Even as you read this online journal, we are undergoing a major shift in the U.S. music industry. The industry appears to be successfully moving toward a new model–one of distributing music over the Internet via for-fee download services like iTunes.
The new legal download services are becoming one of the hottest new media market opportunities.
Two important signs point this way:
First, it looks like the U.S. music companies are wising up–finally. They are catching on to the fact that distributing music via Internet download is a better strategy than crashing dorm rooms and hauling sophomores into court. They are beginning to cooperate with businesses that want to distribute music electronically, working out reasonable licensing deals that allow the online businesses to keep fees low for consumers, yet still be profitable. Moreover, just this week Penn State University announced a deal with Napster to enable students to legally download music–the first such deal with a university.
Second, the download sites seem to be catching on with U.S. consumers. The sites are showing promising sales numbers. A week ago Apple reported that its iTunes music site sold 1,500,000 songs in a one week period. Add to that the 300,000 songs that Napster sold during its first week after re-opening as a for-fee download site. Then you have other paid-download sites, like RealNetwork’s Rhapsody, where songs are just 79 cents (US) and you can even sign up for a free 14-day trial. BestBuy, which markets the Rhapsody service, has also started to market another download service, from FullAudio. Sales of 1,800,000+ songs in one week is enough to make a dent in the 30 Million customers each month frequenting the offshore “free” filesharing sites, such as KaZaa, Grokster and Morpheus. These are early days, and the new for-fee download services haven’t hit their strides yet, so expect their sales numbers to keep growing.
(In Europe, on the other hand, the legitimate download sites have yet to catch on. In large part this is due to the inability of those sites to negotiate licensing arrangements at price points low enough to allow them to offer consumers the songs at reasonable fees.
What does the shift to paid download sites mean for smaller artists and smaller record labels? Ultimately this will be a positive step. According to McKinsey & Co., music artists and record companies ultimately should be OK: “Despite the frazzled state of the music moguls, history is on the side of content creators and owners. Each new format and market for media products, from the phonograph to the Walkman to the VCR to the DVD, has resulted in the creation of increasing value for intellectual property.” Expect the new download sites to level the playing field, especially for artists not represented by the five major music labels. Smaller artists who couldn’t reach consumers because they didn’t have the large labels behind them to pay for marketing just may have greater access to consumers than ever before.