever how people perceive music as a product.
Revenues Slump As The Music Fan Wrests Control
The fundamentals of the music business have been turned on their heads and the recorded music
industry kicked into meltdown as:

Digitization puts power firmly in the hands of the audience. The advent of CD ripping and

its inevitable bedfellow, file sharing, ended the music industrys ability to exercise control via a
monopoly of supply. It had created monetary value by virtue of the fact that music fans could
only acquire music to own via music shops.1 By ripping CDs, consumers could conveniently
create high-quality copies; with Napster, they could then make those copies instantly available
to millions of other music fans.

The meltdown plays out in three acts. Digitization itself didnt cause the meltdown; instead,

it was the enabler and the first act in a three-act play. Act 1: Digitization brought with it the
contagion of free. Once consumers could get all the music they wanted for free from Kazaa or
YouTube, they started to wonder why they would ever pay for music. Act 2: Meltdown began,
and music sales plummeted while free prospered; the contagion became epidemic. At the start
of the 21st centurys second decade, we find ourselves listening to the opening lines of Act 3:
Rebuild. Although its far too early to say whether this story will have a happy ending, change is
happening.2

On-demand replaces on-command. Perhaps the single most important dynamic of the music

industry meltdown is that consumers decide what, when, where, and how they get their music.
Record labels used to dictate what music consumers could buy and when. Now, music fans
dissect albums, preempt release schedules, and mash-up, share, acquire, and discard music with
the voracious appetite of a foodie at an all-you-can-eat buffet. The problem with all of this is
that virtually none of it generates much revenue and much of it occurs outside of the legitimate
domain. Music fans have created a new consumption-based usage paradigm; the music industry
now needs to create a series of new music businesses around it.

January 22, 2010

2010, Forrester Research, Inc. Reproduction Prohibited

Music Industry Meltdown: Recasting The Mold


For Consumer Product Strategy Professionals

Consumer behavior shapes business models. In the 20th centurys distribution era of selling

units of music, the music industry effectively shaped consumer music behavior. But in the
consumption era, in which the audience is king, business models are playing catch-up, chasing
emerging behavior patterns.

The Noughties: The Digital Decade That Shook The Music Industry To The Core
The first 10 years of the 21st century may have been the decade in which music went digital, but it
was also a terrible decade for the music industry. By the end of 2009, US and European recorded
music revenues were just 42% of what they had been at the start of the decade, down from 25.6
billion to 10.8 billion (see Figure 1). Although recorded music revenues actually grew in 2001, the
seeds of the forthcoming trouble were already well and truly sown, most notably with the launches
of Napster, MP3.com, and the PMP300.3 Napster is both a symbol of the transition from the
distribution era to the consumption paradigm and the crucible of the music industrys 21st-century
meltdown. The story of musics digital decade maps neatly to the four stages of the music industrys
digital strategy:

Stage 1: Denial. As the music industrys revenues began to crumble, the major record labels

had already gone a long way to casting the die for the first half of the noughties; they failed to
see the true importance of Napster and refused to license music to the likes of CDuctive, Listen.
com, and MP3.com. Instead of nipping peer-to-peer (P2P) activities in the bud by meeting
burgeoning digital demand with legitimate supply, the labels focused their energies on fighting
file sharing. Although a number of people within the major labels began to think differently,
their voices werent yet loud enough to shape strategy.

Stage 2: Confusion. By late 2001, the digital supporters within the majors had grown

sufficiently loud to result in the licensing of services like Rhapsody; we also saw the ill-advised
launch of two major-label distribution platforms, MusicNet and Duet (later pressplay), with
which the labels hoped to control digital music distribution. It was now also clear that P2P
activity was more than just Napster, and the RIAA commenced high-profile legal action against
individual file sharers. Despite the rise of MP3 downloads on P2P networks, the legal music
services were shackled by restrictive licenses that tethered purchased digital music to the PC.
Unsurprisingly, digital music fans continued to opt for P2P downloads.

Stage 3: Acceptance. The impact of Apple on digital music cannot be overstated: Steve Jobs

masterstroke of persuading the labels to license for portable downloads in the beta lab of the
Mac platform single-handedly transformed the legitimate digital music market. Of course, the
core reason for the success of the iTunes Store was the iPod: It wasnt the first MP3 player, but it
was the best, and it pulled millions of consumers into the digital music arena. However, it soon
became clear that the paid download market wasnt coming close to offsetting the impact of
declining CD sales and that music piracy was in rude health. The iTunes 99-cent model proved
to be a transition model albeit a useful one between the distribution and consumption
eras.4 It was time for plan B.

2010, Forrester Research, Inc. Reproduction Prohibited

January 22, 2010

Music Industry Meltdown: Recasting The Mold


For Consumer Product Strategy Professionals

Stage 4: Rebuilding. Plan B saw the music labels grant licenses to diverse and potentially

disruptive services, including Comes With Music, imeem, MySpace Music, SpiralFrog, Spotify,
and Virgin Media. Not all of them have succeeded, and more will fail, but some will succeed in
the coming years. Rather than representing desperation, this throwing everything at the wall to
see what sticks approach recognizes that it would be foolish to assume that we now know the
answer to the question that Napster first posed in 1999.

