Marc Aafjes’ Blog

I’ve published a small piece on the way forward for the music industry:    Downloading is the future of the music industry – BIOS : Technology For Business

Let me know if you have any thoughts on this.

Here is the full text:

Before the launch of iTunes, music was already becoming a download market. The proliferation of MP3 players and illegal file sharing services such as Audiogalaxy and Kazaa paved the way for a legitimate download industry. As a result, by the end of 2003 the US iTunes service had delivered around 70 million tracks, demonstrating that it is possible to download music legally and make money for artists in the process.

Despite this, iTunes has less than 1 per cent of the music retail market and this isn’t expected to reach more than 1.5 per cent by the end of 2004. Although sales rose sharply over the first week of launch in both the UK (450,000 songs) and the US, for the last 10 weeks in the US they have remained static at 3.3 million a week. This indicates that the legal download market is not a mass market activity just yet.

One of the key issues the iTunes launch raises is format. Currently the iTunes store is only compatible with Apple’s iTunes software, with the iPod used as the portable player. If its competitors can find a way of selling music in multiple formats this could give competitive advantage in the long run.

One such competitor could be OD2 (On Demand Distribution), based in Europe, and recently acquired by Loudeye Technologies, a digital media services provider. The acquisition means that Loudeye is now the largest B2B digital media firm in the world. OD2 already owned the European market, providing a content and payment platform for companies like HMV and Coca-Cola, but faced serious competition from Napster and rumours of services being launched by Microsoft.

OD2’s success will rest on its ability to provide music in multiple formats, independent of playing software. OD2 can then capitalise on the 1.3 million tracks Loudeye is planning to provide, overshadowing iTunes’ 750,000.

Another potential advantage for OD2 could be to expand pan-European copyright arrangements. This means that it could offer music to the whole of Europe, something iTunes and Napster currently do not do. European users may want to download music from their native speaking bands, and local independent labels – something that currently isn’t available on any of the other legal download sites.

Pricing is the final differentiator. The market is still very unclear here. OD2 has recently lowered the pricing for tracks and this price point will become ever more important. Currently the iTunes pricing is 79p per track in the UK, $0.99 in the US. This equates to a 22 per cent discount on buying an album. Will this be enough to stop people using illegal sites to download for free, or to stop friends clubbing together to buy the albums in the shops and then converting these to MP3 files?

However, while some analysts don’t expect music downloads to be worth more than 20 per cent of the music retail market by 2008, their impact should not be underestimated. Music retail sales have been falling at 15 per cent for the past 2 years – a fact that cannot be explained by piracy alone, as a recent Harvard University study showed. Downloads could be just the tonic the industry needs.

A recent survey by the NPD group of 4,000 online customers found that 94 per cent of people downloading music online tend to download less than two tracks per album. This suggests that consumers tend to see downloads as a way to ’sample’ an album, rather than a way to purchase an album itself. This can only be good news for the CD album format, and possibly bad news for the CD single. However, with sales of the latter only equating to 8 per cent of total offline CD sales, this should not be a major concern. Instead, with better marketing of music to specific users, the industry could see a rejuvenation in album sales.

Clearly, it is a real time of change for the industry, and it could be that the best innovations are yet to come. But I truly believe that downloading is the future of the music industry.