Much has changed in the music industry over the last decade, as technology has enabled new methods of music consumption, distribution, and discovery.  While we’ve seen significant change in how music is sold, we haven’t yet seen a significant transformation in which music gets sold (when looking at the overall marketplace). That seems poised to change in the coming years, which should have an even more dramatic impact on the structure of the music industry than we’ve seen to date.

mp3 + p2p + broadband

Napster kicked off the industry’s transformation.  Launched in June 1999, Napster peaked with over 25 million global users 20 months later in February 2001.  While it was never able to establish a business model, Napster brought to halt the decade-plus long growth cycle that had been fueled by the growth of the CD & MTV and the consolidation of broadcast radio.  Napster highlighted the disruptive threat that the internet posed to traditional media distribution models.  By the time the iTunes store had sold its first download in 2004, physical music revenues had contracted by 25%.

(Source: RIAA, Live Nation)

iPod + iTunes

Billions of mp3 files were distributed via Napster and subsequent file-sharing networks.  Software made it easy to rip CDs (often one’s own collection) to create a library of mp3s.  As a result, a significant portion of music consumption shifted from the stereo/CD player to the computer.  As the computer because a significant media hub, the iPod was the first successful attempt to monetize that media.  Apple’s integrated iTunes/iPod experience made those mp3s mobile in a simple intuitive manner that appealed to the mass market.  By 2007, Apple was selling 50+ million iPods per year.  Apple built the iTunes store off the strength of this installed based.  Most music found on iPods wasn’t purchased thru iTunes, it was ripped from CDs or filled with mp3s obtained for free via the internet.  Despite accounting for probably no more than 15% of all music found on iPods, by the beginning of 2008 the iTunes Store had surpassed Wal-mart to become the #1 music retailer in the US, with over 50 million customers. 

(Source: Apple)

By this point in time, physical music sales were less than 50% of their peak.  Notwithstanding the significant changes that had taken place in the prior 8 years, the recorded music industry remained highly concentrated in the same few hands, as it does today.  One reason for is that the primary recorded music business model, while diminished in scale, remains relatively unchanged.  Broadcast radio still accounts for almost 95% of all radio listening in the US.  iTunes unbundled the album and built a digital music business at scale, but it didn’t fundamentally shift which music gets sold.  The biggest drivers of sales on iTunes are radio & TV airplay and having placement in the iTunes store.  This is pretty much the same discovery/sales model from the 80s/90s, but instead of radio + MTV + Best Buy Powerwall, we have radio + American Idol/Glee + iTunes banners/bricks/charts.  

iPhone + WiFi + 3G

When Apple launched the iPhone, it’s growth was even faster than the iPod.   If the iPod made music mobile a simple, accessible manner, the iPhone did the same for the internet.  Apps (combined with 3G/wifi) took functionality that previously existed on the internet and made it mobile in a simple intuitive manner that appealed to the mass market.  Streaming radio was one such example.  In it’s first two years, Pandora had reached 1.5 million PC users.  After Pandora introduce an iPhone app, it’s growth accelerated and by 2011 Pandora had 36 million users, with a majority of activity happening on mobile devices. 

(Source: Pandora)

Despite Pandora’s growth, traditional radio still accounts for the vast majority of radio listener hours.  While digital music revenues are approaching 50% of overall revenues, digital radio hours are still just over 5%, with a lot of growth to come.

(Source: RIAA, Pandora)

Social Music Services

Over this period, social networking services have emerged at scale, with Facebook reaching 160 million users in the US.  In terms of reach, Facebook is approaching the scale of broadcast radio, which reaches 200+ million users a week.  Facebook’s recent integration of a number of music services will put to the test the power of the social graph to drive music discovery.   

(Source: ComScore)

Spotify

Spotify integrates a number of technologies and business model innovations that have emerged in music over the last decade (p2p, streaming, mobile apps/premium upsell). With its free tier and social integration, Spotify may be the first on-demand streaming service to achieve mass scale.

What’s Next

The next 10 years in the music industry are destined to be similar to the last: challenging, confusing, exciting, frustrating, exhilarating, etc.  While we can’t predict the future with precision, we can see some emerging trends.  The development of streaming services at scale.  The penetration of wifi/internet enabled dashboards into the automobile.  Broadcast radio’s declining share of music listening/discovery and growth of social music services/discovery.  The future will belong to those businesses & artists that position themselves to ride these waves not fight them.