Figure 1 The 2000s: Musics Digital Decade


Sony
launches
The Store

Rhapsody
launches (US)
iTunes Store
launches (US)

iPod
launches

Vivendi buys
MP3.com

30
US and EU recorded music revenues
(billions)

15

iTunes Store
and
Napster (LLC)
launch (EU)
Ruling
against
Napster
(P2P)

Rise of
Napster
(P2P)
Ruling
against
MP3.com

10
5
0

eMusic
launches
(EU)

MusicNet Napster (LLC)


and Duet launches (US)
launch

25
20

News Corporation
buys MySpace

2000

2001

2002

Rhapsody
subscriber
decline

Virgin Media
YouTube
Virgin closes announces
signs
deal with service (UK) unlimited
MP3 service
labels
Nokia
announces Spotify
Comes
launches
With Music
(EU)

IFPI pursues
file sharers (EU)

RIAA pursues
file sharers

Long-term
music revenue
decline begins

MySpace buys
imeem and iLike;
Apple buys Lala

Rise of Kazaa
2003

2004

Rulings
RIAA launches
against early settlements
HADOPI
Grokster
bill
PRS/YouTube
and
passed
dispute
Kazaa
(FR)
Ruling against
Rise of BitTorrent
The Pirate Bay
2005
2006
2007
2008
2009

Source: Forrester Research Internet Music Forecast, 12/09 (US) & Forecast: European Digital Music, 2008 To 2014
56147

Source: Forrester Research, Inc.

digital music business models are playing catch-up with consumer behavior
From the comparatively bleak perspective of the 21st century, the 1990s look distinctly golden;
with the luxury of hindsight, it could be argued that record labels should have invested in the next
generation of music products while the CD was at its peak. In defense of the labels, there was no
precedent for the way that digital transformed consumers relationship with music. But whatever the
reasoning, the net result is that digital music is nowhere near where it should be by now.

January 22, 2010

2010, Forrester Research, Inc. Reproduction Prohibited

Music Industry Meltdown: Recasting The Mold


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Digital music adoption is still niche. Most music fans still dont listen to digital music. The

car and the radio still dominate listening for 74% and 71% of European online consumers,
respectively, with the iPod accounting for just 37%.5 Despite its prolonged demise, CD buying
is more widespread among European online consumers than any digital music activity, paid or
free (see Figure 2).

Next-generation music services are not yet unseating the incumbents. Interactivity, social

utility, the cloud, and ubiquitous access will define the future of digital music. Right now,
though, the forward-looking services are little more than a niche within digital musics niche:
Just 6% of European online consumers visit social music sites like Last.fm, and only 13% visit
artist pages on social networks.

A demographic time bomb is ticking. The digital music generational divide is pronounced.

Although overall digital music adoption is modest, youth are avid users. A whopping 72% of
European online 12- to 15-year-olds use MP3 players; more than half watch music videos; and,
most significantly, 20% download music via P2P networks, rising to 24% for 16- to 24-yearolds in Spain, these figures are 43% and 48%, respectively.6 A generation of young music fans
is growing up with the expectation that music should be instantly available, with near-limitless
choice and access, and, of course, free. The initial effects are being keenly felt but will be even
more pronounced over the coming decade as this generation gains spending power but opts not
to spend on music, leaving a gaping hole in future recorded music revenues.

Figure 2 Buying CDs Remains The Most Popular Music Activity, Despite Sales Being In Freefall
Thinking about your music listening habits, which of the following apply to you?
What type of online video, if any, have you viewed in the past month?
Buy CDs

48%

Watch music videos online

31%

Go to gigs and concerts

28%

Watch live concerts on TV

27%

Watch music DVDs

17%

Download music via P2P

14%

Visit artist pages on social networks

13%

Buy digital music


Visit social music sites like Last.fm

10%
6%

With the exception of music video,


online music activity is fundamentally
niche in reach.

Base: European online consumers


(multiple responses accepted)
Source: European Technographics Media, Marketing, And Social Computing Online Survey, Q3 2009
56147

2010, Forrester Research, Inc. Reproduction Prohibited

Source: Forrester Research, Inc.

January 22, 2010

Music Industry Meltdown: Recasting The Mold


For Consumer Product Strategy Professionals

Free Music Is Here To Stay


Like it or loathe it, the legacy of Napster is that people expect music to be free on the Internet not
all people, perhaps, but certainly more than pay for music online. Free is not about to disappear;
indeed, the fact that it is synonymous with online music grants it a central role in future digital
music strategy.

File sharing has always remained one step ahead of industry countermeasures. Ever since the
first legal proceedings were initiated against Napster, online music piracy has played a game of
cat and mouse with the music industry. And just as Jerry always evades Toms grasp, so music
piracy has evaded the law. The simple fact is that technology moves at light speed compared
with the methodical mechanisms of the judiciary and legislature. As Audiogalaxy, Grokster,
Kazaa, Morpheus, and Napster closed down, their more sophisticated successors already had
scale. Ironically, file sharing has perfected the art of the format replacement cycle just as the
music industry has forgotten it.

