LOS ANGELES (Billboard) - Record labels need the digital
music market to take off. So why aren't they helping it any?
Physical CD sales have been in decline for the last five
years, and according to various estimates are expected to fall
another 15%-20% again this year. And while digital revenue is
on the rise, it is not yet reversing the trend. Sony BMG global
digital business president Thomas Hesse says that if physical
revenue drops by 15%, digital revenue must rise by 60% to
compensate. This year, he expects net revenue to fall.
So what are labels doing other than licensing their music
to digital services that they hope will become successful?
According to many service providers and industry analysts, the
answer is -- nothing.
"There's no plan, no sense of direction," one digital
retailer executive says. "They're just hoping somebody is going
to figure all this out for them."
To date, that somebody has been Apple -- its iTunes store
commands 70% of all digital music sales and the iPod around 80%
of all digital music devices. Yet, record labels are the first
to point out that Apple can't reverse their falling fortunes on
its own. They need more services selling more music to more
people. And although labels have tried to support potential
competitors to iTunes, such as Microsoft's Zune bid, these
services are merely limping along.
The reason, operators of such services and digital music
industry analysts say, is the music industry is not taking an
active-enough role. "They're not directly hurting services,"
one former digital service provider says, "but they're not
directly helping either."
Record labels are marketing and promotion machines, and
could flex that muscle to help drive more users to digital
outlets. Yet most of their advertising directs buyers to either
big-box CD retailers or iTunes.
Even some label execs think this needs to change.
"(We need to) take more responsibility for driving
awareness and consumption from our own ad dollars and
impressions rather than relying on others to do it for us,"
Universal Music Mobile GM Rio Caraeff says. "We're not doing
enough in my opinion. Most of our marketing goes toward selling
As digital revenue contributes more to labels' bottom
lines, he says, that will change.
SLICING THE PIE
Of course, digital service providers could spend much more
of their own marketing dollars if they didn't have to pay
labels and publishers so much in licensing fees. This is an old
argument, but one that isn't going away anytime soon.
Gabriel Levy, VP of labels relations at Rhapsody, says
satellite radio providers were able to amass millions of
subscribers in a relatively short period of time because they
didn't have to pay the same licensing rates that subscription
music services do, and as such were able to devote more money
And that's just the existing services. A host of new
technologies and business models are waiting to license music
to go public, but are left waiting in the wings as labels work
to evaluate the risk potential rather than the business
"The people in charge of these deals are very risk-averse,"
Music Choice CEO David Del Beccaro says. "They're a bunch of
Label sources say that they make deals as quickly as they
can and prioritize their efforts based on which deals will
result in the most immediate revenue. But even industry
insiders agree that, for the long term, the dealmaking process
needs to be addressed.
"If we don't retrofit our business to accommodate, we're
going to miss out," says Richard Blackstone, senior adviser to
the chairman for Warner Music Group.
Perhaps the greatest obstacle to the digital market's
growth, though, is that music acquired from any "legal" service
other than iTunes won't work with the iPod.
Apple famously encouraged the labels to sell without DRM
(digital rights management) to solve the problem, while labels
put the onus on Apple to license its FairPlay DRM system to
"This is a technical problem with a technical solution,"
says Thomas Gewecke, senior VP of Sony BMG's Digital Business
Group. "The only people that have a problem with it are
technology companies who benefit from the situation being
Yet if labels are serious about forcing Apple to open up
its technology, some question why they don't just pull their
music from iTunes until Apple complies. "If you don't like the
way (Apple) is protecting your property, take it away," dares
Jon Potter, executive director of the Digital Media Assn.
Most digital music services are run by executives hailing
from either the software or consumer electronics world, where
it is not uncommon for the major companies involved to jointly
set the technological standards and other rules governing the
sale and distribution of their products. The music industry, by
contrast, so far seems satisfied to simply license its content
and let the technology industry figure out the rest--a source
of increasing frustration among those in the digital space.
How the music industry responds should prove an interesting
barometer for how far along the convergence of digital and
music has come, and how much further it has to go.