Bye Bye Record Biz: Analysis

Bye Bye Record BizWe’re frequently impressed with the observations of Marc Freedman from The Diffusion Group (TDG). This one is going to make for dark reading for those who work at music companies or those who own shares in them. Key quote – Technology has undermined the entertainment industry’s pretense of control despite its best efforts.
Mitch Bainwol, CEO of the RIAA, recently told CNET that digital music sales are “…rising at a value that is larger than the decline in physical sales” and that because of such trends there is “new optimism” for the music industry. Hate to spoil the temporary elation, Mitch, but it may be time to pause and reconsider.
Facing an Unpleasant Truth
A new Pali Capital report, US Digital Track Trends Weakening finds that while paid music download sales continue to grow year-over-year, sales have declined each week during the second quarter and are below last year’s year-to-date average.

Average Weekly Digital Music Single Sales per Four Week Period
(in millions)

1st 4 Weeks
2nd 4 Weeks
3rd 4 Weeks
4th 4 Weeks

But wait – doesn’t this data clearly demonstrate that average weekly unit sales have doubled year-over-year? Wow, this is great news! No doubt, but before the music industry pours itself another glass of champagne, we recommend a deeper look at the numbers.
The Pali report states that over the past nine quarters (since Billboard started tracking digital music sales) growth has never been less than 8% sequentially. That is, until now. In other words, for the first time since digital music download tracking was initiated by Billboard, average weekly sales are declining.
Bye Bye Record Biz As illustrated, average weekly sales during the first four-week periods of 2006 decline from 17.56 million units/week in the 1st period to 16.68 million units/week in the 4th period (a drop of .9 million units or 5.1%). Compare this to average weekly sales for the first four-week periods of 2005 when average weekly sales grew from 7.38 million units/week in the 1st period to 8.73 million units/week in the 4th period (an increase of 1.4 million units or 18.3%).
So What Does Data Really Mean?
Pali’s findings are quite significant and are indicative of a market that may be encountering its first ‘glass ceiling’- for you MBAs in the audience, the S-curve appears to be flattening and a demand asymptote has been reached.
The implications of these findings for the digital music industry are very profound: the hypergrowth of the past few years is over and the buzz that drove digital music sales to new heights has essentially run its course.
Bye Bye Record BizDigital music sales rose to a point where they essentially offset the decline in CD sales in 2005. (Bainwol was right on that point, but that was for last year.) With the hypergrowth behind it, digital music sales can no longer make up for the hemorrhaging of physical music sales nor will it return the music industry to its prior glory days.
Moreover, elements such as mobile music downloads, ringtones, and paid P2P will remain ancillary to the overall digital music business equation and, as such, will not make up for the shortfall in revenue. Growth in digital music sales was the primary means of offsetting this negative trend, and without continued growth in download sales, the damage of declines in physical unit sales will be more immediate.
Of course, this is bad news for online music sellers not named after a fruit. One can ignore competition when the market is exploding, but as growth slows and the market matures, competitors eventually find themselves squared off in a zero-sum environment – a context in which one gains market share only by taking it from someone else. In such an environment, branding and integrated offerings become critical to customer acquisition. Wouldn’t you know, these are precisely Apple’s core strengths. Apple may actually benefit from this trend, as it validates Apple’s ‘razor blade’ strategy and underscores the fact that the real money for Apple is in the iPod.
The Long-Term Implications
The long-term message is that the music industry’s real problems can no longer be obscured by success in the digital world. The transition to digital is not a panacea for what ails the music industry – the disease runs much deeper.
Bye Bye Record BizUnlike the transition from albums to CDs or video tapes to DVD, ‘going digital’ is not a simple format media transition. The use of digital technologies and the Internet has and will continue to fundamentally change how entertainment is created, stored, distributed, and consumed. Technology has undermined the entertainment industry’s pretense of control despite its best efforts.
For objective observers, there never was any doubt about the decline of the music industry. The predictions were issued several years ago. Since then, industry cutbacks, layoffs, and consolidations have been ongoing. Labels are focusing more on management, multi-channel merchandising, and Internet marketing, efforts which are by and large reactive and incremental.
Ironically, the digital music industry has long cried that “the sky is falling” because of a variety of different threats including piracy, iPod copying, P2P, and so on. But now when it seems the sky may indeed be falling, the industry appears to have gone blind, duped by its “new optimism.”
It’s time to put the rose-colored glasses aside and look at things a bit more closely. The sky does indeed seem to be darkening and this time you can’t wish it away.

