The funny thing about the music industry these days is the growing influence of people you would least expect to be hanging backstage with the band. Mobile operators, handset manufacturers, broadband providers and even social networking geeks - Music is fast becoming the digital currency de jour for anyone who wants to engage with consumers online. But what does that mean for the value of music going forward?
The future of music was a question hotly debated at this year's Music Matters conference - Asia's peak music industry summit held in Hong Kong. Value is a complex issue. If songs have intrinsic worth in themselves, then their commercial distribution should be defended to the hilt even in the wake of overwhelming piracy. If greater value lies elsewhere - for example selling concert tickets, branded merchandise or reducing churn on mobile data plans - then music should be free and leveraged as a promotional platform.
With fast broadband, advanced mobiles and media hungry consumers - Asia is a great laboratory for understanding where the entertainment industry is heading. In most cases, consumer behavior is still way ahead of corporate attempts at commercialisation - hence the lawsuits. But there are growing pockets of innovation. Here is a quick primer on four areas where consumers are pushing the boundaries of the traditional music industry:
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1. Buying Music From Your Phone Until very recently, ringtones were a major cash cow for Telco operators. But as mobile networks have become faster and handsets smarter - mobile music products have also had to innovate. Japan's sophisticated mobile market is a case in point. According to the RIAJ, last year 90% of Japanese digital music sales took place on mobile phones, with only 10% over the Internet. The new music profit driver in Japan 'over the air' (OTA) song purchases. 'Chaku-uta', (30-second song snippets) and 'Chaku-uta Full' (MP3 full-length songs) have become very popular with consumers, and are largely distributed through a platform called Label Music, owned by all the major record labels.
Nevertheless, Japan is a curious and unique market. Contradictions abound. An aging population, which still prefers buying CDs, continues to support the sales of physical music. So local music labels have a segmented marketing strategy. They target the over forties with CDs and albums, and kids with mobile distribution and digital singles. The latter has had an interesting impact on the creative process. Take superband GReeeeN for example, which are focused primarily on the mobile and download markets. Unlike typical Japanese Tarento, the band refuses to show their faces - the cute story being that they haven't told their parents yet. Their hit song "Kiseki" recently broke all the records with 2.3 million chaku-uta full downloads.
Japanese mobile success may be hard to replicate elsewhere. While Asian kids have adopted their phones as music devices - sideloading poses a longer term challenge to the OTA business model. According to Synovate, across Asia 46% of young users download music and transfer tracks to their phone. Only 21% regionally download music directly to their phone.
2. Finding Music on Search Engines The second area where the music industry is being forced to keep pace with consumer innovation is around search. In China, digital piracy is rampant. The vast majority of music is illegal - and even if you do buy a physical CD - chances are, the retailer selling it to you stole it himself. Not surprisingly, MP3s are one of the most popular search items on the major search engines in China. The China Market Research Group estimate that music accounts for 20 to 30 percent of all searches on Baidu. To combat Baidu, Google China launched its first music platform - Google Music, which in partnership with Top100.cn offers free advertising supported music search and streaming. All the music on the site has been legally provided through deals with the major labels - the vast majority of which had long since given up making money from anything other than ringtones in China anyway.
What makes Google Music interesting, however, is not just free legal music. One of the key enteratinment issues in China is discovery. An unusual consequences of the growth in ringtones in China has been the proliferation of what literally translates as 'saliva music' - songs that are simple in melody, and designed for the limitations of a 2G ringtone. Unfortunately, that makes the long tail in China pretty short.
To help expose Chinese users to a greater depth of artists and music tracks - Google Music uses an algorithym that analyses the timbre, rhythym and beat of songs, in order to recommend similar tracks. The results are impressive but like elsewhere in the world - the jury is still out as to whether revenue sharing on free streamed and downloadable music tracks will be worthwhile for content owners. But at least now, unlike before - the labels in China have skin in the game.
3. Mixing Music with Friends The third trend in music innovation is around social media. Forget Myspace Music - if you want to see the future of commercialising music through social networks, take a look at Tencent. Tencent operates the instant messaging community QQ. It has over 200 millions users in China, and even more impressive - over a billion (USD) in revenues. Unlike social networks in the US like Facebook or Myspace - online advertising last year contributed only $120.9 million to Tencent's revenues. The vast majority of the top line revenue figure ($719.1m) came from interactive services like virtual items, personalisation and music.
In exchange for small transaction fees, Tencent allows users to play music in the backgrounds of their profile pages or dedicate music to each other. It has been estimated that they make between $30-40 million a year alone on these music based services.
Virtual merchandise and the commercial integration of music into social platforms is a lesson that the West could well learn from countries like China and Korea. While platforms like Myspace Music, Last.FM and iMeem do a great job at supporting music discovery - their advertising dependent business models are still only half formed.
4. Bundling Music with Everyone Else Finally, it is worth thinking about the potential impact of offering consumers access to large music libraries as part of bundled subscription services. Telco operators have started to pay attention to music for two reasons - ARPU and churn. But do consumers care? Denmark is an interesting case study. Under Danish law, Telcos can only bind their customers to six month contracts - making renewals a serious issue. TDC, Denmark's major carrier launched a service in March 2008 which gives their mobile and broadband customers unlimited access to music downloads for free. Of course, if you cancel your subscription, you also lose access to the music. So far, their plan seems to be working - churn is down 60%. But as a consumer model, it is still less than ideal.
Danish telcos are not the only ones looking to use music to bind consumers more tightly to their services. Even handset manufacturers like Nokia are offering unlimited music downloads to consumers who buy certain models of their phones. Music subscription services are a double edged sword for consumers. They offer infinite choice, but often lack the community infrastructure to aid music discovery. Further, the looming threat of cancelled access provides little incentive for consumers to invest time in curating a collection.
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Taken together, all of these four trends are examples of businesses adjusting to the new ways that audiences are consuming digital music. The longer term structure of the music industry is still far from certain. Things are moving fast, and the worst possible mistake is to focus on fading metrics. The top line retail sales look bad, but they only tell part of the story. At the current rate of change, in five years time - measuring the quarterly drop in CD sales may be about as useful as tracking the current decline of cassette tapes. It's time to start watching the new sources of growth and leave dying formats in the grave.
After all, the first thing you need when the world changes is a new set of maps.
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