Can Social Media Save the Music Business?

Sales of recorded music in the U.S. peaked back in 1999 at $15 billion. Since then, the industry has lost half its value. Digital music makes up over 40 percent of total sales, but it hasn’t been enough to return the industry to growth, let alone help recapture its former glory. After getting hammered by the recession, radio ad revenues seem to be stabilizing at around $16 billion, but that’s also well below the industry’s peak.

Online digital music can combine discovery, consumption and retail — all wrapped in social experiences like sharing, recommending and self-expression — in a way that physical goods and stores, and terrestrial radio, cannot. So what’s the problem? Did CD ripping and file-sharing outweigh any potential social media benefits for the industry?

Music Spending Realities

First, let’s look at some of the hard realities facing the music business:

  • While ripping and file sharing no doubt affected sales, the CD artificially inflated the market. CDs raised the price of an album and eliminated singles. Digital music returns popular music to its natural state as a singles business and lowers prices.
  • Although everybody listens to music, nearly half of Americans don’t buy any, and of the remainder, 25 percent account for 75 percent of the spending. A relatively small number of heavy buyers spend $200 a year, while all the other spenders buy an album or two. The heavy buyers are disproportionately Baby Boomers. Boomers are a big generation in terms of absolute numbers; they were raised on rock when it was a cultural phenomenon, and they’ve re-bought their collections in several formats (vinyl, cassette, CD).

Remixing Music with Social Media

These patterns don’t look good for music spending. Nor has the industry harnessed social media to its advantage. Music is inherently social, especially for youth audiences who use it for fashion and lifestyle cues and to express their “tribal” affiliations (e.g., goth, indie, mainstream). Although radio is the number one source of new music discovery, a friend’s recommendation is the second, and recommendations are more important the younger the audience.

New digital services like cloud-based lockers for streaming access and synchronization — likely Google’s digital music strategy — could take advantage of and even speed up the transition to fully digital music, but those offerings don’t appear particularly social. In contrast, YouTube and Myspace have led the way on providing free, ad-supported consumption and embedding of music videos and songs. And they pay much higher royalties than analog radio stations. Microsoft pioneered mobile song sharing with its unsuccessful Zune player — smartly trying to use DRM to invent a new business model rather than lock down an old one. If Apple’s Ping is an example of the future of social commerce, right now it’s missing the mark by using weak social content that’s kept mostly within Apple’s walled garden.

The newer freemium music services like Spotify and MOG focus a bit more on social media integration than original for-pay streamers like Rhapsody and second-gen Napster. That could help, but $10 a month on-demand services have never attracted more than a couple million users in the U.S., mostly selling to a high-spending, digitally savvy music fan that only constitutes 15 percent of the online population. Spotify’s premium business subsidizes its ad-based one, and it can’t get the royalty deals from the record labels it needs to be profitable — or even launch in the U.S.

In a year when the Beatles’ arrival on iTunes counted as “big news,” we’re starting to see more action in digital music, especially with social integration. There are a couple of location-based, socially influenced soundtracks of cities or neighborhoods. Audiogalaxy, a former file-sharing site, is trying to find a legal business, and MixApp has built a hybrid chatroom-listening space. But they all face the currently impossible task of covering royalty costs with advertising. It may be that social media makes its contribution in cost-savings, whether that’s crowdsourcing music videos or making artist development more efficient with online tryouts and audience-building.

Question of the week

How could social media save the music industry?
Relevant Analyst
P1040724

David Card

VP Research Gigaom Research

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