Digital music sales on right track

Stuart Biggs
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The music industry is embracing the digital age and is looking ahead to years of stellar growth in which digital sales will outstrip CD revenues lost to file-sharers.

That was the message from many participants at the Asia-Pacific Music Matters conference held in Hong Kong last week.

'Most of our industry would probably admit that we were slow to react, but I believe that we all now get it and are embracing the future,' said Harry Hui, president of Universal Music in Southeast Asia.

The widespread bullish mood was evident in some of the astonishing growth projections announced during the event.

The potential market for digital music rose from several hundred million US dollars to several billion in the space of a few hours on the first morning.

This new-found optimism derives from the industry's belief that while the digital era has made it easier to get free music, it has brought new revenue streams beyond traditional CDs, merchandise and concert tickets in the form of ring tones, mobile music and cross-media licensing agreements.

'I don't think there is any doubt that digital consumption will replace CD sales ... [and] in the future it will be greater than a one-to-one ratio,' Mr Hui said.

'The issue now is how to develop the revenue because, whereas in the past we had only one or two revenue streams, with physical products we now have many new windows of revenue exploitation.'

But hidden behind the optimism lies arguably an even greater challenge than piracy to the recording labels and publishers, the stalwarts of the traditional music industry.

Diversified revenue streams are bringing with them a new set of players hoping to share in the spoils, including service providers, telecommunications companies, content aggregators and device manufacturers.

'Perhaps this conference should have been called 'Mobile Music Matters',' quipped one participant in reference to the number of technology firms, especially mobile phone firms, in attendance.

There is little doubt that while the future may be bright for digital music, the next few years promise a major power struggle between big players - old and new - based on who will get a greater share of the profits.

Mobile music is a good example. While the market for digital music in the United States is dominated by a computer hardware manufacturer - Apple - in China 95 per cent of the market for digital music runs through China Mobile and China Unicom in the form of ring tones.

The two operators claim 70 per cent of the revenue from mobile music sales; the rest is shared by service providers, publishers, record labels and artists. Hardware manufacturer Motorola has designs on the PC-based music market with its Moto Music service.

'We will not play the ring tone game in China because the operators have too much control,' said Sudhanshu Sarronwala, chief executive of online and mobile music firm Soundbuzz, one of the first companies to develop digital music services in the region.

Instead, Soundbuzz was betting on India, where Mr Sarronwala predicted that keen competition among the five mobile operators would attract them to firms such as Soundbuzz to differentiate their services from the competition.

A Franklin Templeton Investments analyst said: 'In India the telecoms [firms] skim off 55 per cent of the revenue, compared with 70 per cent in China. But the market is still in flux and over time the key to the value chain will be who holds the bargaining power. Soundbuzz and others will hold some bargaining power because they will be offering innovation.'

Mr Sarronwala said the emergence of mobile music services would ultimately benefit the music industry the most 'because they control the content'.

But while record labels and publishers still control who receives distribution licences for their music, the onset of online piracy has diminished their control of what consumers are prepared to pay, and consequently the price points at which distributors are willing to sell.

The four major record labels - EMI, Universal, Warner and Sony BMG - recently agreed to renew their contracts with Apple's iTunes store at 99 US cents per song despite their desire for variable pricing.

If these challenges are not already enough, the record labels still face criticism from those who claim the industry has not gone far enough in facilitating the products and services that consumers want.

Five years after consumers began stocking their iPods with free music because legitimate services did not exist or because pioneering companies such as Soundbuzz were finding record labels resistant to change, digital licensing remains a critical issue.

'I am frustrated with the royalties system, but it remains the only way to monetise this content. There is no clearing house, so the same five or 10 guys have to go to every copyright holder to clear every song - a 10,000-song catalogue requires a 10,000 page spreadsheet, which took a year to compile,' Motorola Asia-Pacific vice-president Ian Chapman-Banks said of his company's experience in building its online Moto Music store in China.

To which John Kennedy, chairman of the International Federation of the Phonographic Industry (IFPI), replied: 'It is almost embarrassing that I still have to talk about my part of the industry - it would be nice if the industry had got its act together to be more user friendly.

'The recording industry has its problems with the publishing industry - the publishers feel that they deserve a better share of the cake, whereas we should concentrate on making the cake bigger.'

Warner Music regional president Lachie Rutherford agreed: 'We do have a pernicious and negative struggle between the recording labels and the publishers - there is something wrong at the top of the music industry right now.'

The battle for control is taking place as a growing number of artists see their future outside the arms of traditional record labels.

The choice - especially for upcoming bands - has never been greater, with many finding a large audience for little or no cost on websites such as YouTube or MySpace.

Mr Rutherford insisted the record labels were still relevant and would remain integral to the success of artists as they built their careers.

'MySpace performs a valuable function to give talented artists the opportunity to showcase their material, and therefore it promotes creativity,' he said.

'It allows bands to perfect their craft before they encounter big record companies that can then take them to the next level. And that's positive for the industry.'

The fact remains, however, that artists now have a greater choice, as do consumers, when spending their money.

'Free downloading is a huge problem, but the fact is we make it so difficult for consumers to buy products and to go and see shows,' promoter Harvey Goldsmith said.

'We set ticket prices too high, we overprice our records and we confuse with technology. The consequence is that consumers go somewhere else.'

PricewaterhouseCoopers media practice chief Marcel Fenez said consumers were increasingly spending their entertainment budgets on video, TV, sports and films - all of which would have higher compound annual growth rates than music in the next five years.

Part of the reason may be because digital music services - outside of mobile products such as ring tones - do not thrill consumers to the same extent as online gaming or traditional entertainment.

Shanda Interactive Entertainment director of business development and investor relations Zhou Donglei said part of the problem might be the restrictions of digital rights management (DRM) software, which prevent users from sharing music or transferring their downloaded songs to multiple devices.

'Interaction is still the key to developing a unique and personal experience,' she said. 'Games have grown so fast because of the way they are presented and distributed, and because they allow interaction among users. There is too much free and pirated content out there ... so we do need DRM, but the downside is that it can limit the user experience.'

There is no easy solution for the industry. The IFPI's Mr Kennedy said copyright laws were set up so that as soon as one digital copy was made, the artist, labels and publishers were entitled to be paid.

The debate is made more complex by the lack of agreement in the industry on whether the positive effects of file-sharing outweigh the negative effect of lost revenue.

'I've been in the business for 11 years and I make less now than in the first four years. Piracy costs me 80 per cent [of my earnings],' Thai pop star Tata Young said.

But entertainer Edison Chen Koon-hei sees revenue lost to file-sharing as revenue gained elsewhere. 'I may have lost a lot of money from [piracy] but I may have made money from it also. Maybe if people hadn't bought those pirated CDs then they wouldn't have gone to see my movie,' he said.

Amid the often heated debate, however, only one thing is clear - the record labels have little time left to get their house in order.