Article From: The Economist, 9th June 2011
One of the great alchemical feats of the past ten years has been the transformation of media-company profits into technology-company profits. There is no greater alchemist than Steve Jobs, Apple’s boss, who was back on stage on June 6th. The creator of the iPod and the iPhone unveiled a new service that will make it easier to store music on remote servers, “in the cloud”. Apple will surely benefit. But music executives are oddly optimistic, too. In several ways, not all of them having to do with Mr Jobs, technology is starting to work in their favour.
Theirs is still a deeply troubled business. Since 2000, when online file-sharing took off, global recorded-music sales have fallen from $26.9 billion a year to $15.9 billion, according to the IFPI, a trade group. Apple has helped to smash profitable albums into less profitable singles. High-street music shops are closing.
Digital outlets such as iTunes are not growing nearly fast enough to offset the decline in CD sales. Indeed, in many countries they are stuck in a niche. In Japan, 73% of spending on recorded music in 2010 was on CDs, DVDs and vinyl. Fewer than one-fifth of Britons bought digital music last year. Streaming services such as Spotify, which make money from advertising and subscriptions, are not yet helping much. They brought in just 3% of total recorded-music revenues last year, according to the BPI, which represents British record labels.
The new products unveiled by the Great Turtlenecked One this week should push the digital market out of its niche. Apple’s iCloud is not just a storage locker for music. It will search devices for tracks purchased from the iTunes store, and automatically give customers the rights to download the music to any Apple device. That puts Apple’s service ahead of recent offerings by Amazon and Google, which require users to upload music to the cloud. By making digital music purchases more accessible, it should raise their perceived value, leading to more sales.
Apple also announced a service, not available even in America until later this year, which will scan computers for all music tracks and offer cloud-based access to them for $24.99 a year. Apple will take a cut of sales and give the rest to the record companies. Whereas the iCloud is simply better than the competition, this is a breakthrough. In effect, it will allow music companies to levy an annual fee for the use of their music, whether ripped from CDs or downloaded illegally.
Yet music companies do not expect Apple or any other technological behemoth to save them. Few believe recorded music is about to rebound, despite healthy digital sales for two singers, Adele and Lady Gaga, in the past few weeks. To stay afloat, they need to drive down costs without crippling their core business. Quietly, technology is allowing them to do this, too.
The new data farmers
Online music outfits such as iTunes, Spotify and YouTube bring in much less money than CD sales. But they produce far more precise, timely data. Every time a track is uploaded to or played on YouTube, every time it is sold by iTunes, streamed on Spotify, shared on a pirate network, liked on Facebook or tweeted about, it gives off a digital signal. A cottage industry has sprung up to process these signals and feed the results to the record companies.
This is already shaping strategies. Universal, the world’s biggest music company, is developing its own data-crunching tool, known as the Artist Portal. Data from the portal have proved what many had suspected: that the decades-old practice of releasing music to radio weeks before putting it on sale feeds piracy and saps sales. So, earlier this year, it stopped the practice for many releases.
Atlantic Records’ British arm, which is owned by Warner Music Group, increasingly uses data to hone marketing campaigns. Last year it faced the tricky task of touting an artist, Plan B, who had made an abrupt transition from hard-core rapper to besuited soul singer. That meant finding an entirely new audience of young women, while holding on to the rap crowd. Atlantic ran two parallel campaigns, using Buzzdeck, a data-crunching service, to evaluate how each group was responding. It worked: Plan B’s album was the sixth-best-selling in Britain last year.
Data aggregators such as the Artist Portal, Buzzdeck and the California-based BigChampagne have so far proved unable to replace human talent scouts. But they are helping record companies get more bang for their ever-shrinking artist-development and marketing bucks. Music companies use data much more shrewdly than, say, Hollywood studios, which still fling huge sums of money at broadcast television in the hope of driving people to cinemas. And they will find new uses.
“We’re no longer just a wholesaler of music,” says Paul Smernicki of Universal. As their traditional business declines, the music companies are moving into live music and merchandise. To succeed in those markets, they will need to become experts in fan behaviour, understanding not just how and why people buy music but how they weave it into their lives. In that, data will be crucial.
If they could, music executives would uninvent the internet, and perhaps Apple as well. But technology, which has done so much damage to the recorded-music business, increasingly props it up. Media firms can do a little alchemy, too.
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