Friday, July 15, 2011

Will Spotify Force The Music Industry To Adjust?

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Spotify the music service that has enthralled its European customers and inspired deep envy in U.S. music lovers, has come to the U.S.  By all accounts the service provides a delightfully fast and seamless user experience.  Now that the service is here, it is worth reviewing just what this service might mean to the larger music industry.
Daniel Ek, Spotify’s founder, is perhaps the best placed individual in the world to usher the music industry into a new age of distribution and a new business model.  The music industry had an awful decade; after peaking at $27 billion in 1999 worldwide revenue fell to $14 billion in 2008, a -6.4% CAGR.  Despite the changes to the music industry that iTunes has wrought, Spotify represents a larger step into a new era, in which streaming, not outright sales, is the revenue driver.  A comparison of the U.S. and Swedish music markets highlights the magnitude of the change still to come: 
In 2010, close to 80 percent of the labels’ $2 billion in digital revenue in the U.S. came from the sale of tracks and albums, or, more simply put, iTunes. This is the same basic transaction as with an Edison cylinder: Give us your money once and you may have our sound forever. In Sweden, album and track sales together provide only 20 percent of the country’s $38 million in digital revenue; 60 percent comes from streaming.
For an industry that has likely had its fill of innovation, further disruptive change can hardly be welcome, but change is necessary. The Achilles' heel of the music industry is its dependence on catalog sales (baby boomer favorites), and not contemporary artists, to drive revenue.  Recently catalog sales were up 7% while sales of current albums declined 4%. 
Spotify offers more than simply disruption; it may provide a bridge to a sustainable (and hopefully profitable) future. 
  • The service is considerably more popular among younger listeners, and as a result it may be the best weapon the music industry has ever had against piracy. 
  • Spotify collects, and shares with music labels, data that can provide invaluable insights.  For instance: 
Jay-z used to think he was big in London, based on U.K. album sales; it turns out he’s big in Manchester. Spotify has discovered that radio plays—on real, terrestrial, electromagnetic spectrum—still drive interest in artists, as do Sweden’s summer talk shows.”
  • The existence of the service may considerably extend the commercial life of recorded music.  Discussing the current life of product in the music industry Per Sundin, head of Universal Music in Sweden, notes: “it used to be six months. Now it’s 10 years.”
The combination of a high quality user experience, a business model that provides value to the long-suffering music labels and the length and depth of the labels’ suffering to this point suggests that it is at least possible that Spotify could play an integral part in a long-overdue evolution of the music industry. 

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