Online music piracy is going off-network. Over the past few years, an increasing number

of consumers have opted for non-network alternatives to P2P file sharing, such as instant
messaging (IM), email, music blogs, forums, file storage sites, and binary groups. Part of their
motivation may be to evade industry policing of P2P networks it is much more problematic
to monitor personal communication channels such as IM and email. Remote storage services
like RapidShare and Megaupload are also gaining traction. While none of these alternatives are
as convenient as P2P networks for sharing large numbers of files, they illustrate how technology
will always evolve. P2P networks are not the issue; downloading free music is.

Combating music piracy requires a multilayered approach. File sharing cant be defeated

through enforcement alone. Enforcement and legislation are necessary cogs in the wheel
consumers need to know the rules and that there are consequences for breaking them but
the stick will only work with a big fat carrot and with cooperation across the value chain. ISPs
clearly have a major role to play; in the UK, the labels and ISPs are working more closely
together than elsewhere. The ISPs role should be that of business partner, not just enforcer. Just
38% of the digital music executives we interviewed for this report believe that ISPs should be
responsible for the traffic on their networks.7

The industry is fighting free with free. Since the major labels signed a licensing deal with

YouTube in 2006, they have tacitly recognized that the only truly effective way to fight free is
with free itself via services that are either free to the consumer or that feel like free. The
policy really came into effect with the licensing of services like Nokias Comes with Music,
imeem, and SpiralFrog. Although these arent exactly a list of successful services, they were
strategically brave moves and represent the essential experimentation that underpins evolution.
And Last.fm, MySpace, Pandora, Spotify, and YouTube represent the much more successful side
of free.8 The fortunes of individual services aside, free is here to stay: It is the best way to address
the generation weaned on file sharing.

January 22, 2010

2010, Forrester Research, Inc. Reproduction Prohibited

Music Industry Meltdown: Recasting The Mold


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Introducing Forresters Music Industry Meltdown Consumer Segmentation


The transition between the distribution and consumption eras manifests itself in polarized
consumer behavior. To see how the transition is defining the digital music audience, Forrester
designed a proprietary music industry meltdown segmentation (see Figure 3 and see Figure 4). This
segmentation divides European online consumers into four groups based upon their free online
music activities and music-buying behavior.

Music buyers still dominate for now. Although more than half of European online

consumers buy music, this isnt the most useful way of looking at the audience: Theyre clearly
spending a lot less than they used to, and this will be exacerbated as consumers increasingly
fall out of the habit of buying units of media. Whereas Music Mavens are highly engaged with
online music in addition to being strong spenders, Strictly Spenders are not and so, despite their
current value, are vulnerable. Many of these consumers will be near-term casualties in the shift
to the consumption era.

Youth is where the action is. Unsurprisingly, the digitally engaged Music Mavens and

Freeloading Fans are also the youngest segments; 60% of Freeloading Fans are younger
than 35. One key issue is whether the behavior of these consumers will prove to be based
on demographics or cohort i.e., will they grow out of the activity. The answer is almost
certainly no. They may lessen in intensity, but their current activity is laying the foundations
of tomorrows mainstream. Business models will evolve to successfully monetize this
predominantly free activity and will thus turn the Freeloading Fans into cash cows.9

Portable music is only part of the story. Portable music both dedicated MP3 players and,

in particular, mobile phones is niche even among the Music Mavens and Freeloading Fans
(see Figure 5). The traditional locations for listening to music, such as the car, radio, and home
hi-fi, still dominate across all consumers. This matters because digital music has thus far been
obsessed with portable music; as such, it fails to cater for not only the mass market but also the
majority of those digitally engaged consumers who listen to music. iPod docking stations are a
clumsy fix to a problem that shouldnt even exist. If digital music is to jump out of its niche, it
needs to wholeheartedly enter the home and the car.10

2010, Forrester Research, Inc. Reproduction Prohibited

January 22, 2010

Music Industry Meltdown: Recasting The Mold


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Figure 3 Forresters Music Industry Meltdown Consumer Segmentation


Strictly Spenders

Buy music

31%

Music Mavens

Do not download/stream for free

33%

Passive Populus

Key distributionera audience

21%

Download/stream for free


Do not buy music

15%
Key consumptionera audience
Freeloading Fans

Base: 13,279 European online consumers ages 16 or older


Source: European Technographics Media, Marketing, And Social Computing Online Survey, Q3 2009
Source: Forrester Research, Inc.

56147

Figure 4 Freeloading Fans Dont Spend Much On Live Music Either But Are The Core Youth Market
Music Mavens

Like classical/opera, rock n roll, and


dance
28% younger than 35 (average age is 44),
49% male
35% go to gigs and concerts
26% would pay for online music

Like dance, R&B, and ambient/chillout


50% younger than 35 (average age is 36),
55% male
53% go to gigs and concerts
39% would pay for online music

Buy music

Strictly Spenders

Do not download/stream for free


Like other, dance, and classical/opera
29% younger than 35 (average age is 45),
50% male
12% go to gigs and concerts
13% would pay for online music
Passive Populus

Download/stream for free


Do not buy music

Like dance, R&B, and rap/hip-hop


60% younger than 35 (average age is 33),
53% male
25% go to gigs and concerts
26% would pay for online music
Freeloading Fans

Base: European online consumers ages 16 or older


Source: European Technographics Media, Marketing, And Social Computing Online Survey, Q3 2009
56147

January 22, 2010

Source: Forrester Research, Inc.

