Historical changes of the music industry impacted by the digital revolution

Since the dawn of the internet there have been significant changes to the way music has been consumed.

One of the first companies to adopt the internet for music sales was Ritmoteca in 1998, who had agreements with Universal, Sony, Warner, and Bertelsmann Music Group in order to use their artists in their catalogue of 300,000 songs available to buy. However the company became defunct in 2003, but was able to inspire others to create similar services. With MyCokeMusic launching in January 2001, followed by iTunes music store in June that year. MyCokeMusic sold over 100,000 songs in the first 3 months, but Itunes in the UK sold over 450,000 songs in the first week alone.

Before the internet era began, the main consumption of music would have been through the CD format, or in some cases tape or vinyl. However, with the internet making it easier to access the music you want almost immediately, it has become the most consumed format.

Initially this could have been seen as a positive change, as online downloads has “allowed for potentially lower expenses such as lower coordination costs, lower distribution costs, as well as the possibility for redistributed total profits “ O'Reilly, R. (2014). Now the issue that is faced here is that despite the drop in distribution and production costs to distribute physical records, for any singles or albums going through the iTunes route, every artist and label has to give iTunes a cut in the sales, which on average is a “30% cut of sales” Billboard. (2013).

iTunes was seen as providing “a place where we were going to monetize music and in theory stem the tide of piracy. So, it was certainly a solution for the time,” Mcdonald, M. (2013). Before services like iTunes, it was all too easy to illegally download the music you wanted, with sites such as Limewire and Napster offering 24 hour services for file sharing. There were very few precautions in place to punish those who were downloading illegally, and there were very few online legal substitutes that offered such a wide range.

The main companies in the music industry at the early 2000's took a long time to adapt to the changes brought about via internet and rather than seeing its positive attributes and utilising these. They didn't invest enough time in the idea of online distribution, which paved the way for piracy sites set up by people who noticed the need of the consumer and created sites to cater for this at a large scale:

“So far they have been slow to embrace the internet, which has seemed to them not an opportunity but their nemesis. Rather than putting their product on file-sharing applications, they are prosecuting free-download users for theft.”

The Economist, (2004)

At the forefront of the digital downloads in the late 90's to early 00's was Napster.

Defined as a peer-to-peer service, they specialised in MP3 files allowing “IT people to dip into each other's hard drives, and share their MP3 music files.” Lamont, T. (2013). and at their peak had around 80 million registered users. This is not to say that piracy wasn't available prior to the internet era, as consumers could copy CD's etc from friends onto blank cassette tapes and discs, but peer-to-peer online sharing sites made the piracy game a lot quicker and therefore took a massive market away from the recording industry. It now meant that just 1 person would have to buy the records to begin with and from there 80 million people had free access to this.

Napster were closed as a peer-to-peer service in 2001, but until the big companies were ready to go along with this change in music consumption there would be new sites cropping up constantly and a growing number of consumers ready to risk being fined in order to gain the easy and free accessibility of pirated music.

In the year 2000 72.8% of record sales were in CD format and the value of recording sales across the world was at $36.9 billion. However according to the International Federation of the Phonographic Industry “World sales of recorded music for the year 2000 fell by 1.3% in value and by 1.2% in units compared with 1999.” IFPI, (2001). This suggests that global sales were already being affected by factors such as online piracy.

If we were to compare those figures to the most recent sales, the world value of the recording industry for the year 2014 was $15 billion - less than half the income made 14 years before and with a equal split of 46% each for digital revenues and physical sales.

Although the industry have begun to grasp at services such as iTunes and digital sales have shown that they are a convenient and sought after way of consuming music, the music industry now have further progressions to utilise streaming:

“Subscription services, part of an increasingly diverse mix of industry revenue streams, are going from strength to strength.” IFPI, (2015). However streaming services are causing an issue in the recording industry, with labels only getting a certain cut in sales and with a consumer audience who have since the late 90's been accustomed to getting what they want, when they want, for free.

In 2005 we saw the launch of Youtube, a free video sharing online platform. A year later, this service was bought up by Google. With millions of users already visiting the site regularly, Google decided to get the major record labels involved, offering them a cut in revenues in order to use their artists' music videos on their site. The great thing about Youtube was that it was feeding this need for free content, but at the same time keeping it legal and getting revenue streams through advertisements which could then be generated back to the content owner.

“It has been speculated on the webvine that YouTube is willing to pay its users at the very least $1 per view. This only goes into effect if a user reaches a minimum number of views which seems to be in the vicinity of 1,000. The snag comes in the site’s payment terms. YouTube only issues checks when a user has earned $100.”

Somoso, E. (2013).

