Music Needs Tuning
By: John Gartner
The complex space needs some harmony before online marketers start to sing.
Imagine you're a publisher trying to parlay your expertise and passion for vacuum cleaners into a performance- based business. You are shocked to learn that sellers don't compete on price, that you aren't allowed to see what is in the manufacturers' catalogs and that if you want to sell in volume, there's only one partner.
Although this scenario seems somewhat over the top, it approximates what publishers looking to participate in the market for digital music downloads and subscription services now face. While online music sales are rapidly rising, the companies with distribution rights will have to revamp the way music is marketed to reach its revenue potential.
The sales of digital tracks rose by more than 150 percent from 2004 to 2005 (to 353 million songs), according to Nielsen SoundScan. That is a growth rate that any industry would be proud to have. Global revenue to the record companies from digital music sales nearly tripled, from $400 million to $1.1 billion in 2005, according to the International Federation of the Phonographic Industry (IFPI).
Great news, right? Almost. From a glass-is-half-empty perspective, however, the total sales of recorded music (both physical and digital) fell by 3 percent last year, or not in the direction that the folks at Sony BMG, EMI or the other major labels want things to go.
Apple at the Core
Most of the growth in music download sales can be attributed to Apple's iPod player and iTunes store. The two most visited online music sites for the final week of January 2006 according to Nielsen//NetRatings NetView, were Apple's iTunes store, and AOL Music, which also sells iTunes. Depending on which analyst you ask, Apple's share of music download sales is between 75 and 90 percent. "If you want to be successful [selling downloads], you have to partner with Apple," says Tim Bajarin, president of analyst firm Creative Strategies.
iTunes may be delivering sizable revenue for Apple and the major music labels, but publishers aren't getting much of the action. Apple, which has sold more than 1 billion tracks via iTunes, pays its affiliates a 5 percent commission on the sales of its $0.99 tracks. The company does not have a subscription service.
Bajarin says the status quo is likely to continue in music downloads for the foreseeable future. "I don't see anyone touching [Apple]," says Bajarin, adding that the company has created a "digital ecosystem to acquire, manage and distribute digital content" to iPods that is without competition.
Apple declined to be interviewed for this article.
AOL Music offers iTunes downloads and a subscription service (AOL Music Now) that is billed separately, according to Erik Flannigan, vice president and general manager of AOL Music, Movies and Television.
The confusing structure has AOL Music (music.aol.com) sending traffic to the iTunes store for download purchases, while AOL Music Now (aol.musicnow.com), which will officially launch this summer, is the home of its $9.95-per-month subscription service. AOL Music Now also sells Windows Media format downloads.
The company hopes to someday have a single service. "We believe in both models, and would love to see them both together," Flannigan says. He is hopeful that Apple will someday enable subscription service listeners to enjoy music on their iPods.
Affiliates aren't jumping at the opportunity to earn a nickel per sale for downloads when they are accustomed to earning just as much from mere clicks in other industries. Lisa Riolo, senior vice president of business development at Commission Junction, says few affiliates have contacted the company looking to partner with download sites. "We haven't heard a lot of demand from affiliates for downloads," she says.
Subscription services, which can pay between $5 and $15 commissions when a consumer signs up for a trial, can be much more lucrative for publishers, Riolo says. Commission Junction manages the affiliate programs for subscription-based RealNetworks, Yahoo and eMusic, which all offer subscriptions and downloads.
Subscription service revenues may not be growing as fast as music download sites, but the number of consumers paying a few dollars per month to listen to catalogs online almost doubled, from 1.5 million to 2.8 million globally in 2005, according to the IFPI.
Like Apple, RealNetworks sells tracks for $0.99 each, but the company does not offer affiliate incentives on downloads, instead paying commissions for trial subscriptions, according to Rachel Lazar, the director of consumer marketing for RealNetworks.
Focusing on subscriptions provides a better opportunity for publishers to generate revenue than making a few cents per download, Lazar says. RealNetworks recently raised its bounty for trial subscriptions secured by a credit card, from $12 to $15. "It would take a huge volume to make up the money they could do with subscriptions," she says.
Although she would not disclose how many affiliates RealNetworks has, Lazar says that during a few recent quarters the number of affiliates doubled.
Subscription services have been hampered by a lack of consumer understanding about how they work and the lack of a solution for mobile users. Subscription services allow access to a catalog of music through channels or stations that focus on genres. If consumers want to access music after a subscription is terminated, they must purchase tracks separately.
"There is a lot of education that is yet to be done when it comes to subscription music services," and publishers could aid in clarifying that, RealNetworks' Lazar says. Publishers who are involved in marketing other media, such as movies or audio books, are a good match for promoting music, according to Lazar.
Creative Strategies' Bajarin says consumers aren't accustomed to paying to listen to music and are more comfortable with owning music. "When you quit [RealNetworks Rhapsody service], your music is gone," he says.
"The problem with the subscription model is portability," music industry consultant Barry Sosnick, president of Earful.info, says. Consumers have a "strong desire to have ownership when it comes to music," so having access to songs end with a subscription is a "critical shortcoming," he says.
However, music publishers including Napster and AOL Music have addressed this concern with higher fee services that allow consumers to listen on portable devices during the time that they are subscribers.
Publishers also have an opportunity to help distinguish competing music subscription services. While services like Rhapsody, EMusic and Napster all claim to have catalogs of more than 1.5 million tracks, identifying which if any service has a majority of an individual's favorite artists can be a challenge. For example, Rhapsody has an extensive collection of tracks from Indie singer-songwriter Bob Mould, but no albums from classic rock stalwart Bob Seger.
The subscription services only permit consumers to search their catalogs after they have subscribed, but affiliates are now getting tools to differentiate the subscription services. Continued on Page 2...
Tags:
music, apple, ipod, download, subscription,
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