In its first month, Turntable.fm has generated a tremendous amount of buzz. It’s the first truly social web music service; it’s addicting, viral, and easy to use. This weekend the service hit its first hiccup as it closed the service to users outside the US. This led to disappointed international users who had spent the last few weeks falling in love with it. Before addressing the licensing issues, I think it’s worth considering exactly what Turntable has accomplished and what it could become.

THE TURNTABLE OPPORTUNITY

In an industry with dozens of music services that have struggled to scale, the company has already demonstrated strong product / market fit. They’ve reached 225k+ Monthly Active Users. Daily Active Users today are 48k, which is the highest yet (and this is AFTER closing the service to international users). If you login to the site, you’ll see between 1.5k-2k concurrent users, which is the constraining load factor at this point. This is a synchronous streaming service and they need to scale the infrastructure before it can handle tens of thousands of concurrent users. But it appears pretty apparent the demand is there once they can handle it.

The service is extremely viral and the gaming elements encourage engagement and retention. What does that mean?  Assume for argument’s sake the service remains global.  It’s a social application built to leverage Facebook and Twitter, with content that is universally accessible. Cityville, the top Facebook App, hit 26 million MAU in its first 2 weeks, and is currently at 88 million MAUs. Its DAU are 17 million (#1 rank overall). The next 3 highest-ranked FB apps are other Zynga games, each with 30+ million MAU and 7+ million DAUs. Given the nature of the service and the wide appeal of music, it’s entirely possible that Turntable could achieve this kind of reach with this level of engagement. As an industry, one of the biggest battles we are fighting right now is the battle for consumer attention - and it would be valuable to have an application with music at its core competing for attention with Cityville and Empire & Allies. This could be an opportunity to build a social music service and community reaching tens of millions users in a very short time period.

As a point of reference, the top music app on Facebook is the Roots Music Band Page, a player that many artists install on their FB page. It has 32 million MAU users (#6 rank).  However it had only 1.7 million DAU yesterday (#29 rank). So while it has reach, it has relatively low engagement.

While Turntable can be a very engaging experience, there is also a passive use case. A lot of the big rooms regularly have 150+ users (meaning most users are just listening). Room titles like “Coding” and “Indie While You Work” suggest that people are using Turntable like radio while they are working. You can see in the graph below that usage picks up around 8 am on the East Cost, peaks at 10 am (room capacity is 200) and stays there throughout the workday. This is important because radio still makes up 85% percent of music consumption and this passive use case makes the service relevant to this a wider audience. Turntable wouldn’t just be a game that a user played for 20-30 minutes a day; it could be a service users listen to for hours on end.

CODING SOUNDTRACK LISTENERS (GMT)

via Turntable Dashboard (6/25)

Turntable is a social network with music at its core. What really sets Turntable apart is the ability to assemble social communities where experiencing music in real-time is the primary application. This is the digital equivalent of hanging out in the record store, listening to music in a college dorm room, or going to a show. If you look at the early users of the site, these are clearly music lovers. A service at this scale would build a significant social music taste graph. Turntable would understand user taste profiles and also be able to identify tastemakers/influencers.  If you’re serious about transforming how music is marketed, this is a critical piece of the equation. Imagine if every time a song played on Z100 you could identify in real-time who heard the song, who liked it, their level of influence, and their social graph and then target them with a relevant marketing message/offer.

This could be huge. I’m really excited to see what Turntable can build.

TURNTABLE GOES US ONLY

As I mentioned above, this weekend Turntable restricted its service to US users. Unfortunately, the licensing restrictions aren’t a surprise. Turntable is operating as a non-interactive internet music service, just like Pandora. The US is the only country with a statutory licensing structure in place, which is why Pandora only operates in the US. (On the bright side, it seems its non-interactive status isn’t being challenged right now, since it’s still operating in the US). The US-only restriction obviously impacts long-term growth potential, but I think it also adds an additional risk by compromising the user experience (While Pandora has a US-only restriction, it hasn’t altered how one experiences the service.)

Introducing a territory restriction means I can’t experience music with friends outside the US (or at all if I’m outside the US). If Turntable is limited to the US for an extended period of time, some US users may look for alternatives if a significant portion of their social network is outside the US. The international users who would love to get in today might never come back. It feels like a huge missed opportunity.

Could Turntable be licensed globally? Under the status quo, its seems unlikely.  Here’s how Pandora describe the situation in their IPO prospectus:  

“Currently, the licensing terms offered by rights organizations and individual copyright owners in countries outside the United States are prohibitively expensive. Addressing licensing structure and royalty rate issues in the United States required us to make very substantial investments of time, capital and other resources, and our business could have failed if such investments had not succeeded. Addressing these issues in foreign jurisdictions may require a commensurate investment by us, and there can be no assurance that we would succeed or achieve any return on this investment.”

