Digitalisation: no longer the music industry’s worst nightmare, but its growth driver

London, 31 July 2009 - Increasing digitalisation and the success of the internet have led to dramatic sales losses in the music industry. Changed patterns of behaviour in media use and the widespread use of illegal music file-sharing sites have seen a slump of more than 25% (from £1.9 billion in 1998 to £1.4 billion in 2008) in total sales for the UK music recording industry. However, from 2012 on, revenue is expected to rise to over 50% thanks to new sources of revenue such as music downloads, music subscription services for mobile end-devices, and concert recordings on DVD, according to a new analysis by the international strategy consultants Booz & Company.

Bringing digital revenue streams online is vital for survival
A fundamental structural change in the music sector is underpinning this positive development. “In the past, the business model was based on selling as many albums as possible by an artist. Concerts, music videos and merchandising licences served as a means to promote the latest album rather than to generate turnover,” said Michael Peterson, partner at Booz & Company.

Chart-topping artists and superstars rarely sell more than half a million CDs in large markets such as the UK and Germany. To return to generating a good level of sales from each piece of music and to take account of the changed pattern of media use by consumers, developing additional revenue streams is vital to success. No record label can afford the luxury of passing up contributions to sales from Apple's iTunes, Nokia’s Comes with Music or Amazon’s MP3 Shop. “The major music labels have largely ignored the internet trend and are now having to hand over parts of the value-added chain to the new players if they are to succeed in still cutting themselves a slice of the digital cake,” said Peterson.

For more than a decade the industry has needed the structural preconditions for more fragmented music marketing (in the form of downloads, live concert streaming, ringtones, video game music or merchandising) to be put in place. The changes required were new business models for subscription services and licences to internet portals, new contracts with artists to cover the full scope of the digital value-added chain, and—not least—innovations by new market players.

Price war on music downloads leading to erosion of margins
The new sources of revenue are likely to lead to an upward trend in music market sales
after 2010 for the first time since the mid-1990s, although the traditional market players will have to share a significant part of those sales with the new download platforms.

Despite the positive prospects, the change process in the music industry is far from being completed. Necessary innovations in how it approaches its customers, continued and increasing fragmentation, and new market players will maintain the pressure on business models and prices. There are still open questions during this experimentation phase – for example, whether the trend towards even cheaper music will continue, or if charges for hits from well-known artists will increase in future. At present, new players are forcing themselves into the market, using combative pricing to position themselves as price leaders and secure significant market share as quickly as possible. If this strategy wins, margins will melt away for all market players.

Media industry still faced with digital turnaround
The print media are currently undergoing a similar structural change, as are TV providers and the cinema sector. “The example of the music industry shows that critical competitive advantage can only be achieved with consistent alignment to the new needs in relation to media use, together with intimate knowledge of customers and rapid positioning of new ideas on the market,” said Peterson. “Just as the music industry served for a long time as a warning of how a media sector can be steamrollered by digitalisation, now it is demonstrating that digital turnaround with fresh growth in sales is possible.”

The strategic principles determining whether and how traditional media groups can profit from this digital change process are being set down right now. The music industry demonstrates that only groups with structures capable of adapting can make a profit from the dynamism of the internet.