[I just wrote a column for GigaOm.  My original title was "The Music Industry is Dead; Long Live the Music Industry" but they prudently pruned this to something pithier, ie "The New, New Music Industry".]
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The music business has been transforming
before our eyes. Many players in the industry are struggling to survive
amidst the tectonic shifts as the industry transforms itself for the
digital age. And yet there has never been more demand for consuming
music, and the ability to satifsy that demand, as there is today. The
events of the past few weeks point to an acceleration of change that
promises to make 2007 a landmark year in the music industry.

The Music Industry is Dead

The major music conglomerates, Universal
Music, Sony BMG, Warner Music and EMI, are having to transform
themselves and their business model. Theirs is a hit-driven,
high-risk/high-reward business model, not unlike that of VCs²,
in which singles promoted through mainstream, offline outlets (mainly
radio but also TV and print) spur the purchase of albums via physical
retail stores. All aspects of this model are under duress:

• Consumers have proven resentful of the ‘bait and switch’
  in which they were made to purchase albums just to get the 1 or 2 songs
  that were good. The proliferation of digital music platforms, both
  legal and not, now enable consumers to only get the song(s) that they
  want.
• Offline outlets no longer move the needle as they
  once did. Terrestrial radio has been undergoing its own changes as a
  result of the landmark Telecommunications Act in 1996. There are now
  fewer music stations on the dial with tighter playlists and increased
  scrutiny of anything that smells of payola. As a result, it is harder
  to break an act on radio. MTV plays few music videos on its flagship TV
  properties, while print is proving increasingly irrelevant to the
  younger demographic — they’re not exactly rushing to the stores to get
  the new Rolling Stone to determine what music to buy. The hits that do
  break are not proving as durable as they once were. More titles churned through Billboard’s tops spot last year than ever before ³.  Gold is the new Platinum.
• Illegal
  file sharing is rampant and has only continued to grow notwithstanding
  the legal and technological tactics that the majors have been
  executing. 1.5 Billion songs are available at any given time⁴ with estimates from Big Champagne⁵ of over a billion files being traded on a monthly basis.
• Of
  most concern is the removal of shelf space devoted to music products at
  retail stores. Tower’s bankruptcy removed millions of square feet and
  property owners will look askance at music retailers looking for space.
  The last decade saw the rise of discount retailers⁶,
  Target, Wal-Mart and Best Buy being the big 3, use cheaply priced CDs
  as a loss leader to drive foot traffic. This has been a successful
  strategy, however the question is how long these discount stores will
  continue to sustain this strategy. If they start devoting the space to
  other products — games, DVDs or even iPod and related accessories, it
  will hasten the demise of the CD-driven business model. As one
  executive at a major told me, ‘if Wal-Mart removes just 8 less square
  feet per store to CDs, it’s like losing 300 stores.’ This will be a
  major story to watch in 2007.
• Indie labels are also
  having a hard time. Although their acts have tended to be more
  album-driven, the loss of Tower has been a shock to the system and
  there will likely be losses from the inventory and/or receivables with
  Tower. There are few other major retailers that carry a lot of these
  records and so the savvier indie labels are being forced to sell a
  greater % of their music digitally.
• All in all, the
  declining physical revenue is not enough to offset the growth of
  digital revenues. That is causing the major labels to scramble for
  alternative revenue sources such as licensing music videos and
  advertising (two areas in which my company, Brightcove, is working with⁷ the labels⁸).
  To spur the growth of digital further, they will also need to solve the
  interoperability issue, which many believe means selling their music
  without DRM. This has been in the news recently with Steve Jobs’ letter⁹ and the rumors of EMI selling their music as MP3s¹⁰.
  Being both the smallest major label and the one under the most
  financial stress, EMI may well have to take such risks. This will be
  the other major story to follow in 2007.

Long Live the Music Industry

And yet there has never been as much demand for music from
consumers. They are voting with their ears, eyes, fingers and wallets.
They want music at a reasonable price whenever they want and wherever
they are.

• The numbers around file sharing not only illustrate
  potential foregone sales (something that the industry continues to
  debate), but also pent-up demand for music.
• New mediums such as internet radio¹¹, podcasting and satellite radio¹² are attracting tens of millions of end users.
• Billions of music videos¹³
  are streamed every year on the Web. Who needs MTV when you can watch
  videos on-demand on the Web while chatting with your friends?
• The worldwide market for flash or hard-drive-based players was 140 Million units in ‘05.
• Add in music-capabile mobile phones and it’s a much bigger pie.  Already, ringtones are a multi-billion dollar market¹⁴
  in the US. Mobile music promises to be an even bigger market if the
  operators and labels can figure out how to deliver music to consumers
  at a reasonable price. $2.50 per download + tax is not it¹⁵.
• More
  people are buying instruments and related materials than ever before.
  Spurred by technologies to help people make and record music, the industry has doubled in the last decade to $7.5 B¹⁶.

And so we have an industry transforming itself before our very eyes.
If you would have told someone in 1999 that, 5 years later, Apple would
become one of the most powerful companies in the music business, they
would have thought you crazy. The overall market will be bigger than it
is today but spread out over more entities. The music industry of 2012
will be markedly different than the one we have today with new winners
and losers. One thing’s for sure — we will all be consuming more music.

The reports that EMI has been in talks with some leading digital music services to license a lot of its catalog in the unprotected MP3 format has caused lots of excitement, especially on the heels of Steve Jobs’ anti-DRM manifesto.  At any rate, my thoughts on this are that:

• EMI in some ways has the least to lose and should be considering this more seriously than the others.  It recently restructured amid warnings of a lower than expected 2nd half (of their fiscal year, which ends on March 31st) and guidance of revenues to be 6-10% lower than previous estimates.  The growth of digital revenues is not offsetting the erosion of physical revenues.  What to do?  Some combo of accelerating digital’s growth, slowing physical from deterioration and cutting costs.  They’re doing the 3rd and have no doubt been looking at all sorts of ways of doing the first two.  Their digital market share, at 10%, is by far the lowest of their peers and so they may as well take some riskier moves to boost share.
• They would likely release their back catalog as MP3 first.  It would represent a lower risk than releasing their priority artists in unrestricted formats.  Of course they may still hold off on the crown jewels of their catalog, which includes the Beatles, Van Morrison and the Beatie Boys.
• This would give a boost to the music services like Napster and Rhapsody, however, in the absence of the other majors following suit, it would be awkward to promote just a portion of their catalog as being ‘iPod compatible’.
• It could all be posturing ahead of the upcoming renewal negotiations with Apple, which apparently begin in March.

The rumors are that the services are balking at the high advances being asked by EMI.  We’ll know soon enough.  If it happens, the first one of my digital music predictions for this year would come true.