Since Napster dragged the music industry into the internet era 12 years ago, the industry has struggled to enable consumer friendly internet music services within the framework of a complex and arcane licensing structure.  Repeatedly, the industry seems to focus on risk mitigation (DRM, unsustainable royalties, negative incentives) rather than maximizing the new opportunities. What may seem like reasonable trade-offs in the context of a contract negotiation can have a real impact on how a consumer experiences a service. While a service may agree to make compromises to the experience they deliver to users, we can’t force consumers to use these services.  We may be achieving short-term gains at the expense of the long-term size of the market.

In addition to the economics of deals, there is the challenge that multiple stakeholders are involved in the discussions: labels, publishers, rights organizations, etc. We’re suffering from an industry-wide strategic misalignment between the licensing status quo and the current market place.  We can’t expect start-ups with limited resources to solve a structural problem like this for us.

IT’S ALL ABOUT THE CONSUMER

A new approach should start with the following assumption: “If we do right by the consumer, it will benefit us in the long-run”.  This doesn’t mean giving the store away for free, but it does mean evaluating trade-offs thru the lens of the consumer.  We need to enable services that appeal to the widest possible audience and respect the physics of the web.  We need to lower the barrier to entry for new services to launch globally.

This would require coordination of many different entities to offer licenses on sustainable terms.  Just thinking about non-interactive services, the current US situation for webcasters could serve as a template - focusing on where the situation ended up, not the process it took to get there.  There is a statutory regime place: anyone can offer a non-interactive service provided they pay the established rates, which are not cost prohibitive, and no advance is required.  The current rates are “non-precedential” and up for negotiation in 2015.  In other words, let’s allow the market to develop more and then we can revisit later.

There are plenty of reasons why an approach like this wouldn’t work on a global scale - you’ve got multiple labels, publishers, rights organizations, governments, etc. involved in the discussion, all with conflicting short-term agendas.  But that’s not the point. Every music industry stakeholder has a vested interest in fixing this situation and 12 years post-Napster it’s long overdue.

(Note: These views are my own and was written before I joined Turntable.fm.  At the time of writing this, I was unaware of any conversations that Turntable.fm had, or hadn’t, had with rights holders or their agents or the current timing of their int’l service beyond what they’ve said publicly.)

Dave Matthews Band was the top grossing touring act of the last decade, with $500+ million in gross ticket sales and 11+ million tickets sold.  Instead of touring as usual this year, DMB is playing four 3-day, multi-artist festivals.  While an increasing # of artists have been putting on their own festivals, it’s notable given that DMB is such a big draw on the road.  

So what does this have to do with Live Nation?  Well, in 2010, Live Nation promoted 56 of DMB’s 61 shows, with a tour gross of $61 million and 1+ million tickets.  As most of those shows took place in Live Nation venues, those 1 million people generated ancillary income for LN (parking, concessions, etc) as well as ticketing fees (most, if not all, of the shows would have been ticketed thru Ticketmaster).  

In 2011, DMB’s Caravan Festival will hit 4 venues: Bader Field (Atlantic City), Govenor’s Island (NYC), Lakeside (Chicago) and The Gorge (George, WA).  Bader Field has a 60k+ capacity and the other venues are on the 20k-25k range.  Tickets are priced at $65/day.  

Of the 4 venues, only the Gorge is a Live Nation venue.  So rather than Live Nation promoting the majority of its tour, DMB will be in control and able to ticket the festivals themselves (except for the Gorge - since it’s a LN venue its ticketed thru Ticketmaster).

Based on the venue capacities, DMB could be able to sell 350k+ tickets this summer, and could gross $25 million - before factoring in VIP packages, travels packages, concessions, etc.  Based on 12 days (3 days X 4 festivals), that’s $2 million+ per day (about 2x what they grossed last year per show, of course they have a talent bill to pay this year).

This year is the band’s 20th anniversary, so perhaps this is a one-off deal and next year they’ll be back on the road as normal.  But it’s certainly possible that the band may prefer being in control - of the ticketing, the overall experience, etc.  Fans may not want to travel as far each year, but there’s no reason DMB couldn’t expand the concept to more cities over time - the key is finding non-traditional venues not controlled by LN.  This could be a much better business model for DMB that allows them to control the overall fan experience from end-to-end and takes LN (largely) out of the equation.  Of course, that’s the strategy espoused by Live Nation - being able to control the fan experience from start to finish.  It just seems that DMB (and their team) is much credible when they make that promise.