Lemming image – credit Josh Neuman

Podcasting is Dead! Long Live Podcasting!

Marc Freedman of The Diffusion Group (TDG) makes good points here about Podcasting, including the now slack usage of the term to describe any audio that is downloaded from a Website.

We even thought it was good enough to leave in the ‘alternative marketing value,’ otherwise known as a plug (tip of the hat to Andy).

Podcasting is Dead! Long Live Podcasting!I come not to bury podcasting but to praise it. It is the creation, and victim, of its own success. It captured the imagination of the press and public with a hip pedigree and a huge wave of media hype. It will exit with a permanent mark on the media landscape.

Podcasting remarkably rose from inception to million users of users in less than two years. According to TDG’s (yes, our) recent analysis, Podcasting as an Extension of Portable Digital Media – Fact, Fiction, and Opportunity, more than five million US consumers will partake of podcasts by the end of 2005, growing to more than 60 million in 2010.

Many in the industry scoffed at TDG’s predictions. Other research firms put forth podcasting forecasts significantly lower than TDG’s, arguing that podcasting will never move beyond the technological elite or “chic geeks” that gave podcasting its early buzz. But these same research behemoths were the ones that first said podcasting wouldn’t break the five million mark by 2010, only to triple their forecast in less than two weeks. Fair enough – they’re indecisive.

To be fair, TDG analysts simply see the world a little differently (and in this case more accurately). In the past two months alone, AOL, Yahoo, and Apple have integrated podcasting into their web sites and software. It is only a matter of time until podcasting is integrated into all major media players, much like other media technologies, such as Internet streaming and web music guides. Due to the widespread availability of podcasting services and the proliferation of portable digital audio devices, podcasting will enjoy rapid growth over the next 12 months as these services and products build upon one another in holy union.

Technology is a multiphase cycle of standalone development, integration, disaggregation, and resynthesis. At the moment, podcasting is its integration phase, arising about two years ago with application-specific search engines, directories, players, and other software (solutions that are now integrated into the online offerings of both legacy and new media firms).

Podcasting is Dead! Long Live Podcasting!Podcasting is in fact not one phenomenon but three. The first is its name. Mother Apple came to claim the child it midwifed when it folded podcasting into iTunes. Apple has successfully ridden the digital music rocket by staying at the forefront of technology. It ensured the future integrity of the iPod brand, as well as the podcasting name, when it added video to the iPod.

Despite widespread publicity, however, podcasting itself remains unfamiliar to most US consumers. According to TDG’s recent research, 64% of Internet users are not familiar with or have not heard of podcasting. Making matters worse, many music and audio publishers refer to their downloadable content as “podcasts” even though they are not tagged or do not provide subscriptions. Lastly, because Apple is so closely associated with the iPod, anyone that promotes podcasting is in essence promoting the Apple brand. Yes, the iPod has become the Kleenex of its time: it is more than just the brand of a particular product – it is now a product category in itself. That said, no doubt the podcasting name will be further diluted with time, competition, and new technologies, much like Internet broadcasting, streaming, and radio are often used interchangeably today.

The second phenomenon is mobile audio distribution. Podcasting was driven by the need to take advantage of the vast vacant space found on iPods and many other portable digital music players. Yes, mobile audio made podcasting. However, podcasting will itself become less about MP3 players and more about consuming subscription-based audio programming on desktop PCs, laptops. PDAs, and even cell phones.

The third phenomenon is media subscriptions. The automatic downloading of new content has returned as an essential form of consumer media distribution both for connected and mobile devices.

No doubt the name “podcasting” will fade as new forms of digital media distribution enter the fray, but the technology and tenets of podcasting will be permanent. The underlying technologies and the concept of subscription-based digital audio distribution will survive through many generations of consumer platforms and services.Podcasting’s ultimate legacy may in fact be the addition of ‘Subscribe’ to the typical media distribution options of ‘Find,”Play,’ ‘Rip,’ ‘Burn,’ and ‘Stream.’

– Podcasting: RIP 2007 –