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.