2010, Forrester Research, Inc. Reproduction Prohibited

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Figure 5 Consumption-Driven Music Consumers Coalesce Around Digital Platforms


Thinking about your music listening habits, which of the following apply to you?

In the car

70%
71%

Radio

67%
66%

Home hi-fi/stereo

49%
43%

32%

iPod/MP3 player
19%

Mobile phone

14%
11%

36%
33%

79%
81%

Music Mavens
Strictly Spenders
Freeloading Fans
Passive Populus

78%
78%

73%
69%

55%
44%
Digital platforms are strongly
adopted by consumption
consumers but shunned by
distribution-only consumers.

Base: European online consumers ages 16 or older


(multiple responses accepted)
Source: European Technographics Media, Marketing, And Social Computing Online Survey, Q3 2009
56147

Source: Forrester Research, Inc.

The move to the consumption era will realign the music industry value
chain
Consumer behavior can only drive business if the supply side is willing to be driven. To help gauge
the extent to which this is the case, Forrester fielded a survey to European and US digital music
executives. The results offer some encouragement.

The consumption era is coming and the music industry knows it. When we asked music

industry executives how they expect the roles of channel partners to change, it is clear that
they understand that the balance of power is shifting from retailers to social and on-demand
services (see Figure 6).11 They anticipate the big losers to be radio and digital stores and services.
While we agree with the sentiment, we think that the case is somewhat overstated. Although
the majority of digital music fans will increasingly seek out ad-supported and subsidized music,
digital stores and services will still deliver the highest average revenue per user (ARPU). The
importance of radio will not dissipate to such an extent, particularly when we factor in digital
radio.

2010, Forrester Research, Inc. Reproduction Prohibited

January 22, 2010

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Music Industry Meltdown: Recasting The Mold


For Consumer Product Strategy Professionals

Figure 6 In The Shift To The Consumption Era, Streaming Services Gain At The Expense Of Stores
In your opinion, which of the following are the most important channel partners
for the music industry?
(Please select three, both for now and in five years time)
Streaming music services

61%

26%
52%

Digital stores and services


Social networks

32%

ISPs and mobile operators

26%

Media retailers
Technology companies

16%

Radio

16%

Brands

16%
10%

Dont know

39%

35%

16%

90%

2015
Now*
42%

26%

45%

3%
0%

Base: 86 US and European digital music executives at record labels, publishers, and industry bodies
*Base: 85 US and European digital music executives at record labels, publishers, and industry bodies
(multiple responses accepted)
Source: Q4 2009 Global Music Research Panel Online Survey
56147

Source: Forrester Research, Inc.

A new hierarchy of value chain relationships will evolve. Interestingly, music industry

executives only expected ISPs to become significant channel partners; they didnt expect much
more from technology companies or brands. While ISPs will certainly become key conduits
as providers of subsidized household music subscription services, technology companies like
Apple and Nokia will continue to play a pivotal role even more so than now. The importance
of brands is also set to grow. Bacardis signing of Groove Armada and RIMs large-scale
sponsorship of U2 are precursors of wider trends, not temporary anomalies. As the revenues
from music sales decline, those revenues that increasingly come from elsewhere mean that those
partners will become increasingly important.

Artists and their managers will become more powerful. It is also apparent that the partners

with whom music industry executives do business expect more value chain transformation than

January 22, 2010

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Music Industry Meltdown: Recasting The Mold


For Consumer Product Strategy Professionals

they do (see Figure 7). These partners expect the role of artists and artist managers to grow
at the expense of labels and music publishers an entirely feasible byproduct of the decline
in music sales. Indeed, as artists increasingly seek out additional revenue sources, some will
even opt out of label relationships. Although we believe that labels and publishers will remain
the main investors in creative talent, a tier of established artists especially those late in their
career and seeking one last payday will seek out brands instead.12 Big brands will need to be
careful that they dont just become pension plans for aging artists.
Figure 7 The Role Of Artists, Managers, And Agents Is Expected To Increase At The Labels Expense
In your opinion, which of the following do you think will be the most important factors
in the future of the digital music market?
Artists

57%

Artist managers/agents

45%
45%

Record labels
30%

Music publishers

2015
Now*

64%

70%

41%

20%
16%

Concert promoters
Dont know

68%

7%

16%

Base: 104 US and European digital music executives who are not
at record labels or publishers or trade bodies
*Base: 107 US and European digital music executives who are not
at record labels or publishers or trade bodies
(multiple responses accepted)
Source: Q4 2009 Global Music Research Panel Online Survey
56147

Source: Forrester Research, Inc.

Cracks Are Emerging In The Digital Music Value Chain That Need Fixing
Any process of change necessitates shifts in the organizations and systems that it affects. As CD sales
tank and digital download revenues fail to get into top gear, retailers are the obvious losers all the
more so as labels focus on licensing to consumption-based services.13 The changes that digital music
is heralding go much further, though, and are nothing short of tectonic shifts in the value chain.

