Recent rumours around Facebook Timeline having a music feed, Twitter’s standalone music app, Amazon in talks with big record labels plus Google and Apple to join the music subscription business bandwagon have revitalised the debate around the music industry and its future. The industry is on a rollercoaster ride, mostly downwards (in monetary terms) since the advent of Napster and BitTorrent, and has seen one-time industry leaders like HMV and EMI reduced to minnows or on the verge of bankruptcy. However, the recent financial stats suggest, for the first time in ten years, an upward trend and raised hopes of a revival.

Let’s look at this $16.5bn market where average users spend over 14 hr/week and see how exactly contents are distributed , who the main players are, the likely future trends and possible options to achieve sustainable growth!

Piracy, Pay-as-you-go and free play with advertising are currently the dominant trends, as according to the International Federation of the Phonographic Industry (IFPI) 2012 report, recorded music industry revenues rose globally by an estimated 0.3 per cent to US$16.5 billion in 2012. However, digital revenues increased by an estimated 9 per cent to US$5.6 billion in 2012 and now account for around 34 per cent of global industry revenues, with the following breakdown:

In addition, the above reports suggested, and this is very clearly visible too, that “Music is driving a broader economy i.e. Recorded music is helping fuel a range of industries, from social media platforms to radio broadcasters, headphone to handset manufacturers, live concert promoters to bars and nightclubs. As a simple illustration of music’s influence on the digital world, nine of the 10 most viewed videos on YouTube are music videos.”

Reports also suggest that “Consumer satisfaction with licensed services is demonstrably high” and the reasons are “first, security/ ease of payment; second, the guarantee that the service is legal; third, because they trust the brand/company. Users of subscription services pointed to the ability to discover new music, their free of charge
tier of offerings and the ability to listen to music without needing to purchase individual songs.”

So the clear winner among all the options is music subscription services, and due to higher satisfaction fans are subscribing this concept is on high rise and for now this looks like a future.

Overall, the industry looks very healthy apart from the piracy issue, and if on-going legislative efforts and music subscriptions continue to progress, music piracy, like software piracy, could be under control. In fact, European Commission findings suggests that piracy helps in boosting profit as it encourages users to buy the un-pirated good quality product once they listen to a song they like from a pirated site.

But beneath this rosy picture there is a very critical issue bubbling under the very foundation of this industry: profit margins are very low because there are too many intermediaries between the musician and the listener, such as lyricist, publisher, promoter, music managers, lawyers and distributors, and on top of that a label spends 25% of their revenue in marketing i.e. promotional costs are too high, which means no one (especially artists) can make money. This means music subscription might not after all be the model going forward and therefore the industry is in dire need of finding a business model that can really help it to survive in the long run.

For a sustainable model, the main objective is to cut intermediaries and so achieve costs allowing both publishers or distributors and musicians to survive. Some obvious options to achieve this include artists using YouTube in conjunction with Facebook, Twitter and Pinterest to directly distribute their content, but we should be realistic and accept that there are not many Justin Bieber’s and PSYs (Gangnam Style) who become heroes overnight via social networking sites. The truth is that promoting YouTube or Facebook channels is extremely difficult for artists and the success rate is fraction of one per cent.

So if we know that we need to make a more workable model, we know that we need to increase profit margins for musicians and distributors, we know that we must create a purely promotional mechanism to promote good content created on YouTube, MySpace and Facebook, and we also know that for fans high quality, discovery or interaction, brand and security are the main factors when they listen or watch music, then I am sure we can disrupt this industry beyond music subscription.

Here are some ways it could be done:

1. An independent label can make more interactive content – as the Spotify CEO rightly suggested, a very possible and engaging option to encourage digital interaction between artists and fans. So a song could have five different versions and fans would be allowed to choose which one they like best. This means higher engagement and more traffic and so high advertising revenue.

2. Spotify (or another distributor) can ‘do a Netflix’ to remove layers between artist and listeners i.e. distributors become labels or publishers, in the same way that Netflix is creating their own content.

3. Create Music Facebook on top of Music Cloud (i.e. subscription) – MySpace is projecting itself as music blog but here the idea is that we should develop a technology where singers, lyricists, guitarists, drummers, video directors etc. can crowd source a music album and then the publicist and distributor can use same platform to promote that music e.g. Music Facebook + App Store.

4. Integrate advertising to audio and video – can we not truly integrate advertising to music audio (song’s words can tag to different lyrics) and video via tagging (e.g. the artist’s car, clothes, beverages etc. can tag to brands) so that advertising gets more eyeballs and ear-pings than it does now when advertising content is appended to music videos before after songs? It needs some thought, but let’s create a win-win revenue-generation situation for both advertisers and musicians.

In summary, despite all the recent growth and success of the music subscription model, the industry is struggling with issues like piracy, low margins and continuous disruptions (the latest one being the music subscription model) and all of these are hitting the industry pillars, like labels and musicians, really hard.

Therefore, there is need to create a model where artists and distributors can make money and at the same time fans can get the best quality at the lowest possible price. Possible options could be distributors becoming publishers or the invention of an interactive audio/video blog with integrated advertising. Whatever happens, the industry is heading for another disruption pretty soon!