In the case of many labels, they didn't agree with the cut that was being offered to them, and Warner Music pulled all their videos from the site when they weren't offered the substantial amount per stream that they asked for. Months after this Youtube had a similar dispute with PRS in the UK and for a while had to block the viewing of music videos by major labels in the UK.

By taking their artists off the site, all the labels did was lose out on an extra revenue stream at a time when sales were declining and the recording industry was needing extra revenue. “Musicians get less exposure. YouTube gets less usage. Fans are left in the dark (or hunting around on less reputable sites for music videos).” Masnick, M. (2009).

It has taken a long time for the major labels to come to terms with the fact that consumers no longer want to pay for music and would prefer the option of a free, accessible service. With high speed internet and open access wifi for home devices, mobile phones and more recently the introduction of the tablet, the need for a separate device such as a CD Player or tape player has become obsolete and services that can be accessed through apps and the internet have become far more convenient.

Despite being a video-hosting site for all different entertainment purposes, Youtube has become known as being a huge platform for musicians. Allowing musicians to get their music heard by global audiences whether they have label backing or not, along with being a brilliant promotional tool. “A recent report by tracking firm Visible Measures found that nine out of the ten most "viral" videos in 2009 were music-related” Masnick, M. (2009).

The issue Youtube has had however is after spending ten years being a free service, their revenue only goes as far as deals they make and advertisement. The service is also only available online, leaving the audience rendered without music in a situation where they are offline.

The way Google are getting around this is by working on releasing Youtube Music Key, which will turn your Youtube app into a streaming music player as well as a video app. Offering an “ad-free, premium streaming for $10/mo (starting out with a promo price of $8/mo)” Henry, A. (2014).

Services such as this have been copied from companies like Spotify and Deezer who had seen the success of Youtube and the limitations it has and have built streaming platforms dedicated to music which can provide a online and offline service, whilst giving free service along with also getting consumers to pay for music.

“People thought it was OK to steal with The Pirate Bay. It wasn’t nice going to international meetings. Was it close to killing the industry? Yes. Then Spotify came and it was better than illegal downloading. It was super-fast, almost everything was on it, and it was free.”

Sundin, P. (2014).

In the year-end report for the year 2008 – the year the Swedish streaming service Spotify launched and the year after the french service Deezer was launched – there was a prediction that:

“Advertising-supported services are a potential way to wean habitual non-payers on to legitimate music services. Research in the US suggests that at least 45 million US consumers are willing to view adverts as the price of listening to music.” IFPI, (2009).

In 2008 Spotify was still finding its footing, with the service only launching the October after managing to make deals with the major record labels. The initial subscription was under invitation-only free service for beta-testing purposes. Which when the paid service became available, the beta-testing community had their “existing accounts immediately transition to become a free Spotify account.” Spotifysehr, (2008). – although the free service was still under invitation only in the early days.

They have made their name by being one of the biggest freemium services - meaning that the service is free of charge, unless you choose to subscribe for the premium services. The major difference between the free and paid service at the beginning was that the free service is supported by advertisements and the paid service is interruption free.

Over time the premium service has begun to offer different services, such as offline listening, where you can listen to playlists offline without needing to pay per song to download it onto a device.

Along with being able to skip as many tracks as you like (instead of only being able to skip 5 tracks per hour on the free version), there is also the option of HD music, and Spotify Connect which allows you to control music between devices.

Like piracy, streaming has created a way of users listening to music for free (or through a monthly subscription basis) but due to advertisement revenues and the income from those who pay subscription fees it allows consumers to listen to music conveniently without downloading illegally.

Between March 2011 and August 2012, Spotify rose from around one million paying subscribers to four million. This may have contributed to the reports that in 2011 “the number of peer-to-peer (P2P) file-sharers fell by 26 per cent” IFPI, (2012). With the number of subscribers through the different streaming companies rising by nearly 65% from the previous year. By the end of 2011, Spotify had accounted to 2.5 million of the noted 13 million paying subscribers across all global streaming companies, making them the most subscribed with Deezer coming up second with 1.5 million subscribers.

In 2011 Spotify also announced a partnership with Facebook, integrating music streaming services into the social media market.

Streaming services are seen to be the future of the recorded music industry, and have given artists a good promotional platform with features like the radio stations on Spotify (where you can find new artists by listening to music similar to the artists you are already listening to), along with giving consumers a good service.

“I love the way music turns all these techie devices like PCs, mobile phones and iPads into personalised juke boxes and I love how the internet lets me connect with fans wherever they are in the world.” Bedingfield, N. (2012).

Not everyone is happy with the way streaming services are currently being run though. There have been multiple complaints from different artists on the amount of money that is generated via streaming services and how much of this reaches the artist.