Artists are beginning but only beginning to understand music piracys impact. Many

artists see little or no income from actual sales of their music after their labels have recouped
their costs, making tours and merchandise their bread and butter. It was inevitable that many
artists would soon regard file sharing as a great way of getting punters through the doors, caring

2010, Forrester Research, Inc. Reproduction Prohibited

January 22, 2010

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little for what it might do to CD sales of their albums.14 Although Lily Allens recent and
short-lived spell as an artist crusader against music piracy shows that artists are beginning to
change their tune, there is a long way to go. Every one of the artists we interviewed considered
file-sharing sites to be a crucial tool for helping people discover music, and few were convinced
that losses from file sharing were important.15

Digital shines a light on artist and label differences. When we asked digital music executives

what they thought was holding back the sector, the labels and publishers placed much of the
blame on consumers while artists and their managers thought the industry was at fault.16
Music industry execs consider file sharing to be the No. 1 problem, but the other respondents
cite the inflexibility of labels and collection societies and the financial demands of rights owners.
These trends are, of course, to be expected, but they highlight the fact that it is difficult to make
money in the digital music marketplace unless you have the financial might of a MySpace or
YouTube to negotiate competitive licensing terms.

Artists and their managers are finding their voices. Publishing and live music revenues

didnt nosedive between 2000 and 2010 in the way that recorded music revenues did. This shift
threatens the degree of importance of record labels, and the major labels shift to 360 contracts
is not enough to redress the changing balance.17 Artists and their managers are taking tentative
first steps toward defining stronger roles for themselves. Organizations like the Featured Artists
Coalition may be some way yet from real power, but they illustrate the changing trends. These
are the early skirmishes as the two opposing forces size each other up.

the future of digital music will be a rich tapestry of targeted offerings


The current meltdown does not spell the end of music business, just the slow demise of the 20thcentury music business. Music retains a core cultural relevance, and more people are consuming
more music across more digital platforms and technology than ever before. If the first 10 years of the
21st century were the years when the music industry cleared its throat, in the next 10 years it needs
to find its new voice.

Monetization will follow a three-tier hierarchy. Digital music offerings will become even more
diverse, but they will sit within a three-tier structure, with premium at the top, subsidized in the
middle, and free-to-consumer at the bottom. While the ARPU lessens as you move down the
ladder, audience size increases.18 The larger the addressable audience, the lower the customer
value opportunity. Careful positioning of these tiers will be crucial and is currently absent.19

Ad-supported services wont pay the bills. Making ad-supported music pay is a tough business,
as Qtrax, SpiralFrog, Spotify, we7, and YouTube will attest. Not only are the economics tough
for the services and in need of revision but the revenues from such services fall far short of
filling the gaping chasm left by declining CD sales.

January 22, 2010

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Subsidized services will become the crucial third way. Premium digital services will

continue to drive the strongest revenues 5.8 billion in 2014 in the US and Europe,
representing 56% of all recorded music revenues but the sweet spot between niche premium
customers and mass-market free music fans remains untapped.20 We believe that ISPs, mobile
operators, and device manufacturers will fill the gap, providing music services for which they
subsidize some or all of the cost for their customers. Consider a portable Apple device with
unlimited music streaming and a monthly allowance of free downloads or a home Internet
tariff that includes unlimited household access to music downloads. Nokia may not have set the
subsidized world alight with Comes With Music at least not yet but the subsidized model
is the best means of generating meaningful mass-market digital revenues.21 And telcos may not
be the best programmers of content, but then neither was Apple when it launched its music
store.

Music product innovation will be key to future prosperity. If one thing stands out above all

else as key to the success of the 21st-century music business, it is product innovation. Weve
been stuck with the same linear collection of songs product for a century the commercial
album celebrated its 100th birthday in 2009. A radical music product overhaul is required.
Currently, there is too little difference between the iTunes 99-cent download and a BitTorrent
download. Unless music products improve their game, they cant expect to genuinely compete
with free illegal alternatives. Future music products need to adopt a platform-agnostic world
view that encompasses powerful and social interactivity to empower consumers to create their
own unique experiences.22

The Digital Music Strategy Of Non-Music Companies Will Become Increasingly Influential
Underpinning the multiplicity of consumer experiences and business models that will be core to
future success will be an ever richer mix of commercial partners. These partners will bring muchneeded financial investment and routes to market, but they additionally bring their own agendas
and priorities, which in turn will contribute to the recasting of the music industry mold.

New entrants are filling the space vacated by traditional retailers. Of course, much has already

changed, as Apples position as the No. 1 music retailer in the US shows. But Apples role represents
much more. The major record labels have tried and failed at being distributors witness
MusicNet and Duet/pressplay and traditional media retailers across the globe are scrambling
for alternative revenue streams. Future revenue growth will depend upon the success of ventures
launched by new channel partners picking up where traditional players have failed.

