Free streaming services are replacing piracy as the chief culprit of music industry revenue loss in the minds of fiscally frustrated executives, if a number of panel discussions at a New York digital music conference are any indication.
People are listening to more music than ever before, but they are paying less for it, noted Russ Crupnick, a president at the analyst firm NPD Group, speaking at the Digital Music Forum East conference.
Crupnick noted that the average consumer listened to music 19.7 hours a week in 2010, up from 18.5 hours per week in 2009. But at the same time, consumers have been buying less music. In 2010, only 50 percent of consumers purchased music, by either buying a CD or paying for a downloadable music track, down from 70 percent in 2006.
"We have lost 20 million buyers in just five years," Crupnick said. Moreover, only about 14 percent of buyers account for 56 percent of revenue for the recording industry.
"Consumers have flipped us the bird," Crupnick concluded, adding that the lost sales has thus far not been made up yet by other forms of revenue, such as concerts or merchandise sales.
Physical sales decline
The music industry has long expected that sales of music CDs would decline, as consumers move their libraries to computers and portable listening devices. Digital sales, however, have not made up for the shortfall on CD sales over the past decade. Last year, digital sales accounted for about 23 percent of all music sales, which is up only modestly from 14 percent in 2006, Crupnick said.
"We never really made the digital transformation," he said.
The reasons behind this sales decline have been routinely debated at this conference over the past decade, the panelists noted. In years past, music executives put the blame on digital music piracy, the easy and free sharing of music with Internet software like BitTorrent, for eroding sales of recorded music.
At this year's conference, however, concern centered on the growing influence of free streaming Internet services, such as Rhapsody, MySpace, Spotify and even YouTube. Music listeners deploy YouTube as a streaming service, picking the songs they want to hear and minimising the browser window, noted Eric Garland, who is the CEO and founder of BigChampagne, a media tracking company.
"We've given consumers an awful lot of options for free music, which they've certainly taken advantage of," Crupnick said.
While recording companies do get some revenue from free streaming services, it is a fraction of what they get from selling a digital track. Garland estimated that a record company gets only $.0001 for each time a user plays one of its songs, which is far less than the average of $1.00 a track that is collected when a digital copy of a song is sold.
And while users seem to have gravitated towards free streaming services, such as the online streams offered by their local radio stations, they aren't willing to pay $10.00 or $15.00 a month for a paid streaming service, such as Rhapsody's ad-free paid subscription.
In the US only about 2 million users pay for streaming music services, said Ted Cohen, who is a managing partner for digital entertainment consulting firm Tag Strategic. And the number of paid subscriptions has largely been flat over the past few years, with about 5 percent of the Internet users worldwide paying for a streaming service, Crupnick added.
Microsoft offers a streaming music service for its Xbox users priced at $14.99 a month, including 10 free MP3 tracks a month. Customer interest, however, "hasn't been what we hoped for," said Christina Calio, who is a director of music relationships at Microsoft.
"I think we need to demand more from consumers," Crupnick said. "Why are we being so liberal? Why aren't we talking about asking for more money for the product?"
Taking lessons from Hollywood
The music industry could take a lesson from Hollywood, Crupnick suggested. He noted how the Hollywood studios have deliberately withheld their products in certain formats to spur revenue. He held up a DVD package of the 2010 movie "Inception," explaining that consumers could either purchase a deluxe Blu-ray packaged edition of the movie for $75, purchase a DVD for around $14.99, or watch it as a pay-per-view or rent it from a video store for about $4.
Consumers, however, could not watch it for free on an existing Netflix streaming service. He encouraged the music industry to create a similar form of "artificial scarcity."
The practices of the movie industry may be harder to adopt for music industry though, argued Gerrit Meier, chief operating officer of digital operations for Clear Channel Radio. People are already more used to renting movies, or paying to see them, whereas the idea of paying to stream doesn't seem worth the cost.
"I'm not sure subscription in itself is the right model. I think there are still a lot of other models that the business hasn't explored," said Julie Lee, executive vice president for business development and business affairs for the Vevo web video service.