Spotify for example keep 30% of the money from subscriptions and advertisement revenue and “pay out nearly 70% of all the money we earn in royalties," Spotify, (2013). On average they pay per recording a fee of “$0.007 per play” BBC, (2013). This means that a recording would have to be played just over 140 times for the fee to reach the usual 99 cent price that a single would be sold for on iTunes.

For major artists, Spotify have revealed that in 2013 through the pay per play agreement, several artists had been paid more than $3 million that year alone.

Geoff Barrow from Portishead has been the most recent to claim to have received an unfair sum of streaming revenue, as from 34,000,000 streams he has only received £1700 after tax. The problem here is not specifically how much revenue goes to the artist from the streaming companies, as we already know how much Spotify for starters give per stream, but more so that the money must go through the record company first, and how much of that money will then make it to the artist once the record company have deducted their fees.

In the case of a recently leaked copy of Lady Gaga's contract, there shows a clause that any royalties would not be payable if generated from “any blanket licenses under which the licensee is granted access to all or a significant portion of Interscope's catalog” Resnicoff, P. (2014).

As it is the record label that have made a deal with streaming services and not directly the artists, the record label are free to offer their artist whatever deal they like when it comes down to revenue generated by streaming. This could be an amount where the label pay the royalties on the same basis as they would any other recording revenue, by taking cuts for areas such as distribution and marketing for the record. Or it could even be a deal such as the supposed Interscope deal, where they offer no royalties at all, as they are licensing their catalogue as a whole and not just a specific artist’s works.

This is where the criticisms begin for the new streaming service Tidal, which launched last month. There are two main selling points for Tidal, the first being their high fidelity sound and the second being that they are supposedly more artist friendly.

According to their twitter page 75% of their revenue generated will go to labels and they will keep just 25% themselves. The problem with this being that once again the licensing deal is with the record label, so despite being a higher percentage of royalties reaching the labels, that does not necessarily mean a higher percentage will reach the artists.

Another controversy surrounding Tidal is that there is no free option as there are with other services, there is a two tier payment option. With normal quality sound being $9.99 monthly (same price of Spotify premium) and premium high fidelity sound being $19.99 monthly.

With artists such as Taylor Swift taking their entire catalogue off other streaming sites and being exclusive to Tidal, this means that for many fans they are left with fewer options than before. Of course a lot of this music can still be accessed on Youtube, but with artists bringing out exclusive tracks just to Tidal this brings to questioning; will this be an incentive for fans to subscribe or will it push them back to piracy.

As Lily Allen recently argued on Twitter that music fans “won't be able to get the exclusive content on spotify, so they'll go to torrent sites and pick up some other stuff too” Allen, L. (2015).

The marketing focus has very much been around it being an artist friendly company, but when the artists involved in the marketing are already some of the richest in the business, and with smaller artists criticising the company over social media and interviews it would have been better for them to focus on the quality of the sound.

For a major music fan, the type that already own a high quality sound system and headphones, $19.99 a month might be a reasonable price for being able to have unlimited streaming without having to subsidise the sound quality.

And clearly there is a large audience for hi-fi sound as continued sales of hi-fi equipment show, and Deezer are doing a similar thing with Deezer Elite at the moment.

There are still however several types of audience of music consumer, even within the audience that are looking for high sound quality you have both an audience who want all their music on the same device where they can listen to unlimited music without filling up their phones with massive memory eating files, and then you have those who prefer to physically own a recording whether that be on physical format or digital.

To cater for this market another company Pono Music launched like Tidal in early 2015 and with a catalogue of 2 million tracks are also catering for that second audience by selling high quality downloads online. Their albums are roughly around $18 each, so this is also an issue worth considering as many Tidal sceptics have said they wouldn't spend $19.99 a month buying a physical record let alone want to spend that much on a service where they can't even own the music (which of course is a criticism of streaming services as a whole).

We are at a time in the music industry where there has been one of the fastest technological progressions: from fifteen years ago when the first mobile phone was released with mp3 capabilities to now when smartphones dominate and you can get millions of tracks available to you any time of the day wherever you are.

“Through the internet, which more than anything else creates access to things, limitless music eventually became available for free. The big record companies didn’t see how to make money from online distribution so they effectively ignored it, leaving it to the hackers and the audience to populate a new landscape of downloading....In the blink of an eye music went from being rare, expensive and only available through physical media in controlled outlets to being ubiquitous and free worldwide.”

Albini, S. (2014).

The technological world is progressing, technology is getting cheaper, consumers are constantly looking for best deals for their money and the future of the music industry is to learn from their past mistakes and follow the market and support innovation rather than clinging to old models of consumption.

We've seen that almost half of the revenue being generated in the past year have been by digital revenues and that streaming is getting more popular year on year.

So now is the time for the music industry to look at its current business model and address issues such as the legal status of streaming licensing deals and to maximise the amount of revenue generated without alienating the consumers once again.

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