Mobile music and the changing industry landscape
As some of you may know, part of us (the management team of mmC) are private shareholders (non-executives) of a mobile media company focused mainly in music distribution. Mobile music is a challenging topic, and a extremely difficult business to run in an iTunes era where, the evolving business models around mobile distribution, the huge amount of competitors in the battle-field and the increased margin erosion of the business leave the game to just a limited number of players.
Over the last decade, the music industry has seen the emergence and rapid growth of digital distribution at the expense of physical formats. Many record labels have suffered falling revenues and profits in recent years.
Contrary to popular belief, people are not tuning out of recorded music – far from it. Digital technology has enabled recorded music to proliferate, and people are listening to it more often and in more places than ever before. Revenues, however, have not kept up with the pace of listening growth, as consumers are buying less “pre-packaged” music, especially in permanent, physical formats. We assess this changing landscape, particularly focusing on the economics of music, in order to speculate as to whom might benefit in the digitally- driven industry.
The changing landscape.
Consumers are consuming more music than ever before, both in old and mew media. But the move to digital has not stimulated a significant replacement cycle, unlike prior format changes. While volumes have declined, the negative effect on revenue has been multiplied by declining real prices and more fragmented purchases. In addition, record companies have experienced a loss of revenue through piracy, or simply through more music being freely available.
In light of the changing industry landscape, we consider below the economics of recorded music, with particular reference to the relative economics of digital versus physical music products, and the impact of piracy. Digital distribution of music is typically more profitable than physical distribution, as a result of lower retailing and manufacturing costs. As Cristóbal Alonso (mmchannel’s chief commercial officer) says, “we estimate digital margins are 15p.p. higher than physical margins; and record labels receive a higher share of the selling price than non-digital products”.
However, the unbundling of the album by online distribution networks has reduced revenues. The single-track model, whereby users choose to download only songs they wish to, has proved to be an appealing proposition for the final customer, that therefore purchase less, and more selectively, in digital than they do in physical formats.
On top of this, there generally appears to have been some mist-math between online pricing of singles versus album. The highly competitive headline price of digital songs downloads – 0.99€ in Spain on Apple’s iTunes store, against 5-7€ for CD singles (on which users typically only want one single track) compares with only small differences between physical and online album pricing (9€ per album as an average), notwithstanding the differences in physical characteristics of the products.
Piracy is a significant problem, but one that arose in digital as pirates took control of the online distribution platform sooner than the music majors. Annual trading updates from the music majors continue to mention piracy as a key factor in lower revenues and profits.
But piracy has not stopped the move to producing and selling music digitally, altering the traditional industry structure of the old cd times. Prior to this ‘digital revolution’, music majors held significant power, selecting and promoting artists and exercising immense influence over what became popular. Similarly, in retail, restrictions allocated over shelf-space and the policies set by retailers also strongly influenced which products were available for purchase. However, the development of mechanisms to share recommendations, feedback and build networks of similarly linked products (be it songs, artists or books) has made providing consumers with practically unlimited choice a viable proposition.
Mobile music downloads constitute half of global digital music market revenues. Mobile has opened the market to new players, but may offer majors a strong source of new revenues. Historically sales of ringtones have driven mobile revenues, but more recently synthesised tones have been evolving into “real” songs. The rollout of music-focused handsets supported by higher network speed will help drive sales, particularly of full track downloads. At least this is what we expect for the success of our investment.
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