Digital music: The genie’s out of the bottle

The music industry jumps further into the digital game.

Major record labels are notorious for going overboard in their resistance to digital music. But the big four — Universal, EMI, Warner and Sony BMG — are slowly becoming more open to experimenting digitally because they don’t have a choice, experts say, meaning a host of innovative new music services have a future. “CD sales are continuing to decline at a massive pace, so you’ve got this situation where the music industry is at a crisis point,” says Mark Mulligan, digital music analyst at JupiterResearch. “For the first time, that’s creating a good-news story for the digital space, because [the labels] have to make these other things work.”

Most music markets globally faced their biggest declines in 2007; indeed, Canadian recording industry sales declined to $563 million in 2007 from $765 million in 2001, according to digital music analyst Dan Cryan at media research firm Screen Digest, who predicts a further decline to $504 million in 2012. The International Federation of the Phonographic Industry (IFPI), which represents the recording industry’s interests, says tens of billions of illegal music files are downloaded annually — 20 illegal songs for every legal download from a site like iTunes. Illegal downloading is not going away, despite the industry’s best efforts, Mulligan says.

Digital music sales make up a small portion of the market — 15% globally, worth US$2.9 billion, according to IFPI. With piracy and CDs still dominant, such sales are growing so slowly they won’t make up for the decline in the CD industry, which as of 2006 was worth US$9.6 billion, any time soon, even though digital is where the growth is. (Cryan expects legal digital music sales in Canada to more than double to $176 million in 2012 from 2007.) And that has the industry moving beyond the iTunes pay-per-downloadmodel that currently dominates. “The iTunes model is not the future, and everybody recognizes that,” says Paul Brindley, managing director of digital music research firm Music Ally, noting that yearly sales for these downloads are lacklustre except for big spikes at Christmas.

The biggest trends are toward services that, unlike iTunes, “feel free,” Brindley says. That includes ad-supported download sites like SpiralFrog, where users can download tracks for free while watching advertisements. More viable, Brindley says, are ad-supported streaming services, which follow a broadcast model similar to radio. This type of digital offering is led by imeem, which has deals with all four majors., the world’s largest online music community, with 20 million users, recently announced a limited streaming subscription service, and says a paid service offering unlimited songs is near. Details haven’t been released, but the current generation of paid subscription services, like Napster and Rhapsody, haven’t attracted many users; they charge by the month for unlimited downloads, but consumers have to keep paying the monthly fee if they want to keep their music. Yahoo, MTV and AOL have all ditched the model.

Bundling is another model that “feels free.” This involves unlimited downloading or streaming packaged with an ISP or device for an additional fee. Nokia’s upcoming Comes With Music service will offer unlimited downloads straight to users’ phones, and the Financial Times has reported Apple is in talks with the major labels to offer new iPod and iPhone owners unlimited access to the iTunes catalogue for an additional cost.

Record labels have no choice but to invest in digital music. But the industry still has a ways to go to win over today’s music fans, especially the younger ones. Few of the new innovative services areiPod-compatible, and digital-rights management software, which limits where and how songs can be played, still factors into most — not the best way to reach consumers raised on illegal downloading. When they gain earning power in five years, “the downturn in music sales we’re looking at now will look like a blip compared to the gaping hole which will exist if those consumers don’t start developing music-buying habits,” Mulligan says. Labels take note: unless changes are made, the day the music sales died might not be very far off.