November 2011 Early Indications: The State of Online Music

The past 20 years have been tumultuous, to say the least, for the recording industry. From a time when old formats (the LP and cassette) were declared dead and the compact disc was essentially the only way to buy music, through Napster, then Rhapsody, iTunes, and MySpace music, listeners now confront a confusing array of options that call into question some basic questions:

*What does it mean to "buy" a song? Or to "own" it without paying?

*How are artists discovered by publishers?

*How do listeners discover new music?

*Who pays, for what, and who makes money?

*Most fundamentally, is music a standalone industry or will it become a feature of a larger "content" business?

While much remains uncertain, six facts about the state of online music can be asserted.

1) The state of online music is puzzling.

Any venture capitalist will ask a few basic questions of a new venture, one of them being the size of the addressable market. According to the recording industry's trade association, which values CDs at retail and not at wholesale or purchase price, the total value of the U.S. music industry was only $6.8 billion in 2010, a 10.9% decline over the previous year. Just this year, Citigroup basically repossessed EMI, the #4 label, from the private equity firm to whom it lent money for its purchase and recently sold part to a Sony-led consortium and part to Vivendi's Universal label; Citi took a loss of more than $1 billion on the deal, best I can tell. Why are so many players fighting for a piece of a shrinking industry that is unprofitable for many?

2) The state of online music is crowded.

According to Wikipedia, there are 9 download sites with more than 10 million songs; nobody has more than Amazon's 18 million (iTunes is at 14):

*7digital
*Amazon MP3
*artistxsite
*eMusic
*Fairsharemusic
*Apple iTunes
*Napster
*Rhapsody
*Spotify
*Microsoft Zune

At the same time, there are 15 sites with more than 5 million tracks available for streaming, with Grooveshark the leader at 22 million:

*8tracks
*Deezer
*Grooveshark
*last.fm
*Mflow
*MOG
*Qriocity
*Rdio
*Rhapsody
*Simfy
*Spotify
*we7
*WiMP
*Zune

Also worth mentioning as a digital music resource is YouTube, for which music numbers are not readily broken out. The most-watched videos of all time, however, tilt heavily to music: how Justin Bieber could have 666 million views (the published number, not hyperbole from your cynical narrator) without click fraud is an open question. Finally, Internet radio is alive even after being hit with extremely high license fees. (One estimate I saw estimated that a station with 2,000 listeners playing 15 songs an hour would face $185,000 a year in fees.) Live365 coordinates more than 5,000 stations from more than 150 countries.

3) The state on online music is increasingly social.

If one takes a long view, music has traversed a complicated arc. Originally performed by performers sometimes backed by considerable cultural infrastructure (in the case of symphony orchestras and opera companies, not to mention large church bodies for organists and choirs) for massed audiences, or performed by amateur town bands and similar groups, music shrunk in the 20th century: singer-songwriters flourished, and consumer electronics and recording technologies made audiences of one common. The apex of solitary listening was probably iTunes on the iPod, with the iconic white earbuds. In this vein, with expensive celebrity models like Beats now fashionable, U.S. headphone sales nearly doubled in the past year, to $2 billion.

After the demise of MySpace, a great tool for music sharing and distribution if not much else, other social tools are emerging. Blackberry, Google, Grooveshark, Last.fm (owned by CBS), and other services connect people to other fans, to concerts, and to artists. Shared listening services including turntable.fm reconvene groups of people to play and listen to each other. Other startups of note include Flowd, a social network for music much like Apple's Ping. Thus music went from being physically communal, to private, to both solitary and electronically, and sometimes asynchronously, communal.

4) The state of online music is multi-platform.

In the "old" days of Napster or iTunes, one could store ripped CDs or MP3 files on a computer hard drive. iTunes and Zune could sync the files to a portable storage device (iPod or Microsoft player). Now, the complexity of the landscape is begetting both new solutions and consumer confusion. Some streaming services like Spotify have mobile apps that allow offline and/or streamed listening away from the PC, and Spotify just announced an app store platform -- a great idea. Given the complexity of the smartphone world, however, this means building and updating a series of apps for Windows, Apple, RIM, and Android, along with potentially Palm's webOS (if HP sells it off) and Samsung's Bada.