New channel partners bring new and often competing priorities. The bitter pill for the music
industry to swallow is that most of the new partners are simply using music as a way of selling
their other core products. Music becomes bits and bytes to fill the pipes and devices of ISPs,
mobile operators, and device manufacturers. Contents throne is no longer undisputed; it is

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instead busy fighting off the republican advances of the channel. For example, while Nokia and
RIM might invest heavily in music and in building music DNA into their organizations, they are
doing so in order to sell more phones. This doesnt preclude these sorts of companies becoming
crucial partners particularly for subsidized services and sponsorships but it does change
many fundamental value chain dynamics.

Digital music has more pulling power than ever. Value chain tensions aside, it is clear that

digital music will be an even more appealing proposition for brands and product strategists in
2010 than it was in 2009. Of the executives we interviewed, the majority expects to invest more
in 2010, believes that digital music helped them meet their strategic objectives in 2009, and
believes that digital music remains a valuable tool for differentiation (see Figure 8). Partners
as diverse as drinks companies, car manufacturers, ISPs, and hardware firms will continue to
invest more in digital music and will expect more from it. Of course, the more companies that
work with digital music, the more difficult it becomes to differentiate, so labels and publishers
will need to work ever harder to enable differentiated offerings for their partners.

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Figure 8 The Popularity Of Digital Music Among Brands And Product Managers Is Clear
What will your companys investment in your digital music strategy be in 2010 compared with 2009?
Less

Same

More

27%

8%

65%

Base: 48 US and European digital music executives who are


not at record labels or publishers or trade bodies
What priority will your companys digital music strategy take in 2010 compared with 2009?
Lower

Same

Higher

52%

8%

40%

Base: 48 US and European digital music executives who are


not at record labels or publishers or trade bodies
To what degree did digital music help you meet your strategic objectives in 2009?
No help

Neutral

Helped

27%

7%

66%

Base: 44 US and European digital music executives who are


not at record labels or publishers or trade bodies
To what degree do you consider digital music to still be a useful tool for dierentiation?
Not useful
23%

Neutral

Useful

14%

64%

Base: 44 US and European digital music executives who are


not at record labels or publishers or trade bodies
Source: Q4 2009 Global Music Research Panel Online Survey
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rec o mme n d a ti o n s

build a series of new music businesses


In the age of The X Factor and Americas Got Talent, it is easy to view the music industry as being
in a race to the bottom in pursuit of safe bets that play to the lowest common denominator.
Given the climate for music sales, the labels need to minimize their already sizeable risks is
understandable. But a successful music business depends not only upon the mainstream but
also upon variety, the counterintuitive, and the left field. The digital music sector requires exactly
the same diversity of approach and a bold willingness to experiment, even if it means getting it
wrong again.

Innovate like its 1999.

A lot of mistakes were made during the digital decade. If we


could turn the clock back to 1999 while retaining labels present-day licensing mentality, it
is probable that we would see very similar innovation to what we see now and that we
lacked in the first half of the noughties. The key difference? Services would get a headstart
on file sharing, thus prompting much greater consumer uptake, and more of these services
would be successfully charging for music. This doesnt mean that the digital decade was
wasted, but it is clear that the lessons learned toward the end of it will be the key ones that
inform the next 10 years.24
23

Focus on building great consumer experiences. Seventy-seven percent of the digital


music executives we interviewed believe that business model innovation will be the most
important factor in the future of the digital music market. They are only partly right: If
anything, too strong a focus on business models held back progress during the past 10 years.
The focus now must be on great consumer experiences. Were not saying that you should
forget business models, but get the experience right first. An economically sound business
model is of little value without a good product.

Dont fall for the lure of the levy. The argument for replacing music business innovation
with a flat-rate levy has sustained surprising momentum, most recently via the so-called
Google Tax in France. But the levy argument is flawed: Not only is it virtually impossible to
implement but it also discourages innovation.25 In a world with a flat-rate levy, technology
companies would have much more limited incentive to innovate, and consumers would
ultimately be left with inferior experiences.

Empower artists as stakeholders. Radioheads spurning of EMI in favor of going direct


to consumers remains the big success story of this strategy, but others will come.26 Record
labels need to work hard at giving artists real value, but it must be a two-way street: Artists
also need to behave responsibly. Artists should become partners in their success, not just
employees. EMI boss Guy Hands suggestion of 50:50 net receipts as standard practice
echoing much of the independent sector is a smart tactic that would drive this strategy. If
artists have more skin in the game, more to gain, and thus more to lose, theyll work harder
to make themselves and their labels a success.

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Embrace social media and social tools. One of the more significant trends in recent years
has been the rise of semi-pro sites and services such as My Major Company, SellaBand, and
TuneCore. When you add them to artist pages on social networks especially MySpace
social crowdsourcing tools like Last.fms Scrobbler, music blogs like The Hype Machine, and
fan forums, you get an incredibly rich social picture. Social media has reinvented the artist/
fan relationship, it has revolutionized discovery, and it has created new routes to market for
emerging artists and new A&R sources for record labels. The success of future music products
and services will rely heavily upon the continued and increased leveraging of audiences via
the social Web. After all, if music isnt for the fans, who is it for?