Over the last 2.5 years, Pandora has grown it’s listener hours by almost 4x, from 1 billion hours in fiscal 2009 to 3.9 billion in fiscal 2011.  2/3 of this growth has been from Pandora’s mobile platform.  Launch in July 2008 with it’s iPhone app, Pandora’s mobile platform now accounts for greater than 50% of the company’s listener hours.  Over the same period, Pandora’s revenue has grown more than 6x, from $19 million to $138 million.  It’s a great story - significant mobile adoption and top line growth, except for one disconnect…

While mobile usage has driven the bulk of Pandora’s listener growth over the lat 2 years, it’s driven very little revenue to date.  The revenue growth has come from Pandora ramping up its online display advertising.  While this revenue growth is a clearly a good trend, Pandora needs to demonstrate it can turn a profit on its mobile platform.

Pandora’s fundamental challenge is that it has hard costs associated with each listener hour, regardless of platform. Unfortunately, the online advertising market is much more mature than the mobile market ($8.5 billion vs $743 million in 2010).

As Pandora moves into the mobile market, it’s opportunity is going to be driven much more by audio ads and local customers, as opposed to national advertisers buying display ads.  While this is still a nascent market, the goal is to start capturing a share of the traditional radio advertising market ($15.7 billion in 2010).

Given the importance of mobile listeners to Pandora’s overall growth, Pandora has to significantly ramp up it’s mobile monetization (or switch to more of a subscription driven model, which hasn’t been the primary focus to date).

If Pandora can do this, they have a large market in front of them.  They are just starting to enter the automotive market, which could be another huge source of listener hours. It’s also a key listening environment if they really are going to start capturing traditional radio advertising $.

Although Mumford & Sons didn’t win a Grammy - they walked away with the breakthru performance of the show.  Their story is a reminder that the music industry is driven by artist development - getting an artist in front of an audience and building a fan base.  Everything else follows from there.

While a majority of Grammy viewers may have seen Mumford and Sons for the first time, their development (here in the US) started back about a year and half ago.  Prior to that, they had already spent a couple of years touring and developing in the UK. Here’s a look at Mumford & Sons growth in the US through a variety of measures.

October 2009-Feb 2010 - The band’s album was released in the UK in October 2009. At this point, US awareness was low - but you can see the US search activity starting to grow (Google Trends; charts below).  The US album release was in Feb, where you can see awareness continuing to grow.

Feb 2010-July 2010 - After the album release, there was sustained momentum: album sales held up, the bands social community grew, and site traffic grew.  Their single grew slowly at radio along with digital single sales.  The band played about 20 tours dates in 500-1500 capacity venues, selling 15k+ tickets. They also appeared at major US festivals (Bonnaroo, Lollapalooza, Telluride Blues, etc.) over the summer. 

Aug 2010-Nov 10 - In August, activity really took off as some traditional, more mainstream drivers kicked in.  VH1 started playing the video and featuring the band in their You Oughta Know campaign, which likely have helped drive the radio audience.  Across the board, you see a pick up in sales, site traffic, search, streams, etc.  The band plays another 18 dates in Oct/Sept, this time in 1,000-3,000 capacity venues, selling close to 40k tickets.

Dec 2010-Feb 2011 - Momentum continued to build thru the holidays and right up to the Grammy’s, at which point their performance introduced to them a much larger audience. 

Looking backwards, it’s tempting to look at the growth and think it was inevitable, or forseable, but that’s not the case.  This is a really a best case scenario.  But it’s still interesting to see the early signs of traction and growth… initially driven by the UK buzz and word of mouth.  What seems remarkable is the consistent growth, even at low levels, the trends were always moving in the right direction.  What also jumps out is that when the mainstream drivers kicked in it amplified everything that was going on. The VH1 spins and radio airplay weren’t happening in a vacuum - groundwork had already been laid.  There’s You Oughta Know artists who don’t connect, and artists who reach much greater radio audience that sell fewer albums.  But in this case these drivers had a real impact, as they were a piece of a larger story, not THE story.

There’s a lot of focus these days on the macro trends in the industry, i.e. collapsing CD sales.  While this is understandable - it should also be obvious at this point to anybody who’s paying attention.  It’s also distracts from the task at hand - which is finding a way forward to sustain the artist development process.  One piece of that is sorting out which artists are gaining traction and filtering/amplifying that info to the masses - and it sill seems like there’s a big opportunity to really nail that challenge.

Unless noted, all metrics are US only.