At the same time, PCs and smartphones are being joined by hard-drive-based home entertainment solutions for music and video. Some TVs, meanwhile, are USB and wi-fi compatible. Finally, depending on the model, blu-ray players can play multiple types of disks, or support games, or stream networked content. Thus the home entertainment and mobile entertainment worlds are recombining, with several billion-dollar markets up for grabs. Google tried an Internet-augmented TV; Apple is rumored to have one in the works. Confusingly, Apple TV isn't a TV at all, but a universal media streamer without storage. Western Digital, for its part, offers a hard-disk solution for music, videos, and movies that also supports streaming. The Olive and Sonos systems offer multi-room music playback, controlled by an iOS or Android device.

While MP3 is widely adopted, more and more higher-than-CD bitrate files are becoming available to enthusiasts. At the very expensive end of the market, high-resolution music files from the likes of UK firms Linn and Bowers and Wilkins, or Reference Recordings and HD Tracks in the U.S., can be played through megabuck hard-drive (as opposed to silver disk) systems from the likes of Linn, Meridian, Ayer, Berkeley Audio, and custom PC-based platforms.

Thus the "dematerialization" process continues: from owning physical polycarbonate, to storing files on one's hard drive, now to cloud-resident lockers, one's entertainment collection is getting more and more ethereal. Those cloud-based bits are also getting more and more agnostic about their playback/display device.

5) The state of online music is geographically determined

A quick look at the streaming services reveals considerable geographic specificity. While some services are worldwide, others are available only in one or two countries. Combine this rights-related limitation with the question of mobile platforms, and some degree of fragmentation becomes inevitable: uptake of different phone brands and types, recording artists, and payment systems varies widely. Unlike the compact disc, which was the universal medium for music (as product) distribution, online music might turn out to exhibit some degree of speciation.

6) The state of online music is potentially irrelevant

This could be misinterpreted: I would be the last person to say music doesn't matter. But music as a separate category may not stand alone much longer. Digital content types continue to converge (Amazon wants to hold my book bits, and my music bits, and my video bits on the server-in-the-sky; YouTube bridges music, TV, instructional videos, and other genres). Digital playback hardware diverges: in my house alone, I could play music on more than a dozen devices, many of which do lots of other things too.

Thus the proliferation of music file types, playback modes and devices, and available artists (a classic long-tail story) means that online music is diverging into more and more sub-markets: not only do music genres proliferate, but so do listening patterns. A Pandora user at a desktop PC in Canada will have relatively little in common with a YouTube viewer in Brazil or a Spotify mobile user in Sweden or a high-resolution Society of Sound member in the UK. All are listening to digital music files via the Internet, but the social layers, business models, hardware requirements, and connection mechanics are considerably different.

For the present, confusion reigns as niche players and mega-players compete to get big fast. One prediction: while free content will continue to be an option, the forces pushing paid content are not going away, and I would wager millions of people will at some point buy music they already own in yet another format: iTunes will not be forever, I don't think. A second prediction: the limits of ad-supported business models are accumulating. It works for TV, for sure, but not for movies, not to mention books (but it's fine for magazines). Where music will fall on the new continuum is anybody's guess as experiments like Nokia's now-dead Comes with Music (cell phone subscriptions included pre-paid rights payments) and Radiohead's Name Your Price exercise will continue.

Who will win? It's hard to bet against the Goliaths: rights fees are expensive, and music as a content type can increasingly be viewed as a feature of a larger bit-management regime, whether iTunes or Amazon's cloud or the Google/Android/YouTube mediaplex. As much as people love Spotify, or Pandora, or legal Napster, or the Internet Archive's amazing live-music treasure chest, it's hard to see any of these ever expanding beyond niche status alongside Disney, Sony, or other statutorily privileged content conglomerates. Outside the reach of said statutes, it's a pretty unappealing landscape for content owners, which means there might be innovation -- or merely more unpaid downloads. The wild card is in the social layer: music and friends will always travel well together, so the Facebook music partnerships may well change the landscape. In any case, it's unlikely to be either the hardware or carriage companies that set the tone: Apple is now a content company, essentially using high-margin hardware as "smart pipes" to carry bits of personal meaning, and along with Google and Amazon, likely to set the music agenda for the next 5-10 years.