Supplemental material
Methodology
The European Technographics Media, Marketing, And Social Computing Online Survey, Q3 2009,
surveyed 14,536 respondents in the seven markets of France, Germany, Italy, the Netherlands, Spain,
Sweden, and the UK. This survey is based on online adults ages 12 and older who are members of
the Ipsos-MORI online panel. Ipsos weighted the data by age, sex, online frequency, and hours spent
online to demographically represent the online adult European population per country. Ipsos fielded
the survey in June and July 2009 and motivated respondents with various incentives. For results
based on a randomly chosen sample of this size (N = 14,536), there is 95% confidence that the
results have a statistical precision of plus or minus 1.1% of what they would be if the entire online
adult population of Western Europe had been polled. This confidence interval can widen to 3.1%
when the data is analyzed at a country level. The sample used by Ipsos is not a random sample; while
individuals have been randomly sampled from the Ipsos panel for this survey, they have previously
chosen to take part in the Ipsos online panel.
Forrester fielded its Q4 2009 Global Music Research Panel Online Survey to 173 consumer product
strategy professionals from our ongoing Marketing & Strategy Research Panel. However, only a
portion of survey results are illustrated in this document. The panel consists of volunteers who join
on the basis of interest and familiarity with specific music topics. For quality assurance, panelists are
required to provide contact information and answer basic questions about their firms revenues and
budgets. Forrester fielded the survey in early December 2009. Respondents were given a summary
of the survey results, in report form, as an incentive for completing the survey.
Exact sample sizes are provided in this report on a question-by-question basis. Panels are not
guaranteed to be representative of the population. Unless otherwise noted, statistical data is
intended to be used for descriptive and not inferential purposes.
If youre interested in joining one of Forresters research panels, you may visit us at http://Forrester.
com/Panel.

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Endnotes
1

Of course, they could tape from the radio and from their friends, but the home taping experience was both
clumsy and time-consuming. It was always a markedly inferior experience to the genuine article. For a
detailed description of the three pillars of value, see the December 15, 2009, Media Product Innovation:
Building Products That Thrive In The Media Meltdown report.

We have proclaimed the death of the music industry, the decline of print journalism, and the radical
overhaul of the TV and movie business. And while each industry is being remade in its own unique way,
there is a fundamental similarity in the way that these media industries are being remade: They are all
suffering from media digitization, which removes distribution scarcity. This ultimately alters how content
is produced, distributed, and consumed. In this report, we lay out three phases that media industries have
begun to pass through: digitization, meltdown, and rebuild. Most media businesses are in meltdown. Its
time to rebuild. Product strategists in all the phases of media production, distribution, or consumption
including device makers must prepare for a world in which media are characterized by multiplatform
access, increased audiences, and diverse revenue sources. See the October 9, 2009, How To Rebuild The
Media Industries report.

These were, respectively, the first music peer-to-peer network, the first large-scale music download site, and
the first portable MP3 player.

Just 10% of European online consumers buy digital music, compared with 48% who still buy physical CDs.
Source: Forresters European Technographics Media, Marketing, And Social Computing Online Survey, Q3
2009.

Source: Forresters European Technographics Media, Marketing, And Social Computing Online Survey, Q3
2009.

Source: Forresters European Technographics Media, Marketing, And Social Computing Online Survey,
Q3 2009. P2P behavior is typically significantly underreported in consumer surveys due to consumer
reluctance to admit to the activity. This is particularly true in markets where high-profile industry
countermeasures are in place.

Taxing the likes of Google, Facebook, and Microsoft certainly isnt the answer either, as has recently
been proposed in France. Source: Mark Mulligan, Taxing the Net Wont Stop the Media Meltdown, The
Forrester Blog For Consumer Strategy Professionals, January 7, 2010 (http://blogs.forrester.com/consumer_
product_strategy/2010/01/taxing-the-net-wont-stop-the-media-meltdown.html).

The difficulty that Spotify has had in securing licenses for the US market and the fact that subsequent freeto-consumer on-demand services like MSN Music in the UK have much smaller catalogs from the majors
suggests a change in strategic outlook. Although Spotify has proven to be a major consumer success, with
6 million users in September 2009, it has not done well at converting users to the premium tier which
accounts for no more than a few percent of total users. Record labels see a service that promised to use free
as a tool to pull in consumers to pay for music doing an even better job than BitTorrent in educating massmarket music fans that music should be free.

Fundamental shifts in consumers perceptions of value underpin the current period of crisis in which the
media industries find themselves. Consumers are not falling out of love with media but instead with its

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20th-century product iterations. Those consumers who currently spend extensively but consume modestly
will be most exposed as the media distribution paradigm is superseded by the consumption era. A new
framework for media product innovation is required to align media industry content assets with 21stcentury consumer behavior and demand. The exhaustive process of product innovation and rebuilding that
this entails will be media businesses ticket out of the media meltdown. See the December 15, 2009, Media
Product Innovation: Building Products That Thrive In The Media Meltdown report.
10

The iPod heralded a new paradigm in music consumption, but it has done little to counter the impact of the
CDs terminal decline; it may even have helped accelerate it. Although mobile music now looks set to start
delivering on some of its promises, it shares a core failing with MP3 players: They both deliver individual
experiences and largely fail to address the decline of music technology in the home. See the November 6,
2009, Taking Digital Music To The Mainstream: The Music Product Features For The Living Room report.