Google Trends (relative scale; up to but not including Grammy’s)

Monthly Site Traffic (in thousands)

Weekly Audio Streams (in thousands)

Not specifically US streams, but you can still see a growth pattern similar to the other trends (YouTube streams were probably 5x-10x this level).  Also, Myspace traffic overall was declining during this period.

Digital Singles (in thousands)

Album Sales (in thousands)

Radio Audience (in millions)

Video Audience (in millions)

Community Growth (New Facebook Fans, in thousands)

Tickets Sold

Google Trends (up to and include the Grammy’s)

This includes the Grammy spike.  The jump was about the same level as Arcarde Fire, who won album of the year - and considerably higher than the Avett Brothers of Bob Dylan, who Mumford & Sons performed with.

Data from Google Trends, Compete.com, Pollstar, Songkick, Nielsen Soundscan/BDS, Next Big Sound, and estimates.

Kyla La Grange “Walk Thru Walls” 

Stumbled across this on Soundcloud - debut single from UK artist Kyla La grange.

A haunting and powerful voice.

iTunes recently increased their song previews from 30 seconds to 90 seconds. The reasoning is straightforward: give people an opportunity to hear more music and and you have a greater chance of converting them (provided the content is good). Makes sense. But if I want to preview an album, listening to 10-12 consecutive 90-second clips is not something I would do. I want to hear the album in its entirety - hopefully multiple times.  If I don’t make it thru the first listen, I’m not a buyer. Sometimes the first listen is just on in the background while I’m working.  Before I know it, the album is over and I think to myself that sounded good.  I’m going to listen again - this time paying more attention. Maybe I’ll listen to it during a run or on my way home.  I want to live with it for a few days/plays and decide if I really like it.  At that point, if it’s an album that I’ve enjoyed, there’s a good a chance I want to add it to my permanent collection and be willing to buy it.

iTunes is limited by what it’s content partners are willing to do, and clearly 90 seconds is more then 30 seconds, but it’s still short of what I want.  Give me the music, let me live with it for a few days, and then I’ll decide if I want to buy it.  Yes, this is what album previews on Spinner, MySpace, NPR, etc. do (without the mobility).  Yes, this is what TopSpin widgets and Bandcamp pages do (again w/o the mobility).  And yes, I’m able to do this via subscription services.  Which only reinforces the point that it it could be a powerful feature if integrated into iTunes.

I want to try before I buy.

Looking at how people discover music, people seem to fall into one of two broad categories.  There are those who take an active approach - let’s call them the crate diggers.  They used to spend hours flipping through the racks of vinyl/CDs at their record store and reading music magazines.  Today they’ve likely moved their attention online – where they read blogs, share music with their social networks, and sample music from a variety of sources (YouTube, MySpace, P2P, IM, subscription services, etc).  Regardless of the shift, the crate-diggers invest their time in looking for new music, are willing to sample lots of new music, and generally take pride in discovering something new and sharing it with their friends.  They enjoy the music discovery process itself.

The other category takes a more passive approach to music discovery.  While they enjoy listening to music and are open to new music - they don’t enjoy the process of looking for new music, they don’t know how to go about it, or they simply don’t have the time to commit to it.  Let’s call this group radio listeners, because by and large that’s how they’ve often discovered music in the past (and continue to do so today) – through broadcast radio and video channels, and increasingly online radio.

These two groups aren’t mutually exclusive.  Crate-digging is very much a lean-forward media experience while radio listening is lean-back.  If I have a few free hours on the weekend, I may want to spend some time looking for new music. But when I’m busy at work, I may just want to hit a button and turn some music on.  So for any individual, music consumption may be a mix of active and passive, a mix which also will likely shift over time.  A college student may easily find a few hours a week to dedicate to active music discovery.  But a middle-aged professional with a family with limited free time may not have the same luxury.

It’s no secret that a majority of music consumption falls into the passive category.  As Pandora has pointed out, 85% of music consumption in the US is radio listening (http://bit.ly/cItRIn).   We7 in the UK recently switched it’s focus to a radio focus from online streaming.  In doing so, it announced that 55% of its tracks where being access via it’s radio feature.  Similarly, a look at the iTunes or Spotify charts shows a high correlation with radio airplay – suggesting that a large % of consumers still discover music through largely passive means.

So what?  There’s still a significant community of passive music consumers that aren’t discovering new music, which represents an opportunity for those services which address this need.

Looking forward to hearing more new material…

thefamilyrecords:

Song Of The Day: Wakey!Wakey! - Great Lake Love

The first new W!W! song the band has recorded since the current album, and a b-side to the new Dance So Good (Full Band Version) single which is set to go up on iTunes later today. Please support the band! :)