11

Respondents to Forresters Q4 2009 Global Music Research Panel Online Survey were from record labels,
music publishers, music rights bodies, and music trade bodies.

12

In the late 20th century, music business artist contracts, development cycles, release schedules, and
promotional activity were all shaped around getting a little shiny disc of a dozen or so tracks into the
stores. Now in the 21st century, the album straightjacket can be thrown off and releases can become part
of a continual artist-fan relationship. Sure, the die-hard artists of the album era will bemoan the death of a
creative construct. But that ignores the immensity of the new creative opportunities that will accompany
the radical product innovation that the music industry so desperately needs. And the benefits go far
beyond the artists and labels; they open up core new revenue opportunities for mobile carriers, ISPs, device
manufacturers, and even brands. Perceptions of value and scarcity must be rebuilt along new lines, creating
a blueprint for product strategists across all content genres. See the September 4, 2009, Music Release
Windows: The Product Innovation That The Music Business Cant Do Without report.

13

Media retailers have spent most of the 21st century shifting more and more of their floor space from CDs
to other media and products. But the media meltdown affects all media industries, not just music. DVD
sales are already being hit as well. The smart media retailers are investing in businesses that monetize
consumption. A best-practice example is HMV in the UK, which has invested in boutique movie theaters
and live music venues.

14

High-profile file-sharing fans include Robbie Williams and Travis Fran Healy. Metallicas Lars Ulrich was
an early exception to the rule, and U2s Bono is currently doing his best to pick up Ulrichs baton due in
no small part due to the influence of his vociferous manager Paul McGuinness.

15

File sharing and non-network music piracy, such as sharing via instant messaging, music blogs, and email,
are indeed strong discovery mechanisms for many digital consumers but they are also detrimental to
music sales. While teenage file sharers may discover and consume far more music due to file sharing than
their equivalents 10 years ago, their spending is much lower. Because music is free, they have shifted their
now larger disposable income to other items, such as console games. Music retains an intrinsic cultural
value for youth but has lost its monetary value. As one teenager in a focus group said, If I could download
my Nike, I would buy music.

16

Source: Q4 2009 Global Music Research Panel Online Survey.

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17

360 contracts are those in which an artist grants the record label the right to participate in additional
nonrecorded music revenues, such as live performances and merchandizing. To date, they have created
more animosity among artists and artist managers than they have revenues for record labels.

Prices and paying audiences will continue to decline. Although free will play a key role in the business
model and user experience revision process, it needs careful positioning within a clear strategic framework.
Successful monetization of digital content will follow a three-tier hierarchy. See the December 15, 2009,
Media Product Innovation: Building Products That Thrive In The Media Meltdown report.

18

19

For example, a UK basic Napster customer pays 9.99 a month for on-demand streaming music, while other
UK consumers get virtually the same on-demand experience from Spotify for free. The absence of a few
audio ads falls far short of establishing 10 of value.

20

This data excludes ring tones. Source: Forrester Research Internet Music Forecast, 12/09 (US) and see the
January 20, 2009, How Digital Licensing Will Help Save The Music Industry report. For more information
on Forresters new ForecastView offering, including access to additional details and metrics not included in
this report, please contact us at data@forrester.com.

21

TDCs Play service in Denmark remains the industry benchmark for subsidized music services, but the
pace will quicken over the coming years. Spotifys recently announced partnerships with mobile operator 3
in the UK and ISP Telia in Sweden add a further twist, presenting the subsidized model as the most realistic
means of making the premium tier of the ad-supported service pay.

In 2009, the album celebrated its 100th birthday and yet remains the centerpiece of the recorded music
product portfolio. The time has come for a radical overhaul of the recorded music product range. Forrester
proposes a music product manifesto of consumer rights that music products should embrace. Future
music products will need to adopt a platform-agnostic world view that encompasses powerful and social
interactivity to empower consumers to create their own unique experiences. See the September 29, 2009,
Music Product Manifesto: The Product Features That Will Save Recorded Music report.

22

23

This echoes the lyrics of Prince, who has done more than his fair share of business model innovation
ranging from the innovative but ultimately unsuccessful New Power Generation subscription service to the
hugely successful newspaper cover mount in the UK that enabled him to sell out his residency at the O2.

24

If the noughties were the original 1970s run of Battlestar Galactica, the next decade needs to be the 2004
remake.

25

The key issues are who gets paid and how much? Many industries could make a strong case for revenue
loss due to piracy. Where should we draw the line? Music? Movies? TV? Books? Games? Software? News?
Magazines? Software? Pornography? Is revenue share based on how much the industries have lost? Or
on how big a portion of their revenue has declined? Or on how many files are downloaded? For example,
music companies have lost a larger share of revenues to piracy than movies, but the absolute loss for movies
is probably larger. Who gets paid more movie studios or record labels?

26

Other high-profile moves such as Paul McCartney to Starbucks, Madonna to Live Nation, and Groove
Armada to Bacardi are all exceptions rather than rules. Each instance is a new player making as big an
entrance as possible by overinvesting in a high-profile and disaffected major-label artist.

January 22, 2010

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